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Setting Rural Tariffs: The Case of Peru – Main Issues Eduardo Zolezzi

Setting Rural Tariffs: The Case of Peru – Main Issues Eduardo Zolezzi World Bank Former Staff and Consultant Former Peru Energy Sector Regulator Washington, March 7, 2006. Situation of Electrification in Peru (1).

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Setting Rural Tariffs: The Case of Peru – Main Issues Eduardo Zolezzi

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  1. Setting Rural Tariffs: The Case of Peru – Main Issues Eduardo Zolezzi World Bank Former Staff and Consultant Former Peru Energy Sector Regulator Washington, March 7, 2006

  2. Situation of Electrification in Peru (1) • The population of Perú is about 27 million inhabitants, of which 65% live in urban areas (17.5 millones) and the remaining 35% (9.5 millones) live in rural areas. • The highest poverty indexes correspond to rural areas, mainly located in the highlands and the amazon. • The average annual family income in the rural areas is in the range of US$ 300-1,500. • The rural population without electricity is approximately 6.5 million; corresponding to about 70% of the total rural population. • Access to other type of infrastructure in rural areas is also very limited – according to the 2000 National Household Survey, one in eight inhabitants of rural areas has access to paved road and less than 40% has public pipeline potable water service.

  3. Overall Consumption Interconnected Isolated Total Percentage 0-30 kWh 1 026 964 137 639 1 164 603 60% 31-100 kWh 1 139 643 89 746 1 229 389 40% > 100 kWh 1 516 483 61 121 1 577 604 Total 3 683 090 288 506 3 971 596 100% Rural Consumption Rural Customers Percentage 0-30 kWh 140 546 75% 31-100 kWh 31 024 17% > 100 kWh 16 381 9% Total 187 951 100% Situation of Electrification in Peru (2)

  4. Consumption Poor Households Consumption Non Poor Household 0 0 30 100 200 300 400 500 Consumption (kWh) Situation of Electrification in Peru (3)

  5. Electrification Index per Province

  6. Socio-Economic Quintiles (5) Per Capita Expenditures (Mean) (US$) % with Electricity Poorest 814.40 40.0 2 1,432.22 65.0 3 2,110.38 81.9 4 3,164.53 91.0 Richest 7,894.30 96.7 Total 3,082.35 74.9 Per Capita Expenditures and Electricity Access

  7. Affordability Frontier Access Gap Market Efficiency Gap Expansion with Tolerable Private Return P o v e r t y Expansion with Reduced Private Return Politically & Socially Desirable Actual Access with Desirable Private Return Commercially Feasible Farthest, Geographic Isolation Access Gap to Reach the Poor

  8. Main Characteristics of Distribution Systems • Theoretical analysis and empirical evidence show that electricity distribution cost functions exhibit: • important economies of scale • increasing returns with scale; and • important economies with consumption and • clients’ geographical density.

  9. Distribution Investment and O&M Costs Indicator “New” Rural Projects Electrification Sector 5 Rural Sector 4 Urban-Rural Sector 1 Urban Sector 3 High Density Urban Low Density Sector 2 Urban Medium Density The Cost Problem of Rural Electrification

  10. Situation of Electricity Distribution in Peru (1) Very Diverse Structure/Management: • High Density Market: (very) profitable, efficient private ownership/management (Edelnor, Luz del Sur) • Medium Density Markets: profitable, efficient public ownership/management (e.g. Distriluz, Seal, Electrosur Este); minor problems for introducing private participation. • Low Density Markets: barely sustainable, not very efficient public ownership/management (some RDC) • Disperse and Very Low Density Markets: non profitable, loosing making, inefficient public ownership/management (most of public-owned RDC) • MEM Expansion of Electricity Frontier/Rural Projects: high loosing making projects, administered by Adinelsa; the major problem of electrification.

  11. Situation of Electricity Distribution in Peru (2) Operating Margin of Public-Owned Distribution Companies: (1.00 US$ = S/. 3.3 New Soles) • Operating Profits Distriluz Group: S/. 32 million in 2002, 37.5 in 2003 and 64.7 in 2004 • Operating Profits Seal, ELSO: S/. 11 million in 2002, 3.8 in 2003 and 2.8 in 2004 • Operating Profits Other (ELS, ELO, Puno, Ucayali): S/. -18.6 million in 2002, +6.3 en 2003 y +12.2 en 2004 • Operating Losses Adinelsa: S/.3.9 million in 2002, 9.3 in 2003 and 15.5 in 2004

  12. FOSE Impact (1) • 62% of all residential clients at national level benefit from FOSE • Lima consumers are the major contributors to FOSE • An average of S/. 2.5 millions each month are transferred to distributors that receive FOSE • Only regulated consumers pay for FOSE; representing about 50% of total consumption • The newly expanded FOSE has increased this subsidy transfers considerably

  13. FOSE Impact (2) FOSE Impact on Average Residential Tariff Consumption of 30 kWh/Month 20 17,39 18 16,33 16 13,62 14 12,56 12 9,85 Cents of US$/kWh 10 8,79 8 6 4 2 0 No FOSE No FOSE With FOSE With FOSE With FOSE With FOSE Monthly Reading Monthly Reading Monthly Reading Six-Month Reading Six-Month Reading Six-Month Reading Law 27510 (2001) Law 8307 (2005)

  14. Electricity Prices in Peru and Other LAC Countries

  15. Main Problems Identified • Lack of Predictable and Sustainable Sources of Funding • Lack of Incentives for Investment in Rural Electrification Programs/Projects • Inadequate Tariffs for Rural Electrification Development • Very Low Rural Electricity Consumption and Barriers to Densification • Deficiencies in Planning, Design, Regulations, Management and Implementation of RE Projects • Lack of Adequate Legal and Regulatory Framework for RE and Electrification of remote, isolated communities • Limited Participation of Regional and Local Governments, and Practically Null Participation of Private Sector

  16. Existing Legal Frameworks for RE • Electricity Concession Law (LCE) No. 25844-1992 and Regulations (overall sector framework; no specific reference to electrification of urban marginal, rural, remote and isolated comunities, and consumers). • Rural, Remote, Isolated and Frontier Electrification Law No. 27744-2002 (establish a financing fund; keeps a centralized approach with MEM/DEP in charge of planning, designing and construction of projects. This law was objected by the executive and was not regulated – not operational) • Draft Law for the Promotion of Private Investment in Rural Electrification, approved by congress, but objected by the executive; not enacted (do not supercedes Law 27744; it complements some of the articles of Law 27744 creating a special regime for promoting private investment in RE under the general ProInversion concession regime) • Law for the Promotion and Use of Renewable Energy Resources in Rural, Remote and Isolated Areas, No. 28546-2005 (very general and declarative with no specific promotion mechanisms; it has not yet been regulated) • Second Draft Law for the Promotion of Private Investment in Rural Electrification, approved by congress but objected by the executive (some improvements to Law 27744; main objection is to sources of funding for the RE fund it establishes and the tax exceptions to investment subsidy)

  17. The Great Challenge of Rural Electrification in Peru Its Geography Satellite Digital Terrain Elevation Model

  18. Thank You For Your Attention

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