Lima, 31 de Mayo de 2013 Regulation for the electrification of isolated rural areas in Guatemala Congreso Internacional sobre el Acceso Universal a los Servicios Públicos de Energía A. González, J.I. Pérez-Arriaga, A. Moreno, L.M. Uriarte

2 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Contents 7. Regulatory proposals 1. Global context 2. Rural electrification context in Guatemala 3. Technology choices 4. Business models 5. Financial framework 6. Governance

1 Introduction

4 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 The REGEZRA project This research work has been developed within the framework of project REGEZRA coordinated by Fundación Energía Sin Fronteras (Energy Without Borders EsF) with support from the Spanish International Cooperation and Development Agency (AECID). The authors are grateful to the project partners for their input, comments and ideas: Government and regulatory agencies: Intituto Nacional de Electricidad, Comisión Nacional de la Energía Eléctrica (Guatemala) and Comisión Nacional de la Energía (Spain). Affected population: Asociación Nacional de Municipalidades, Concejos Comunitarios de Desarrollo and Concejos Municipales de Desarrollo (Guatemala). Experts and facilitators: EsF, Mercados EMI, Instituto de Investigación Tecnológica (Universidad Pontificia Comillas de Madrid), Centro Nacional de Energías Renovables, Fundación Solar (Spain), NRECA International (USA), Universidad San Carlos, Universidad del Valle, and Universidad Rafael Landívar (Guatemala)

5 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 What do we mean by “universal access”? “Access to energy services that are clean, reliable and affordable for cooking, heating, lighting, health, communications and productive uses” Energy for a Sustainable Future” (UN AGECC 2010 )

6 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Relevance & urgency of universal access “One of the major obstacles to energy sustainability is the lack of universal access to modern energy services” “Universal access to electricity must be a permanent objective until it is finally achieved” The International Energy Agency (IEA) has set 2030 as the target year to achieve universal access to modern energy services

7 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 The size of the problem (electricity) “This chapter highlights another key strategic challenge for the energy sector, one that requires immediate and focused attention by governments and the international community. It is the alarming fact that today billions of people lack access to the most basic energy services, electricity and clean cooking facilities, and, worse, this situation is set to change very little over the next 20 years, actually deteriorating in some respects. This is shameful and unacceptable. Today, there are 1.4 billion people in the world that lack access to electricity, some 85% of them in rural areas. Without additional dedicated policies, by 2030 the number of people drops, but only to 1.2 billion. Some 15% of the world’s population still lack access, the majority in sub-Saharan Africa.” IEA, “World Energy Outlook 2010”

8 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 The number of non-electrified declines by 2030 except in sub-Saharan Africa (millions of people)

9 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 “Addressing these inequities depends upon international recognition that the projected situation is intolerable, a commitment to effect the necessary change, and setting targets and indicators to monitor progress. A new financial, institutional and technological framework is required, as is capacity building in order to dramatically scale up access to modern energy services at the local and regional levels.” IEA, “World Energy Outlook 2010” Scaling up access

10 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 “In 2009, we estimate that $9.1 billion was invested in extending access to modern energy services, supplying 20 million more people with electricity access and 7 million people with advanced biomass cookstoves. This amount was sourced from multilateral organizations (34%), domestic government finance (30%), private investors (22%) and bilateral aid (14%).” “To provide universal modern energy access by 2030 cumulative investment of $1 trillion is required –an average of $48 billion per year, more than five times the level in We estimate that around $18 billion per year is needed from multilateral and bilateral development sources, $15 billion per year from the governments of developing countries and $15 billion per year from the broad range of actors that form the private sector.” IEA, “World Energy Outlook 2011” Investment needs

11 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 “Achieving universal access by 2030 would increase global electricity generation by 2.5%. Demand for fossil fuels would grow by 0.8% and CO2 emissions go up by 0.7%, both figures being trivial in relation to concerns about energy security or climate change. The prize would be a major contribution to social and economic development and help to avoid 1.5 million premature deaths per year.” “Adding $/kWh, some 1.8%, to current electricity tariffs in OECD countries could fully fund the additional investment.” (IEA WEO 2010) Estimated impacts IEA, “World Energy Outlook 2010”

12 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 “Financing the amount needed to provide universal access to modern energy services in , compared with the New Policies Scenario, is a major challenge. All available sources of finance will need to be tapped: international funds, public/private partnerships, bank finance at multilateral, bilateral and local levels, microfinance, loans and targeted subsidies.” “The financing mechanism adopted will need to be matched to the particular characteristics of the financing need. The public sector can be expected to fund the costs of creating the necessary enabling environment, for example, establishing the appropriate policies, regulations and institutions, and will often need to finance the relatively large investments, such as additional generating capacity or transmission links.” Sources of finance IEA, “World Energy Outlook 2011”

13 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 “Private sector investment needs to grow the most, but significant barriers must first be overcome. Public authorities must provide a supportive investment climate, such as by implementing strong governance and regulatory reforms. The public sector, including donors, needs also to use its tools to leverage power sector investment where the commercial case is marginal. At present, energy access funding tends to be directed primarily toward large scale electricity infrastructure. This does not always reach the poorest households. Access to funding at local level is essential to support initiatives that cater effectively for local needs, building local financial and technical capacity and stimulating sectoral development.” IEA, “World Energy Outlook 2011” Enable private funding & channel funding also at local level

14 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 The EU talks about committing 50 M€/yr immediately & raising several hundred M€ to leverage private funds; note that IEA WEO-2011 estimates a need of about 48b€/year to achieve energy access for all by 2030 An interesting EU initiative

15 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 “While there is broad recognition that lack of access to modern energy has major implications for development, the energy access gap is increasingly being seen as a market” “Each year, the poor spend $37 billion on poor-quality energy solutions to meet their lighting and cooking needs. This represents a substantial and largely untapped market for the private sector to deliver better alternatives.” “…an estimated 90 percent of (poor) people already spend so much on kerosene lamps, candles, and disposable batteries to meet their lighting needs that they could afford to purchase better options, such as solar lamps. Even more people could afford efficient cookstoves because of the fuel cost savings they offer.” International Finance Corporation, “From gap to opportunity: Business models for scaling up energy access”, 2012 Energy access is also a business opportunity

16 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Energy access activities at IIT Low-cost energy technologies for Universal Access to modern energy services: Business models, policy tools, regulation and governance. Developed by MIT and Comillas University – IIT joint program for electricity systems COMITES (with support from ENEL Foundation). Regulation for the Electrification of Isolated Rural Areas (REGEZRA), regulatory framework and business model to be implemented by the government and regulator of Guatemala Private Public Partnerships for Electrification in Guatemala (ApEL): Governance, social enterprises and cooperative model for electrification business models Acciona Microenergía Perú: Social microenterprise to supply basic electric services (light and communications) in rural areas of Perú. GRECA: Interdisciplinary review group for electrification of isolated communities Study (with support from Endesa Foundation) by the Royal Academy of Engineering In collaboration with Energía Sin Fronteras Foundation, Acciona Microenergía, Research Group on Sustainable Organizations and Aula de Solidaridad

17 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Scope of the project To this point it is clear that a problem of this magnitude and complexity cannot be seriously approached without a specific attention by governments, intervention of private capital and the involvement of specialized companies. Obviously this will only happen if – An attractive business model can be defined. This model must include: the definition of the appropriate technologies to be used. – A regulatory framework that clearly defines the rights and obligations of all parties involved and, specifically, the rules of remuneration for the provision of a service. – The sources of finance for this activity

18 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Research objectives This paper analyses the power sector regulatory framework in Guatemala in regards to off-grid electrification for isolated rural areas. 1. Propose a dedicated regulatory framework for the supply of off-grid electricity to isolated rural areas in Guatemala, undertaking the challenge of providing Universal Access to electricity services 2. Stipulate the public roles of the agents involved in this activity

2 Rural electrification context in Guatemala

20 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Energy poverty Energy Development Index: commercial consumption, household consumption, share of modern fuels, electrification rate 3 million people lack electricity (IEA 2012) 2.35 million in rural areas Rural Electrification Plan Traditional expenditure: US$ 5 to 6: Kerosene, candles & batteries Market size US$ 36 million 7 year Figure 6: Comparison of the Energy Development Index to the Human Development Index and position of Guatemala. (IEA, 2010)

21 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Electrification targets PER targets 95% of population for 2015 Population without access reaches 700,000 in 2030 Lower electrification level – higher poverty index Rural areas electrification cover falls down to 44% Cost of energy should be around 10-15% of the incomes Willingness to pay for a good service Social tariff Cost benefit analysis (Benavides & Dussan, 2005) Target women and communities (NRECA, 2001)

22 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Isolated rural areas Out of reach of the network extension (15 years) Extension cost greater than US$ 1000 Mini-grids and household systems Geo-referenced analysis – 3422 settlements – 140,000 users (households) – 600,000 people (2030 – PER) Orographic & topographic characteristics Socio-demographic and economic (Arraiza & Conde Zurita, 2011) Figure 7: Distribution of acknowledged isolated rural settlements in Guatemala. Source: Rafael Landívar University

3 Technology choices

24 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Energy sources Domestic oil production Natural gas reserves Fuel wood for heating Geothermal-power High solar potential Coastal wind potential Figure 3: Global Horizontal Solar Radiation in Central America (GEF & MEM, 2005)

25 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Satisfaction of basic human needs Adequate technical quality User friendly Environmental and socially friendly Understandable Compatible and adaptable to local lifestyle Appropriable Figure 8: Global addressable market for lighting technologies. (IFC World Bank, 2012)

26 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Grid extension vs. off-grid electrification Need of an integrated approach Higher quality standards vs. modularity and adaptability Affordability Cultural and socioeconomic factors Levelized monthly cost O&M service model (Eisman, 2011) Figure 9: Commercial price of modern energy alternatives (IFC World Bank, 2012)

4 Business models

28 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Barriers for attraction of actors Access to capital Lack of funding by government programs Bankruptcy of the national power industry Lack of tariffs for off-grid electrification (social tariff) Lack of technical standards for quality of service Lack of monitoring and continuity in support Lack of institutional instruments Lack of interest by traditional utilities Lack of suitable and transparent regulatory framework Lack of information, accessible and verifiable

29 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Classification of business models Concession model is aimed at minimizing subsidies and encouraging private sector participation, assuring government control. Retailer model involves a decentralized approach to providing off-grid electricity, as cooperatives or rural service companies. Dealer model, center on developing dealers that can sell equipment to people out of the network reach Source: Bessant-Jones, 2006; Saghir 2005

30 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Decentralized cooperatives Targets communities with a capacity of payment above US$ 8 per month Suitable for mini grids (lower dispersion of the community) or solar home systems Service center established by the cooperative amid the electrified community Higher impact in development and appropriation of technology Distinctive roles: – Promoter – Owner – Operator Source: Izquierdo et al Royal Academy of Engineering of Spain

5 Financial framework

32 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Tariff and subsidies Cost of electrification in isolated rural areas of Guatemala is greater than the capacity of payment of the population. Tariff for off-grid consumers must not be higher than the network social tariff (<300 kWh, US$ 0,24 per month). A subsidy scheme is required to balance the gap. Retailer model with characteristics of a regulated monopoly. Targeted subsidies and tariffs in descending blocks should be studied Source: Dietrich et al. 2011

33 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Investment and funding scheme Estimation of investment for isolated rural areas electrification in Guatemala is US$ 110 million over the next 20 years Need to establish an isolated rural electrification trust, fenced to guarantee financial contributions. Availability of diverse sources for funding of subsidies and capital costs. Requires the participation of the private sector. Channeled through competitive tendering process. Subsidies conditioned to the provision of service Source: Dietrich et al. 2011

6 Governance

35 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Rights and responsibilities of the agents National government and authorities and regulator Private institutions – Energy companies – Cooperatives – Suppliers – Entrepreneurs Local and regional administrations Communities, with special concern for the participation of indigenous population. Customers, with special reference to the role of women. Interaction of agents needs further analysis

7 Regulatory proposals

37 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Regulatory process Assessment of Conditions Key principles General regulatory framework Detailed regulatory tools Additional Considerations

38 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de Universal Electricity Access for all. 2. Fair equitable prices at a reasonable quality. 3. Government ruling and control by the regulatory authorities under the subsidiarity principle. 4. Decentralization, delegation and coordination of actions. 5. Participation and impulse from the communities. 6. Promotion of private initiative. 7. Competitive conditions. 8. Sustainability conditions. 9. Long term ensured funding scheme. 10. Concern for the environment. 11. Open cooperation. 12. Knowledge capitalization. Key regulatory principles

39 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Proposal 1: Unified definition of Isolated Rural Area Isolated rural areas must be defined unequivocally, determining these areas in the country exactly. An isolated rural area is one whose connection to the distribution network is presently unfeasible, either due to the difficult geographical accessibility or to economic reasons that in practice result in being excluded from the Plan for Rural Electrification through network extension in a time horizon of 15 years

40 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Proposal 2: INDE with the explicit mandate over rural electrification in isolated areas The National Institute for Electrification should be entrusted with an explicit mandate towards isolated rural areas, including the necessary directives for launching this initiative in the short term. The planning should include the basic criteria for prioritizing the communities to be electrified

41 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Proposal 3: Create a dedicated Technical Office for Electrification in Isolated Rural Areas INDE should establish this office (OECA) with powers to carry out the electrification process in isolated areas, including an Electrification Counsel in which the beneficiary communities should be represented

42 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Proposal 4: Creation of an Isolated Rural Electrification Trust This trust would gather and coordinate the funds specifically devoted to the investments for the electrification of isolated rural areas. This trust will be governed by OECA, that would assign the funds through public tendering processes defined by INDE, control the payment of investment installments and periodic service subsidies, and supervise the quality and service given to the beneficiaries along the whole life cycle of the off-grid supply, also allocating particular incentives or penalties as required by the service agreements

43 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Proposal 5: Determination of the tariff The electric tariff applicable for off- grid electrification projects should be determined by the National Energy Commission (CNE) in accordance to the social tariff established for low- income population with grid supply, specially targeted for poor, fragile population

44 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Proposal 6: Procedural transparency In order to comply with the principles of transparency and universal publicity, the procedures and conditions of the calls for tenders shall by officially announced, including the award criteria, concession decisions and authorizations granted in each one of the electrification procedures and tools for isolated rural areas

45 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Proposal 7: Quality assessment The CNE will settle the technical and quality regulations for the electricity services in off-grid areas that are subject to concessions

46 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Overview of regulatory details Characterization of electrification initiatives – Technology (from grid extension to off-grid) – Form of ownership Delivery model (fee-for-service, dealers, hybrids) – Financing mechanisms / types of subsidies (connection vs. consumption; targeted vs. untargeted) – Process of selection of operators (competition in the market or for the market, by project, by cluster, by yardstick) & parameters to be bid (tariffs, connection charges, minimum required subsidies, number of new connected consumers) – Risk allocation (between consumers, suppliers & government) – Quality of service standards – Assignment of maintenance responsibilities

47 Instituto de Investigación Tecnológica Escuela Técnica Superior de Ingeniería ICAI Regulación Electrificación de Zonas Rurales en Guatemala – A. González Lima, 31 de mayo de 2013 Limitations and future work Comprehensive approach: Network extension and off-grid models for electrification planning. Impact of Universal Access in National Energy System International energy policies and cooperation. Replicability and scalability conditions. Dealer model complementarities with Retailer model. Long term sustainability assessment. Synergies and integral development. Impact on productive and community uses of electricity. Interactions between the electrification agents ecosystem.

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