Utility-maximizing financial contracts for distributed rural electrification

Abstract

We develop a cost-benefit framework for extending electricity access in currently un-electrified regions. We first show that distributed technologies may be the lowest-cost electrification option in areas where electricity consumption is low and grid connection costs are high. We also show that some centralized electrification programs provide services with subsidized rates far below cost recovery. An economic model is developed to compare three financial mechanisms that can be used to make capital intensive, distributed electrification technologies more accessible to rural populations; direct subsidies, rental programs and microloans. These contracts are compared on their ability to increase consumer utility for a given cost to the providing agency. We show that a direct technology subsidy is generally preferred when the desired subsidization is high and that, under certain parameter combinations, microloan and rental programs can improve energy access for the poor while also making a profit for the providing agency.