Innovative Policy: Chile's Rural Electrification

For countries with privatized utility industries, the challenge facing national policies aimed at electrifying rural households is to create a socially allocative market in the place of a market driven by private gain. How is this accomplished? It can be complicated: Should a government provide tax incentives? Subsidies? Credit? To the electric companies or to the consumer? What amount is the right amount? With private electric companies and a lack of rural electrification, these were among the questions facing policymakers in Chile.

Recognizing the importance of electrification and it's direct correlation with human development, Chile embarked on an ambitious rural electrification program in 1994 that is planned to continue through the end of this year (2004). Before the program, 240,000 people did not have access to electricity, approximately one half of Chile's rural population.

The program was designed to "promote private investment, stimulate competition, and take into account the structural reforming in the power industry and the decentralization of the national administration." According to the World Bank, the program is based on the following four principles:

• Joint Financing
• Competition
• Decentralization
• Appropriate Technologies

The program creates a competitive market for the supply and demand for rural electrification on numerous levels. From the demand side, the communities most compete for subsidies by submitting proposals for a rural electrification program complete with information of how the community plans to finance the ongoing costs. On the supply side, the policy creates competition amongst the electricity providers by not assigning sole jurisdiction to any private distribution company but instead awarding a grant to the company with the plan that realistically proposes the highest social return. Even regional governments electrification funds from the central government are determined by the previous allocative efficiency of the regions projects.

Decentralization is another crucial factor to the success of the project. It empowers the regions with the authority to allocate resources and regulate their own projects to shape the projects to the specific needs of a given community.

The programs focus on "appropriate technologies" involves grid extension wherever economically feasible and alternative sources where the grid isn't viable. Photovoltaic systems have been used in isolated areas in the northern part of the country and experimental technologies (such as wind and biomass) in the southern part, however these instances are marginal. (Use fig. 3) (7)

So far the program has exceeded its electrification goals of electrifying 75% of the rural population by the year 2000 (76% were electrified by 1999). The success of this initiative can be attributed to the program's provisions for competition, which necessitates efficiency.

For further reading on Chile's rural electrification: http://www.worldbank.org/html/fpd/esmap/energy_report2000/ch9.pdf