E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) JANUARY 2019 RWANDA • Limited domestic energy resources, high cost of supply, and already-high, non-cost reflective tariffs posed a complex reform challenge. LIFTING THE BURDEN OF • ESMAP grants have supported World Bank ELECTRICITY SUBSIDIES, engagement and analysis, which has helped to WHILE EXPANDING ACCESS set out options for decisive government action. • The government has been able to significantly reduce fiscal transfers to the electricity sector, THE CHALLENGE: GROWING while doubling new connections per year, halving AFFORDABLE GRID AND OFF tariffs for low-income households and making GRID ACCESS WHILE SLIMMING connection charges significantly more affordable. SUBSIDIES Rwanda has achieved impressive development in recent years. GDP has grown at an annual average of 7.5% over While the government is committed to continue this the previous decade, and the poverty rate declined from progress, the significant fiscal challenges associated with 57% in 2006 to 39% in 2014. In 2018, the World Bank the electricity sector have been an impediment. Even ranked Rwanda as the 29th easiest nation in the world with tariffs that are among the highest in the region, the in which to do business, making it the only low-income revenues of the Rwanda Energy Group (the utility) have country in the top 100. consistently fallen below costs, requiring government Expansion of access has been very successful in Rwanda, subsidy payments from the budget to fill the gap. These quadrupling from just 9% in 2009 to 42% in March 2018. subsidy payments averaged 1.8% of GDP annually from The government is targeting universal access by 2024 – 2015-2018. Without action, this drain on public finances with 52% of the population to be connected to the grid was set to balloon to about 4.5% of GDP by 2020/21, and 48% to use off-grid solutions. which would put pressure on the government’s capacity E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) to maintain critical investments in health, education and social protection. Reforming electricity subsidies is a complex challenge in Rwanda, a landlocked country with limited energy resources and a small industrial base. Expensive and historically unreliable electricity services have been det- rimental to the growth of businesses and unaffordable for a large section of the population. Any adjustment to tariffs in such a context must be preceded by improving the efficiency of the power sector. It must also go in parallel with safeguarding the competitiveness of the domestic private sector and ensuring affordability of electricity for low income households. THE RESPONSE: IMPROVED TARIFF STRUCTURE, PLANNING AND COST-EFFICIENCY The challenge of sustainably financing the expansion of the electricity sector without curtailing other devel- opment commitments of the government led to urgent sector reforms. From 2017 onwards, with support from the Energy Sector Management Assistance Program (ESMAP), the World Bank has helped the Government of Rwanda design a comprehensive reform program built enforcing competitive procurement and promoting around two major objectives. First, the program aims to regional power trade. In achieving its access expansion contain and eventually eliminate budget transfers to the targets, the government’s approach is unprecedented power sector. The second objective, closely linked to the in its high off-grid target as well as in the adoption of first, is to improve the operational efficiency, affordability cutting edge planning tools to ensure cost-efficiency and accountability of the electricity service in Rwanda. of electrification. World Bank technical assistance has The World Bank is providing financial support to the supported new public-private partnership guidelines government’s reform program. to inform competitive procurement, a new mini-grid Robust analysis, conducted and supported by the World licensing policy to support off-grid renewables, and the Bank, has helped the government develop different National Electrification Plan to expand access. options to contain, reduce and ultimately eliminate Rwanda has also implemented a series of immediate budget transfers to the electricity sector, and understand changes in electricity tariffs to enhance cost-recovery. In the potential impacts of each option. 2017, the tariff scheme changed from a flat rate of RWF A key area of focus is maximizing cost-efficiency, while 182 per kWh to a block structure. A “lifeline” tariff for expanding both electricity supply and access. Critical electricity consumption below 15 kWh per month was measures have included adopting least-cost planning, introduced that halved tariffs for low-income house- holds to RWF 89 per kWh. Vulnerable households have E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) also benefited from reforms to connection pricing that Bank’s assistance program. Based on Rwanda’s revised eliminated the up-front payment of the connection fee Least-cost Power Development Plan, the government is and allowed for it to be paid over time. Further tariff aiming to reschedule the opening of new power plants reform in August 2018 helped move average tariffs to avoid oversupply. The National Electrification Plan has closer to levels that reflect costs, while still protecting the set out a complete forward-looking access investment poor. Industrial and commercial tariffs were increased. framework. To improve its accountability and the ability to Almost all household consumption was exempt from raise private sector financing, the utility has modernized tariff increases, helping keep electricity affordable for its accounting and reporting to comply with International low-income households. Financial Reporting Standards. Utility management has also taken steps to improve the quality of service and reduce system losses, including institutionalizing proce- THE IMPACT: FISCAL BURDEN dures related to management of outages and complaints REDUCED AND ACCESS from customers on electricity supply, from occurrence/ INCREASED reception to full service restoration. The reform program is ongoing, so its full impact remains The first steps of the reform program have laid a solid to be seen. However, analysis has already been trans- foundation for the next phases of electricity sector lated into policy, and institutional reforms and actions transformation, as the country proceeds on its journey are already showing tangible results. towards universal access by 2024. The government has The government has significantly reduced fiscal transfers to the electricity sector–from 2.28% of GDP in FY2014/15 to 1.35% in FY2017/18. This has been achieved through a combination of tariff changes, implementation of the recommendations of the least cost planning exercise, and modernization of utility operations with the objec- tive of improving the quality of electricity services. Tariff changes in 2017 and 2018 were informed by an efficient revenue requirement study and other assessments. They helped make electricity dramatically more affordable for low-income consumers, while keeping the utility’s revenue base virtually unchanged. Furthermore, the new policy on connection charges has helped rapidly increase access of low income households. New connections completed per year doubled to 154,000 in FY2017/18. To put this in perspective, Rwanda now connects a similar number of new households per year as Ethiopia and Tanzania, which have 10 and 5 times Rwanda’s population, respectively. In reforming sectoral policies and institutions, the government has acted upon the recommendations of ongoing studies and analyses supported by the World E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) committed to contain budget transfers to the electricity the fiscal cost of sector expansion and improving the sector below 1.4% of GDP in the medium-term as it con- affordability of electricity services for the most vulner- tinues to improve sector planning as well as efficiency able groups. and affordability of electricity services. Continued close cooperation between the World Bank and the Government of Rwanda, as well as between CONCLUSION: the government’s ministries and the utility, will be criti- ANALYSIS + ACTION = RESULTS cal in the years to come. A growing and more efficient electricity sector has the potential to make a huge dif- Reform was urgently needed in Rwanda to avoid the ference to businesses and households in this dynamic, unsustainable and growing burden of budget transfers forward-looking country. bridging the gap between cost and revenues of the electricity sector. The joint response of the World Bank ESMAP’s $20 million Energy Subsidy Reform Facility and the Government of Rwanda showed that urgency (ESRF) was set up in 2013 to help countries remove to address a fiscal imperative did not preclude strong fossil fuel subsidies while protecting the poor. analytical underpinning of the reforms. Multi-sectoral ESRF provides technical assistance to governments, develops tools for assessment and decision-making, technical assistance from ESMAP provided the necessary and facilitates knowledge-exchange for a global tools and analyses to develop possible options for the community of reformers. sector to take a more sustainable path while limiting ABOUT ESMAP The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by the World Bank. It provides analytical and advisory services to low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Canada, Denmark, the European Commission, Finland, France, Germany, Iceland, Italy, Japan, Lithuania, Luxembourg, the Netherlands, Norway, the Rockefeller Foundation, Sweden, Switzerland, and the United Kingdom, as well as the World Bank. ESMAP | 1818 H Street, NW | Washington DC 20433 | 202.522.3018 | www.esmap.org