Institutional Structure for the Development of Rural Electrification Projects. GVEP Project for Rural Electrification in Southern Mexico

Institutional Structure for the Development of Rural Electrification Projects GVEP Project for Rural Electrification in Southern Mexico Final Report Submitted: November 2005 i

EXECUTIVE SUMMARY This report has been produced by Intermediate Technology Consultants (ITC) of the UK, under a World Bank contract, funded by the Global Village Energy Partnership (GVEP) with the following three main aims: 1) Analysis of the experience of the institutional setup for the implementation of integrated energy services in Chihuahua and Guanajuato 2) Based on this, evaluation of the merits of the current institutional and organizational structure for rural electrification in each of the four Southern States (Chiapas, Oaxaca, Guerrero and Veracruz) 3) Proposal of an improved institutional design for the implementation of integrated energy services in those States Following a brief introduction in Chapter 1, Chapter II Current Institutional and Organisational Structure in General and in the Four Southern States - analyses the transition from a centralized to a decentralized approach to rural electrification since 1996. Municipalities and states have therefore increasingly become the main arena for decisions on infrastructure investment, under the leadership of State planning committees (COPLADEs). However, most of the communities in Mexico are served by the Federal Electricity Committee (CFE) and Federal institutions still play a big role in infrastructure programs, including rural electrification, such as the Ministry of Social Development (SEDESOL) with its Micro-regions Program, which fosters strong community participation, and the Commission for Development of Indigenous People (CDI), which focuses on indigenous community development. CFE also continues to execute conventional grid extensions at the behest of the states and municipalities, financed through a mix of federal, state and municipal funding sources. The national electrification level is 95% and rural electrification approaches 85%. Further extension of the conventional grid to the remotest villages is becoming very costly, making renewable energy solutions increasingly competitive. However, electrification with renewable energy technologies faces a number of barriers: States and municipalities have little experience in least-cost planning of rural electrification that includes off-grid and renewable energy options, such as wind, mini-hydro and solar PV While almost 60,000 PV systems have been installed since the early 90s, this installation has sometimes been carried out without proper information to the end user on maintenance and limitations of the solar home system (resulting in damage to system components) which has led to skepticism and disappointment of some communities with renewable energy Little awareness by communities on how renewable energy can help them to provide electricity and lead to income generation by stimulating productive uses Social issues are not always appropriately addressed, such as the cultural aspects (important as 60% of the non-electrified communities are indigenous), low social cohesiveness of some remote communities (large transient populations) or internal divisions Institutional barriers, such as the lack of proper coordination (between state entities and between layers of government (federal, state, municipality, community) act as a barrier to integrated rural electrification planning ii

Chapter III Initiatives on the Institutional Setup for Rural Electrification in Selected States is an analysis of how the four southern States have responded to these barriers. The chapter also reviews the experiences of institutional coordination on energy and rural electrification in Chihuahua and Guanajuato. Chapter IV Analysis of the Potential of Success of Institutional Coordination Modalities studies the characteristics of possible alternative rural electrification coordination models that address the institutional and other barriers identified above. The models discussed are (a) cooperation in an independent working group between private sector, NGOs and governmental entities, (b) working group led by one or more state government entities, (c) a committee, formally established by the state government, and (d) an autonomous state energy commission or agency. A matrix is presented that compares the advantages and disadvantages of each model according to certain criteria (e.g. capacity to mobilize existing expertise, involvement of private sector/ngos, adaptability to the existing state structure, continuity after state elections, capacity to mobilize various sources of funding and allowance of bottom-up initiatives). The conclusion of the analysis is that, in the context of the four southern states, the best option is to have inter-sectoral committee, dedicated exclusively to rural electrification or at least to have a subcommittee or formal working group focusing on rural electrification within an intersectoral committee (that has a broad energy mandate). Chapter V Consultants Proposal for Institutional Models, Structure and Function at State Level presents general and specific state-by-state institutional proposals, based on the analysis in the preceding chapter. Here, it is attempted to strike the right balance between flexibility, capability to take decisions, and consideration of the organic nature of institution building, i.e. a process that needs to grow out of and needs to have the political support of the existing institutional environment. The proposed general setup for institutional coordination on electrification at state level has the following elements: A State Coordinating Unit (CU), consisting of the relevant state secretariats, and Federal secretariats, with participation by beneficiaries (municipalities) as well as institutes, NGO and private sector, is proposed as the policy and planning body regarding rural electrification. To enable decision-making, voting power would be restricted to only some of the members or to groups of members. The CU should have the legal status of a committee (or working group or subcommittee under such a committee), as the recommended institutional coordination modality. A Trust Fund (TF) is proposed to be set up in each state to pool the available federal and state resources for rural electrification. A Trust Fund Steering Committee (TFSC) would be established as a sub-committee of the CU to manage these funds, according to specified criteria. Specific operating guidelines for the TF and the trustees are also proposed. The CU would be chaired by the state entity, referred to here as State Implementing Agency (SIA), that currently has rural electrification in its mandate, usually the COPLADE or the State Secretary it belongs to. Apart from chairing the CU, the SIA would have specific responsibilities in the tendering and iii

contracting of approved rural electrification projects as well as for documenting and disseminating the selection process. A State Implementation Unit (IU) would provide administrative support, by acting as a secretariat to the CU, and technical support on energy and development issues. This Implementation Unit would need to be staffed by a core team of full-time staff, supported by short-term professionals contracted on an asneeded basis. The staff need not necessarily be newly recruited staff; instead existing expertise could be mobilized from the institutions represented in the CU by formally seconding appropriate staff to the Unit. The IU could be based physically in the SIA s offices or elsewhere in the State Capital, or even be based in a town closer to the clusters of unelectrified communities. The Implementation Unit would be the inter-disciplinary eyes and ears regarding rural electrification, making sure that the CU s policies and objectives are implemented effectively and efficiently. The development of awareness and dissemination information on rural and renewable energy opportunities amongst the municipal authorities and the beneficiaries in the communities should be a key responsibility of the Implementation Unit, as well providing technical support to localities in the preparation of specific projects and subsequent monitoring and evaluation, once projects are being implemented. Chapter V also includes guidelines on issues in rural and renewable energy, such as outreach and awareness-raising, pre-investment screening and applying social and economic criteria for selection of rural and renewable energy proposals. Finally, appendices are included to provide additional detail of the project development and selection process, the social management systems required for project success and notes on the context and discussions made by the consultants during their visits. iv

ACRONYMS AND ABBREVIATIONS ANES Nacional Solar Energy Association (Asociación Nacional de Energía Solar) CDI Indigenous People s Development Commission (Comisión Nacional para el Desarrollo de los Pueblos Indígenas) CFE Federal Commission of Electricity (Comisión Federal de Electricidad) CNA National Water Commission (Comisión Nacional del Agua) CONAE National Energy Savings Commission (Comisión Nacional para el Ahorro de Energía) CONCYTEG Guanajuato Council of Science and Technology (Consejo de Ciencia y Tecnología) COVECYT Council of Science and Technology of Veracruz (Consejo Veracruzana de Ciencia y Tecnología) COPLADE State Planning and Development Committee (Comité de Planeación para el Desarrollo del Estado) COPLADEG COPLADE of Guerrero COPLADEVER COPLADE of Veracruz COPLADEMUN Municipal Planning and Development Committee (Comité de Planeación para el Desarrollo Municipal) CRE Energy Regulatory Commission (Comisión Reguladora de Energía) CTEEG Technical Committee on Energy of the State of Guanajuato (Comité Técnico de Energía del Estado de Guanajuato) CTEEV Veracruz State Energy Committee (Comisión Técnica de Energía del Estado de Veracruz) CU State Coordinating Unit SCSE Energy Sectorial Subcommittee of COPLADE, Oaxaca (Sub-Comité Sectorial de Energía) FAIS Fund for Social Infrastructure Development FIDEAPECH Small Enterprise Support Trust Fund (Fideicomiso de Apoyo a la Pequeña Empresa de Chihuahua) FIRCO Shared Risk Trust Fund (Fideicomiso de Riesgo Compartido) GEF Global Environment Facility GTERCH Renewable Energy Working Group (Grupo de Trabajo de Energía Renovable de Chihuahua) IBRD International Bank for Reconstruction and Development (of the World Bank Group) IESSCRM Integrated Energy Services for Small Communities of Rural Mexico Project (Servicios Integrados de Energía para Pequeñas Comunidades Rurales en el Sureste de México) IIE Institute for Electrical Research (Instituto de Investigaciones Eléctricas) IPP independent power producer JCAS Chihuahua Central Council for Water and Sanitation (Junta Central de Aguas y Saneamiento) kw kilowatt = 1,000 Watt kwh kilowatt-hours MW megawatts (megavatios) = 1 million Watt v

NAFIN Nacional Financiera NREL National Renewable Energy Laboratory PDF Project development facility (of the GEF) PV photovoltaic RET renewable energy technology SAI Secretary of Indigenous Affairs of Guerrero (Secretaría de Asuntos Indígenas) SAGARPA Federal Secretary of Agriculture and Rural Development (Secretaría de Agricultura y Desarrollo Rural) SE Secretary of Economy of Guanajuato (Secretaría de Economía) SEDESO Secretary of Social Development of Chiapas (Secretaría de Desarrollo Social) SEDESOL Federal Secretary of Social Development (Secretaría de Desarrollo Social) SEDESOL Secretary of Social Development of Guerrero (Secretaría de Desarrollo Social) SEDEES Secretary for Sustainable Economic Development of Guanajuto (Secretaría de Desarrollo Económico Sustentable) SEDER Secretary of Rural Development of Guerrero (Secretaría de Desarrollo Rural) SEDER Secretary of Rural Development of Guanajuato (Secretaría de Desarrollo Rural) SEFINA Secretary of Finance and Administration of Guerrero (Secretaría de Finanzas y Administración), SEMARNAT Federal Secretary of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales) SENER Federal Secretary of Energy (Secretaría de Energía) SEPI Secretary of Indigenous Peoples of Chiapas (Secretaría de Pueblos Indígenos) SF Secretary of Finance of Guanajuato (Secretaría de Finanzas) SHCP Federal Secretary of Treasury (Secretaría de Hacienda y Crédito Público) SIA State Implementing Agency SOP Public Works Secretary of Guanajuato (Secretaría de Obras Públicas) SPF Secretary for Planning and Finance of Chiapas (Secretaría de Planeación y Finanzas) SS Health Secretary of Guanajuato (Secretaría de Salud) ToR Terms of Reference USAID United States Agency for International Development WB World Bank Exchange rate: 1 US$ (US dollar) = 10.9 Mexican pesos (August 2005). vi

TABLE OF CONTENTS EXECUTIVE SUMMARY...II ACRONYMS AND ABBREVIATIONS... V TABLE OF CONTENTS... VII TABLE OF FIGURES... IX 1. INTRODUCTION...1 2. CURRENT INSTITUTIONAL AND ORGANIZATIONAL STRUCTURE IN GENERAL AND IN THE FOUR SOUTHERN STATES...3 2.1 TRANSITION FROM CENTRALIZED TO DECENTRALIZED APPROACH TO RURAL ELECTRIFICATION...3 2.2 ROLE OF FEDERAL AGENCIES INVOLVED IN RURAL ELECTRIFICATION...5 2.3 ROLE OF STATE-LEVEL GOVERNMENTS, MUNICIPALITIES AND COMMUNITIES IN RURAL ELECTRIFICATION...7 2.3.1 Process of financing and implementation...7 2.3.2 Role of municipalities and communities in decision-making processes...8 2.4 ROLE OF PRIVATE SECTOR, NON-GOVERNMENTAL ORGANIZATIONS AND BENEFICIARIES...9 2.5 CASE STUDIES: STATES APPROACH TO AND RECORD WITH RURAL ELECTRIFICATION 10 2.5.1 Chiapas...10 2.5.2 Guerrero...11 2.5.3 Oaxaca...12 2.5.4 Veracruz...12 2.6 LIMITATIONS TO THE EXISTING APPROACH...13 2.6.1 General barriers to rural electrification...13 2.6.2 Barriers to renewable energy for rural electrification...14 2.6.3 Institutional barriers...16 2.6.4 Concluding remarks...17 3. INITIATIVES ON THE INSTITUTIONAL SETUP FOR RURAL ELECTRIFICATION IN SELECTED STATES...19 3.1 CASE STUDIES ON RURAL ELECTRIFICATION: CHIHUAHUA AND GUANAJUATO...19 3.1.1 Chihuahua - Working Group of government and non-governmental organizations, proposed to be converted into an organization...19 3.1.2 Guanajuato - Coordinating Energy Committee, proposed to be converted into an Energy Commission...23 3.2 COORDINATION STRUCTURES PROPOSED OR UNDER DISCUSSION IN THE SOUTHERN STATES 27 3.2.1 Guerrero - Working Group coordinated by COPLADE...27 3.2.2 Oaxaca - Subcommittee coordinated by COPLADE...29 3.2.3 Veracruz - Technical Committee on Energy coordinated by SEDERE...33 3.3 CONCLUDING REMARKS...36 4. ANALYSIS OF THE POTENTIAL OF SUCCESS OF INSTITUTIONAL COORDINATION MODALITIES...37 5. CONSULTANTS PROPOSAL FOR INSTITUTIONAL MODELS, STRUCTURE AND FUNCTION AT STATE LEVEL...44 5.1 RECOMMENDED INSTITUTIONAL MODEL...44 5.2 FEDERAL-LEVEL SUPPORT FOR STATE INITIATIVES...50 - vii -

5.3 ROLES AND RESPONSIBILITIES OF THE PROPOSED STATE COORDINATING UNITS AND THEIR IMPLEMENTATION UNITS...51 5.3.1 Project Outreach/awareness-raising...52 5.3.2 Pre-investment screening and studies...53 5.3.3 Project design and development...55 5.3.4 CU review and evaluation of project applications...56 5.3.5 Tendering for equipment, installation and operation of selected RE projects and funding winning bids...56 5.3.6 Project Monitoring...57 5.4 WORK PLAN: STEPS FOR IMPLEMENTING THE RECOMMENDED INSTITUTIONAL STRUCTURE...59 5.5 DEVELOPING RECOMMENDATIONS FOR SPECIFIC STATES...61 5.5.1 Chiapas...62 5.5.2 Guerrero...63 5.5.3 Oaxaca...65 5.5.4 Veracruz...66 6. CONCLUSIONS AND RECOMMENDATIONS...68 6.1 CONCLUSIONS...68 6.2 RECOMMENDATIONS...69 REFERENCES...71 ANNEX A. TERMS OF REFERENCE...72 ANNEX B. FURTHER RECOMMENDATIONS ON THE STATE COORDINATING UNITS POLICY DESIGN...75 B.1 Project Development and Selection Criteria...75 B.2 Guidelines for establishing Social Management Systems for operating rural electrification schemes...77 ANNEX C. ANNEX D. ANNEX E. ANNEX F. ANNEX G. RENEWABLE ENERGY IN MEXICO...81 CONSULTANT NOTES ON MEXICO CITY MEETINGS...83 CONSULTANT NOTES ON OAXACA...88 CONSULTANT NOTES ON VERACRUZ...107 CONSULTANT NOTES ON GUERRERO...120 ANNEX H. CONSULTANT NOTES ON CHIAPAS...132 - viii -

TABLE OF FIGURES FIGURE 3-1 ORGANIZATIONAL STRUCTURE FOR CHIHUAHUA S GTERCH...20 FIGURE 3-2 PROPOSED ORGANISATIONAL STRUCTURE FOR THE GUANAJUATO STATE ENERGY COMMISSION...25 FIGURE 3-3 WORKING GROUP STRUCTURE FOR RURAL ELECTRIFICATION, AS PROPOSED BY COPLADE GUERRERO...28 FIGURE 3-4 ORGANISATIONAL STRUCTURE IN OAXACA WITH REGARDS TO RURAL ELECTRIFICATION AND RURAL DEVELOPMENT...30 FIGURE 3-5 DECISION-MAKING IN VERACRUZ WITH RESPECT TO RURAL ELECTRIFICATION AND THE ROLE OF CTEEV...34 FIGURE 5-1 PROPOSED INSTITUTIONAL SETUP FOR SOUTHERN STATES...45 FIGURE 5-2 PROPOSED INSTITUTIONAL SETUP FOR CHIAPAS...62 FIGURE 5-3 PROPOSED INSTITUTIONAL SETUP FOR GUERRERO...64 FIGURE 5-4 PROPOSED INSTITUTIONAL SETUP FOR OAXACA...65 FIGURE 5-5 PROPOSED INSTITUTIONAL SETUP FOR VERACRUZ...67 - ix -

1. INTRODUCTION Mexico has already achieved an electrification coverage rate of 95% of households with a rural electrification rate of 85% 1. While this electrication rate is impressive, it implies that some 5.1 million people (in approximately 74,000 communities) are still without access to electricity. Sixty percent of people without electricity are indigenous, and they live in the greatest concentrations in the States of Chiapas, Guerrero, Oaxaca, and Veracruz. Many unelectrified communities also lack other basic services such as water supply, access to health centers, telecommunications and education. The number of people living in these circumstances is steadily rising, since population growth exceeds the rate at which new connections are made. The growing need for rural electrification service exists in the face of increasing challenges to address this need as the remaining communities are more remote, disperse, and sparsely populated, all of which conspire to raise the costs of connection. The Energy Sector Program 2001-2006 establishes the Government s commitment to develop and implement a National Rural Electrification Program with the ultimate objective of achieving full coverage at the national level. Through a range of social development funds available under the Mexican decentralization policy, public financial resources are available for a range of rural municipally-based services. The use of these funds however is not channeled effectively to energy projects that meet the needs of the rural poor. The decentralization and devolution of financial and programmatic control to the States and municipalities has also not been accompanied by a parallel build-up of local capacity to identify electrification needs/uses and plan cost-effective solutions, while no organizational scheme exists that effectively integrates their expertise and potential contribution. SENER has been granted resources from the Global Village Energy Partnership (GVEP) to examine the institutional aspects associated with rural electrification in Mexico. With GVEP financial support, Intermediate Technology Consultants (ITC) has been commissioned to undertake a study on the Institutional structure for the development of rural electrification projects in four States of Southern Mexico: Chiapas, Guerrero, Oaxaca and Veracruz. The Terms of Reference (ToR) for the study is given in Annex A. The consultant team of four experts conducted their fieldwork in Mexico in July/August 2005, during which time extensive interviews and discussions were held with all the relevant project partners in the Mexico City (México D.F.) as well as in the four States. Where appropriate, requests for relevant documents and missing information were made. A first team experts visited D.F. and the States of Veracruz and Oaxaca in the last 2 weeks of July and first 2 weeks of August 2005, followed by a second team of experts that went to D.F., Guerrero and Chiapas during the last 3 weeks of August 2005. 1 Source: CFE, 2002-1 -

This report presents the issues outlined in the Term of Reference (ToR, see Annex A) as well as the team s conclusions and recommendations for the next phases of the project. The report is structured as follows: Chapter 2: Current Institutional and Organizational Structure in General and in the Four Southern States (corresponding to Item II of the ToR s list of tasks ) Chapter 3: Initiatives on the Institutional Setup for Rural Electrification in Selected States (dealing with Chihuahua and Guanajuato as case studies, corresponding to Item I of the ToR, and describing existing proposals in the four Southern states) Chapter 4: Analysis of the Potential of Success of Institutional Coordination Modalities (corresponding to Item III of the ToR s list of tasks ) Chapter 5: Consultants Proposal for Institutional Models, Structure and Function at State Level (which presents institutional models for the implementation of rural energy solutions, corresponding to Item III in the ToR) Chapter 6: Conclusions and recommendations The Annexes provide additional information.. - 2 -

2. CURRENT INSTITUTIONAL AND ORGANIZATIONAL STRUCTURE IN GENERAL AND IN THE FOUR SOUTHERN STATES (Item II in the Terms of Reference s list of tasks; see Annex A) This chapter presents a review of the current institutional and organizational structure for the implementation rural electrification projects/activities in Mexico, focusing in particular on four southern States (namely, Chiapas, Oaxaca, Guerrero and Veracruz), including decision-making processes and the role of relevant stakeholders. In this chapter it is explained how rural electrification activities have proceeded since the decentralization in decision-making on rural electrification in 1996. Recently, the States have developed their own organizational models for rural electrification at different paces and in different ways, and these existing proposals will be discussed in chapter 3. 2.1 Transition from centralized to decentralized approach to rural electrification For many years Mexico has pursued a top-down approach to rural electrification for two main reasons: the highly centralized structure of government, and the specific requirements of rural electrification planning. Since the mid-nineties a number of changes have occurred which has necessitated a re-think in the institutional approach to rural electrification. The first is a shift towards decentralization of government, including infrastructure projects. The second is the fact that around the same time, the Federal Commission for Electricity (CFE) had arrived at relatively high rate of rural electrification of 85%, implying that the only remaining communities without electricity are typically very remote and isolated ones. This means that each subsequent community connected to the grid poses increasingly higher connection costs, until the cost-benefit balance for grid extension can no longer be supported. Given the above changes, attempts are being made to adapt the system to the changing institutional and technological needs/conditions. According to CFE statistics (2003), 5.1 million people, spread over 74,068 communities are without electricity, of which 1.8 million are in urban areas and 3.3 million are in rural areas. Providing power to the non-electrified urban areas (3,539 communities) would require an investment of 1,447 million pesos. Providing power to the 4,314 communities (that have more than 100 inhabitants) by means of grid extension and some solar energy would require an investment of 4,764 million pesos (CFE, 2003). 2 In fact, CFE is finding it financially and institutionally challenging to provide conventional grid service at the rural margin. During the period 2004-2006 conventional connections are projected to cost on average US$2,700 per household (with marginal costs of providing service even higher). These costs are 3 to 6 times higher than connections in the rest of Latin America 3. 2 3 Requiring 13,801 kilometres of distribution lines and 26,390 solar PV modules According to a 2001 study by SENER, US$360 million would be needed to achieve 100% electrification (defined as electrifying communities with more than 100 inhabitants) and US$215 million to electrify indigenous communities only. - 3 -

Some 66,215 communities have fewer than 100 people and are usually located far from the grid. In this situation, renewable energy options (solar, wind, biomass and small-scale hydropower) could be very competitive in many rural areas and would be their only logical option as an electricity source. For comparsion, a small solar PV system could cost around US$1,000-2,000 per household. 4 As a general rule of thumb, CFE applies as criteria for electrification that a community is located less than 10 km from the grid and has a road to facilitate movement of equipment. However, CFE does not use formal models that would permit the comparative techno-economic evaluation of grid extension, mini-grid systems and individual energy systems. Since the early 1990s, solar photovoltaic (PV) energy has been applied by CFE as an electrification solution for isolated areas. CFE believes that solar energy is the most important renewable energy option available because there are few sites where wind power is an option and few rivers near non-electrified communities that have a permanent flow of water. Biogas would also not be possible in most areas, because the proportion of stabled cattle, needed to ensure an efficient supply of dung, is small. 5 Over the past decades, CFE has installed 60,000 household solar PV systems of which 13,000 were installed directly by CFE and the remainder by the States with CFE supervision. These installations are in some 2,500 communities, benefiting 42,000 households, community centers, schools and clinics as well as telecommunication facilities under the Federal Government s Renewable Energy Electrification Program. In addition, some 30,000 systems have been installed by the private sector, including 12,000 PV-powered telephones. These trends are occurring within a changing institutional context in which the responsibility for addressing rural needs (including electricity, but also water, education, health services, and telecommunications) has been decentralized. While it remains true that, by constitutional mandate, the Mexican government has direct, permanent, and non-transferable dominion over the electricity distribution and transmission to public users, 6 as of 1996, the Government of Mexico implemented decentralization policies that effectively transferred the administration and use of federal resources for social municipal infrastructure development (known as Branch 33 of the Federal Budget or Ramo 33 7 in Spanish) from the central government to the 4 5 6 7 Cost of solar energy is around US$3,500-7,000 per kw, wind turbines $1,000 per kw installed (energy costing between $0.05-.11/kWh), mini/micro hydropower $800-6,000 per kw ($0.03-0.45/kWh) Private communications with CFE officials by consultants team (see Annex B) In Mexico, the state-owned companies CFE (Comisión Federal de Electricidad) and LFC (Luz y Fuerza del Centro) have been the only entities responsible for electricity supply. Since 1992, independent private companies have been permitted to generate electricity for their own consumption, for exportation and importation, or as small producers (less than 50 MW) with power to be sold to CFE. All these options require permission from the Energy Regulatory Commission (CRE, Comisión Reguladora de Energía); at levels below 15 MW, a simplified permission can be applied for and capacities below 0.5 MW do not require permission. Federal funding refers to the Branch 33 (Ramo 33) section of the Federal budget, which manages social and economic development funds granted to State and Municipal governments. Ramo 33 is distributed among States and Municipalities considering the degree of poverty and the development status of social infrastructure, especially electricity and water. Before 1996, the Social Development Secretary (SEDESOL) managed these funds. - 4 -

States and Municipalities. Ramo 33 is composed of seven funds that are earmarked for several purposes. Among these there is only one fund, the Fund for Social Infrastructure Development (known in Spanish, as FAIS), which targets social infrastructure development. 8 FAIS must be used to invest in health, education, transport, water and electrification works, among others. The States and municipalities thus became responsible for selecting the social infrastructure projects to be developed each year, authorizing the allocation of available funds, and determining the amount each participating community must contribute (see also section 2.3). Thus, today decisions for infrastructure investment are made, for the most part, at the regional level. Federal funds for social and economic infrastructure development are given to each region in accordance with projected needs and relative income. State and municipal governments are responsible for developing the infrastructure project portfolio through each state s Planning and Development Committee, known as COPLADE, 9 with staff from the state s Finance Secretary responsible for final approval. In this way, the power of decision-making regarding electrification works was transferred from the Federal Commission of Electricity (CFE) to the State and municipal level. Since 1996, the CFE has functioned only as a contractor and is no longer in charge of planning or programmatic activities. Normally, rural electrification targets are annually formulated, examined, and agreed upon by CFE, State, and Municipal governments within each State s COPLADE. 2.2 Role of federal agencies involved in rural electrification The Secretary of Energy (SENER, Secretaría de Energía) is in charge of establishing general policy guidelines, planning of the energy sector s development, applying a transparent regulatory framework and for the promotion and implementation of projects (as established in the National Energy Program, PROSENER). SENER introduced the program Agua y Luz para el Desarrollo y la Salud in 2001, as rural electrification projects became more and more linked with federal funds for social development. Through this initiative SENER gained useful experience in working closely together with other government agencies, such as SEDESOL, CFE, CDI, CONAE and IIE. The Indigenous People s Development Comission (CDI, Comisión Nacional para el Desarrollo de los Pueblos Indígenas) is active in providing basic services integrated with productive uses in indigenous communities. Within this framework CDI make funding available for electrifying indigenous communities (defined as localities where at least 30% speaks an indigenous language) that have between 100 and 2,500 inhabitants. In 2004, some 1,906 million pesos were made available for infrastructure works in indigenous villages. 10 Of the 1,609 million pesos from federal funding, 326 million pesos were authorised for electrification projects. 8 9 10 The budget in 2005 for Ramo 33 was 2,756 million pesos, of which 875 million pesos was for the Fondo de Aportaciones para la Infraestructure Social (FAIS); source: Comisión de Presupuesta de la Cámara de Dipitados del Congreso de la Unión Comité de Planeación para el Desarrollo (del Estado) Of which 84% was from federal resources, 5% State, 9% municipalities and 1% from the beneficiary communities; source: www.cdi.gob.mx - 5 -

The Secretary of Social Development (SEDESOL, Secretaría de Desarrollo Social) initiated the Micro-Regions Program (microrregiones) in February 2001 aiming to support municipalities in the development of rural infrastructure mainly focused on education, housing and health. In the period 2001-2002 the program invested a negligible amount of resources in grid extensions. The strategy, which includes a strong community participation component, focuses on geographic areas composed by one to two municipalities that exhibit high levels of marginalization. Some 55% of the localities included in the strategy have less than 50 inhabitants. 11 The Micro-Regions Program is implemented at the national level. The microrregiones are based on cultural identity, in which Strategic Community Centres (CEC, Centros Estratégicos Comunitarios) are chosen on the basis of the potential of certain towns to lead the micro/region to serve as its development pole. Overall, SEDESOL operates in about 100,000 small villages, of which 62,000 have 50 inhabitants or less. It has 2,966 CECs, of which about 2,000 have grid electricity, and the rest are expected to be connected at some time in the future. In Mexico, Federal Commission for Electricity (CFE, Comisión Federal de Electricidad) generates slightly over 80% of total power supply and controls 96% of the country s transmission network. Since 1996, CFE is no longer in charge of planning or programmatic activities on rural electrification, but plays an important role as contractor in the Ramo 33 programmes and projects on behalf of SENER SEDESOL and CDI, which have been the main source of funding for rural electrification, but rely on CFE expertise. In Mexico, there is an important network dedicated to renewable energy promotion and research by public and private institutions who are important stakeholders in providing expertise in the area of renewable energy techologies. The National Commisson for Energy Savings (CONAE, Comisión Nacional de Ahorro de Energía) is an autonomous technical agency under SENER, involved in the promotion of energy efficiency and renewable energy technologies. Technologies that are relevant for rural electrification, include solar photovoltaics, mini hydropower 12, wind energy and biomass. Worth mentioning also are the Institute for Electical Research (IIE, Instituto de Investigaciones Eléctricas) and universities, such as UNAM (Universidad Nacional Autónoma de México), which are involved in applied research and technology development in electricity and renewable energy technologies, as well as in providing specialized services and promotion. Currently, there is no coordination on energy matters with the National Water Commission (CNA, Comisión Nacional del Agua) and this can be attributed to the fact that off-grid rural electrification has almost exclusively focused on solar energy. Studies have been made for other technologies, such as mini and micro-hydropower (by CFE and CONAE), but few projects have been implemented so far. Given that 11 12 In Oaxaca: 182 highly marginalised municipalities (888,600 inhabitants) of which population 85% are indigenous and in which 29% of households are not electrified; In Chiapas: 44 highly marginalised municipalities (907,300 inhabitants) of which population 71% are indigenous and 25% of households are not electrified; In Veracruz: 49 highly marginalised municipalities (754,500 inhabitants) of which population 53% are indigenous and 33% of households are not electrified; In Guerrero: 30 highly marginalised municipalities (718,900 inhabitants) of which population 49% are indigenous and 30% of households are not electrified. Source: SEDESOL (2004); see also www.microrregiones.gob.mx CONAE has published the Manual Minihydráulica, available at www.conae.gob.mx - 6 -

the vast majority of waters suitable for smaller hydro projects fall under the jurisdiction of the CNA, their participation is essential. This will facilitate better data on hydro resources as well as expedite the approval of permits for smaller-scale hydro plants. As far as electricity supply affects the use of natural resources, the Secretary of Environment and Natural Resources (SEMARNAT, Secretaría de Medio Ambiente y Recursos Naturales) plays an obvious role. Also, SEMARNAT is the focal point of the Kyoto Protocol to the UN Framework Convention of Climate Change (UNFCCC). SEMARNAT will therefore be responsible for defining the overall strategy and sustainable development criteria as well as the approval of energy and reforestation projects that will be submitted under the Clean Development Mechanism, although in most electrification projects the CO 2 emission reduction will not be that significant. There are already projects in operation for the provision of renewable energy in rural areas. The Shared Risk Trust Fund (FIRCO, Fideicomiso de Recursos Compartidos) of the Secretariat of Agriculture (SAGARPA) is promoting a program to install water pumping equipment for agricultural purposes using solar photovoltaic technology. Mexican development banks are involved in promoting development and local financing schemes. Such schemes will not only be important in financing off-grid power supply, but in the creation of productive uses in the off-grid areas, where the additional income generated could make the operation and maintenance of off-grid energy systems affordable and viable. For example, BANOBRAS has worked with the private and public sector in financing infrastructure and public service projects as well as promoting investment in private projects by providing guarantees. 2.3 Role of State-level governments, municipalities and communities in rural electrification 2.3.1 Process of financing and implementation (Item 2.1 in the Terms of Reference s list of tasks) As discussed in paragraph 2.1, three levels of government handle rural electrification (federal, state and municipal). Normally, rural electrification targets are annually formulated and examined at the State level then examined and agreed upon by CFE, State, and Municipal governments within the responsible State department, usually the State s Planning and Development Committee (COPLADE). Each state s COPLADE evaluates project requests from its municipalities and grants final project approval. Apart from federal resources (Ramo 33), resources for rural electrification come from direct funding and shared resources, State and municipal governments, beneficiary communities, private sources and federal programs, such as CDI s infrastructure program. 13 To carry out these rural electrification programs, CDI, CFE and State Government (including the relevant municipality) sign a tripartite agreement. CFE s 13 To illustrate the level of funding in Mexico, in 1999 total investment in electrification was US$ 206 million, benefiting 277,000 people (61,628 households), of which US$ 81 million came from federal spending, US$ 70 million from shared resources and US$ 56 million from direct funding (Gutierrez, 2001) - 7 -

Regional Electrification Department usually acts as the executive agent responsible for project planning, development, and management. CFE also acts as the regulatory and technical agency in charge of standardization and equipment monitoring. SEDESOL has delegaciones in almost every State (that officially represent SEDESOL in that state) as well as residentes, who coordinate with the presidentes municipals. In Oaxaca, for example, there are 70 residentes and in Veracruz there are 45. SEDESOL is regarded as being an effective institution in raising local community consciousness regarding development issues and options, and in organizing these communities to attain their development objectives by linking them to their respective presidentes municipales, by means of the asambleas comunitarias or cabildos. The formal decision of the cabildo is then channeled to COPLADE. For example, of the 99 communities in Oaxaca State without electricity and without road access, 24 communities with a population of about 5,000 were selected as rural electrification priorities by COPLADE on the basis of their being near an Strategic Community Centre (CID) in SEDESOL s microrregiones program. Similarly, CDI has its own network in the form of representatives in the States (delegaciones) and Coordinating Centres (CCDI, centros coordinadores). In Chiapas, there are 12 CCDIs, Guerrero has 5, Oaxaca 10 and there are 9 in Veracruz 14. CDI supports infrastructural works through its Basic Infrastructure (Infraestructura básica) Program. Also, local funds have been established to make loans for productive projects for indigenous communities and producers organizations within such communities. Normally, CDI receives requests for grid extension to the community, or to increase the coverage within the community. They also receive requests to improve the quality of service (voltage level or upgrading from 1 to 3-phase current). If neither of these options is possible, they try to convince the community to accept renewable energy solutions. 2.3.2 Role of municipalities and communities in decision-making processes (Items 2.3 and 2.4 in the Terms of Reference s list of tasks) The municipality refers to a territorial extension under the administration of a Presidente Municipal (mayor), elected for 3 years. However, there are also municipalities organized under traditional communal customs (usos y costumbres or UC), where the mayor is not elected, but appointed by the community in an assembly, but only for one year. This is further complicated by the fact that in many of these communities the control of communal land (ejidos) is in the hands of the elected Eijdo Authority (Autoridad Ejidal) with a term of 3 years. Most rural municipalities have very limited resources, which are barely sufficient to cover operating costs, let alone investment in infrastructure. Hence, little local revenue can be raised and municipalities depend on federal and state resources for most of their funds. Federal Law establishes a mechanism for calculating how much each Municipality will receive each year from the Federal Budget, through the Ramo 33 (Federal Budget-line 33). 14 See www.cdi.gob.mx - 8 -

In theory municipalities have total autonomy in assigning their resources but, in practice, COPLADE often prevails on them to execute projects in line with State Government priorities, or vetos low priority projects with the incentive of providing matching State (and Federal) resources for projects considered under Ramo 33. In practice, municipalities remain highly dependent on State Governments. Within municipalities, funds are allocated to communities (localidades or pueblos) or subprojects. Regarding the mechanism for allocating expenditure, often Municipal Development Planning Committees (COPLADEMUNs) coordinate the social and infrastructure priorities and projects declared by the representatives of the communities belonging to the Municipality, although often under different names and structure, as indicated in section 2.5. For example, in Veracruz, the Municipal Councils on Sustainable Development (Consejos Municipales de Desarrollo Rural Sustentable) are the formal bodies that would pre-approve and prioritise individual community initiatives. Sometimes, the involvement of federal and state level Secretaries for rural development implies setting up parallel structures. In Oaxaca, for example, there are two local bodies responsible for municipal-level planning: Municipal Development Council (Consejo de Desarrollo Municipal,CDM), which represents the various communities and local organizations and coordinates social and infrastructure programs, of which the matching funds are provided by SEDESOL and CDI. The CDM, known as COPLADEMUM in other States, reports directly to State COPLADE. Municipal Council for Sustainable Rural Development (Consejo Municipal de Desarrollo Rural Sustentable, CDRS), which represents local producers organizations and communities and channels productive project proposals to COPLADE through the State Secretariat for Rural Development (Secretaría de Desarrollo Rural, SEDER) and the Governor s Office. Much of the matching funds are provided by SEDESOL and CDI through this Secretariat. 2.4 Role of private sector, non-governmental organizations and beneficiaries (Items 2.2 and 2.3 in the Terms of Reference s list of tasks) Conventional grid extension projects are usually implemented by CFE, since the Commission has technical standards for power generation and distribution which are supposed to apply everywhere. The role of local inhabitants in CFE grid extension projects is usually limited to secondary tasks, such as last-mile haulage of equipment. Off-grid rural electrification projects are typically private or NGO-driven. Regarding solar PV and other renewable energy projects, private companies usually handle equipment supply and are responsible for installation and after-sales service, as well as for training users in basic system maintenance. Communities provide basic technical support for a project during and after installation of the domestic systems, as well as underwriting of maintenance costs and financing of capacity expansion. - 9 -

The involvement of non-government stakeholders in the planning activities of each Secretary or Government entity seems dependent on the (personal) relations it has with NGOs, universities and private sector and differs from project to project. In Chiapas, for example, the Delegation of CFE works with a Consultative Group, consisting of the CFE representation in Chiapas, the representative of the Chiapas government at CFE, chambers of commerce, universities and associations of engineers and architects. Regarding solar PV, some 100 companies operate in Mexico, providing PV technology for lighting, water pumping and refrigeration. 15 The Mexican National Solar Energy Association (ANES) promotes of the use of renewable energy sources in that country. This non-government association, initiated in 1980, is made up of a group of some 270 professionals and other specialists from both public and private institutions, academics as well as members of Mexico's renewable energy industry, that are interested in researching, applying, developing and commercializing renewable energy sources in that country. 2.5 Case studies: states approach to and record with rural electrification (Items 2.1 and 2.4 in Terms of Reference s list of tasks) After reviewing the institutional characteristics above, and the limitations thereof, we turn our attention to the records of accomplishment individual States have achieved under this modus operandi. This section describes in more detail the institutional structure which each of the four Southern States have utilized to pursue rural electrification planning. 2.5.1 Chiapas Planning of rural electrification falls under the Directorate of Programs (Dirección de Programas Concertadas) of the Subsecretary of Planning (Subsecretario de Planeación) who also acts as Operative Coordinator of COPLADE, falling under the Secretary for Planning and Finance (Secretario de Planeación y Finanzas, SFP), who is also de General Coordinator of COPLADE in Chiapas. Unlike in other States, there is no dedicated Department of Rural Electrification and the role of the Chiapas COPLADE is less pronounced in this area. In practice, the planning of rural electrification projects is discussed between the Governor s Office (Representative of Chiapas at CFE), the Planning and Finance Secretary, the local representation of CFE (delagación), and CDI under agreements between the Federal and State Governments. During 2004-2005 the budget available for rural electrification (communities with more than 100 inhabitants, located in 33 municipalities) was 180 million pesos, of which CFE, CDI and the Chiapas Government each contributed one-third. For 2006, the budget for conventional grid extension is 164 million pesos (CDI: 57 million, CFE: 57 million and State Government: 50 million), while the State Government has set aside 7 million pesos 15 SENER (2004), based on data provided by IIE and the National Solar Energy Association (ANES, Asociación Nacional de Energía Solar); Huacuz (2001) - 10 -

for non-conventional electrification. Other relevant government Secretaries are SEPI (Secretaría de Pueblos Indígenos) and SEDESO (Secretaría de Desarrollo Social) that are involved the development of infrastructural and productive projects for indigenous and marginalized communities. Chiapas is administratively divided in 9 regions with 19,455 16 communities (with a total of 4,232 million people) grouped together in 118 municipalities. According to CFE statistics, some 2,627 communities (with 228,171 inhabitants) do not have access to electricity, out which there are 620 with more than 100 people (with a total of 109,729 inhabitants) and 53 with over 1000 people (with 40,760 inhabitants). In Chiapas, the electrification depends on the region, for example in the remote Lacandona jungle, 75% of the 188 communities do not have electricity. Some 25% of the population in Chiapas is classified as indigenous people. The current CFE grid extension plan covers 411 communities (with more than 100 inhabitants each) with 96,364 inhabitants (or 20,291 users) 17 in total. During 2004-2005 the budget available for rural electrification (communities with more than 100 inhabitants, located in 33 municipalities) was 180 million pesos, of which CFE, CDI and the Chiapas Government each contributed one-third. For 2006, the budget for conventional grid extension is 164 million pesos (CDI: 57 million, CFE: 57 million and State Government: 50 million), while the State Government has set aside 7 million pesos for non-conventional electrification. 2.5.2 Guerrero The COPLAGEG (COPLADE of Guerrero) carries the responsibility for rural electrification through its Department for Rural Electrification (Depto. de Electrification Rural), while the General Coordination for Municipal Strengthening (Coordinación General de Fortalecimiento Municipal) manages the contacts with the municipalities on an operational level. The General Coordinator of COPLADEG is also the Secretary of Social Development in Guerrero (SEDESOL) Other relevant Secretaries include the Secretary of Finance and Administration (SEFINA, Secretaría de Finanzas y Administración), Secretary of Indigenous Affairs (SAI, Secretaría de Asuntos Indígenas) and Secretary of Rural Development (SEDER, Secretaría de Desarrollo Rural). Guerrero is administratively divided in 7 regions with 7,451 communities grouped together in 80 municipalities. The electrification rate in Guerrero is 91%, 99% and 81%, in total, urban areas and rural areas, respectively. According to these CFE statistics, this leaves 2,059 communities (with 176,624 inhabitants) to be electrified with community defined as a locality that has more than 5 inhabitants. If 16 17 Out of which 4,725 have more than 100 inhabitants, having a total 3,948 million people The non-conventional electrification plan of CFE covers 219 communities (serving 43,380 inhabitants) with 8,495 solar home systems (one per household), costing around 127 million pesos or 14,940 pesos per user (household), which is equivalent to US$ 1,370 per household. The conventional electrification plan of CFE for 2005 covered 58 communities with a combined length of 169 km (with 1,224 poles). The cost will be 57.8 million pesos (R.D.: 24.4 million and L.D: 33.4 million), or 29,700 pesos per user (household), which is equivalent to US$ 2,730 per household. - 11 -