Converting consumers into customers in slums at Sao Paulo city
One billion people and growing at a reported rate of 5% per year live in poor urban and peri-urban areas, throughout the developing world. This paper shares experiences and economic and social studies on innovative, socially responsible and cost-effective approaches, to expanding access to electricity services in these poor urban neighborhoods. The paper reviews worldwide lessons learned, with a particular highlight of the pilot project in the "favela" (slum) of Paraisopolis in Sao Paulo, Brazil, conducted by AES Eletropaulo (local utility), the U.S. Agency for International Development (USAID), and the International Copper Association (ICA) with local community and industry partners.
The focus of this project is on the safety and reliability of energy supply and use, and especially, the benefits of energy efficiency and renewable energy, as applied to residential and commercial buildings in poor urban areas, commonly called "slums" (favelas). Furthermore, this paper discusses the challenges, sustainability aspects, socio-economic conditions, financial analysis, regulatory and institutional factors, and technical solutions.
The total investment in the pilot project reached US$1.8 million. The financial analysis concludes that the payback is a very attractive 1.5 years, making the business case for action.
The pilot project's objectives were to convert formerly 'free' electricity consumers into satisfied and paying customers in a manner that was financially viable for the distribution company. This in turn depended on securing community support for the project and improving customers' willingness and ability to pay for their consumption. The specific objectives for the pilot were:
- To develop and test new approaches for regularization and improvement of electricity services in a target area in São Paulo city; and
- To document and disseminate the lessons learned from the roll-out of the AES program in São Paulo for incorporation into a larger regional program.
The selected pilot area covers two neighborhoods (Antônico and Centro) within Paraisópolis, a "favela" with approximately 20,000 households in the urban area of São Paulo city. This target area includes 4,365 low income households and businesses (of which 60 households had small home businesses and 423 were stand-alone commercial enterprises of varying sizes and types of services/sales).
Like most other favelas, Paraísopolis is an informal community which lacks many municipal services and is the home to families that migrated from rural areas over the years. Located in a large ravine, Paraísopolis has a physically challenging geography and is surrounded by middle- and upper-income residential areas.
A consumer poll, conducted after project completion and several months of billing, showed that a majority of the regularized families in the pilot area were highly satisfied with their better quality service and the assistance received in improving their household energy efficiency.
Considering the 400 households surveyed, 62% rated their overall satisfaction with the project as a 9 or 10 on a scale of 1 to 10. Not surprisingly, this percentage increased to 98% for those who received a new refrigerator and were re-wired and to 80% for those who were only re-wired. The majority (88%) of the households considered the quality of the electricity service to be good or very good after project implementation compared to only 17% before the project. 89% of the households would recommend the program to other residents.
The energy efficiency measures taken in the households and distribution network are expected to yield annual energy savings of over 2 million kWh. Until recently, bills to households and businesses were capped at 150 kWh to help households transition to paying for service as well as to educate them about their actual consumption levels and charges once the cap is removed. It is expected that additional savings will accrue (but additional bad debt may also occur) when larger consumers start to experience the true cost of their consumption.
After project implementation, AES Eletropaulo began to collect a significant amount of
new revenues from consumers who had not previously paid for their electricity consumption.
Before the project implementation in Paraísopolis, the second largest "favela" in São Paulo, Brazil, the quality of electricity service was very poor: almost all the households and businesses had illegal electricity connections; they were also exposed to dangerous irregular local grids and wiring conditions and did not pay for service. Households and businesses consumed, what are considered for this population, high amounts of electricity – on average 250 kWh/ month – due to the very poor condition of household appliances and electrical equipment (especially refrigerators and electric water heaters for showers), and the lack of price signal to encourage consumers to use electricity wisely.
USAID, AES Eletropaulo, ICA and its local affiliate, Procobre, worked closely to ensure a coordinated approach to project design and implementation. A 'responsibility matrix' was prepared which presented the project components and indicated the organization that was responsible for funding and implementing each task. AES Eletropaulo picked up the bulk of the project costs, including the distribution network upgrades, metering, consumer registration, and with ICA paid for new refrigerators; ICA arranged for the efficient transformers with the support of the manufacturer Itaipu, for the coaxial distribution and service drop cables cost-shared with the wire and cable company Nexans, and the rewiring of households, as well as the preparation of a financial model; USAID covered the community campaign costs, audits of each household and selected commercial customers, postproject survey, and efficiency recommendations to targeted commercial customers. The total cost of the project was around $1.8 million at the average rate of exchange over the project period.
A financial analysis concludes that the payback time is 1.5 years, with a range, depending on optimistic and pessimistic projections of local conditions, from 1.4 years to 2.1years.
In the late 1990s, ANEEL created an 'electricity-industry-wide' fund to be split evenly for Research and Development (R&D) and Energy Efficiency (EE) improvements. Utilities' concessionaire contracts contain provisions to access this fund, which amounts to 1% of the utility's gross revenue for use in their own territory (½% for R&D and ½% for EE). Recently, ANEEL has added the requirement that one-half of the set-aside for EE (i.e., ¼%) be used for low income households. Annual cycles of planning, application, and approval by ANEEL govern each year's allowable activities and expenditures.
Recently, slum electrification initiatives (e.g., reconnection and metering) became eligible for EE activities as they enabled customers to understand and monitor their own energy consumption. In addition, expenditures on energy saving appliances within slum households were also eligible if they achieved at least an 80% cost-benefit ratio.
Fifteen community campaigns were carried out over several months and were supplemented by door-to-door visits by community "agents" hired by AES Eletropaulo, and by utility staff to each household both pre- and post- regularization. As residents previously did not have to pay for electricity (except in some cases to get their illegal connection), these campaigns were important to educate consumers on the importance of paying, understanding their electricity bill, and implementing efficiency measures that could be undertaken to reduce consumption and costs.
AES Eletropaulo undertook the registration of all customers and numbering of the houses. Mini-audits were conducted by Technolight in more than 4.000 houses, and in 70 commercial enterprises, and finally a customer satisfaction survey took place.
In the consumer poll, 89% of those surveyed felt that security in the area had improved. Indeed, safety records indicate that emergency incidences responded to, which were related to electricity, fell from 57 from the first 6 months of 2006 to 2 in the same period for 2007. Although external wiring and some re-wiring inside households were replaced under the project, further safety improvements could be made through additional re-wiring. For example, audits of the 70 commercial enterprises found that a third had bad or very bad wiring, which mostly occurred in large commercial customers. Recommendations were made to upgrade the wiring in the worst cases.
Under the project, the distribution network was upgraded and households and businesses were metered. The households were not charged a connection fee and any debts owed were forgiven. A key component of the SELR program was the use of new technologies and techniques to reduce theft and improve the energy efficiency and reliability of the distribution network.
Through a Global Development Alliance partnership with the International CopperAssociation (ICA), USAID and ICA teamed with AES Eletropaulo to develop, test, and evaluate customized approaches to regularizing electricity service in a target area of Paraísopolis. The pilot was the first to be launched under the USAID-ICA SELR program, which was initiated in October 2005 on the theme of regularizing and improving electricity service to low income communities.
Key Performance Indicators (KPIs) were created to evaluate project results, and kept statistics that would be tracked throughout the project and used to determine which customers would receive additional available benefits. The KPIs were organized into three categories:
KPI Category 1: Financial Viability for the Company
KPI Category 2: Affordability and Acceptability for the Customer
KPI Category 3: Societal and Community Acceptance
Outputs of the project included the number of residences that were regularized, the number of energy efficiency benefits delivered, as well as the physical infrastructure that was installed in the area. These energy efficiency and safety measures combined with the 'regularization effect' reduced consumption in the targeted 4365 households and commercial entities from an average of 250 kWh down to 151 kWh per customer for a reduction on average of 40%.
The average post-regularization consumption, prior to installation of energy efficiency measures was 192 kWh per month. This drop in consumption can be considered the 'regularization' effect. That is, the effect on consumption of the new anti-theft measures, the 'price signal' sent by now billing for electricity service, and changes in consumer behavior as a result of the community campaign. The regularization effect amounted to about a 23% reduction in overall consumption during the pilot period. The remainder of the reduction in consumption can be attributed to the energy efficiency measures implemented, amounting to an additional overall 23% reduction.
The favorable financial results obtained for the distribution company were driven by several factors:
Substantially improved revenues due to improved collections that went from virtually no payment to 68% paying (non-payment dropped from 98% to 32%, a reduction of 67%),
A reduction in electricity consumption within the pilot area of about 40% and a corresponding reduction in costs to the company for their supply of electricity that was not paid for prior to regularization, and
The conversion of consumers to metered and paying customers which enabled the utility to collect the low-income subsidy component of the tariff from the Government. The low-income customers' consumption became eligible for reimbursement by the Government for the difference between the low income tariff for which they were eligible and the cost-recovery tariff that normally applies to non-low income residential customers.
The company's financial success greatly depended on new customer satisfaction that their upgraded electricity service was worth taking on the new financial burden of their electricity bill. Regularization was seen by the vast majority of those polled to be inevitable and essentially fairer than the prior system. Overall satisfaction with the project was very high, with the mean of 62% in the level of 'very great satisfaction'.
The aim of the pilot project was to develop a sustainable service model for AES and other distribution companies that would meet the needs of consumers in low-income urban areas and could be widely replicated. Although AES had undertaken electricity 'regularization' programs in the past with varying degrees of success, they had not examined and conducted analysis on which program elements would be critical to achieving sustainability, which might be optional and which could be eliminated. In addition to developing a new approach, the pilot would serve as a controlled test of the pilot elements most likely to produce a sustainable service model. The partners recognized that the approach must be financially viable for the distribution company which depended on both the willingness and ability of the regularized consumers to pay for their consumption. It was also dependent on the regulatory environment under which the pilot would be carried out. For this reason, Brazil offered particularly fertile ground to conduct the pilot because of the progressive stance of ANEEL in promoting solutions to bringing legal electricity service to the urban poor.
U.S. Agency for International Development
Mollet J.R., Junior G.G. Cavaretti J., Lawaetz S., Improving Electricity Services and Reducing Energy Losses for the Urban Poor, ACEEE Summer Study on Energy Efficiency in Buildings, 2008.
Cavaretti, J. – Overview of the Paraisopolis Project – presentation December 2007
Cavaretti, J. – Sustainability from the Company's Perspective – presentation December 2007
USAID – Innovative Approaches to Slum Electrification – December 2004
USAID – Slum Electrification: Brazil background report – December 2005
USAID – Cost-benefit Analysis of a refrigerator replacement program for low-income households in Brazil – January 2007
USAID – Energy Update – p.10 – Spring 2008
Zampolli, M. – Socio-Economic Conditions in the Slum Area – presentation December 2008
Workshop, 4-6 December 2007, Sao Paulo, "Improving Electricity Services for the Urban Poor" – all presentations, also those reviewing other countries in Latin America, Africa, Asia, can be found on: http://www.procobre.org/procobre/cobre_para_especialistas/
Name:Converting consumers into customers in slums at Sao Paulo city
USAID, AES Eletropaulo, ICA and its local affiliate, Procobre, worked closely to ensure a coordinated approach to project design and implementation.
U.S. Agency for International Development
- Energy Efficiency
- Unspecified grid electricity
- National Grid
Project status:Completed project
Implementing approach:Public private partnership