The Economics of Connecting the Poor to Natural Gas: Lessons from Egypt

Franz GernerWorld Bank

ENERGY WEEK 2006

The World Bank

Benefits of Switching

Benefits of connecting the poor to natural gas: Health: Alternative fuels more ‘dirty’ (coal, wood,

kerosene, LPG) Environmental: Reduction in CO2 emissions Economic: Alternative fuels more expensive (LPG,

kerosene) Social: 12.5 kg cylinder of LPG (total weight of 18 kg) Safety: Rough handling and explosions Other: Convenience

Background to Study

Standard perception: It is uneconomic to Build distribution network without ‘heating load’ Connect low income and poor households

World Bank Study (Gerner and Sinclair, March 2006) Investigates the ‘economics of switching

residential customers (including the poor) to natural gas in Egypt’

Where do the Urban Poor Live?

Location: West Alexandria (Alexandria)

Where do the Urban Poor Live?

Location: Asslam (Cairo)Location: West Alexandria (Alexandria)

Characteristics of the Poor

High population density Housing

Government built, financed and owned Often free (or low) rent Connected to water, sewerage and electricity Solid structure suitable for connecting to gas

Household size Six/seven with men as the single income earner

Use LPG to meet energy needs for cooking

LPG for Cooking

Why don’t the Poor Switch?

Poor Monthly Household Income US$110 LPG consumption

One 12.5 kg LPG cylinder per month Expenditure US$1.2 (subsidized)

Equivalent gas consumption 23 cm of gas at subsidized gas price of US$0.40

Household gas connection fee US$270

The poor are unwilling/unable to pay for gas connections

Why don’t Distributors Connect?

Total gas connection costs US$430 MoP pays distributor US$160/connection

Financing constraints (6 million households) Selling LPG and gas in domestic market – loss Limited approval of annual development plans

Opex payments encourage connections to higher income households

Poor unwilling to sign supply contracts

It is unattractive for distributors to finance gas distribution development to the poor

The Benefits of Conversion to the Government of Egypt

Egypt is gas-rich Transmission network in Nile Delta well developed Economic costs of gas relatively lower than LPG LPG imported at international market prices At subsidized prices - gas is priced at 35 percent of

equivalent heat content of LPG LPG subsidy large negative impact on GDP

For every LPG bottle not consumed GoE saves about US$5/per poor household/per month

The GoE has large savings by switching households from LPG to natural gas that

justify gas connection financing

General Findings for Egypt

It is economic to connect households (including the urban poor) to natural gas despite the lack of heating load, because Existing transmission network Large degree of urbanization/population density Construction of houses allow for pipeline

connections (safety) Households use relatively more expensive fuels

to meet their domestic energy needs

Lessons for Other Countries

The urban poor do not have enough savings from switching to natural gas to pay for conversions

The low volume uptake is not attractive enough for distributors to pay for connections

However, benefits of conversion to government due to LPG subsidy savings are large enough to pay for network development

Egypt not unique - other countries potentially similar circumstances (Mexico, China, India)

Further details in report (published April 2006)