Estimating the value of off-grid electricity benefits for rural households: Evidence from rural Sumba, Indonesia

doi:10.21203/rs.3.rs-3132228/v1

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Research Article

Estimating the value of off-grid electricity benefits for rural households: Evidence from rural Sumba, Indonesia

https://doi.org/10.21203/rs.3.rs-3132228/v1

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Background

Off-grid renewable electricity generation and distribution has become a cost effective way to supply electricity in rural areas remote from the grid system. However, in addition to the risk of not being able to pay for full cost tariffs, beneficiaries may not have the skills or time for the institutional and technical requirements to operate and maintain the technology. This might lead to sub-optimal functioning of off-grid renewable power plants and potentially to damage and abandonment. This raises the question of whether off-grid electricity benefits outweigh the effort and costs experienced by rural communities.

Results

We conducted a cost-benefit analysis of off-grid electricity in rural Sumba Island, Indonesia, which has been a focal area for implementation of off-grid electricity systems under the Indonesian government 'Iconic Island' programme. The research found a positive benefit-cost ratio when both market and non-market values were estimated suggesting that electricity is advantageous for rural households even without supporting interventions.

Conclusions

In conclusion we highlight the significance of non-market benefits of electricity. We argue that estimating the value of perceived benefits of electricity is pivotal for making decisions about intervention and formulating investment strategies for establishment of off-grid electricity systems.

cost-benefit analysis

rural electricity

off-grid electricity

contingent valuation

micro-hydro

Off-grid renewable power plants are an important tool in efforts to progress towards achieving Sustainable Development Goal 7 (SDG7) "Ensure access to affordable, reliable, sustainable and modern energy for all." They can be built in remote areas utilising locally available energy resources conferring a significant advantage for electrification compared to the high cost and technical challenges of main grid extension (Blum et al., 2013; Trotter et al., 2019). In an archipelagic country like Indonesia with 17,000 islands, massive development of off-grid renewable power plants is central to government efforts to electrify the whole nation (Wirawan & Gultom, 2021). The Ministry of Energy and Mineral Resources (MEMR) provides incentives for the utilisation of off-grid renewable sources as part of a strategy to accelerate the rural electricity provision (MEMR, 2016). In 2021, more than three gigawatts of off-grid electricity was produced (MEMR, 2021) for more than 14,000 customers (BPS, 2022). Additionally, establishment of off-grid renewable powerplants can reduce the financial burden on the state electricity company Perusahaan Listrik Negara (PLN) from the high operational cost of diesel generators, which have been a primary energy source for remote areas for decades (Wibisono et al., 2022).

However, there are also numerous examples in Indonesia where newly established off-grid power plants operate for only a relatively short time, and so fail to significantly impact rural development (Barnes, 2019; DAGI Consulting, 2018; Sovacool, 2013). Research results place emphasis on the beneficiaries' lack of institutional and financial capacity to operate and maintain the power plants as the main issue leading to lack of longer-term sustainability (Streimikiene et al., 2021). This then lowers the ability and willingness of the community to pay for the power supplied and repair and maintenance costs.

Despite being considered an important part of SDG7's role in reducing energy poverty, community-based off-grid power plants create a great deal of extra work for the beneficiaries. This is not only just finding a way to pay for monthly tariffs, but also having to deal with long-term institutional and technical issues (Njoh et al., 2019). These costs raise the question of whether the presence of such power plants can be economically justified from the perspective of beneficiaries. In other words, do the economic and social benefits outweigh the cost of electricity for rural households? This research addresses this question using the case study of the Kalilang micro-hydro powerplant (MHPP) on Sumba Island, Indonesia. We identify and monetise the benefits generated by electricity and compare the result with the estimated installation, operation and maintenance costs. We consider both direct economic and social benefits with no market value. We utilise the Contingent Valuation (CV) method to estimate households' willingness to pay (WTP) for the latter type of benefits.

This article is structured as follows. In the next section we provide a review of off-grid renewable electricity in the context of rural areas, specifically its significance for rural development. The use of WTP values for addressing our research question is also explained in the literature review section. In the third section, we describe our case study as well as explaining how the data is obtained and analysed. The fourth section is calculation of results, followed by a discussion of the relevance of those results in addressing our question and a conclusion in the final section.

Recognition of energy as a key part of sustainable development in SDG7 has stimulated widespread installation of off-grid power plants, particularly in Africa and Asia (IRENA, 2018), as a promising solution to electrifying areas hard to reach by main grid infrastructure. Extending grid systems to remote areas with challenging topography, low population density, and low electricity demand is expensive, up to ten times higher than off-grid systems for remote regions (Ortega-Arriaga et al., 2021). The number of people receiving electricity from off-grid systems has been increasing in recent years (Bhattacharyya, 2013). IRENA (2018) estimated that around 133 million people worldwide relied on off-grid renewable generators as their energy sources in 2016. In terms of capacity, from 2008 to 2017, there was a more than 4 GW increase in electricity generated from off-grid renewable generators.

Technological advances have increased efficiency of off-grid renewable power plants and significantly decreased costs, particularly in solar-based systems (IRENA, 2018). According to the World Bank, (2022), off-grid solar products are the cheapest solution to provide Tier 1 access to electricity for powering basic appliances. Bhattarai & Thompson (2016) demonstrated that application of wind energy, despite the marginal resource capacity, resulted in remarkable cost and emission reduction and generated high electrical reliability. Even ten years ago, in most of Indonesia's provinces utilisation of solar PV was at least USD 0.05/kWh cheaper than diesel power plants (Veldhuis & Reinders, 2015). Similarly, in Egypt more than a 13 years ago solar PV could reduce the electricity cost by around USD 0.20/kWh (Qoaider & Steinbrecht, 2010). The generation cost report published by IRENA (2022) reveals that within the period 2010–2021, solar PV experienced 88% cost reduction, from USD 0.417/kWh to USD 0.048/kWh. Within the same period, the average cost of onshore wind generators also fell by 68%, from USD 0.102/kWh to USD 0.033/kWh. Additionally, if the environmental costs of greenhouse gas emissions (GHG) are included, then the economic advantage of the off-grid renewable generator is much more significant (Ortega-Arriaga et al., 2021).

In most cases, off-grid renewable power plants are self-managed. In remote rural areas, the majority of off-grid renewable power plants are developed and funded externally and then handed over to the community once developed. This can result in problems in the power plants' operation and maintenance (Numata et al., 2020). Some of the barriers hindering optimal application of off-grid renewable power plants in rural settings include: a lack of skills and awareness (Njoh et al., 2019; Sovacool, 2018); limited knowledge of people's behaviour (García & Bartolomé, 2010); improperly designed financial models (Sovacool, 2018); and unclear long-term goals (Ouedraogo, 2019). These barriers reflect the complexity of this type of technological intervention in rural areas. On the provider's side, it is necessary to formulate a policy trajectory based on a comprehensive understanding of the behaviour of beneficiaries. The cases of Sumba, Indonesia (Fathoni et al., 2021) and Malaysian Borneo (van Gevelt et al., 2020) demonstrate how sociocultural specificities can shape the implementation of off-grid renewable electricity. In Indonesia, the failure to address the micropolitics of the village inhibited inclusive access to electricity, in Malaysian Borneo the barrier came from skepticism within the community towards the project. Additionally, the ability and willingness of beneficiaries to establish an efficient institutional structure (Feron, 2016), to regularly pay the tariff (Numata et al., 2020), and to participate in capacity-building activities (Ouedraogo, 2019) are also essential components of long-enduring sustainable operation.

The challenging complexities for rural communities of running off-grid power plants raises the question of whether having the off-grid generated electricity brings benefits or burdens to the community at the household level. This topic is not well-explored by the current body of literature. We found that researchers are either focused on macro-level impacts of electricity, e.g. poverty (Asghar et al., 2022; Sambodo & Novandra, 2019; Wirawan & Gultom, 2021), rural economy (Handayani et al., 2023; J. Huang et al., 2020; John & Misra, 2021) and socio-environment (Kanagawa & Nakata, 2008; Riva et al., 2018; Sarker et al., 2020; Wassie & Adaramola, 2021), or the production cost of the generators where the development feasibility is the centre of discussion (see (Blum et al., 2013; Filho et al., 2017; Haning et al., 2021; Zema et al., 2016). The research presented here aims to contribute to this filling this gap in knowledge by obtaining estimates of beneficiary perceptions of how much the electricity is worth and what the most important benefits of electricity are from the household perspective.

3.1 The Case of Kalilang MHPP in Sumba, Indonesia

This research focuses on the Kalilang micro-hydro powerplant (MHPP) in Kambata Bundung Village, East Sumba Regency. The selection of this power plant is for two main reasons. Firstly, the community, through a cooperative, is fully responsible for operation and maintenance (O&M) of the powerplant so it provides a picture of returns to the community in the form of economic and social benefits without external involvement such as government subsidies. Secondly, the Kalilang MHPP is a currently fully operational community-based off-grid power plant. In other places in Sumba, some community-based off-grid generators are not working primarily due to institutional problems (DAGI Consulting, 2018).

The Kalilang MHPP was established in 2018 by the non-governmental organisation IBEKA (IBEKA, n.d.). IBEKA specifically focuses on rural electrification as a tool for community empowerment (Ibrahim, 2020). The Kalilang MHPP is located in Kambata Bundung Village (see Fig. 1) with a capacity of 65 kW. In the initial period of operation, the Kalilang MHPP was able to electrify around 400 households in four villages, i.e. Kambata Bundung, Madutolung, Mauramba, and Meurumba (IBEKA, n.d.; Ropo, 2020). However, due to damage caused by the Seroja cyclone in 2021, the power plant is not working as well as planned. Restoration is proceeding slowly due to the limited financial capacity of the cooperative. The money collected from customers is mostly used to provide incentives to the managers and operators, therefore the ability to fund a major restoration is limited. Nevertheless, with the help of external funding, the connection in two out of four villages has been restored, i.e. Kambata Bundung and Madutolung. We focus our analysis on the village of Kambata Bundung.

The community has been encouraged to participate in the management of the Kalilang MHPP since its development phases. Due to the remoteness of the location, the community worked with IBEKA to open 2.6-kilometre of access to the location. They also manually transported some of the components of MHPP, including the turbines. IBEKA claimed that there were around 400 people involved in establishing the MHPP (IBEKA, n.d.). The community is also involved in setting monthly tariffs. One of the key informants stated that beneficiaries deliberatively determined the basic tariff of 0.5 Ampere and the tariff for 2 and 4 Amperes.

3.2 Data collection

This research utilises both qualitative and quantitative approaches in order to benefit from the reliability and consistency of numerical analysis while capturing complex issues (Creswell, 2009). The qualitative approach provides an understanding of processes, experiences, and how people develop meanings over electricity (Kalof et al., 2008). Whilst, the quantitative approach provides measurable evidence (Aspers & Corte, 2019). We used two steps of data collection and analysis. Firstly, semi-structured interviews of relevant stakeholders were conducted to help understand the perceived benefit of electricity. Secondly, we conducted an end-user interview to obtain a valuation of the identified benefits. Consent for conducting interviews was obtained with a formal letter to get a consent from organisations such as government agencies and non-governmental organisations (NGO); and for the village-level informants the consent was obtained verbally prior to the interview.

In the first set of interviews, we interviewed sixteen key informants from local and provincial government agencies, NGOs, and village stakeholders such as village officials and customary leaders. The interviews were conducted face to face in Bahasa Indonesia. Informants were asked about how they perceive electricity and what changes have been triggered by its arrival. All the informants' statements were recorded and transcribed verbatim. The transcripts were coded and categorised to identify the perceived benefits of electricity that are generally applicable in our study area. These perceived benefits were later monetised in the quantitative analysis step.

In formulating the structure of the end-user interviews, we included all the identified benefits from the previous step. We conducted 105 end-user interviews with Kalilang MHPP customers in Kambata Bundung Village. This was 37.5 per cent of the total customers currently connected to the Kalilang MHPP. In conducting this phase, we were assisted by Sumbanese enumerators. Use of enumerators from Sumba helped to overcome cultural and language barriers when asking questions.We applied two criteria to minimise sampling bias in determining our informants. Firstly, we placed the enumerators in several hamlets to ensure the geographical distribution of respondents. Secondly, the enumerators were also instructed to cover different kinds of customers: the 0.5 Ampere customers (62.81%), the 2 Ampere customers (24.76%), and the 4 Ampere customers (11.43%).

3.3 Analytical approaches

Market and non-market benefits were analysed using different approaches. The value of market benefits were estimated by identifying the rise of income or the opportunity to decrease expenses due to the arrival of electricity. In addition, indirect benefits were estimated using contingent valuation (CV), a widely used stated preference monetisation approach for estimating the non-market benefits in which individuals are asked to reveal their hypothetical value (Atinkut et al., 2020). This method is usually associated with a questionnaires and structured interview as the main data collection tool, particularly in determining people's WTP in various fields such as environmental management (e.g. (Chu et al., 2020; Ghanbarpour et al., 2014, 2014), agriculture (e.g. (Atinkut et al., 2020; X. Huang et al., 2019), and energy (e.g. (Guo et al., 2014; Lee & Heo, 2016; Stigka et al., 2014; Sun & Zhu, 2014)).

We applied the double-bounded dichotomous choice (DBDC) format for our structured interviews. This method was introduced by Hanemann et al. (1991) and is one of the most prevalent methods of CV due to its statistical efficiency (Bateman et al., 2008). In this format, respondents are presented with a hypothetical scenario, for example, if electricity disappears, how much would you be willing to pay to obtain the non-market benefits? In this hypothetical situation, respondents are offered an initial bid and expected to respond with either yes or no. Depending upon the initial response, respondents are offered a second bid to which they can answer with either yes or no. If the answer to the first bid is yes, the respondents will be presented with a higher bid. Conversely, the second bid will be lower if the first answer is no. For this research, we used three sets of bids in Indonesian Rupiah (IDR): (1,000; 2,000; 5,000), (8,000; 10,000; 20,000), and (15,000; 25,000; 50,000). The number of bids is determined by considering the possibility that the respondent's value might fall below the basic tariff (first set of bids), around the amount of basic tariff (second set of bids) and more than the highest tariff (third set of bids). The middle values are the initial bid, whereas the first and third values are the lower and higher follow-up bids. We also considered the financial capability of respondents, who mostly practice subsistence agriculture. Figure 2 shows the flowchart of the DBDC method. We used the statistical package R to estimate the mean and median values of WTP for those non-market benefits by applying the DCchoice package (Nakatani et al., 2022), an add-on R package that provides functions for analysing responses to CV questions (for detail explanation, see Aizaki et al. (2022).

The DBDC method analyses a set of bid responses. As Gelo & Koch, (2015) explain, if an individual is denoted by i and their set of responses is denoted by Y, Y_i = {Y_i1, Y_i2} where Y_it = {1,0} = {yes, no}, and t = {1,2} constitutes the number of bids presented to the individual. Using a rational assumption where an individual does not want to pay more than they are willing, the bid responses yield interval values for estimating their WTP. If the bid is denoted by b, mathematically, the estimation of WTP will be as follows: if Y_i = (no, no) ⇔ WTP_i < b_i2, Y_i = (no, yes) ⇔ b_i1 > WTP_i ≥ b_i2, Y_i = (yes, no) ⇔ b_i1 ≤ WTP_i < b_i2, Y_i = (yes, yes) ⇔ WTP_i ≥ b_i2.

Furthermore, In order to obtain a picture on whether electricity is beneficial to rural households, we calculate the benefit-cost ratio (BCR) from the household perspective. In doing so, there are some assumptions underlying the calculation. Firstly, we use an average cost of small hydropower in the "Renewable Power Generation Costs in 2021" report published by IRENA (2022). Specifically, we refer to the average establishment and the O&M costs of small hydropower during the period of 2016–2021 in the "Other Asia" region. This is conducted as response to the difficulty in estimating the costs of Kalilang MHPP due to inaccessibility of the related documents. Secondly, we exercise a 5.75% discount rate for estimating the present value of electricity benefits. This number refers to the reverse repo rate of Bank of Indonesia in 2023 (Bank of Indonesia, 2023). Lastly, we use a 50 year lifespan of the MHPP (see USAID, 2016) as a basis of calculating the benefit cost ratio (BCR) with the assumption that the powerplant is well maintained and properly operated.

$$BCR=\frac{PVB}{PVC}$$

(1)

The calculation of BCR is done by following the Eq. 1 where PVB represents the present value of the total benefits (market + non-market, or depend on the analysis) and the PVC represents the present value of the cost. By applying the discount rate, the calculation of PVB and PVC is done by following equations 2 and 3 respectively.

$${\sum }_{t=0}^{n}PVB=\frac{Bt}{{(1+r)}^{t}}$$

(2)

$${\sum }_{t=0}^{n}PVC=\frac{Ct}{{(1+r)}^{t}}$$

(3)

Where, Bt represents the total benefits (market + non-market) in year t and t is a number of years; r is a discount rate applied to the calculation as mentioned above. Whereas the Ct represents the total cost (O&M) in year t.

4.1 Identifying the perceived benefits of the Kalilang MHPP

On the basis of our interviews we identified eight benefits of electricity to rural communities which we categorised into market and non-market. Market benefit refers to any advantage that increases household income through extra sources, productivity, or the opportunity to reduce expenses. Whereas a non-market benefit is any benefit that does not have a market value; hence the need for a particular method to estimate the valuation. The summary of these benefits is presented in Table 1.

Table 1

the identified benefits of electricity
Benefits	Supporting statements
Market benefits
Saved cost of kerosene	Before electricity came, some of us used kerosene, and some others used particular fruit for lighting. Those who were living remotely used oil from particular fruit while people who were living near the street bought kerosene in the City of Waingapu – Interview with village authority
Weaving productivity increases	Due to the presence of lighting, women are busy at night. They are no longer feeling sleepy at night, hence looking for something to do. Most of them weave at night. They are busy weaving. – Interview with the cooperative stakeholder
Non-market benefits
Clean water access	In Sumba, particularly rural areas are highly dependent on electricity. It is because the water source is located down the valley, so it needs to be pumped with the electricity pump – interview with IBEKA
Information access	Now we can use handphones to study, search for information, play games, communicate with relatives, and use social media. Women also use it for looking for recipes. – interview with the operator
Convenience in customary practices	The quality of our customary events is improving by applying technology. Now we can use speakers so that everyone can hear the messages. Before the electricity came, we used to shout during the event. – interview with village authority
Entertainment	Usually, men use the television to watch news and football matches, while women usually watch dramas. Kids also use the television for watching cartoons, singing, and doll – Interview with a female activist.
Studying at night	In the past, we used to study using kerosene lamps, so it often made our eyes tear up. But with the availability of electricity, it greatly helps children to study – interview with village authority.

As in other rural regions, the presence of electricity from Kalilang MHPP has replaced the previous source of energy, i.e. kerosene. It then triggers a shift in household expenses from buying kerosene to paying electricity tariffs. Besides substituting kerosene, our informants also mentioned their capability to be more productive due to the presence of light at night. They specifically mention that the electricity has enabled them to weave more mats, as in the following statement.

"Now we can weave at night to increase the number of products. Before the electricity came, we could not do much at night due to lack of light, so our productivity was less" – interview with village authority.

Sumbanese, including our respondents in Kalilang, have a long tradition of using woven mats in their domestic and ceremonial activities. These activities, which are carried out routinely, increases demand for the mats. To meet the demand, the majority of Sumbanese women have weaving skills that are passed on from generation to generation. The presence of electric lighting helps to extend their weaving time especially at night after returning from the farms. Due to the ubiquitous practices of mat-weaving activities, we consider it to be one of the community benefits.

Five non-market benefits were identified. These benefits are derived advantages due to the use of electrical appliances. The presence of lighting is the most significant impact of electricity on rural communities. It has brought a notable change to people's behaviour, particularly in extending people's activity period. Prior to access to electricity, as in most of rural Sumba, people in Kalilang stopped their activities after sunset. With the presence of electric lighting, they can continue activities at night, e.g. weaving, socialising, and studying. Further indirect benefits are associated with the use of handphones and television. Most of our informants stated that, based on their observation, the community mostly uses both handphones and television for entertainment purposes, e.g. watching dramas, YouTube, social media, and football matches. The informants also emphasise using handphones with the internet to access information. Despite this benefit not being as significant as entertainment, some community groups find it beneficial, particularly in helping students study and finding recipes for women.

Moreover, the presence of electricity also benefits the community by providing access to clean water and making customary ceremonies more convenient. In terms of clean water, most people on Sumba Island have had access to clean water since the pre-electrification era (JRI Research, 2012). However, as a hilly island, most water sources in Sumba are in the valley, so people must travel long distances through challenging terrain (Go et al., 2020). The arrival of electricity has enabled the utilisation of communal water pumps. This has made the water-collecting process much easier as the community no longer need to deal with hilly terrain and a time-consuming trip when collecting clean water. Additionally, the benefit of electricity is also observed in customary events. The most noticeable advantage is due to the presence of some appliances such as light and microphones as stated by one of our informants:

"Now we can use lamps for lighting, so we don't need to sit in the dark anymore like we used to during our traditional ceremonies and events" – Interview with customary leader

Furthermore, to understand the extent to which these benefits are worth, we interviewed 105 end-users who are the beneficiaries of the MHPP in Kalilang. Table 2 presents the general characteristics of our respondents. Most (95.24%) of our respondents are farmers, while the other five people are builders (2.86%), priests (0.95%), and an employee in the village office (0.95%). The domination of farmers in our respondents is due to the majority of our population working on subsistence agricultural practices and only limited people working otherwise. This fact is shown in the income distribution of our respondents. While the economic revenue is not an orientation, most of our respondents live below IDR 1200000 ≈ USD 77 a month. 45% of them even obtained less than IDR 600000 ≈ USD 38 a month. This amount is less than a third of the regional minimum salary in the East Sumba Regency, i.e. IDR 1975000 ≈ USD 126.5 a month. Regarding household size, around 47% of our respondents live with four to six people a house while 33% live with more than seven people in a house.

Table 2

The characteristics of respondents
Variables	Number	Percentage (n = 105)
Livelihood
Farmer	100	95.24
Builder	3	2.86
Priest	1	0.95
Village authority	1	0.95
Size of household
1–3	21	20.00
4–6	49	46.67
≥ 7	35	33.33
Household income
0–600,000	47	44.76
600,001–1,200,000	51	48.57
> 1,200,000	7	6.67
Installed power
0.5 Ampere	67	63.81
2 Ampere	26	24.76
4 Ampere	12	11.43

4.2 The market benefits of electricity

Table 3 shows that the primary market benefits of electricity are to substitute kerosene as the previous energy source, mainly for lighting, and the increase in productive hours, leading to more weaved products. The former benefit has shifted the household's monthly expenses from purchasing kerosene regularly to paying electricity tariffs on a monthly basis. We found that the average budget saving from no longer purchasing kerosene is IDR 37500 ≈ USD 2.39 a month. This amount is smaller than the highest electricity tariff, i.e. IDR 40000 ≈ USD 2.54, but bigger than the other two. In other words, by only considering the saving from the kerosene expenses, the household has a positive monthly net benefit except for those connected to the highest electricity tariff.

Moreover, our informants stated that the ability of electricity to extend their working hour at night leads to the increase in the production of weaved products, particularly mats. Prior to the electricity era, the average time for weaving a mat was four days while after the electricity arrived, they can finish a mat in roughly two days. The most common dimension of a woven mat is 2 meters x 1 meter, with an average market price of IDR 50000 ≈ USD 3.25. Therefore, by reducing the production time in half, we can assume that the number of mats produced can be doubled. Furthermore, our respondents stated that if the market absorbs all the mats, the income they generated will be around IDR 350000 ≈ USD 23 before the electricity era, thus we can argue that the income generated is doubled after the arrival of electricity. Thus, approximately, each household can generate around IDR 700000 ≈ USD 46 a month. For the purpose of this analysis, we use the difference between the pre-electrification income and the income after electricity. Thus the electricity is able to generate more income as much as IDR 350000 ≈ USD 23 a month.

Table 3

Electricity tariffs and the profit generated from kerosene substitution.
Variable (monthly)	IDR	USD
Electricity tariffs (0.5 A)	20000	1.27
Electricity tariffs (2 A)	35000	2.23
Electricity tariffs (4 A)	40000	2.54
Market benefit (average)
Kerosene savings	37500	2.39
Increased productivity of mats	350000	23

4.3 The willingness to pay for non-market benefits

In addition to the market benefit, our results reveal that the non-market benefits of electricity generated by Kalilang MHPP are equally valuable. The DBDC method enables us to measure the WTP for the societal advantages in which the market price approach cannot capture. Figure 3 shows that the WTP model is generally similar. The difference between the highest (information access) and the lowest (clean water access) is only around IDR 2700 ≈ USD 0.18. Interestingly, the ability of electricity to provide better access to clean water is perceived as the least valuable benefit among others. Despite the importance of water to human lives, our respondents perceive the information and entertainment purposes of electricity are worth more than any other benefits. These benefits have WTP values of IDR 34580 ≈ USD 2.28 and IDR 34440 ≈ USD 2.27 subsequently, whereas the clean water access is valued at IDR 31860 ≈ USD 2.10.

The regression analysis was conducted to further analyse the relationship between the respondents' responses in the DBDC interview and the independent variables of household income, household size, and bid value. The results of this analysis are presented in Table 4. The bid value variable showed significant P-values for all the non-market benefits at a significance level of 0.001. This indicates that respondents are more likely to respond yes when the bid value is lower. On the other hand, the P-values of the household size variable were found to be insignificant for all the non-market benefits. This suggests that household size does not play a significant role in determining respondents' responses. Regarding the income variable, it was found to be statistically significant for three non-market benefits: clean water access (p = 0.007), information access (p = 0.046), and studying at night (p = 0.014). However, the income variable was found to be insignificant for convenience in customary practices (p = 0.213) and entertainment (p = 0.145). This result indicates people's priority with regard to electricity benefits where higher income household tend to prioritise the benefits that are universally essential, such as clean water, information, and studying at night.

Table 4

The regression results
		Income	Household size	Bid value
Clean water access	Coefficient	0.002	-0.035	-0.122
Clean water access	P value	0.007**	0.745	< 2.2e-16***
Information access	Coefficient	0.001	-0.098	-0.123
Information access	P value	0.046*	0.414	< 2.2e-16***
Convenience in customary practices	Coefficient	0.001	0.061	-0.125
Convenience in customary practices	P value	0.213	0.613	< 2.2e-16***
Entertainment	Coefficient	0.001	0.099	-0.123
Entertainment	P value	0.145	0.429	< 2.2e-16***
Studying at night	Coefficient	0.002	-0.111	-0.127
Studying at night	P value	0.014*	0.927	< 2.2e-16***
Statistically significance level: “*”0.001 “”0.01,”*”0.05,

4.4 The benefit-cost ratio

Lastly, in order to obtain a brief picture of the electricity efficacy in Kambata Bundung Village, we compare our results to the estimated cost of MHPP. Table 5 presents the costs of hydropower according to the IRENA's report. In the period of 2016–2021, IRENA reveals that the installation cost of small hydropower in "other Asia" regions varies between 1224 USD/kW (IDR 18.2 mil) to 4567 USD/kW (IDR 67.8 mil) with the average of 2322 USD/kW (IDR 34.5 mil). By considering its capacity, the approximate installation cost of the Kalilang MHPP reaches IDR 2.2 billion. Furthermore, IRENA (2022) also reveals that the annual average O&M costs for small hydropower plant is around 3% of the capital cost. This O&M costs include an allowance for the periodic replacement or refurbishment of the electrical and mechanical equipment as well as the salary of the officials. According to that assumption, the estimated O&M costs of the Kalilang MHPP is approximately IDR 67 million a year. By assuming that the O&M cost of the Kalilang MHPP is borne by its customer, each household must pay IDR 240267 ≈ USD 16.19 a year.

The benefit-cost ratio (BCR) is calculated to provide a rough picture of the extent to which electricity benefitting rural households. We estimated four different BCR values: the ratio with and without non-market benefits and the ratio with and without the installation cost. We found that the customers of Kalilang MHPP can afford the O&M cost by utilising the value of the obtained benefits. This is indicated by the BCR values without installation cost that are > 1. In this category, although by shifting the kerosene expenses to electricity tariff is economically beneficial, the role of additional household income is essential. In our case, the income generated from producing more mats can increase the BCR value more than three times higher than relying on kerosene saving alone. Moreover, by including the installation cost per household, we can get a picture of whether establishing an MHPP is affordable for the rural households. Our result shows that the rural households can pay back the installation cost of Kalilang MHPP by raising around IDR 8 million within 50 years. It is also indicated by the BCR that is > 1.

Table 5

the summary of cost and benefits of the Kalilang MHPP
Variables	Values
Variables	IDR	USD
Costs
Estimated installation cost	2242500000	150,930
Estimated installation cost per household (n = 280)	8008928	539.035
Estimated annual O&M costs	67275000	4532.63
Estimated annual O&M costs per household (n = 280)	240267	16.19
Market benefits (annually)
Kerosene savings	450000	30.32
Increased productivity of mats	4200000	282.97
Total market benefit	4650000	313.29
Non-market benefits (annually)
Entertainment	412800	27.81
Convenience in customary practices	402720	27.13
Information access	414960	27.96
Clean water access	382320	25.76
Studying at night	411120	27.70
Total non-market benefit	2023920	136.36
Total annual benefit	6673920	449.65
Benefit-Cost Ratio including installation cost*
Market & Non-market benefits	11.32
Market benefit only	3.43
From kerosene saving only	0.76
Benefit-Cost Ratio excluding installation cost*
Market & Non-market benefits	27.77
Market benefit only	8.42
From kerosene saving only	1.87

*The net present value is calculated by assuming the MHPP lifespan of 50 years from the year of establishment, i.e. 2018.

In Sumba, massive development of rural electricity was formally enacted in 2015 by the decree of the Ministry of Energy and Mineral Resources. The project was named "Sumba Iconic Island", and the Island of Sumba was selected due to environmental and social considerations. At the beginning of the project, only around 25% of Sumba inhabitants had access to electricity; hence the necessity to provide electricity was urgent (Hivos, 2012). Besides, the abundance of renewable sources and high dependency on diesel which is transported inefficiently strengthened the ecological narration of the project (Craine, 2013). However, despite the social and environmental narration, the rural economy is a primary goal of the project, as stated in the project's vision:

"… ensuring the provision and utilisation of new and renewable energy sources that can encourage an inclusive and gender-just economy in order to improve the welfare of the people of the island of Sumba" (SII Development Team, 2012: 3)"

Estimating the value of electricity benefits is indeed crucial for assessing and evaluating the overall impact of electrification efforts. By quantifying the monetary values of both direct economic impacts and non-market benefits, stakeholders can gain insights into the net benefits generated at the household level. Our findings provide valuable empirical evidence of the economic and social benefits brought by electricity access in Kambata Bundung Village. The positive net benefit observed indicates that electricity has a favorable economic and social impact on the community. Even the mere presence of electricity in the village generates overall positive outcomes. This highlights the significance of electricity as a basic infrastructure that economically and socially contributes to the development of rural communities.

In the context of Sumba, the provision of electricity through off-grid renewable power plants has primarily focused on ensuring the functional sustainability of the power plants themselves, rather than implementing continuous economic-oriented interventions. However, this research highlights two main ways in which electricity benefits the beneficiaries: through the substitution of energy sources and the increase in production time. Similar patterns of benefits through energy substitution have been observed in other rural regions, such as rural India and East Africa. For example, in rural India, the substitution of kerosene with electricity led to improvements in the educational environment for children (Kanagawa & Nakata, 2008), while in East Africa, replacing kerosene with electricity resulted in better family health conditions (Ortega et al., 2021). In our case, although education and health benefits are also present, the utilisation of electricity as a substitute for kerosene is economically associated with increasing the quantity of woven products, such as mats.

The increased production of mats can be translated into economic benefits when the market absorbs the products. However, it's important to note that the benefits generated from increased mat production may not necessarily be in the form of monetary profit. Instead, the mat is also utilised as their daily necessity and customary ceremonies, as mentioned by the local government.

"Yes, they sell (the weaving products) but also use it as a container for rice and corn in the harvest season. They also utilise it for hosting guests and customary events" – interview with East Sumba Government.

The close-knit nature of Sumbanese communities plays a significant role in their economic practices. The willingness of community members to fulfil each other's needs, including the provision of mats, reflects a system of reciprocity and mutual support. In some cases, instead of monetary transactions, a form of credit system is practised, where individuals provide goods or services to others with the expectation that their own needs will be met in the future when required (Vel & Makambombu, 2019). In such a situation, a policy that stimulates market demand and fosters innovation is necessary. The periodic urban market in rural Ghana is one of the instances of a market intervention that connects consumers to rural farmers (Addai et al., 2023). Such intervention creates a platform that encourages farmers-consumers interaction, bypassing intermediaries and ensuring fair prices. Additionally, diversification of farming practices can be essential to respond to diverse market opportunities beyond the rural boundaries (De Rosa et al., 2019). By expanding the range of agricultural markets, farmers can supply different types of consumers and be adaptive to unpredictable market conditions.

Moreover, our non-market benefit values show that access to clean water is given the least value, whereas entertainment and access to information are among the highest. One might argue that access to clean water is essential for human life. However, we found that the ability of electricity to deliver long-awaited services such as television, light, and social media is more valuable for our respondents. This phenomenon is common when people are asked about what makes a better life; they tend to focus on variables they feel they lack while others can possess (Winther, 2010). In fact, despite having to travel through steep hills, people in rural Sumba can access clean water without the electrical pump. In contrast, the advantage of electronic appliances is absent without electricity. The situation of which a group of people are excluded from services that are commonly provided by the government, such as electricity, is one of the forms of social exclusion and is associated with poverty (de Haan & Maxwell, 2017; Popay, 2010). Therefore, when such services arrive, the feeling of being socially excluded gradually diminishes.

Interestingly, in our case, richer people tend to prioritise particular advantages such as water, information, and education, by showing tendency to place a higher bid in such benefits. The positive relationship between income and WTP has been a common phenomena, particularly in rural electricity sector. Sievert & Steinbuks (2020) found similar pattern in Sub-Saharan Africa where people’s electricity demand increased as they become wealthier. In the context of Sumba, wealthier individuals are more inclined to place a higher bid for benefits related to water supply, access to information, and night studying. These benefits are closely tied to the reliability of electricity connections. For example, with a reliable electricity connection, the capacity of water pumps can be increased, resulting in improved water supply. Similarly, a more reliable connection provides better lighting, making it more comfortable for children to study at night. These benefits are highly valued by wealthier individuals who can afford more than just basic services and have a higher demand for enhanced reliability and functionality.

On the other hand, benefits such as entertainment and convenience in customary practices show no significant relationship with income as determinants of WTP. This could be attributed to the limited association between these benefits and growing electricity demand. While electricity can bring convenience to customary practices, there may be limited scope for its application in such events, as expressed by one of the customary leaders.

“We are grateful that the electricity can be utilised in the nighttime for cultural purposes and customary events …… (however) whether electricity exist or not, the customary practice will still be running and will not affected” – interview with customary leader (rato)

Despite the difference in the WTP tendency among different income groups, in overall, from a household perspective, electricity provision in remote rural communities is economically advantageous, as shown in our BCR results. The existence of electricity itself brings economic benefits to households, primarily through the substitution of kerosene expenses with a relatively cheaper electricity tariff. This allows households to save money that would have been spent on kerosene. The positive BCR values obtained without considering the installation cost indicate that the operation and maintenance (O&M) cost of the power plants is affordable for every household within the lifespan of the generators, regardless of their energy behavior. This suggests that the ongoing costs associated with electricity are economically viable and manageable for rural households.

Moreover, despite the positive BCR resulting from our including-installation-cost calculation, we argue that in Kambata Bundung Village, the role of external funding in establishing generators is irreplaceable. This is due to the uncertain local market of produced mat and the non-capital orientation of mat-selling activities. In addition, the lack of economic-oriented program focusing on how to utilise electricity for business purposes as well as the application in agricultural practices also make the market benefit of electricity sub-optimal. Furthermore, we also found that the non-market benefits of electricity are essential in determining the efficacy of electricity. Such benefits can boost the BCR by three times of the market-only calculations. Similar findings were also found in Zanzibar where the impact of electricity is indirect economically, but simultaneously, the arrival of electricity has triggered a noticeable social influence such as enhanching religious practices and shaping private spaces (Winther, 2010).

Our calculations on market and non-market benefits in Kambata Bundung Village address the research question by emphasising the following points:

The economic benefits of electricity in rural areas like Sumba encompass both cost savings by substituting kerosene and increased income potential through enhanced productivity in local industries such as weaving. These benefits contribute to the economic development and improved livelihoods of rural communities by reducing expenses and expanding income-generating opportunities.

Besides the economic benefits, providing electricity in rural areas like Sumba also brings about significant non-market benefits, which profoundly impact the community. Access to electricity enables the provision of essential services that may have been absent or limited in the past. By considering such benefits, we gain a comprehensive understanding of how electricity socially influences its beneficiaries. It provides economic opportunities and contributes to the community's overall well-being by improving access to essential services, reducing social exclusion, and enhancing the quality of life.

From a household perspective, electricity is a profitable investment. Despite the absence of significant macroeconomic improvements in the village, individual households can derive substantial benefits from accessing electricity. This indicates that, despite limited macroeconomic advances, electricity is a worthwhile investment from the household perspective, and the O&M costs associated with its provision are mathematically affordable for rural inhabitants.

Lastly, this research provides valuable empirical evidence on the economic and social benefits of electricity access in rural communities, contributing to the ongoing debates surrounding rural electrification. Despite the positivity of electricity to rural communities, which seemed to be a consensus among development actors, we find limited literature that quantifies how much such benefits are received and perceived. Addressing the question of "how much" these benefits are received and perceived by rural inhabitants is pivotal for rural electricity policies formulation. Understanding the affordability and actual benefits derived from electricity programs is essential for policymakers in designing effective tariff plans and implementing necessary interventions. This information can guide the formulation of tariff structures, subsidy schemes, or other support mechanisms to ensure that electricity access is affordable and maximizes its economic and social benefits.

BCR Benefit-cost ratio

CV Contingent valuation

DBDC Double-bounded dichotomous choice

IDR Indonesian Rupiah

MEMR Ministry of Energy and Mineral Resources

MHPP Micro-hydro powerplant

NGO Non-governmental organisation

O&M Operation and maintenance

PLN Perusahaan Listrik Negara (State Electricity Company)

SDG7 Sustainable Development Goal 7

WTP Willingness to pay

Ethics approval and consent to participate

This research has passed ethical assessment and thus been granted ethics approval by the School of Business, Environment, and Social Services (AREA) Ethics Committee of the University of Leeds with the following referece: AREA 19-162

Consent for publication

Not applicable

Availability of data and materials

The datasets used and analysed during the current study are not available due to containing respondent’s individual data but are available from the corresponding author on reasonable request

Competing interests

The authors declare that they have no competing interests

Funding

This research is funded by Ministry of Education and Research of the Republic of Indonesia through the BPPLN scholarship scheme specifically in the conceptualisation, design, data collection and analysis. As for the publication, this research is funded by the Engineering and Physical Sciences Research Council of UK through the project entitled ‘Creating Resilient Sustainable Microgrids through Hybrid Renewable Energy Systems’ (EP/ R030243/1)

Authors’ contributions

HW did the major work in conceptualisation, data collection and analysis, and manuscript preparation

JCL provided supervision in the research conceptualisation, analysis, and during the manuscript preparation

CW assisted in conducting WTP data analysis and provided statistical interpretation of the analysis

SS supervised in collecting and processing data as well as provided a contextual interpretation of the research

Acknowledgements

The authors are grateful for the assistance from various parties, including Prof. Kang Li and Dr. Martin Zebracki as the first author’s supervisors, the enumerators from the Wira Wacana Christian University for the assistance during the data collection phases, and all the all stakeholders for the availability and valuable information that was shared to us.

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No competing interests reported.

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Estimating the value of off-grid electricity benefits for rural households: Evidence from rural Sumba, Indonesia

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Abstract

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1. Background

2. Literature Review

3. Material and methods

3.1 The Case of Kalilang MHPP in Sumba, Indonesia

3.2 Data collection

3.3 Analytical approaches

4. Results

4.1 Identifying the perceived benefits of the Kalilang MHPP

4.2 The market benefits of electricity

4.3 The willingness to pay for non-market benefits

4.4 The benefit-cost ratio

5. Discussion

6. Conclusion

Abbreviations

Declarations

References

Additional Declarations

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