The Economics of Connecting the Poor to Natural Gas: Lessons from Egypt Franz Gerner World 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 CO 2 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)