“power sector reform in developing countries”

Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 1

“Power Sector Reform in Developing Countries”

Lessons from a Comparative Study ofBrazil, China, India, Mexico and South Africa

David G. VictorProgram on Energy and Sustainable

DevelopmentStanford University


What Have We Learned? Overview of my Comments

1. Causes of ReformFrom state-centered to market-oriented power systems

2. Pace and Character of ReformReform is slow

3. OutcomesMost reforms get stuck part-wayRegulators are critical but rarely empowered Low-income users are generally not harmed by reform

David Victor


Standard Textbook Model for Reform: four “easy” steps

Sell those parts of the system amenable to competition.

2. Privatize

Open power generation and marketing to competitive firms.

3. Create Markets

Set-up independent regulators to oversee conduct in the industry and regulate the monopoly-prone parts of the business .

4. Create Regulatory Institutions

Separate generating, transmitting, distributing and marketing electricity.

1. Unbundle

David Victor


1. Causes of Reform

•In the advanced industrialized nations– Origins: new ideas about economic organization– Goal: economic efficiency– Expected outcome: tariff reductions– Politics: relatively easy to build support

•In these five developing countries– Origins: economic and power crisis– Goal: financial solvency and investment– Realistic outcome: tariff increases– Politics: very difficult

David Victor


Reform Strategies: No Textbook Model

Aggressive electrification; redrawing of boundaries for distributors; corporatization of utility; independent regulator; IPPs expected

South Africa

Reform at the margins (IPPs); reforms stalled due to political and constitutional barriers; independent regulator

Mexico

Reform at margins (IPPs and guaranteed returns for national power corporation) then seek private management of distribution; independent regulator.

India

Reform at the margins (IPPs) and corporatization of state enterprises to raise money; nascent independent regulator

China

Privatization of distribution and generation companies to raise money; allowance for IPPs; creation of hydro system operator; independent regulator

Brazil

StrategyCountry

David Victor


2. Pace and Character of Reforms• Reform is slow, because…• Electricity Reforms depend on other reforms

– Finance• Soft budgets of state companies kill competition

– Judicial delegation• Independent regulators

– Factor Markets• Labor; fuels

– Corporate Governance and accounting• Essential for regulatory oversight and private investment

– Competition Policy• No evidence yet—no markets

– Contrast w/ OECD• reform with “rule of law,” market institutions, and independent financial sectors

already in placeDavid Victor


3. Outcomes: Market Structure

• Emergence of “dual markets”– Partially state-controlled

• Soft budgets; tariffs• Highly political allocation of rents

– Partially market• Project and concession bidding• Market experiments

– E.g., Six provinces in China (1999-2001)

– Not a transient outcome, but stable equilibrium

David Victor


“Regulatory Squeeze”

Assets squeezed of rents and equity

Solvent, productiveenterprises

Integratedgeneration &

Supply system

Grid customers

Lucrative customers

InsolventCore?

Failed private

investment

Viableprivateunits

Unbundlingand partialreforms

Privati

zatio

n

Time (and increasing fragmentation)

“Self-G

enerators”“The

State”

“Dual

Firms”

“Norm

al Private

Firms”

Legend:Flow of capitaland assetsFlow of Electricity

Regulatory & administrativedecision-making

“Asset sortingand shifting”

Productive assets

Insolvent assets

State-owned system

Privately owned powerSupply & delivery system

Pre-Reform

David Victor


3. Outcomes: Regulation

• The Need for Regulatory Credibility– Even the best cases yield weak & uneven

regulators• India (compare across states)• Brazil (ANEEL’s inconvenient rulings)

– Developing country regulators learn more from each other than from OECD “capacity building”

David Victor


3. Outcomes: Energy Services for the Poor

• Fear that reform would undermine the social contract– Energy services for the poor– Environmental protection– Investment in R&D

• Outcomes mixed– Special programs to advance energy services for the poor– Environmental rules strengthened (and gas helps)– R&D mixed story (contrast U.S. with developing countries)

David Victor


Cause: PolicySouth Africa’s National Electrification Achievement

PRESENT

Source: Gaunt, Load Research Programme, Energy Research Centre - Cape Town South Africa

-3000-2000-1000

0100020003000400050006000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

UrbanRural

(thousands)

David Victor


Conclusions• Most Market Reforms have not yet been “successful”

– Reform is slow– Outcomes allow “dual firms” to dominate– Real markets are rare

• Market reforms tend to create weak links– Insolvent state companies; usually distributors

• Independent regulators are essential– Yet true empowerment is difficult

David Victor


Supplemental slides

David Victor


PESD Research Platforms1. Electricity Market Reforms

– Five-country comparison (Brazil, China, India, Mexico, South Africa)

– Independent Power Producers (IPPs) in 12 countries

2. Energy Services for the Very Poor– Shift from traditional to modern fuels and technologies

3. Geopolitics of Natural Gas– Past and future of large pipelines and LNG– Gas demand in China and India

4. Climate Change Policy– Beyond Kyoto– Engaging developing countries

5. National Oil Companies– Causal relationship between strategies, political influence and

performance– Studies underway on 14 countries

David Victor


Peak winter load in South Africa (2002)

0

0.2

0.4

0.6

0.8

1

1.2

00:0

0:00

03:0

0:00

06:0

0:00

09:0

0:00

12:0

0:00

15:0

0:00

18:0

0:00

21:0

0:00

Time

Frac

tion

of p

eak

(29

GW

)

Mining Commerce Industry Agriculture Suburban Newly Electrified Townshipsource: Eskom and ERC

David Victor


South Africa’s Free Electricity Experiment:Measured Effects (7-15 kWh/month)

220

0

20

40

60

80

100

120

140

160

180

200

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

Year/Quarter

Con

sum

ptio

n in

bin

(kW

h/m

onth

)

Pilot (Sales + EBSST)Control (Sales)

Pilot (EBSST)

Source: Gaunt, Load Research Programme, Energy Research Centre - Cape Town South Africa.David Victor


The Two Dimensions of IPP Outcomes

Country IPP obligations excessive, unnecessary; or mismanagement deters future investment.

Private investors are squeezed out in favor of other actors.

Country attracts investment that produces electricity.

Private investors are squeezed out in favor of other actors.

Investor Outcom

e N

EGA

TIVE

Country IPP obligations excessive, unnecessary or expensive.

Projects are paid and enforced as originally agreed.

Country attracts competitive and sustainable investment.

Projects are paid and enforced as originally agreed.

Investor Outcom

ePO

SITIVE

Country Outcome NEGATIVE

Country Outcome POSITIVE

David Victor


Risk Mitigation Effects of Local Partners

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Suc

cess

ful M

itiga

tion

of R

isk

Fuel Supply Dispatch Risk Non-Payment Renegotiation

Risk Confronting a Project

Local Equity (n = 20 projects) Foreign Only (n = 13 projects)

David Victor


Risk Mitigation Effects of International Lenders

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

% S

ucce

ss R

ate

Fuel Supply Dispatch Non-Payment Renegotiation

Risks Confronting a Project

No Bi-/Multilateral Support (n=17 projects) Bi-/Multilateral Support (n=16 projects)

David Victor

Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 20IPPs developed in unreformed electricity market, selling to national utility.1984Turkey (9)

1994

IPPs developed in unreformed electricity market, selling to national generation and transmission utility.

1994Thailand (7)1997

IPPs developed in reforming electricity market, selling to a national grid operator; ongoing reform has led to stranded cost problems.

1997Poland (3)1997

IPPs developed in unreformed electricity market, selling to national generation and transmission utility.

1988Philippines (45)1988

IPPs developed in unreformed electricity market, selling to vertically integrated national utility.

1992Mexico (16)1995

IPPs developed in unreformed electricity market, selling to vertically integrated national utility.

1993Malaysia (13)1993

IPPs developed largely unreformed electricity market, selling to state transmission and generation monopoly.

1996Kenya (4)1996

IPPs developed in reforming electricity market, selling to state electricity boards.1991India (16)1991

IPPs developed in unreformed electricity market, selling to vertically integrated national utility holding company.

1996Egypt (3)1998

IPPs developed in reforming electricity market, selling to provincial power authorities.

1985China (32)1985

IPPs developed in partially private electricity market, selling to distribution companies and large users.

1995Brazil

IPPs developed in privatized electricity market, selling in highly competitive contract and spot markets.

1992Argentina (16+)1992

Electricity Market Context for IPPs

Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 21GamaEnron (Prisma) 1999$1255$600478MWNat’l GasTurkeyTrakya ElektrikEnkaIntergen2002$518$20003860MWNat’l GasTurkeyGebze, Adapazari, IzmirThai OilUnocal, Westinghouse2000$527$369700MWNat’l GasThailandIndependent Power GMS Marubeni2003$714$250350MWNat’l GasThailandEastern PowerEC ChorzowPSEG2003$1473$324220MWCoalPolandElchoJAC InternationalEnron (Prisma)2000$1138$132116MWNat’l GasPolandENS --CMS → Covanta1995$349$2263MWDieselPhil.CaviteLA Prairie, San LorenzoCalEnergy, Peter Kiewit2001$3536$495140MWHydroPhil.CasecnanPMR ResourcesIntergen, Ogden2000$1946$895460MWCoalPhil.Quezon--CEPA → Mirant1996$1269$888700MWCoalPhil.Pagbilao--CEPA → Mirant1991$190$40210MWDieselPhil.Navotas IGrupo HermesAES, Nichimen2000$491$260530MWNat’l GasMexicoMerida III--EDF2002$412$234568MWNat’l GasMexicoRio Bravo II--Iberdrola2001$513$6101190MWNat’l GasMexicoMonterrey IIIIPS (Agha Khan)Cinergy, CDC, Wartsila, IFC2001$1133$8575MWDieselKenyaTsavoKPLC PensionUnion Fenosa1997$1477$6544MWDieselKenyaIberAfricaST PowerCMS2002$1280$320250MWCoalIndiaST-CMSReddy GroupEl Paso, PSEG, Marubeni2001$764$252330MWNaphtha/GasIndiaPPN--Powergen → CLP1998$1121$734655MWNaphtha/GasIndiaCLP PaguthanEssar Steel--1995$998$514515MWNaphtha/GasIndiaEssar PowerLancoCDC Globeleq2000$1140$285250MWNat’l GasIndiaLanco KondapalliGVKCMS1996$1208$261216MWNat’l GasIndiaGVK Jegurupadu--EDF2002$495$338683MWNat’l GasEgyptPort Said

--EDF2003$498$340683MWNat’l GasEgyptSuez--Intergen2002$610$418685MWNat’l GasEgyptSidi Krir

Shandong gov’tCLP, EDF2003$733$2,2003000MWCoalChinaShandong Zhonghua--Intergen, El Paso, Lippo2001$1043$755724MWCoalChinaMeizhouwanGuangdong gov’tCEPA → Mirant1996$944$1,8701980MWCoalChinaShajiao C--Tractebel Energia2002$947$426450MWHydroBrazilCaña Brava--AES Corp. 2000$583$350600MWNat’l GasBrazilUruguaiana--Electricite de France2004$1137$887780MWNat’l GasBrazilNorte Fluminense--El Paso Energy2001$787$730928MWNat’l Gas BrazilMacaéEBX CapitalMDU Resources2001$345$100290MWNat’l GasBrazilTermoceará

Local SponsorsForeign SponsorCOD$/MWCost US$

MWFuelCountryProject Name


$1255$600478MWNat’l GasTurkeyTrakya Elektrik

$518$20003860MWNat’l GasTurkeyGebze, Adapazari, Izmir

$527$369700MWNat’l GasThailandIndependent Power

$714$250350MWNat’l GasThailandEastern Power

$1138$132116MWNat’l GasPolandENS

$491$260530MWNat’l GasMexicoMerida III

$412$234568MWNat’l GasMexicoRio Bravo II

$513$6101190MWNat’l GasMexicoMonterrey III

$764$252330MWNaphtha/GasIndiaPPN

$1121$734655MWNaphtha/GasIndiaCLP Paguthan

$998$514515MWNaphtha/GasIndiaEssar Power

$1140$285250MWNat’l GasIndiaLanco Kondapalli

$1208$261216MWNat’l GasIndiaGVK Jegurupadu

$495$338683MWNat’l GasEgyptPort Said

$498$340683MWNat’l GasEgyptSuez

$610$418685MWNat’l GasEgyptSidi Krir

$583$350600MWNat’l GasBrazilUruguaiana

$1137$887780MWNat’l GasBrazilNorte Fluminense

$787$730928MWNat’l Gas BrazilMacaé

$345$100290MWNat’l GasBrazilTermoceará

$/MWCost US$MWFuelCountryProject Name


Cost-saving Alternatives to Free Electricity: LPG

16250%

21060%

25870%

30580%

35390%

401100%

Annualized Savings (Rand)Peak Co-incidence Factor

Source: Howells et al., 2005. Draft

David Victor


Lighting Efficiency for a Rural Village in South Africa: Base Case lighting services and fuel use

Source: Howells et al., WP18, PESD (http://pesd.stanford.edu)

David Victor


The Role of Distributed Power Generation

• Institutional, financial and technical impediments to rural electrification• Rural populations are dispersed, small consumers and low-income

– poor customers for grid based systems• Distributed Power Generation:

– Variety of technology options (renewable and non-renewable, isolated and mini-grid)

– Variety of business model options (centralized vs. decentralized, governmental vs. non-governmental)

– Can aid end-use customers in improving access and quality

David Victor


Institutional

Environment

Business Model

Organizational Nature of Enterprise

Technologies

Target Customers

Financial Model

Immediate Outcomes

Changes in Rural Electricity Service

Financial Performance (Sustainability and

Replicability)

Welfare

Impacts

Policy

Levers

Research Outline: Linking Distributed Rural Electrification Policies to Welfare Impacts

David Victor


360 kW Small Hydro Unit in Zhejiang Province, China (Total Plant Capacity 1.18 MW)

One of 40,000 plants providing 28 GW of power in rural China

“power sector reform in developing countries”

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