Electricity Reforms

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Electricity Reforms

• Global Experiences The first few pages of a long
  story

Presentation to media 7th July 2005, ITDG
2
Electricity Reforms History

• Started in 1980s with reforms in Chile in 1983
• Has become a worldwide trend (a World Bank survey
  conducted in 1999 shows a world wide trend in
  electricity reforms)
  
• Reforms have brought mixed results with serious
  re-thinking on future shapes of reforms
  

3
Nature of Reforms

• Market driven Brings state-owned electricity
  industries into market logic
  
• Unbundling of the integrated industry
• Independent regulation

4
Unbundling the Industry

• Vertical Unbundling
• Horizontal unbundling

5
Vertical Unbundling
Stage 4 Complete vertical unbundling
Stage 3 Unbundled generation and distribution,
common transmission
Stage 2 Unbundled generation, common
transmission and distribution
Stage 1 Vertically Integrated Utility
6
Horizontal Unbundling
1 2 3 4 5
6 7 8 9 10
stage
Stage 1 Ministry Department Stage 2 Parastatal
Stage 3 Corporatization Stage 4
Commercialization Stage 5 Contract management S
tage 6 Amendment of the Electricity Act
Stage 7 Establishment of independent regulatory
body Stage 8 IPPs Privatization of generation
Stage 9 Privatization of generation and
distribution Stage 10 Privatization of generatio
n, transmission and distribution
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• Ministry Department
• Power Utilitys parent ministry/department
  manages the utility directly and also makes key
  capital investment decisions
  
• Parastatal
• The utility becomes a state body with its own
  management with more powers to decide and
  implement investments with the parent
  ministry/dept. providing policy directives
• Corporatization
• Utility is accorded the status of a limited
  liability corporate body. As a corporate body the
  utility may seek alternative financing through
  floatation of shares on the stock market or
  issuing bonds. However, the government may retain
  majority shares.

8

• Commercialization
• The utility operates on a commercial basis,
  ceasing to be a welfare-oriented organization.
  The utility would focus on profitability.
  
• Contract management
• The management of the utility is contracted out
  to a private entity. The utility, however, still
  remains the owner of the assets.
  

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Guidelines for Assessing Success of Reforms

• Assessment of financial performance of the
  industry
  
• (e.g. financial stability, efficiency
  improvements of the system, etc.)
  
• Assessment of electricity supply as a service to
  public
  
• (e.g. access, affordability, quality, etc.)
• Assessment of the performance not in isolation
  but in integration to development of the country
  
  
• (e.g. bulk prices, sustainability, sovereignty,
  job creation, etc.)
  

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Hegemonic Focus of Assessment
Financial Performance
Service to public
Development of the country
11
Focus of this Presentation
Financial Performance
Service to Public
Development of the Country
Poor
Status of Renewables and Off-grid Electrification
12
References

• Karekezi, S and Sihag, A (eds.) (2004). Energy
  Access theme results. Energy Access working
  Group Global Network on Energy for Sustainable
  Development, Denmark
• Thomas et al (2005). Turning Off the Lights The
  Threat to Community Electricity in Sri Lanka.
  ITDG, London
  
• Dubash N (eds.) (2002). Power Politics Equity
  and Environment in Electricity Reform. World
  Resource Institute
  
• Cho A and Dubash N (2003). Will Investment Rules
  Shrink Policy Space for Sustainable development?
  Evidence from Electricity Sector. World Resource
  Institute Working Paper. World Resource
  Institute.
• FDC (2004). Privatization of the Philippines
  Power Industry Issues and Struggles. Freedom
  from Debt Coalition. Manila
  
• WGPSR (2004). Press Release The Constitutional
  Court Decision to Annul the Electricity Law
  No.20/2002. Working Group on Power Sector
  Restructuring. Indonesia.
• Prayas (2004). Know Your Power A Citizens
  Primer on the Electricity Sector. Prayas Energy
  Group. Pune

13
Countries investigated

• Argentina Ghana Bulgaria India
• Indonesia South Africa Chile
• Morocco Kenya
• Uganda Senegal Mali
• Zimbabwe Philippines
• Thailand Bangladesh Vietnam
• China Peru El Salvador
  
  
• Brazil
  California

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Aspects Investigated

• history of reforms access affordability
  efficiency improvements of the system
  financial performance of the utility
  environmental impacts inflow of private
  capital political uprisings motivations for
  reform degree of consultation in reforms
  lock-in corruption involved with reforms
  IFI role in reforms
  regulation integration of interests
  of poor in reforms / special programs to increase
  electrification

15
Impacts of Electricity Reforms in Improving
Access to Poor
16
Impacts of Electricity Reforms in Improving
Access to Poor

• Overall levels of electrification, in general,
  are either not affected or on the increase from
  pre-reforms to post-reforms
  
• However, reforms have been detrimental to
  electrification of the poor especially in the
  rural areas since rural electrification was not
  given enough attention by the profit-oriented
  companies in many developing countries (e.g.
  Asia, Africa, Latin America and Caribbean)
• (Karekezi and Sihag, 2004)
  
  
• 
  
  continued.

17
Impacts of Electricity Reforms in Improving
Access to Poor

• In fact there are examples of even drop of
  electrification levels for poor in India
  (Karnataka, Himachal Pradesh and Orissa, the
  states the study was conducted) and Kenya as a
  result of disconnecting mass scale, poor illegal
  consumers. Electrification levels have got
  stagnated in Mali and in El Salvador.
• Kenya provides examples of the partly privatized
  utility confiscated funds meant for rural
  electrification and used the funds to cover
  operating costs. By this the utility confined its
  attention to its urban relatively rich
  consumers.
• 
  continued...

18
Impacts of Electricity Reforms in Improving
Access to Poor

• Improvements in the level of electrification for
  poor are achieved only in countries where the
  government paid special attention to rural
  electrification outside the market logic
• 
  

19
Status of Grid-connected Electrification in Sri
Lanka

• By the end of 2003
• National electrification level (grid connected)
  67.9
  
• By 2002
• National electrification level 60
• Average rural electrification level 47
• District variation of the level of
  electrification 20 (in some districts of the
  North) 92 (in Colombo)

20
How Affordable is Electricity for Poor After
Reforms?
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How Affordable is Electricity for Poor After
Reforms?

• Reduction in bulk electricity prices can be
  expected with reforms..
  
• - In Argentina price for large consumers fell
  significantly (by 71).
  
• (However California provides the opposite side
  of the story where whole sale prices went up from
  5 to 52 to 140 cents/unit during the power crisis
  generated as a result of reforms)
  
  
• 
  continued

22
How Affordable is Electricity for Poor After
Reforms?

• The general trend in almost all the countries is
  the increase of electricity prices for the
  domestic sector and especially for the poor
  consumers.
• e.g. Argentina, Kenya, Uganda, India, Indonesia,
  Mali, Philippines, Thailand, Brazil, Peru, El
  Salvador and California
  
• Vietnam (prices for the poor stayed unchanged)
• 
  continued

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How Affordable is Electricity for Poor After
Reforms?

• There can be various reasons for prices hikes.
  However the fact that these studies were done at
  different time periods and especially the fact
  that reforms nowhere has brought prices down
  suggests that
• rather than competition among
  companies bringing down prices the possibility is
  for the removal of subsidies to push prices up
  
• 
  continued

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How Affordable is Electricity for Poor After
Reforms?

• Sudden or gradual removal of cross-subsidies stay
  as a main reason for the increase in electricity
  prices for the poor.

25
a brief visit on some other aspects

• Motivations for reforms
• Industry in real markets
• The independent regulator

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Motivations for reforms

• Donor conditionality
• Has played a main role in almost all the
  developing countries
  
• Poor financial performance/financial crisis of
  the sector
  
• e.g. Argentina, Ghana, India, Indonesia,
  Senegal, Mali, Philippines, California, etc.
  
• 
  continued
  

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Motivations for reforms

• Theoritical attraction for competition
• Even with the availability of both positive and
  negative experiences related to market-based
  reforms, theoretical attraction to competition
  (to make the sector highly efficient and to bring
  down prices) stays as a major motivating factor.
  
• As a part of national agenda
• South Africa and China are rare examples

28
Reform related corruption Industry in real
markets

• Behavior of the sector in real markets is
  different that from the behavior under textbook
  conditions

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Reform related corruption Industry in real
markets

• Market power is having the ability of raising
  prices and elbow out competition.
  
• Market power could be exercised even by small
  power generators, due to the peculiar
  characteristics of electricity namely that
  
• - electricity cannot be stored
• - new plants need time for construction (hence
  
  
• entry into the market is not immediate), and
  
  
• - transmission of electricity is constrained by
  
  
• available transmission capacity.

30
Enron story from India

• In 1992 Maharashtra state entered into an MoU
  with US muilinational Enron to set up a LNG plant
  of 2000-2400MW. GE and Bechtel also joined Enron
  to set up Dabhol Power Company (DPC). A PPA was
  signed in 1993 for the project designed in 2
  phases, 1st 695MW, 2nd 1320MW (against the
  reservations of World Bank and CEA). PPA was a
  secret for 15 months. In 1995 government changed
  and the cabinet decided to scrap the project.
  Construction stopped. But under the pressure from
  different channels, including international
  agencies, negotiations re-started, Enron invited
  back and a new PPA was signed. This was worse
  than the earlier one with higher costs. MSEB
  could not make timely payments. MSEB later
  cancelled the PPA with DPC on the issue of
  mis-declaration of plant characteristics by DPC
  and the plant was shut down. In December 2001
  Enron in the US collapsed. Even by 2004 the plant
  was not generating any power.

31
Exercise of market-power in Philippines

• Manila Electricity Company (meralco) breached
  the contact with the state-owned NPC and buys
  power at a much higher rate from its IPPS (IPP
  rate is P4.21/kWh compared to NPCs P2.46/kWh).
  This is charged from consumers. Now the said
  settlement be approved the cost of Meralcos
  un-brought power from NPC amounting to P 20
  billion would be paid for by the consumers just
  the same, even when that same un-bought power was
  already paid for by the consumers through the
  PPA. In the end it is the consumers again that
  are penalized for the offense of a business
  empire that seems to have the favor of the
  current administration, even to the detriment of
  the people.

32
Californian power crisis

• IPPs created artificial generation scarcity
  resulting hiking up of peak power prices.
  Generation capacity was withheld by some
  companies to create artificial shortages. Using
  monopoly (market) power, the generators exploited
  the consumers. It was reported that the designers
  of the ISO software (controlling market
  operations) had leaked some design limitations to
  generators, who used it to their advantage.

33
Non-payment issues in Orissa, India

• According to the state government appointed
  Kanungo committee in 2001, private distribution
  companies did not pay GRIDCO in time, the cost of
  generation went up and GRIDCO debt burden went
  up. AES, which took over distribution of the
  Central Zone behaved in a high handed fashion and
  ultimately left in August 2001.

34
Independent regulation

• Independent regulation is expected to play a
  decisive role in electricity reforms
  
• Questions are raised about the adequacy of
  resources and infrastructure the developing
  countries are having for a successfully
  operational independent regulator
• Regulators are also criticized for its narrow
  approach used in regulation with strict
  separation of economic decisions with
  environmental and other socially and nationally
  important decisions. Training of regulators by
  international consultants is said to promote this
  narrow approach.

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Sri Lankan Regulatory Commission

• The Commission shall consists of five members
  appointed by the Minister (part II, 3). The
  members of the Commission shall be persons with
  ability and integrity and have shown capacity in
  addressing problems relating to engineering, law,
  economics, business management, accountancy or
  administration (part II, 5)
• Public Utilities Commission of Sri Lanka Act,
  No.35 of 2002

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Sri Lankan Regulatory Commission

• However according to the Electricity Reform Act,
  No.28 of 2002, which defines in particular the
  electricity related regulation of the Public
  Utilities Commission
• The functions of the Commission shall be to ..
  
  
• a. To advice the government , on all matters
  concerning the generation, transmission,
  distribution, supply and use of electricity in
  Sri Lanka ..
• l. To undertake all incidental or ancillary
  measures that it considers appropriate for the
  effective discharge of its functions
  

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Independent regulation

• regulation
• Electrification program was aggressively
  monitored by the National Electricity Regulator
  (NER) in South Africa
  
• - regulation
• The Supreme Court of Philippines recently
  declared illegal the Manila Electric Companys
  (Meralco) provisional tariff increase in January
  2004, ruling that the Energy Regulation
  Commission (ERC) committed grave abuse of
  discretion in granting the increase.
• In California poor regulation resulted in
  private players creating artificial generation
  scarcity and hiking up peak power prices.

38
Strategies for Defending the Interests of
Marginalized

• Improving access and making electricity
  affordable to poor
  
• Off-grid electrification
• and sustainable energy
• technologies

39
Improving access and making electricity
affordable to poor

• Majority of the world population, poor, are more
  or less seriously affected by market-driven
  reforms . Additional measures through state
  intervention is needed to look after the
  interests of them.

40
Improving access and making electricity
affordable to poor

• Committed rural electrification targets
• Special units to look after the interests of the
  poor
  
• Special funds and programs to look after the
  needs of the poor
  
• New laws safeguarding better service
• Subsidization

41
Committed rural electrification targets

• India Power to all by 2012
• Zimbabwe Performance Improvement Program
  included explicit rural and urban electrification
  targets that the utility was obliged to meet.
  
• Philippines Government has set electrification
  of all villages as a target for 2006.
  
• Brazil Luz no Campo is a program to extend
  grid to a million new rural customers.

42
Special units to look after the interests of the
poor

• Uganda Is in the process of creating an
  Electrification Board to promote rural
  electrification and expand the use of mini-grid
  and PV systems.
• Senegal and Mali Rural electrification agency
  has been established recently.
  
• Vietnam A special office for rural
  electrification was set up in 1995 parallel to
  the formation of the company Electricity of
  Vietnam.

43
Special funds and programs to look after the
needs of the poor

• India Rural Electrification Supply Technology
  Mission was launched by the Prime Minister in
  2002. Approaches for rural electrification are
  on-grid, off-grid and hybrid systems.
• South Africa Special measures were taken for
  rural electrification from 1994 to 2001.
  
• Uganda Government has recently introduced a
  Rural Electrification Strategy and Plan for the
  2001-2010, period.
  
• Zimbabwe Rural electrification fund was
  established
  
• Thailand Thailand is having a 98.5
  electrification level by 2003 (In early 1970s the
  level was only 7). This was a result of an
  Accelerated Rural Electrification (ARE) program
  initiated in1974.
• China In 2001, government allocates funds for
  the National Township Electrification Program to
  provide electricity to more than 1000 townships
  using hybrid systems, small hydro, solar and
  wind.

44
New laws safeguarding better service

• Brazil
• - In 1996, an additional law made
  concessionaires responsible of the cost of
  providing services to new customers.
  
• - In the same year law that created ANEEL also
  required that half of the RGR financing for rural
  electrification be directed to the regions with
  lowest electrification levels and half be
  allocated to programs for rural electrification,
  energy efficiency, and electrical power for
  low-income users.
• - In 1997, legislation stipulated that national
  energy policies must aim to identify the most
  suitable solutions to supply electricity to the
  different regions.
• - A law passed in 2002 which tightens universal
  service obligations on concessionaires, defined
  low income consumers, established an energy
  development account to promote universal access
  and use of renewables and provides new consumers
  a partial connection cost subsidy.

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Subsidization

• India A massive central government subsidy to
  facilitate power to all by 2012 plan
  
• South Africa In 2002 a poverty tariff was
  introduced to provide with consumers in 20-50 kWh
  category, electricity free of charge.
  
• Brazil provides new consumers a partial
  connection cost subsidy.
  
• China Village renewable energy systems receive
  subsidies.

46
Off-grid electrification

• Electricity Act 2003, India
• For rural areas stand-alone systems for
  generation and distribution are allowed.

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Off-grid electrification IN Sri Lanka

• Under the Electricity Reform Act, No.28 of 2002
• Illegal

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Off-grid electrification

• Electricity Reform Act, No.28 of 2002
• Chapter III, Part I, 12 (3), (4)
• A person shall not be granted both a transmission
  license and
  
• (a) a generation license or
• (b) a distribution license
• A person shall not be granted both a generation
  license and a distribution license
  

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Sustainable Energy Technologies
Demand for sustainable energy
Sustainable energy technology development
Price fall
To have this cycle in operation there is a need
for external inputs
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Sustainable Energy Technologies

• Examples for external inputs that are generally
  not facilitated by market driven reforms (e.g.
  Arizona, Denmark)
  

• Supply-side
• Subsidizing R D
• Investment in generation equipment

Demand-side - Fee-in laws guaranteeing minimum
prices - Renewable portfolio standards certain
portion of energy comes from renewables

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to be continued..
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