International Trends in Electricity Industry

1
International Trends in Electricity Industry

• Rahul Pandey
• IIM Lucknow
• rahulp_at_iiml.ac.in

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Why should you be aware of international trends
in power ?

• Economies are fast becoming more liberalized
  globalized
• Technology/equipment suppliers are often
  international
• Technological progress investments in advanced
  countries and markets influence international
  equipment costs
• Opportunities for deploying latest management
  tools
• Opportunities for deploying latest IT tools
• Power industry reforms is a global phenomenon
• International backdrop to Indian power reforms
• Some of the ongoing international reform
  experiences to rub on Indian reforms in near
  future
• Removal of trade and tariff barriers will bring
  equipment and fuel prices in India closer to
  international prices

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Outline

• Trends in restructuring
• Trends in environmental regime
• Trends in technologies

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• Trends in Restructuring

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Trends in Restructuring

• Vertical disintegration and deregulation
• Unbundling into generation, transmission and
  distribution entities
• Open access to transmission grid
• (Privatization of generation and/or distribution)

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Pro De-regulation Case

• Unbundling, privatization and deregulation are
  likely to result in greater competition in power
  markets, in turn leading to higher efficiency,
  higher reliability (service) and lower costs
  (lower tariffs)

7
The Case Against

• In the long-run, imperfect competition in power
  markets stems from economies of scale,
  oligopolistic ownership, etc.
• In intermediate term, competition is imperfect
  because of capital intensive production and long
  construction delays.
• In short-run, prices are volatile, supply side is
  technically rigid and demand inelastic, leading
  to imperfect competition.

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Peculiarities of Electricity Industry

• No finished goods inventory (uneconomical
  storage) demand fluctuations
• Not a commodity
• Not a fuel but an instantaneous phenomenon
  occurring throughout an interconnected system
• Real time system synchronization/ coordination/
  integration
• Reliability requires reserve margins
• Relatively inelastic demand
• Capital intensive technologies, long life
• Long gestation periods
• Public good

9
Developed Countries Experiences

• USA
• Public Utilities Regulatory Policies Act in 1978
  ? Supply of wholesale power to utilities
• Energy Policy Act, 1992 ? Competition in
  wholesale elec trading
• Investor owned, Municipal, Federal govt. managed
  utilities, and IPPs including Merchant Plants
• Most states remain regulated (a few de-regulated)
• Independent state-level public utility
  commissions
• Real time dispatch, pricing / tariff setting
• Public participation thru civil society orgns.
• Mixed outcomes
• High costs due to stranded investments
• High efficiency due to integrated resource
  planning and DSM (thanks to strict but effective
  regulation)
• No significant difference between costs of public
  and pvt. ownership

10
Developed Countries Experiences

• California
• 50 GW market size
• Restructuring intended to protect retail
  consumers
• Retail tariffs controlled Wholesale market
  freed-up
• California measured very low on HHI
  (Herfindal-Hirschman Index) ? Low concentration
  of firms
• Totally de-regulated ? Unbridled market power
• Uniform price model (as against pay-as-bid)
• Collusion among big players
• Strategic maintenance scheduling ? gaming the
  market ? Hike in peak prices (reduced peak
  efficiency)
• Market collapse (predicted in 1996) Blackouts
  Supply utilities banckruptcies

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Developed Countries Experiences

• UK
• Restructuring began in late 1980s
• Unbundling Privatization of generation and
  distribution Independent regulator Competition
  commission
• Electricity Pool spot market ? Compulsory
  marginal daily bid system (uniform price)
  Incentive for adding capacity
• Increased market concentration (60 of capacity
  was by 2 firms, in 1996) ? Market power
  (monopolize price-setting)
• Forced divestments by 2000
• Regulators concerns remained for 2 generators
  (8, 18)
• Rejection of Market Abuse Licence Condition in
  2001due to difficulty in benchmarking competitive
  price (bid prices can change over time) ?
  Recognition of limits to competition
• Powergens strategy
• From centralized planning to devolved structure
  (functional to divisional to cluster of BUs)
  profit or cost centers Reduced planning cycle
• From coal-dominant to coal-gas mix (JVs with gas
  suppliers)
• Internationalization (Germany, Hungary,
  Indonesia, etc)
• Technical to Strategic focus

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Developed Countries Experiences

• Australia, UK, New Zealand
• Problems of market power (poor competition)
• Increased prices in peak periods
• Vertical re-integration (UK)
• Norway, Denmark, Finland
• State-controlled generation (hence domestic
  ownership)
• Independent and effective regulation
• No evidence of market power

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Developing Countries Experiences

• Latin America
• Few big MNCs (huge foreign investments)
• Serious problems in most countries except Chile
  (Chile witnessed re-integration Endesa owns
  55 of Chile, 22 Columbia, 19 Argentina, 24
  Peru, 5 Brazil)
• Brazil Reform since 1995 Successful in
  privatization revenue improvement from
  distribution Failed in privatizing generation
  Capacity constraints continue Tariffs increased
  Unbalanced retail and wholesale tariff settings
• Restriction on cross-ownership of firms in
  Argentina, Bolivia, Peru
• Africa
• Reforms in 20 countries (justification same as in
  India)
• Unbundling ? Corporatization ? Commercialization
  of state-owned utilities with no change in
  ownership Contract management
• New generation by IPPs (TD still state owned)
• Independence of ERBs questioned (except in SA and
  Ghana)
• Labour union resistance in West African countries
• Protests due to tariff hikes Corruption in
  Kenya, Tanzania, Uganda, Zimbabwe
• Zimbabwe Initial improvement in public utilitys
  management and efficiency Later problems due to
  implementing privatization without tariff and
  regulatory reform
• Increase in capacity Financial improvement in
  some cases

14
Developing Countries Experiences

• Chile
• Began in early 1980s in the backdrop of economic
  globalization (2-way investment flows X-country
  infrastructure of elec lines and gas pipelines)
• Unbundling and privatization of 2 state owned
  firms (Pvt pension funds, unlike foreign
  investment in rest of LA) Competition in
  generation (direct selling to large buyers) Open
  access to transmission Licensing requirement for
  distribution projects
• Unregulated prices for large buyers Regulated
  for others (at marginal costs, but anchored to
  competitive price)
• Economic Load Dispatch Center market ? Spot
  prices and Spot transfers
• High concentration ? 94 of market by 3
  generators
• Endesa (like other sector Chilean firms) grabbed
  opportunities and responded on multiple fronts
• Integrated state-owned firm in Chile until 1975
  (HydThr) ? Shed off distribution construction
  in early 1980s ? Forced to hike efficiency and
  pay dividends to State ? Doubled employee
  productivity ? Privatization in 1988 ?
  Independent decentralized profit centers ?
  Orgn.-wide incentives Improved availability
  Improved finances New project development
  Engineering ? Internationalization (via JVs with
  Local US partners) ? GenTrans in LA by
  mid-1990s

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Developing Countries Experiences

• Asia and Others
• China
• Province-owned integrated utilities compete in
  each province many controlled by State Power
  Co. of China Provincial Cos. profit centers
• Coal Hydro ratio similar to Indias Distances
  a concern Deficient TD grids
• Least-cost centralized planning by Govt Govt
  controlled regulator Excess capacity
  Time-of-day tariffs
• Recent trend towards mine-mouth power plants and
  clean coal technologies
• Govts inclination for competitive bidding by
  generators announced
• IPP scandals in Asia
• India, Indonesia, Pakistan, Philippines
• Tendency of rent-seeking by IPPs
• 30-50 higher cost of gas power projects in Asia
  and Africa
• High Risk Premiums incompatible with High
  (RoRCapital CostsProtections)
• Other concerns Reduced access of electricity to
  the poor
• Argentina, Georgia, Kazakhstan, Bolivia, Moldova,
  Most African countries

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Lessons from International Experiences

• Competition and System integrity in electricity
  markets requires
• Creating large no. of players
• Real time pricing
• Incentives for system reserve margins (capacity
  investments)
• Preventing vertical re-integration tendencies to
  hedge against price risks
• Independent ERCs
• Effective public participation and oversight in
  regulation

Effective Re-regulation !
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• Trends in Environmental Regimes

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Tightening environmental norms

• Global environmental concerns
• Climate change caused by GHG emissions, of which
  CO2 is a key element
• Kyoto Protocol requires immediate mandatory
  mitigation of by developed nations, and
  envisages commitments by developing nations by
  2010
• Economic advantage of Gas w.r.t. Coal in US
  Western Europe already visible (at least 40 less
  C) due to removal of subsidies (20-40 decline in
  coal markets)
• Coal to Gas substitution also visible in ex-USSR
  Eastern Europe (35 decline in coal markets)
• Gas power generation share on a rapid rise,
  replacing Coal in US EU and Hydro in LA Rapid
  investments in gas pipelines
• Domestic environmental concerns
• Increasing restrictions on SO2, NOx, Ash
  particulates, etc

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Clean technologies under exploration

• CCGT with efficiency of 60-65
• Advanced coal power technologies (target to
  achieve 45-55 efficiency at 1000/kW)
• E.g. IGCC (Coal gasification preferably combined
  with combustion Fluidized bed of limestones to
  capture S and crack tars Gas cleaning system to
  remove S filter ash Gas turbine) US,
  Germany, Japan, Spain, Netherlands
• Possibility of integration with Fuel Cell
  technology
• Carbon sequestration technologies under
  development
• Biomass (mostly for cogeneration), MSW, and Wind
  based generation
• Co-firing of Biomass/MSW (upto 15 of heat input)
  with Coal in utility boilers without significant
  loss of efficiency
• Fuel Cells
• Complementarity with transport sector

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• Trends in Technologies

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Dominant trend since 1890s until 1980s

• Centralized large generating stations located far
  away from end users
• Economy of scale effect
• Lower per-unit-cost with increasing scale
• Traditional thermal, large hydro (later nuclear
  too) matched the requirements well, with part of
  hydro meeting peak loads

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Dominant trend since 1890s until 1980s
10000
Gas
Coal
Nuclear
100
Hydro
Mtoe
1
0.01
1800
1850
1900
1950
2000
Year
Primary energy supply in the US
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Trend since 1980/90s

• Towards smaller generators closer to users
• Economy of series manufacture effect
• Lower per unit cost with increasing volumes of
  manufacturing/assembling subsystems
• First breakthrough Gas Turbines
• Efficient economic at smaller sizes
• Very low gestation periods
• No fuel storage
• No solid waste Much less emissions
• Can be used as Cogeneration of elec heat (eff
  80)
• Reduced TD losses
• No need for system coordination policing
• Higher reliability control of supply
• Amenable to commercial free market businesses
• Amenable to end-use optimization

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Trend since 1980/90s

• Other future prospects
• Fuel cells
• Modular renewable energy technologies
• Microturbines
• Clean coal technologies
• As few major customers shift to on-site
  generation, it will render centralized utility
  generation further uneconomical as system load
  factor will fall

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Costs in 1995 (in US1990/kW)
Geothermal power
Solar PV
Wind
Coal combined cycle power plant
Biomass power plant
Nuclear power plant
Solar thermal
Conventional coal power plant
6000
Gas combined cycle power plant
5000
Combustion gas turbine
4000
3000
2000
1000
0
Mature
Incremental
Radical
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Learning Curves for some Technologies
20000
1982
Solar PV
10000
1992
5000
1982
US(1990)/ kW
Windmills
1000
1987
1958
Gas turbines
500
1963
1980
100
10
100
1,000
10,000
100,000
Cumulative MW installed
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Factors that drive technology costs down

• Cumulative investments
• Investments in support infrastructure (e.g.
  transmission networks, road networks, gas
  pipelines)
• Increasing markets, leading to increasing
  scale/volumes, leading to maturity, leading to
  standardization
• Improvements in production and management systems
  with experience

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Implications for Indian Firms

• In short to medium run..
• Modernize management and technological systems
  Learn new tools of operations, IT and financial
  strategy
• Build innovative capabilities
• In long-run..
• Keep your horizontal, vertical and regional
  options open