The Linkages Between Governance and Finance for the Electricity Sub-sector

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The Linkages Between Governance and Finance for
the Electricity Sub-sector

• Iván Azurdia Bravo, Ph.D.
• FUNDACION SOLAR

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Heracleitus
Change is the only reality. Theres nothing is
and nothing was, but everythings
becoming. (Change is constant)
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Designing electricity markets is an unfinished
business, because adjustments are inevitable, the
challenge is to create a dynamic system that
ensures efficient rule changes. (The key
process)
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The task is to design policies related to energy
for sustainable development that go far beyond
the energy sector. (Sustainable development)
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• To achieve sustainability economically,
  financially, environmentally, socially, and
  politically- reforms must be designed so as to
  minimize the need for revisions.
• (Complex systems approach)

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Governance ?? Finance

• (Multiple correlations)
• Business as usual
• or
• Unusual business.

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No universal model exists
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• Reform efforts have been based on ideological
  considerations that assumed markets could be
  trusted to solve the problem.

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• Guatemala faces an institutional threat for the
  consolidation of vital reforms already undertaken
  and implementation of crucial secod-generation
  reforms.

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• Thus, reform efforts mus be viewed against the
  backdrop of earlier failures.

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Looking Back

• Lack of or inadequate efficiency incentives and
  tariff levels that did not reflect actual costs
  led to poor performance of state-owned utilities
  (SOUs), which accumulated large financial
  deficits. Inadequate incentives were largely
  connected to a lack of clearly defined roles in
  government, which encouraged political abuse by
  the utilities.

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• Consequences included poorly targeted subsidies,
  inefficient expansion of distribution, and a
  sector acting as a form of employment agency,
  subject to corruption.

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• The financial problem was exacerbated by the
  macroeconomic adjustments arising from the 1980s
  debt crisis. Emergency solutions created new
  problems, such as the power purchase agreements
  (PPAs). While PPAs provided a quick fix to
  insufficient availability of electricity, these
  contracts also increased companies financial
  burden.

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• In Guatemala, the high cost of PPAs signed prior
  to reform have become a tremendous financial
  burden on the sector, forcing its government to
  use its remaining asses to buffer the effect on
  tariffs.

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• Failure to address upfront the stranded cost
  resulting from the PPAs, contracted under
  pressing conditions before the reform was in
  place, overshadowed the entire process and
  remains a major threat to reform sustainability.

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• Powerful firms can shape the rules of the game to
  their own advantage, at a high social cost.

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• The important element in this process is not
  privatisation, per se, but the introduction of
  competition to drive costs down, and the
  application of sound business principles in terms
  of pricing, reliable accounting, and
  transparency. It is also important to ensure that
  public monopolies are not simply replaced by
  private oligopolies, which have many of the same
  drawbacks.

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On Financing...

• Up until now 94 of the World Bank credits for
  energy are given for the promotion of fossil
  energy, only 6 for Renewable Energy. Unusual
  business suggests among other issues to turn
  around this ratio phasing out the support for
  coal programmes immediately and for oil by 2008
  instead, the WB should increase the support for
  Renewable Energy by twenty percent per annum.

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• The World Bank needs to consider these
  recommendations in order to fulfill its
  objectives of poverty alleviation consistent with
  social and environmental standards. It is
  necessary to underlined its role in both
  decreasing poverty and increasing environmental
  protection.

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• The objective of the World Bank is to provide
  credits, when otherwise credits cannot be
  obtained. It needs to concentrate its limited
  budget to support small local Renewable Energy
  companies in order to raise local income, to
  better the environment and to provide excess to
  sustainable energy services.

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"It is impossible to solve a problem with the
same methods that caused this problem"  

• Albert Einstein

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• Energy systems are diverse, technologically and
  institutionally complex, and in a state of flux.
• Regrettably, there are no simple blueprints that
  will work in all situations.

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Leapfrogging to
Expanded energy services that are environmentally
sound, as well as safe, affordable, convenient,
reliable, and equitable.
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Conditions of Governance

• Rule of law, clear and accepted property rights,
  independent and competent judiciary, mechanisms
  for peaceful conflict resolution, contract
  enforceability, and quality of public
  bureaucracies and competition agencies.

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The Current Context

• Increasing globalisation.
• Shifting responsibilities for governments.
• Restructuring and liberalisation of energy
  markets.
• The emerging information technology revolution.
• Greater public participation in decision-making.

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Participatory Globalisation

• Good governance. Political stability, an
  impartial and independent legal system,
  transparency of government regulations and open
  access to information.

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Making Markets and the Public Sector Work Better

• As the energy sector becomes more market-driven,
  public sector oversight is perhaps more important
  than ever.

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In Central American countries, power markets are
small thus, although implementation will be
difficult, the medium-term strategy for the
region should emphasize creating an integrated
market.
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• Accounting for externalities in the energy
  equation, and thereby reflecting some of the
  social costs of energy use, has become an
  increasingly important aspect of energy policy.

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Promote Dialogue Among Key Stakeholders

• Politicians and their patrons.
• Business interests.
• Current and potential electricity consumers.
• Electricity companies.
• Foreign investors.
• Financial sector.
• Labor, incorporating Gender issues.

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Strategies to Overcome Threats to Sustainability

• Prospective winners and losers.
• Compensation shemes.
• Empowerment of beneficiaries.
• Public information campaigns.
• Political support.
• Constitutional environment.
• Incentive structures.

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Remember

• Energy
• ?
• Electricity Sub-sector

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The Innovation Chain

• Innovation does not necessarily occur in a linear
  and sequential mode, nor can it be described
  solely in technical terms. Technology involves
  economic, technical, and cultural elements.

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• More attention should be given to policies and
  instruments dealing with the building and
  organisation of sustainable energy innovation
  systems and the management of interfaces between
  potential partners in the innovation process.

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Capacity Development

• Must be an explicit part of any successful
  strategy to use energy as an instrument of
  sustainable development.

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• Capacity development is a continuous process.
  This is one of many reasons that development
  assistance should move away from short-term
  projects to longer-term programmatic support.

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Linking Governance and Finance Requires

• A complex systems approach.
• Innovative options.
• Participatory globalisation.
• Open multistakeholders dialogue.
• Balance between equity and efficiency.
• Capacity building process.

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Bibliography

• European Commission. 2003. World Energy
  Technology and Climate Policy Outlook. Brussels,
  Belgium.
• Sustainable Development International. 2001.
  Strategies and Technologies for Agenda 21
  Implementation. London, UK.
• UNDP/European Commission. 1999. Energy as a
  Tool for Sustainable Development for African,
  Caribbean and Pacific Countries, European
  Commission. Brussels, Belgium.
• UNDP/IIIEE/IEI. 2002. Energy for Sustainable
  Development, a Policy Agenda. Edited by T.B.
  Johansson and J. Goldemberg. United Nations
  Development Programme. New York, NY.
• UNEP. 2000. Natural Selection, Evolving Choices
  for Renewable Energy Technology and Policy.
  United Nations Publication. Paris, France.
• World Bank. 1996. Rural Energy and Development,
  Improving Energy Supplies for Two Billion People.
  Washington, DC.
• World Renewable Energy Network. 2001. Renewable
  Energy 2001. London, UK.

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Muchas Gracias!!!