The Public Benefits Agenda in Electricity Reform

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The Public Benefits Agenda in Electricity Reform
Presented at a World Bank Group Evaluation
Workshop Electricity Sector Reform and Private
Participation Experiences, Lessons and
Outlook November 5-6, 2003 Manila, Philippines

• Navroz K. Dubash

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Electricity Reform Defined

• Electricity reform
• Changes in management/ownership
• Restructuring for market competition
• Independent regulation
• Public benefits include
• Efficiency and reliability
• Access to electricity and affordability
• Environmental considerations
• Labor interests

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Limited Attention to Public Benefits During
Reforms

• Financial considerations crowd out public
  benefits
• Capital shortage led to unitary focus on IPPs
• Macroeconomic crisis and donor conditions drove
  reform agenda
• Closed political process leaves no scope for
  broader goal definition, including public
  benefits
• Six country study showed no examples of rural
  development or environment ministries involved in
  reform goal definition or design

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Access to Electricity

• Profit motive alone is an insufficient driver of
  electricity access
• Early reformers have been high access countries
• Remote locations, low population density, poor
  credit, lack of purchasing power are barriers to
  providing access
• Privatization and restructuring alone will not
  support expanded access E.g. Bolivia, Ghana,
  Argentina
• E.g. Orissa, Kanungo report Rural
  electrification seems to have unintentionally
  become the worst casualty of the reform process

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Approaches to Enhancing Access

• US rural cooperatives
• low interest public funding for rural
  cooperatives with standard engineering and
  universal coverage
• South Africa public utility led electrification
• financed by tariff on users gt 40 to 66 in 6
  years
• Morocco hybrid public and private
• municipalities/households co-finance 45 of cost,
  utility pays 55 using a 2 levy on sales
• One time payment to private provider monthly
  household payments to support distributed
  electricity
• Chile private competition for subsidy
• Private companies (often with municipalities)
  compete for bundled central and regional
  subsidies.
• US112 million in subsidies attracted US60
  million in investment
• Message no single winning approach, focus on
  incentives integrated with broader reforms

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Affordability

• In LDCs, price is likely to rise postreform in
  response to pressure for tariff hikes and subsidy
  removal
• Many subsidies are inefficient and also unfair
• Yet narrow adherence to economic principles alone
  can lead to inequitable outcomes E.g. Argentina
• Cost of supply pricing gt rich paid 40 less than
  poor post reform
• Tariffs revisited in 2000 to incorporate capacity
  to pay and cross-subsidies
• Need to explicitly examine distribution questions
• Identification of needy and potential subsidy
  recipients
• Assessment of incentives introduced by subsidies
• Program of public information

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Environmental concerns

• Electricity has a large environmental footprint
  local and global pollution
• 38 of global CO2 and 50 in South Asia
• More economically efficient sector is also more
  environmentally sound
• But without explicit effort, reforms can
  undermine environmental sustainability

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Environmental Lessons

• Energy efficiency
• End-use efficiency can lower effective prices to
  consumers making reform more palatable
• Unbundling introduces transactions costs
• Scope for proactive measures on efficiency
• E.g. California Decline in attention to
  efficiency until crisis. Post-crisis gt 6,300MW
  saved
• E.g. Brazil 1 of distribution revenues on
  energy conservation
• Mainstream environment in regulation
• Economic decisions have environmental outcomes
  e.g. distribution pricing
• E.g. U.K. cogeneration has been disadvantaged

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Environmental Lessons (Contd.)

• Planning for a clean electricity future
• Planning framework to internalize social benefits
  and costs into private investment decisions
• Incentives for renewable energy, where
  appropriate
• European Commission has established a goal of 22
  of electricity from renewables
• E.g. China renewable portfolio standard as a
  mechanism for inter regional wealth transfer

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The Link Between Good Governance and Public
Benefits

• Open process allows diverse interests to be
  represented, including social and environmental
  constituencies
• Counter-argument open process brings risk of
  political capture and deadlock
• Yet, there are no examples of successful and
  lasting reforms through quick and stealthy
  approach
• Sequencing public benefits up-front brings
  benefits
• Avoids institutional lock-in
• Fully utilizes the narrow political window for
  reforms
• Butresses political viability of reforms

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Conclusions

• Define goals prior to reform with active public
  participation
• Early attention to social and environmental
  concerns can avoid potentially harmful
  institutional, political and financial lock-in
• Successful reform needs a strong and continuing
  public role government and regulators

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Power PoliticsEquity and Environment in
Electricity Reform
Navroz K. Dubash, editor