The new world is hungry for electricity, do we need to re-think the energy sector?

The new world is hungry for electricity, do we need to re-think the energy sector?

Every responsible country wants to provide reliable, affordable and sustainable energy to its citizens. Over the last 25 years some have thrived, others struggle and some are merely standing by.

Why?
Since 1990, many countries have undertaken market-oriented reforms of the electricity sector, such as the creation of independent regulators, the privatization of parts of the electricity industry, the restructuring of utilities, and the introduction of competition. Each of these reforms has its history.
The World Bank published a paper “Rethinking Power Sector Reform in the Developing World”, this is a high level summary.

  • Regulation: Regulation proved to be the most popular reform and approximately 70% of developing countries created quasi-independent regulatory bodies to oversee pricing and monitor quality of service. While many countries have enacted strong legal frameworks, others do not implement regulations.
  • Privatization: Thanks to the widespread adoption of stand-alone power projects, the private sector has contributed - notably - up to 40% of the new generation capacity in the developing world since 1990, even in low-income countries. However, the privatization of utility distribution companies has proven much more problematic. Latin American markets drove an initial surge in the late 1990s, but there was relatively little momentum thereafter. Countries in which utility distribution companies were privatized were much more likely to adhere to cost recovery rates. Many privatized utilities also operate at high levels of efficiency, performing similarly to the best utilities. Regardless of who owns it, the most efficient utilities adopted best governance and management practices, including: transparent financial reporting, merit-based recruitment, and modern information technology (IT) systems.
  • Restructuring: Most developing countries continue to operate with vertically integrated national electricity supply services that function as monopolies. Only 1 in 5 countries implemented both vertical and horizontal unbundling of public services, separating generation from transmission and transmission from distribution and creating multiple public generation and distribution services. Restructuring is the first step towards deeper reforms and the countries that did not advance in this direction did not experience significant impacts. Indeed, restructuring electrical systems that are very small or poorly managed - as is the case in many sub-Saharan African countries - can backfire, reducing the scale of operation and increasing their complexity.
  • Competition: Only 1 in 5 developing countries was able to enter a wholesale electricity market in the past 25 years, in which generators are free to sell electricity directly to a wide range of consumers. Most of these electricity markets are found in the countries of Latin America and Eastern Europe. These countries have reaped the benefits of a more efficient allocation of generation resources, but generally had to introduce more incentives to ensure adequate investment in new capacity. A demanding list of structural, financial and regulatory preconditions for electricity markets prevents most other developing countries from following suit. Such a transition is rarely possible until power systems reach a size of about 3 gigawatts (GW) and a wholesale turnover of about $ 1 billion. For those countries that are not yet ready, participating in a regional electricity market can bring many of the benefits of trade.


The main conclusions of the study are:

  • Power is a political issue: implementing market-oriented power sector reforms poses political challenges. Many countries announced reforms that were later not approved and some enacted reforms that later had to be reversed. In practice, reforms in the electricity sector proved more feasible in countries that had already adopted a broader market ideology and in political systems based on the decentralization of power. Advocates for reforms often played a critical role in driving the change process, but broader stakeholder alignment proved just as important for reforms to be sustained in the long term. For example, in the Dominican Republic a far-reaching market-oriented reform was enacted in an unfavorable political environment and a turbulent macroeconomic context that ultimately led to the renationalization of utilities.
  • Initial conditions are important: market-oriented reforms are complex and presuppose a power system that is already largely developed, adequately governed, and financially secured. Countries that started from this advantageous position generally did quite well from sector reforms. But those who embarked on the process before meeting these basic conditions faced a much more difficult trajectory, with results that often fell short of expectations. Thus, market-oriented power sector reforms performed much better in relatively developed middle-income countries such as Colombia, Peru, or the Philippines than in more difficult environments such as Pakistan or the Indian state of Odisha. For example, in Peru, the electric power sector was completely restructured in 1994, and private sector investment increased substantially in the generation, transmission and distribution networks of the metropolitan area, reaching an amount of around USD 16 billion in 20 years. The creation of an effective regulator and institutions of the wholesale electricity market increased the efficiency of the country's electricity sector and considerably reduced the cost of electricity.
  • There are no universal solutions: reforms in the electric power sector are a means to an end. What ultimately matters is the good results of the sector and there may be different ways of achieving them. Among the best performing electric power sectors in the developing world are some that have thoroughly implemented market-oriented reforms, as well as others that have maintained predominant and competent state electric power services and that respond to strong regulatory mandates, in combination with a more gradual and specific role for the private sector. This reality justifies a greater pluralism of approaches in the future. In Vietnam, for example, central policy focused on achieving universal access to electricity and rapidly expanding generation capacity to achieve energy security in a rapidly growing economy. These objectives were achieved through strong leadership from state entities, complemented by the gradual and selective adoption of market reforms and targeted private investments.
  • The goals have evolved: in the past it used to be enough to achieve energy security and fiscal sustainability, but countries now have more ambitious policy goals for the 21st century, in particular achieving universal access and decarbonizing electricity supply . Market reforms can be useful to improve the overall efficiency and financial viability of the electric power sector, and to create a better investment climate. However, they cannot - in and of themselves - satisfy these social and environmental aspirations. It is necessary to apply complementary policies to guide and encourage the specific investments that are required. For example, in Morocco, an ambitious increase in renewable energy was achieved through the creation of a new institution parallel to the traditional service, with a specific regulatory mandate to guide private investment towards the achievement of government policy objectives.
  • Technology causes disruption: rapid innovation is transforming the institutional environment through the effects of renewable energy, battery storage and digitized grids. The traditional industry of highly centralized networks is increasingly challenged by decentralized actors. These include new entrants and consumers who may have the ability to generate their own electricity or adjust their demand in response to market signals. How this ultimately redesigns the organization of the electric power sector will depend on the extent to which regulators open up markets to new players and reconfigure the incentives for legacy utilities to adopt innovative technologies.

In summary, a nuanced picture emerges from the experiences of developing countries that have aimed to improve the performance of the electric power sector over the past 25 years. Building on this wealth of historical data, and grounded in emerging technology trends, the report provides a new framework for electricity sector reforms that is context-based, results-driven and defined by base of different solutions.

The complete report can also be accessed at http://www.esmap.org/rethinking_power_sector_reform



Great! Next, complete checkout for full access to EnergyByte
Welcome back! You've successfully signed in
You've successfully subscribed to EnergyByte
Success! Your account is fully activated, you now have access to all content
Success! Your billing info has been updated
Your billing was not updated