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Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 1
“Power Sector Reform in Developing Countries”
Lessons from a Comparative Study ofBrazil, China, India, Mexico and South Africa
David G. VictorProgram on Energy and Sustainable
DevelopmentStanford University
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 2
What Have We Learned? Overview of my Comments
1. Causes of ReformFrom state-centered to market-oriented power systems
2. Pace and Character of ReformReform is slow
3. OutcomesMost reforms get stuck part-wayRegulators are critical but rarely empowered Low-income users are generally not harmed by reform
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 3
Standard Textbook Model for Reform: four “easy” steps
Sell those parts of the system amenable to competition.
2. Privatize
Open power generation and marketing to competitive firms.
3. Create Markets
Set-up independent regulators to oversee conduct in the industry and regulate the monopoly-prone parts of the business .
4. Create Regulatory Institutions
Separate generating, transmitting, distributing and marketing electricity.
1. Unbundle
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 4
1. Causes of Reform
•In the advanced industrialized nations– Origins: new ideas about economic organization– Goal: economic efficiency– Expected outcome: tariff reductions– Politics: relatively easy to build support
•In these five developing countries– Origins: economic and power crisis– Goal: financial solvency and investment– Realistic outcome: tariff increases– Politics: very difficult
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 5
Reform Strategies: No Textbook Model
Aggressive electrification; redrawing of boundaries for distributors; corporatization of utility; independent regulator; IPPs expected
South Africa
Reform at the margins (IPPs); reforms stalled due to political and constitutional barriers; independent regulator
Mexico
Reform at margins (IPPs and guaranteed returns for national power corporation) then seek private management of distribution; independent regulator.
India
Reform at the margins (IPPs) and corporatization of state enterprises to raise money; nascent independent regulator
China
Privatization of distribution and generation companies to raise money; allowance for IPPs; creation of hydro system operator; independent regulator
Brazil
StrategyCountry
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 6
2. Pace and Character of Reforms• Reform is slow, because…• Electricity Reforms depend on other reforms
– Finance• Soft budgets of state companies kill competition
– Judicial delegation• Independent regulators
– Factor Markets• Labor; fuels
– Corporate Governance and accounting• Essential for regulatory oversight and private investment
– Competition Policy• No evidence yet—no markets
– Contrast w/ OECD• reform with “rule of law,” market institutions, and independent financial sectors
already in placeDavid Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 7
3. Outcomes: Market Structure
• Emergence of “dual markets”– Partially state-controlled
• Soft budgets; tariffs• Highly political allocation of rents
– Partially market• Project and concession bidding• Market experiments
– E.g., Six provinces in China (1999-2001)
– Not a transient outcome, but stable equilibrium
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 8
“Regulatory Squeeze”
Assets squeezed of rents and equity
Solvent, productiveenterprises
Integratedgeneration &
Supply system
Grid customers
Lucrative customers
InsolventCore?
Failed private
investment
Viableprivateunits
Unbundlingand partialreforms
Privati
zatio
n
Time (and increasing fragmentation)
“Self-G
enerators”“The
State”
“Dual
Firms”
“Norm
al Private
Firms”
Legend:Flow of capitaland assetsFlow of Electricity
Regulatory & administrativedecision-making
“Asset sortingand shifting”
Productive assets
Insolvent assets
State-owned system
Privately owned powerSupply & delivery system
Pre-Reform
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 9
3. Outcomes: Regulation
• The Need for Regulatory Credibility– Even the best cases yield weak & uneven
regulators• India (compare across states)• Brazil (ANEEL’s inconvenient rulings)
– Developing country regulators learn more from each other than from OECD “capacity building”
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 10
3. Outcomes: Energy Services for the Poor
• Fear that reform would undermine the social contract– Energy services for the poor– Environmental protection– Investment in R&D
• Outcomes mixed– Special programs to advance energy services for the poor– Environmental rules strengthened (and gas helps)– R&D mixed story (contrast U.S. with developing countries)
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 11
Cause: PolicySouth Africa’s National Electrification Achievement
PRESENT
Source: Gaunt, Load Research Programme, Energy Research Centre - Cape Town South Africa
-3000-2000-1000
0100020003000400050006000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
UrbanRural
(thousands)
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 12
Conclusions• Most Market Reforms have not yet been “successful”
– Reform is slow– Outcomes allow “dual firms” to dominate– Real markets are rare
• Market reforms tend to create weak links– Insolvent state companies; usually distributors
• Independent regulators are essential– Yet true empowerment is difficult
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 13
Supplemental slides
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 14
PESD Research Platforms1. Electricity Market Reforms
– Five-country comparison (Brazil, China, India, Mexico, South Africa)
– Independent Power Producers (IPPs) in 12 countries
2. Energy Services for the Very Poor– Shift from traditional to modern fuels and technologies
3. Geopolitics of Natural Gas– Past and future of large pipelines and LNG– Gas demand in China and India
4. Climate Change Policy– Beyond Kyoto– Engaging developing countries
5. National Oil Companies– Causal relationship between strategies, political influence and
performance– Studies underway on 14 countries
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 15
Peak winter load in South Africa (2002)
0
0.2
0.4
0.6
0.8
1
1.2
00:0
0:00
03:0
0:00
06:0
0:00
09:0
0:00
12:0
0:00
15:0
0:00
18:0
0:00
21:0
0:00
Time
Frac
tion
of p
eak
(29
GW
)
Mining Commerce Industry Agriculture Suburban Newly Electrified Townshipsource: Eskom and ERC
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 16
South Africa’s Free Electricity Experiment:Measured Effects (7-15 kWh/month)
220
0
20
40
60
80
100
120
140
160
180
200
2000
Q1
2000
Q3
2001
Q1
2001
Q3
2002
Q1
2002
Q3
2003
Q1
Year/Quarter
Con
sum
ptio
n in
bin
(kW
h/m
onth
)
Pilot (Sales + EBSST)Control (Sales)
Pilot (EBSST)
Source: Gaunt, Load Research Programme, Energy Research Centre - Cape Town South Africa.David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 17
The Two Dimensions of IPP Outcomes
Country IPP obligations excessive, unnecessary; or mismanagement deters future investment.
Private investors are squeezed out in favor of other actors.
Country attracts investment that produces electricity.
Private investors are squeezed out in favor of other actors.
Investor Outcom
e N
EGA
TIVE
Country IPP obligations excessive, unnecessary or expensive.
Projects are paid and enforced as originally agreed.
Country attracts competitive and sustainable investment.
Projects are paid and enforced as originally agreed.
Investor Outcom
ePO
SITIVE
Country Outcome NEGATIVE
Country Outcome POSITIVE
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 18
Risk Mitigation Effects of Local Partners
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Suc
cess
ful M
itiga
tion
of R
isk
Fuel Supply Dispatch Risk Non-Payment Renegotiation
Risk Confronting a Project
Local Equity (n = 20 projects) Foreign Only (n = 13 projects)
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 19
Risk Mitigation Effects of International Lenders
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
% S
ucce
ss R
ate
Fuel Supply Dispatch Non-Payment Renegotiation
Risks Confronting a Project
No Bi-/Multilateral Support (n=17 projects) Bi-/Multilateral Support (n=16 projects)
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 20IPPs developed in unreformed electricity market, selling to national utility.1984Turkey (9)
1994
IPPs developed in unreformed electricity market, selling to national generation and transmission utility.
1994Thailand (7)1997
IPPs developed in reforming electricity market, selling to a national grid operator; ongoing reform has led to stranded cost problems.
1997Poland (3)1997
IPPs developed in unreformed electricity market, selling to national generation and transmission utility.
1988Philippines (45)1988
IPPs developed in unreformed electricity market, selling to vertically integrated national utility.
1992Mexico (16)1995
IPPs developed in unreformed electricity market, selling to vertically integrated national utility.
1993Malaysia (13)1993
IPPs developed largely unreformed electricity market, selling to state transmission and generation monopoly.
1996Kenya (4)1996
IPPs developed in reforming electricity market, selling to state electricity boards.1991India (16)1991
IPPs developed in unreformed electricity market, selling to vertically integrated national utility holding company.
1996Egypt (3)1998
IPPs developed in reforming electricity market, selling to provincial power authorities.
1985China (32)1985
IPPs developed in partially private electricity market, selling to distribution companies and large users.
1995Brazil
IPPs developed in privatized electricity market, selling in highly competitive contract and spot markets.
1992Argentina (16+)1992
Electricity Market Context for IPPs
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 21GamaEnron (Prisma) 1999$1255$600478MWNat’l GasTurkeyTrakya ElektrikEnkaIntergen2002$518$20003860MWNat’l GasTurkeyGebze, Adapazari, IzmirThai OilUnocal, Westinghouse2000$527$369700MWNat’l GasThailandIndependent Power GMS Marubeni2003$714$250350MWNat’l GasThailandEastern PowerEC ChorzowPSEG2003$1473$324220MWCoalPolandElchoJAC InternationalEnron (Prisma)2000$1138$132116MWNat’l GasPolandENS --CMS → Covanta1995$349$2263MWDieselPhil.CaviteLA Prairie, San LorenzoCalEnergy, Peter Kiewit2001$3536$495140MWHydroPhil.CasecnanPMR ResourcesIntergen, Ogden2000$1946$895460MWCoalPhil.Quezon--CEPA → Mirant1996$1269$888700MWCoalPhil.Pagbilao--CEPA → Mirant1991$190$40210MWDieselPhil.Navotas IGrupo HermesAES, Nichimen2000$491$260530MWNat’l GasMexicoMerida III--EDF2002$412$234568MWNat’l GasMexicoRio Bravo II--Iberdrola2001$513$6101190MWNat’l GasMexicoMonterrey IIIIPS (Agha Khan)Cinergy, CDC, Wartsila, IFC2001$1133$8575MWDieselKenyaTsavoKPLC PensionUnion Fenosa1997$1477$6544MWDieselKenyaIberAfricaST PowerCMS2002$1280$320250MWCoalIndiaST-CMSReddy GroupEl Paso, PSEG, Marubeni2001$764$252330MWNaphtha/GasIndiaPPN--Powergen → CLP1998$1121$734655MWNaphtha/GasIndiaCLP PaguthanEssar Steel--1995$998$514515MWNaphtha/GasIndiaEssar PowerLancoCDC Globeleq2000$1140$285250MWNat’l GasIndiaLanco KondapalliGVKCMS1996$1208$261216MWNat’l GasIndiaGVK Jegurupadu--EDF2002$495$338683MWNat’l GasEgyptPort Said
--EDF2003$498$340683MWNat’l GasEgyptSuez--Intergen2002$610$418685MWNat’l GasEgyptSidi Krir
Shandong gov’tCLP, EDF2003$733$2,2003000MWCoalChinaShandong Zhonghua--Intergen, El Paso, Lippo2001$1043$755724MWCoalChinaMeizhouwanGuangdong gov’tCEPA → Mirant1996$944$1,8701980MWCoalChinaShajiao C--Tractebel Energia2002$947$426450MWHydroBrazilCaña Brava--AES Corp. 2000$583$350600MWNat’l GasBrazilUruguaiana--Electricite de France2004$1137$887780MWNat’l GasBrazilNorte Fluminense--El Paso Energy2001$787$730928MWNat’l Gas BrazilMacaéEBX CapitalMDU Resources2001$345$100290MWNat’l GasBrazilTermoceará
Local SponsorsForeign SponsorCOD$/MWCost US$
MWFuelCountryProject Name
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 22
$1255$600478MWNat’l GasTurkeyTrakya Elektrik
$518$20003860MWNat’l GasTurkeyGebze, Adapazari, Izmir
$527$369700MWNat’l GasThailandIndependent Power
$714$250350MWNat’l GasThailandEastern Power
$1138$132116MWNat’l GasPolandENS
$491$260530MWNat’l GasMexicoMerida III
$412$234568MWNat’l GasMexicoRio Bravo II
$513$6101190MWNat’l GasMexicoMonterrey III
$764$252330MWNaphtha/GasIndiaPPN
$1121$734655MWNaphtha/GasIndiaCLP Paguthan
$998$514515MWNaphtha/GasIndiaEssar Power
$1140$285250MWNat’l GasIndiaLanco Kondapalli
$1208$261216MWNat’l GasIndiaGVK Jegurupadu
$495$338683MWNat’l GasEgyptPort Said
$498$340683MWNat’l GasEgyptSuez
$610$418685MWNat’l GasEgyptSidi Krir
$583$350600MWNat’l GasBrazilUruguaiana
$1137$887780MWNat’l GasBrazilNorte Fluminense
$787$730928MWNat’l Gas BrazilMacaé
$345$100290MWNat’l GasBrazilTermoceará
$/MWCost US$MWFuelCountryProject Name
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 23
Cost-saving Alternatives to Free Electricity: LPG
16250%
21060%
25870%
30580%
35390%
401100%
Annualized Savings (Rand)Peak Co-incidence Factor
Source: Howells et al., 2005. Draft
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 24
Lighting Efficiency for a Rural Village in South Africa: Base Case lighting services and fuel use
Source: Howells et al., WP18, PESD (http://pesd.stanford.edu)
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 25
The Role of Distributed Power Generation
• Institutional, financial and technical impediments to rural electrification• Rural populations are dispersed, small consumers and low-income
– poor customers for grid based systems• Distributed Power Generation:
– Variety of technology options (renewable and non-renewable, isolated and mini-grid)
– Variety of business model options (centralized vs. decentralized, governmental vs. non-governmental)
– Can aid end-use customers in improving access and quality
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 26
Institutional
Environment
Business Model
Organizational Nature of Enterprise
Technologies
Target Customers
Financial Model
Immediate Outcomes
Changes in Rural Electricity Service
Financial Performance (Sustainability and
Replicability)
Welfare
Impacts
Policy
Levers
Research Outline: Linking Distributed Rural Electrification Policies to Welfare Impacts
David Victor
Insert Your Name - World Forum on Energy Regulation III - Washington, DC - October 8-11, 2006 27
360 kW Small Hydro Unit in Zhejiang Province, China (Total Plant Capacity 1.18 MW)
One of 40,000 plants providing 28 GW of power in rural China