Efficient
and reliable electricity supply is absolutely crucial for a nation’s
economic health. Economic forecasts suggest Asian economies will face
a significant challenge in the coming decades - to ensure investment in
electricity infrastructure grows with demand.
To ensure growth does not drive
a wedge between existing capacity and future demand, large-scale investment
is needed. APEC nations estimate they will need to spend in excess of
$88 billion on generation assets alone by 2010.
ACCESS TO
INVESTMENT
Securing sufficient investment
in generation and transmission infrastructure is a key challenge for growth
preparation. This is not new, and significant progress has been made.
World Bank figures show that in the 1990s East Asia accounted for a third
of global investment in energy projects that had private participation.
However, since the Asian financial
crisis, the inflow of new private investment in the electricity sector
has stalled; largely because investors are adopting conservative approaches
and are not willing to assume the risks associated with marginal projects.
Even now, six years after
the crisis, Asian countries continue to find new investment particularly
difficult to secure. There are a number of reasons for this. Weak currencies
and credit ratings that have not been revived to pre-1997 levels mean
that the cost of raising debt finance remain high. The combination of
adverse monetary conditions and fiscal constraints limit a country’s
ability to viably undertake large-scale investment without assistance.
Lack of transparency around government policy processes and perceptions
of unfair treatment in some jurisdictions mean that private and foreign
investors demand a premium to compensate for heightened risk.
The recent crisis involving
U.S. based energy firms is also negatively influencing global investment
flows.
RESTRUCTURING
& PRIVATISATION
Over the last decade, attempts
by Asian governments to increase private involvement in the electricity
sector have included: Privatisation and improvements in governance at
regulatory and industry levels; Encouraging the entry of Independent Power
Producers (IPPs); and Liberalising market structures.
Privatisation of government
owned utilities can be used as a way to: Release capital for other high
priority areas; Encourage competition; and Reduce the government’s
exposure to commercial risk.
There has been very limited
divestment of government energy assets in Asia, despite plans to do so.
Countries that have made substantial progress towards asset sales are
those with more mature market liberalisation programmes. South Korea has
begun its sales process with State run monopoly Korea Electric Power Corp
(KEPCO) to sell 34 - 51% of its stake in the thermal generator, Korea
South-East Power Co. Singapore has recently put its privatisation programme
on hold, pending improvements in international investment conditions.
Despite the slow progress
on divestment, both Singapore and Korea have acknowledged they can continue
to control assets via regulatory mechanisms and market structures rather
than ownership.
INDEPENDENT
POWER PRODUCERS (IPPS)
Another widely used method
of increasing private sector investment in electricity infrastructure
is to encourage the establishment of independently built and operated
generation plants. A well designed and implemented IPP arrangement can
lead to reduced costs, increased access to best practice technology, improved
access to project finance via international capital markets, and the shifting
of key risks, particularly construction risk, to the private sector. The
viability of power reforms based on IPPs depends critically on how risks
are shared between the parties and the rate of return on IPP assets.
Asia’s experience with
IPPs has been mixed. During the 1990s, an overwhelming proportion of South
Asia’s private investment was in Green field projects based on an
IPP arrangement. The Asian financial crisis made many governments recognise
the potential problems of introducing IPPs that sell power to State Owned
Enterprises without reforming the sector. The strategy ignored the main
problems in the sector; subsidised tariffs, inefficiencies and monopolistic
market structures. It also forced governments to assume contingent liabilities,
through take-or-pay power purchase agreements (PPAs). The pressure created
by inappropriate risk sharing in PPAs has led to some governments to renegotiate
contracts.
EXPERIENCE
WITH LIBERALISED MARKETS
In recognition of the problems
of attracting investment, and to make the most of IPPs, many governments
have committed to sectoral reform that would liberalise market structures
and processes. This policy sends a number of important signals. A liberalised
electricity market: unleashes the value embedded in government owned utility
assets; attracts investment; and improves economic efficiency to deliver
benefits to end consumers.
DO LIBERALISED
MARKETS ATTRACT INVESTMENT?
Liberalised markets that are
structured for competition, aim to facilitate the efficient behaviour
of both incumbents and new market entrants by offering incentives such
as: economic dispatch of generation; open access grid policy; and a pricing
mechanism that encourages efficient generation to operate profitably.
Although there have been some
very public cases of reform failure associated with liberalised markets,
they have an impressive track record in attracting private investment.
In the National Electricity
Market of Australia, private investment accounts for 38% of generation
assets. Since July 2000 65% of the 3,600MW of generation commissioned
was privately funded.
The New Zealand Electricity
Market, which has been operating for seven years, also has 38% private
investment in generation. More significantly, all the new capacity commissioned
since market start has been privately funded.
Argentina’s wholesale
electricity market has moved from a position of complete Government ownership
to a market now involving more than 40 private generation companies with
a 75% share of the 22,000 MW installed capacity. All new generation investment
since liberalisation in 1992 has come from non-government sources.
Even in Singapore, where a
nodal spot market has only recently opened after having Pool based arrangements
since 1998, has 9% of its generation capacity privately funded. Of the
3,500MW new generation commissioned since 1998, over 25% was privately
funded.
Liberalised markets are not
only useful for securing private funding but are also successful in attracting
and utilising quality investments in efficient generation assets. In Argentina
combined-cycle gas turbine (CCGTs) generation units make up 27% of the
generation sector, all of which has been commissioned since liberalisation.
The new Singapore wholesale
electricity market (SWEM) has stimulated a structural shift in the type
of generation unit being run to supply electricity.
CCGTs are now the
dominant source of generation in the SWEM whereas they were a secondary
source to oil-fired open-cycle generation units in the Pool.
The SWEM has stimulated this
change because the new trading rules reward generators responsive to changes
in system demand. CCGTs, with their ramping capabilities are in a unique
position to capture market share in a more dynamic marketplace.
WILL LIBERALISED
MARKETS FULFILL THEIR PROMISE IN ASIA?
Incumbent electricity monopolists
who say: “We don’t need a market. Trust us. We can do it better”,
are wrong.
Market liberalisation is about
establishing a framework for efficient trading. Economic signals provide
accurate information on which investment decisions can be made. Keeping
these signals hidden within bureaucratic and vertically integrated organisations
with conflicting objectives will not inspire the new investment needed
to meet the challenges posed by increasing demand.
Liberalised markets are not
problem free. Structural change is likely to bring pain. However, many
of the teething problems that have forced the abandonment of market reform
in places such as California and Ontario can be avoided with careful design
and implementation.
Some markets have experienced
energy shortages and associated price spikes. To categorise electricity
market reform as a failure because prices have gone up in response to
shortages misses the purpose of the reform. It is taken as a matter of
course that shortages in supply in commodity markets are accompanied by
prices increases. Electricity markets are no different.
AN EFFICIENT
MARKET
An efficient market does not
guarantee lower prices; it simply allows prices to reflect movements in
fundamentals such as demand and supply. Electricity produced at a competitive
price provides the signals needed to encourage new investment.
Reform efforts should be directed
at establishing a market framework that will allow efficient trading and
investment decisions based on economic signals.
International experience has
shown that market reform is a complex, but worthwhile undertaking. Careful
implementation planning is essential. It is important to recognise that
although implementation delays may occur, these should not be used as
an excuse for not taking reform further. In addition, it is of high importance
that market structures are accompanied by complementary investment policies
that provide prospective market entrants with confidence that they will
be able to compete on a level playing field and that incumbents will not
be afforded undue advantages.
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