South East Asia Power Scenario
Transcript of South East Asia Power Scenario
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Changing landscape of theChanging landscape of therisks in power sectorrisks in power sector
Sohail Hasnie
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Efficient power sectorEfficient power sector
matters!matters!
Efficiently managed power sectorcan deliver:
Cheaper electricity
With higher reliability
Freeing up public resources for other
priority areas like public schools andhospitals
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Reform is neededReform is needed
Reform is needed for efficiencyimprovement, BUT
Should be tailored to local needs
Benefit must outweigh cost
No single solution fits all
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Independent RegulationIndependent Regulation(Can we apply same regulatory approach?)(Can we apply same regulatory approach?)
China added
about 70,000MW this year
Mongolias total
installed capacityabout 650 MW
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Metering of ConsumptionMetering of Consumption(Can we apply same metering solution?)(Can we apply same metering solution?)
Tokyo CBD needs themost sophisticatedmetering
Consumption by theserural Tajik houses is lessthan 50 kWh per month
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Wholesale Electricity MarketWholesale Electricity Market(Can the same approach apply to all countries??)(Can the same approach apply to all countries??)
Nepal 610 MW installed, 36% of
power generated by the largest ofthe 10 generators
Philippines installed capacityabout 14,000 MW, largestgenerator 1000 MW, about 150generators in total
China installed capacity about500,000 MW with thousands ofgenerators
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TopicTopic
Role played by ADB Example of changes in the power
sector
Indonesia
Philippines
Regulatory risk
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Unbundling and Reform, Victoria AUSTRALIA
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SECV - 95Expected
Equivalent,c
/kWh(2005prices)
Generation
Transmission
Distribution
RetailCompetition
Regulation
Regulation
Competition
Unbundled Tariff
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SECV State Electricity Commission, Victoria
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Average electricity pricesAverage electricity prices(result of competition)(result of competition)
Average annual prices (per financial year)
Year NSW QLD SA SNOWY TAS VIC
1998-1999 33.13 51.65 156.02 32.34 36.33
1999-2000 28.27 44.11 59.27 27.96 26.35
2000-2001 37.69 41.33 56.39 37.06 44.57
2001-2002 34.76 35.34 31.61 31.59 30.97
2002-2003 32.91 37.79 30.11 29.83 27.56
2003-2004 32.37 28.18 34.86 30.8 25.38
2005-2006 22.12 18.65 25.47 22.57 99.4 22.85
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Changes in power sectorChanges in power sector
Reform why it is relevant ? Unbundling what makes sense?
Regulation what is needed? Privatization when it is viable?
Regional Regulators Network why?
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ADBADBssVisionVision
ADBs goal in the energy sector is toincrease availability and access toenergy, particularly for the poor, in aleast-cost, clean and environmental-friendly manner.
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We bring money and ideasWe bring money and ideas
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OfficesOffices
HQ in Manila, 26 field offices
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PrioritiesPriorities
Priority areas: Private sector in development
Regional cooperation: integration,address shared problems, and poolinformation
Environmental sustainability: forefront ofdevelopment planning, and reversingdamage
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Money and Ideas forMoney and Ideas for
Developing SolutionsDeveloping Solutions
Technical Assistance Loans
Grants Co-financing
Risk Guarantees Equity
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Recent OperationsRecent Operations
2000 2003Item
No. / % Amount No. / % Amount
Loans, Total ADB 74 5,850m 85 5,918m
Loans, Energy Sector 8 1,141m 10 757m
Share of Energy Sector 10.8% 19.5% 11.7% 12.4%
TAs, Total ADB 233 136.9 239 126
TAs, Energy Sector 15 9.2 25 15.1
Share of Energy Sector 6.4% 6.7% 10.5% 12.03%
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Indonesia: Power SectorIndonesia: Power Sector
43% of population is without power(roughly 90 million people)
Looming shortages in Java-Bali grid andoutages elsewhere
Unsustainable fuel subsidies--about
$8.2 billion (18% of the totalgovernment expenditure) in 2005
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Indonesia: Power SectorIndonesia: Power Sector
Current installed capacity (about 21,800MW) plus the IPPs (3,400 MW) can notmeet peak demand growing at 6.6%
Additional generating capacity of 1,000-2,000 MW needed annually to meetdemand forecast
Momentum of reform lost because ofdelay
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Indonesia: Power SectorIndonesia: Power Sector Electricity Law No. 20/2002 gave long-term
vision for the sector unbundling of State Electricity Corporation (PLN)
independent regulation, competition in generation
and private sector participation
Constitutional Court annulled the law (Dec04) on grounds that it (unbundling andcompetition) violated the Constitution
Drafting of a new law is underway
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PhilippinesPhilippines
Policy DeclarationPolicy Declaration
Ensure quality, reliability, security and affordability of electricity
and accelerated total electrification;
Ensure transparent and reasonable prices, fair competition and
full public accountability
Enhance inflow of private capital, broaden the ownership base
of power sector by privatization of NPC;
Assure socially and environmentally compatible energy sources,
efficient use of energy, promotion of renewable resources anddemand side management;
Establish strong, independent regulatory body to ensure
consumer protection and competition in generation.
Phili iPhilippines
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PhilippinesPhilippines
Industry StructureIndustry Structure
GenerationGeneration
80%
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Introduction of CompetitionIntroduction of Competition Establishment of wholesale spot market (within 1 year);
generation prices market determined not to be regulated
Market settlement mechanisms will be developed
Customers with a peak demand of at least 1 MW will beable to choose their electricity supplier immediately;
consumption of 750 kW, pa within 3 years;
Every year thereafter, DOE to evaluate performance of
the market to gradually introduce contestability to others
No choice for electric co-op. customers for first 5 years
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Open Access onOpen Access on
distributiondistribution To be implemented within 3 years provided that:
wholesale electricity spot market is created;
approval of transmission and distribution charges;
implementation of cross subsidy removal scheme;
privatization of at least 70% of NPCs generation
Assets;
transfer of at least 70% IPP contracts to the IPP
Administrator.
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Objectives of the ERCObjectives of the ERC
In the restructured industry ERC will
promote competition;
encourage market development;
ensure customer choice; and
discourage/penalize abuse of market power.
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Functions of the ERCFunctions of the ERC
Key functions:
promulgate and enforce, Grid Code and Distribution Code including
standards for Transmission, distribution and suppliers;
Establish criteria for standard financial capability of companies.
establish methodology for transmission and distribution charges
Determine existing cross subsidies until completely removed;
Regulate retail rates for franchise market of a distribution utility;
Develop guidelines on accounting separation, pricing methodology,
asset valuations and consumer protection
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Functions of the ERCFunctions of the ERC
Key functions (Contd.)
Monitor anti-competitive behavior and abuse of market power.
Ensure generation cost reductions passed on to customers;
Mange timetable for divestments, if required;
Regulate operations of the electricity spot market;
Implement ownership rules including the requirement that
unlisted generation and distribution sells at least 15% to public.
Handle consumer complaints and ascertain consumer interests
establish procedure for dispute resolution
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Functions of the ERCFunctions of the ERC
Key functions (Contd.)
Implement cross ownership rules that limits -
Ownership by a single company to 30 percent of a
grid and or 25 percent of the national generatingcapacity;
Bilateral power supply contracts to 50 percent of
total demand sourced from an associated
generator;
Sourcing of power by bilateral contracts to 90percent of total demand for the first five years
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Functions of the ERCFunctions of the ERC
To Develop within one year a universal charge, charged to all
users, for all forms of cross-subsidies for a period not exceeding3 years, including:
Payment for NPC and other stranded costs;
Missionary electrification; equalization of taxes and royalties between indigenous or
renewable and imported sources energy;
An environmental charge of P 0.0025/kWh to be used solely
for watershed rehabilitation and management;
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Other Powers and PenaltiesOther Powers and Penalties
Electricity Regulatory Commission-
can modify the existing grid definition when two or more of thethree separate grids become sufficiently interconnected
can suspend wholesale electricity spot market in emergency.
Penalties at the discretion of the court
Members of the Board of Directors of companies may be fined by
an amount not exceeding double the amount of damages caused
or by imprisonment 1 or 2 years or both; Individuals: imprisonment and fine P10,000 to P10,000,000 or
both
fines and penalties that imposed by ERC for any violation of ornon-compliance with the Act ranges P50,000 to P50,000,000.
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PhilippinesPhilippines
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PhilippinesPhilippines -- ReformReform
ChallengesChallengesPrivatization
Act requires 70% Genco privatization before openaccess and contestability
privatization target revised to Jun 06 as perceived
high risk by investors is delaying the process- Emerging market risk, government and regulatory
risk, and absence of transition supply contract
Without the timetable for open access distributorsare unwilling to sign transition supply contracts(vesting contracts)
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PhilippinesPhilippines -- ReformReform
ChallengesChallenges
Wholesale Electricity Spot Market Hardware and software are installed, and trial marketis in progress
Basic design of the market is sound but initially as anenergy only market, with a limited number ofseparately-owned generators, and large number ofdistributors high price volatility is likely
Too risky to open the market without vestingcontract in place
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PRCPRC
Reform GoalReform Goal
Divest and restructure power assets,separate generation from transmissionand distribution
Introduce competition in generation,implement bidding for generationgradually
Establish independent and efficientelectricity regulatory system
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PRCPRC
Reform ProgressReform Progress 2002: State Power divested into 5 generators; 2 grid
companies; and 4 non-core Corporations 2003: Tariff reform plan; Regional and provincial grid
companies were restructured; SERC was established;
and Regional wholesale markets pilots initiated; 2004: Pilots for accounting separation oftransmission, pilots for large customer contestability
2005: Provisional Regulations on Electricitypromulgated
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Risks in power sectorRisks in power sector
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Why Independent Regulator?Why Independent Regulator?
Balance the priorities of Investors,Government, and Consumers
ensure everyone is equally unhappy
Balance local context / laws / culturewith international demands
Norms, guidelines: one size does not fit all Enhance credibility and legitimacy of
regulatory processes
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IssuesIssues What belongs in law? in concessions? in rules? -
e.g. pricing regime, service quality standards,social expectations
What investors entitled to know?
What protections are consumers entitled to, andfrom where are they derived?
Clear identification of risk / reward symmetries(e.g. who bears what risk, risk premiums)
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Independent RegulatorIndependent Regulator Setting up a regulator is not enough
5+ years to be effective & gain respect
Repeatability, Predictability and
Transparency of regulatory process Regulation by Contract is a better
interim solution
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Risks come fromRisks come from People, Regulatory Framework and process
for changing the framework
Independence alone does not reduce the
risk new framework takes a while investor complaints of unfair treatment
consumer complaints about service qualityand prices
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Process and ProceduresProcess and Procedures Defining transparency, information flow among
decision-makers, role of staff
Publication of decisions with full explanations
Consultation process / public debate External Publication Pubic documents /
confidentiality
Guidelines
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Human ResourcesHuman Resources Qualifications
Training
Diversity of skills, experience, and academic
backgrounds Compensation levels
Career opportunities
Job tenure
Ethical standards protection of information
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Regulatory CaptureRegulatory Capture Gamekeeper turns poacher or, at least, helps
poacher. Interest groups seek to promotetheir private interest ... Over time, regulatoryagencies may be dominated by the industriesregulated.
Regulators always at RISKof being captured
by the regulated firms.
Who regulates theWho regulates the
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Who regulates theWho regulates the
Regulator?Regulator?
Who to Appeal? Process and compositions ofmembers and their tenure
Steps and scope of appeal allowed by law
Correctness /reasonableness of decision Transparency of process, information
requirement and cost
Experience from past appeals
Risk from generatorsRisk from generators
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Risk from generatorsRisk from generators
perspectiveperspective Lower electricity prices: more capital
intensive low fuel costs (wind, nuclear)generators suffer more
Higher fuel prices
Emissions costs
Safety & Compliance Cost
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Regulatory RiskRegulatory Risk NetworkNetwork
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Regulatory RiskRegulatory Risk NetworkNetwork
BusinessBusiness Form of regulation -- incentive based light-
handed can become rate of return ifrequired revenue benchmark is used
WACC post tax WACC eliminates incentivesfor generating tax benefits
Efficiency carry-over partial glide path
for efficiency carry over imposes compliancecosts and reduces incentive to invest inefficiency and innovation.
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Regulatory RiskRegulatory Risk CustomersCustomers
Sustainable consumer advocacy/representation
Complaint handling process
Quality of service standards
Remedial powers / penalties
Will prices will be lower in the long term?
What value does the regulator bring?
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Independent Regulationis not the Panacea
Every country and culture is different
One Size does not fit all
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ReformIndependent Regulation
Wholesale Market
but not enough
Tailor the solution to the country