Changing landscape of the

Changing landscape of the

risks in power sector
risks in power sector
Sohail Hasnie
Efficient power sector
Efficient power sector
matters!
matters!
Efficiently managed power sector
can deliver:
Cheaper electricity
With higher reliability
Freeing up public resources for other
priority areas like public schools and
hospitals
Reform is needed
Reform is needed
Reform is needed for efficiency
improvement, BUT
Should be tailoredto local needs
Benefit must outweigh cost
No single solution fits all
Independent Regulation
Independent Regulation
(Can we apply same regulatory approach?)
(Can we apply same regulatory approach?)
China added
about 70,000
MW this year
Mongolias total
installed capacity
about 650 MW
Metering of Consumption
Metering of Consumption
(Can we apply same metering solution?)
(Can we apply same metering solution?)
Tokyo CBD needs the
most sophisticated
metering
Consumption by these
rural Tajik houses is less
than 50 kWh per month
Wholesale Electricity Market
Wholesale 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 of
the 10 generators
Philippines installed capacity
about 14,000 MW, largest
generator 1000 MW, about 150
generators in total
China installed capacity about
500,000 MW with thousands of
generators
Topic
Topic
Role played by ADB
Example of changes in the power
sector
Indonesia
Philippines
Regulatory risk
Unbundling and Reform, Victoria AUSTRALIA
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Generation
Transmission
Distribution
Retail
Competition
Regulation
Regulation
Competition
Unbundled Tariff
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SECV State Electricity Commission, Victoria
Average electricity prices
Average 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
Changes in power sector
Changes 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?
ADB
ADB

s
s
Vision
Vision
ADBs goal in the energy sector is to
increase availability and access to
energy, particularly for the poor, in a
least-cost, clean and environmental-
friendly manner.
We bring money and ideas
We bring money and ideas
Offices
Offices
HQ in Manila, 26 field offices
Priorities
Priorities
Priority areas:
Private sector in development
Regional cooperation: integration,
address shared problems, and pool
information
Environmental sustainability: forefront of
development planning, and reversing
damage
Money and Ideas for
Money and Ideas for
Developing Solutions
Developing Solutions
Technical Assistance
Loans
Grants
Co-financing
Risk Guarantees
Equity
Recent Operations
Recent Operations
2000 2003 Item
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%

Indonesia: Power Sector
Indonesia: Power Sector
43% of population is without power
(roughly 90 million people)
Looming shortages in J ava-Bali grid and
outages elsewhere
Unsustainable fuel subsidies--about
$8.2 billion (18% of the total
government expenditure) in 2005
Indonesia: Power Sector
Indonesia: Power Sector
Current installed capacity (about 21,800
MW) plus the IPPs (3,400 MW) can not
meet peak demand growing at 6.6%
Additional generating capacity of 1,000-
2,000 MW needed annually to meet
demand forecast
Momentum of reform lost because of
delay
Indonesia: Power Sector
Indonesia: 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 (Dec
04) on grounds that it (unbundling and
competition) violated the Constitution
Drafting of a new law is underway
Philippines
Philippines
Policy Declaration
Policy 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 and
demand side management;
Establish strong, independent regulatory body to ensure
consumer protection and competition in generation.
Philippines
Philippines
Industry Structure
Industry Structure
Generation
Generation
80%
<0.5%
18%
2.0%
NPC
Independent Power Producers
Rural Elec. Authorities
Other Private Generation
Hydro 30%
Geo Thermal 14%
Oil Fired
26%
Coal 5%
Diesel 10%
Gas Turbine
15%
NPC Transmission
NPC Transmission
Distribution
Distribution
78%
11 Municipalities 120 rural co.op
15 Private Distribution
Customers
Customers
Franchise Customers
High Voltage
Industrial 43%
Residential 30%
Commercial 24%
Others 3%
MeralCo
Introduction of Competition
Introduction 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 be
able 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
Open Access on
Open Access on
distribution
distribution
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.
Objectives of the ERC
Objectives of the ERC
In the restructured industry ERC will
promote competition;
encourage market development;
ensure customer choice; and
discourage/penalize abuse of market power.
Functions of the ERC
Functions 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
Functions of the ERC
Functions 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
Functions of the ERC
Functions 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 generating
capacity;
Bilateral power supply contracts to 50 percent of
total demand sourced from an associated
generator;
Sourcing of power by bilateral contracts to 90
percent of total demand for the first five years
Functions of the ERC
Functions 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 exceeding
3 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;
Other Powers and Penalties
Other Powers and Penalties
Electricity Regulatory Commission -
can modify the existing grid definition when two or more of the
three 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 or
non-compliance with the Act ranges P50,000 to P50,000,000.
Philippines
Philippines
Philippines
Philippines
-
-
Reform
Reform
Challenges
Challenges
Privatization
Act requires 70% Genco privatization before open
access and contestability
privatization target revised to J un 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 distributors
are unwilling to sign transition supply contracts
(vesting contracts)
Philippines
Philippines
-
-
Reform
Reform
Challenges
Challenges
Wholesale Electricity Spot Market
Hardware and software are installed, and trial market
is in progress
Basic design of the market is sound but initially as an
energy only market, with a limited number of
separately-owned generators, and large number of
distributors high price volatility is likely
Too risky to open the market without vesting
contract in place
PRC
PRC
Reform Goal
Reform Goal
Divest and restructure power assets,
separate generation from transmission
and distribution
Introduce competition in generation,
implement bidding for generation
gradually
Establish independent and efficient
electricity regulatory system
PRC
PRC
Reform Progress
Reform 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 of
transmission, pilots for large customer contestability
2005: Provisional Regulations on Electricity
promulgated
Risks in power sector
Risks in power sector
Why Independent Regulator?
Why Independent Regulator?
Balance the priorities of Investors,
Government, and Consumers
ensure everyone is equally unhappy
Balance local context / laws / culture
with international demands
Norms, guidelines: one size does not fit all
Enhance credibility and legitimacy of
regulatory processes
Issues
Issues
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, and
from where are they derived?
Clear identification of risk / reward symmetries
(e.g. who bears what risk, risk premiums)
Independent Regulator
Independent 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
Risks come from
Risks 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 quality
and prices
Process and Procedures
Process 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
Human Resources
Human Resources
Qualifications
Training
Diversity of skills, experience, and academic
backgrounds
Compensation levels
Career opportunities
J ob tenure
Ethical standards protection of information
Regulatory Capture
Regulatory Capture
Gamekeeper turns poacher or, at least, helps
poacher. Interest groups seek to promote
their private interest ... Over time, regulatory
agencies may be dominated by the industries
regulated.
Regulators always at RISK of being captured
by the regulated firms.
Who regulates the
Who regulates the
Regulator?
Regulator?
Who to Appeal? Process and compositions of
members 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 generators
Risk from generators
perspective
perspective
Lower electricity prices: more capital
intensive low fuel costs (wind, nuclear)
generators suffer more
Higher fuel prices
Emissions costs
Safety & Compliance Cost
Price Intervention
Price Intervention
(Risk)
(Risk)
Surplus capacity: prices below LRMC not allowing
marginal generators recover any of their fixed costs.
Scarce capacity during peak, prices above LRMC
attracting new investments.
Regulatory Risk
Regulatory Risk

Network
Network
Business
Business
Form of regulation -- incentive based light-
handed can become rate of return if
required revenue benchmark is used
WACC post tax WACC eliminates incentives
for generating tax benefits
Efficiency carry-over partial glide path
for efficiency carry over imposes compliance
costs and reduces incentive to invest in
efficiency and innovation.
Regulatory Risk
Regulatory Risk

Customers
Customers
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?
Independent Regulation
is not the Panacea
Every country and culture is different
One Size does not fit all
Reform
Independent Regulation
Wholesale Market
but not enough
Tailor the solution to the country