Utilizing FDI to improve infrastructure Electricity: - Case Studies of Chile and New Zealand

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1 2008/SOM3/IEG/SEM2/004 Session: I Utilizing FDI to improve infrastructure Electricity: - Case Studies of Chile and New Zealand Submitted by: UNCTAD Seminar on Recent Trends on Investment Liberalization and Facilitation in Transport and Telecommunication Infrastructure Lima, Peru August 2008

2 Utilising FDI to improve infrastructure - electricity Case studies of Chile and New Zealand APEC Meetings August 2008 in Lima, Peru Rory Allan Principal Investment Adviser Division on Investment and Enterprise rory.allan@unctad.org

3 Background Chile and New Zealand case studies in FDI in electricity Objective guidance for developing economy policy makers For APEC-UNCTAD Joint Capacity Building Project for Addressing Knowledge Gaps in the Use of FDI (CTI 03/2008A) Presentation of draft not final report. Comments welcome. 2

4 Chile and NZ overview Installed Capacity % 4% 2% 5% 2% 7% 22% Hydro Geothermal Oil Coal Gas Other Wind 8,600 MW Installed Capacity, Dec % 41% Hydro- Run of river Hydro -Dam Carbon 27% 12% 5% Combined cycle (Diesel, LNG) Others 3

5 Objectives Reducing state ownership for the benefits of reduced calls on public funds or guarantees Introducing commercial skills and disciplines Forgoing economies of scale for the benefits of competition Two approaches Maintain State system Competitive Framework Capacity enhancement Chile, New Zealand IPPs, Grid concessions Case studies 4

6 Electricity market reform and utilising FDI in the sector is: Complicated Long term; and requires Great resilience to changing conditions and new challenges. Good practice depends on many economy characteristics so "best" practices needs careful interpretation. But lessons can be drawn. 5

7 Chile Timeline of Key Events 1987: Endesa s privatization begins 1990: Endesa s privatization finalized 1994: Endesa traded in NYSE 1997: Endesa Spain gains control of Enersis 2000: Endesa required to sell Transelec 2004: Argentina cuts gas supply 2006: Brookfield acquires Transelec : General Electricity Law 1985: System operator created 1990: First Transmission Law 2000: Competition Commission transmission ruling 2005: Short Law II 2004: Short Law I New Zealand 1992: Drought causes energy crisis 1994: Power New Zealand is formed 1999: Contact is privatized 2001: Dry year crisis 2000: NGC buys Transalta 2004: Origin Energy gains cotnrol of Contact 1986: State Owned Enterprise Act 1988: Transpower is created 1992: Energy Companies Act 1998: Electricty Reform Act 2003: Ec Com more regulation

8 Lessons political economy (1) Don't rush the reforms. Neither Chile nor NZ were forced to rapid privatisation to bail out state operations No "big bang" of electricity market reform and private investment in either economy Get functioning commercialised SOEs in the new unbundled industry before inviting FDI. (NZ still has many after 20 years) [IPPs can fill generation gaps?] Be careful about addressing community expectations Expectation of lower prices can backfire (NZ). Chile presented prices as a signal not an outcome There will be crises and people will look for scapegoats Connecting new users helps development and community support. Co-financing works well Develop expertise and quality institutions in government their competence will be fully and continuously tested. Regulation changed over time in both economies 7

9 How Chile and NZ did it Achieving a competitive framework to engage private investment: Vertical disaggregation Horizontal competition The role of FDI, domestic investors and the state as operators. 8

10 The Competitive Framework Vertical Disaggregation Chile New Zealand Non-regulated users Generation Transmission Distribution Permitted Not Permitted Retail 9

11 Competitive Framework Horizontal Competition Generation Chile Enersis AES Suez Colbun Other: small + alternative New Zealand Mighty River Meridian Genesis Trustpower Contact Transmission Transelec CEMIG Transpower Distribution Enersis Sempra CGE Community Trusts Powerco Vector Retail The gentailers FDI SOE Local Investor 10

12 Regulatory institutions and cross-cutting issues Industry and competition regulators Chile Regulatory policy National Energy Commission and Min of Economy Experts Panel replaced Minister to decide disputes on rules and between operators. Competition Tribunal. New Zealand National energy policy framework - Ministry of Economic Development. Regulatory oversight Electricity Commission implements electricity market rules over wholesale market and adjudicates breaches. Competition and fair trading laws provide protections against anticompetitive practices. FDI policy: Chile DL 600 tax stability and remittance rights NZ FDI approval needed; no contractual tax stability. 11

13 FDI and impact Substantial FDI in Chile but did not come immediately. Less in NZ, but fewer opportunities Impact: Chile FDI contributed to: More competition top 3 share of generation decreased from 80% to under 60%. Real prices 30% lower Capacity doubled (privatisation); again since 1997 with FDI Diversification: hydro reduced. Impact: NZ Limited FDI investments: One major generator participant with majority overseas ownership, three major State owned generators, two smaller gentailer companies. Greater FDI for local distribution companies seeking stable asset returns. National average real prices to end-users increased 10% FDI can bring innovation Enel (Italy) in geothermal power, AES (US) and SN Power (Norway) wind, Pacific Hydro (Aus and US) run-of river-hydro. 12

14 Results and lessons (2) FDI can be attracted to liberalised market and will invest to grow capacity FDI possible in system with high state ownership but Requires confidence in separation of state regulatory and ownership roles "Light-handed" regulation problematical with high SOE content in stress situations (e.g. outages - NZ 1999) Successful inward FDI can lead to outward FDI in the region Eneris backed by Endesa's (Spain) financial capacity for an early mover Early evidence that non-traditional generation can be fitted in FDI interest in wind, run of river hydro, geothermal in both countries Innovation and outward FDI by NZ SOEs re climate change 13

15 Results and lessons (3) Vertical separation of transmission is important for horizontal competition in other segments Chile unwound cross-ownership Transmission can be privately owned if ring fenced and regulated Can attract FDI to existing grid and to expansion Both economies permit cross-ownership in generation and retail Important advantages in market access for generators No offtake guarantees by government But potential entry barrier in each segment. (e.g. Transalta withdrawal - NZ) Importance of quality policy and regulatory agencies Can calm investor nervousness about political influence or delay in regulatory decisions. [Role of industry regulator vs competition regulator.] 14