Reforming Power Markets: Lessons from Five Developing Countries presented at: World Forum on Energy Regulation Rome, 6 October 2003 David G. Victor Program on Energy and Sustainable Development Stanford University http://pesd.stanford.edu/
From State-Centered to Market-Centered Organization Unbundling; fragmentation Ownership Privatization, IPPs Financing Market finance replaces soft budgets Governance and Accounting External shareholder accountability Oversight From the state to independent regulators
Five Critical Developing Countries Gas (0%) Coal (93%) 40 200 126 9401 43m South Africa Gas (18%) Oil (47%) 39 192 575 9023 98m Mexico Gas (6%) Coal (75%) 108 527 456 2358 1016m India Gas (0.4%) Coal (78%) 294 1240 1079 3976 1262m China Gas (0.2%) Hydro (88%) 69 332 595 7625 170m Brazil New Fuel Dominant Fuel Gen. Capacity (Gw) Power Supply (Twh) GDP (billion US$) Income (GDP/cap $, PPP) Populat n Country
Reform Strategies Country Brazil China Strategy Privatization for investors. Sell distribution companies then generation companies Reform at the margins (IPPs) then corporatization India Mexico South Africa Reform at margins (IPPs, state power corp) then restructure markets then privatize distribution Reform at the margins (IPPs) then (hopefully) full competition Social benefits of electrification then corporatization then (maybe) privatization Slide 10
Main Results 1. No textbook restructuring 2. Creation of hybrid markets Partially state-controlled Financing; tariffs Equity squeeze for IPPs in slack markets Partially market Project and concession bidding Brief market experiments Orissa; wet hydro in Brazil 3. Regulators: replacement for government
Why No Textbook Restructuring? (1) Key Reform Driver: Need for New Capacity Tight systems; bad context for true markets How to attract investors Markets, or stability? Brazil s experience Fast reformers focus on IPPs China, India, Mexico, Brazil Slower reformers have excess capacity South Africa Contrast w/ OECD: efficiency driven reforms
Electric Power Restructuring: Financing Options Self-financing through retained earnings Financing through the state Need new capacity Financing at margin (e.g., IPPs) PPAs (local & FDI Financing through restructuring Unbundling SOEs, new governance, independent regulators, market rules, etc.
Time for a Change? CFE s slow expansion in Mexico 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1930 1940 1950 1960 CFE Chapala Impulsora Mexicana
IPPs in Mexico: Visions for the Future 90.000 75.000 60.000 45.000 Close to 60 billion dollars will be required during the next 10 years in the power sector. Only 47% of the investment is expected to come from the Federal Budget. 38,195 IPP and FP Federal Budget 51,468 39% 48,946 41% 2002-2011 2011 (Billion pesos of 2002) 54,244 53,064 49% 48% 61,723 53% 66,401 66,352 59% 58.0% 71,191 59% 74,334 58% 30.000 61% 15.000 61% 59% 51% 52% 47% 41% 42% 41% 42% 39% 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Energy Ministry with CFE and LyFC data.
Value and Number of Financial Closings of Greenfield Electricity Projects in East Asia and the Pacific 14000 50 12000 Value of investment 45 40 Value in US$ millions 10000 8000 6000 4000 Number of financial closings 35 30 25 20 15 10 2000 5 0 0 1994 1995 1996 1997 1998 1999 2000 2001 Year
Why No Textbook Restructuring? (2) Interlocking Reforms Required Factor Markets Labor; fuels Judicial Mexico; India Corporate Governance and accounting China; Brazil; Mexico Finance China Contrast w/ OECD reform with market-base and rule of law systems already in place
Hybrid Markets Fragmented Ownership and Control Isolated pockets of profitability: listed corporations Pervasive under-performing: retained by the state Hybrid financing Hard debt; equity squeeze; soft loans; pervasive state safety nets Hybrid governance JV model survives Constant pressure to socialize the downside and privatize the upside Policy implications: tunneling strategies? APDRP in India Policy implications: large effect of transparency reforms Corporate governance and accounting
Conclusion: Implications for Regulation Regulators overseeing hybrid markets, not markets Key issues: governance, transparency, IPP tenders Lesser issues: market power, congestion Interplay with other reforms Regulators as replacement for the State Example of tariff control Especially in democratic countries?
Total Electric Subsidies in Mexico
Expected Future Costs of Power Delivery in South Africa 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 Regulated Current Cost Accounting Regulated Historical Cost Accounting Competitive Scenario Wholesale Price (2001 c/kwh) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
India: Present and Future Cost of Supply Present (est.) Generator TransCo DistCo Consumer Future (hypothetical) 2.31* Rs/kWh Tr Operating Costs + Profit (Returns) Transmission losses (Tr) Tr 8% 8%? 10% C T C T C T (no separate cost) Operating Costs + Profit (Returns) C D 25% Distribution losses (D) + Theft C D 2.20 Rs/kWh 2.63 Rs/kWh 3.74 Rs/kWh? 3.50 Rs/kWh C D Unbundling forces profitability raising costs D Theft D Theft 10% 12% 7% 5%
Power Consumption in China Power Consumption Structure 1400 1200 TWh 1000 800 600 400 Residential Tertiary Industry Agriculture 200 0 1980 1984 1988 1992 1996 2000
Power Consumption and Tariffs in India 449.2 194.4 Outside 1% Railway 2% Others 10% Domestic 21% 195.6 Consumption 315 Billion kwh Commercial 5% Industry 31% 378.7 Source: Planning Commission Agricultural 30% 426.3 41.6 Prices 239.9 ps/kwh (Average) 5.00 /kwh