south east asia power scenario

8/12/2019 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

Unbu

ndlin

g

Actual -97

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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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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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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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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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;

h d l i


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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.

Phili iPhilippines


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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

south east asia power scenario

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