Generation & Capacity Addition

The salient features of the Electricity Bill are as follows:

The Central Government to prepare a national Electricity Policy in construction with State Government.

Thrust to complete the rural electrification and provide for management of rural distribution by Panchayats, cooperative Societies, Non-Government Organization, Franchises etc.

Generation, being delicensed and captive generation being freely permitted.  Hydro projects would, however, need clearance from the Central Electricity Authority.

Distribution licensees would be free to undertake generation and generating companies would be free to take up distribution licenses.

The state Electricity Regulatory commission is mandatory requirement.

 

Private Participation in Power

Over a past decade a growing number of developing countries have opened their electricity industries to the private sector. The new wave of policy reforms designed to promote private participation has been driven by three main forces: the need to expand capacity or increase the reliability of systems, or both; public sector budget constraints; and the positive results of the early experiments with private participation in Chile and the UK. Between 1990 and 1997, 62 developing countries introduced private participation in the electricity sector to varying degrees- ranging from management contracts for the state-owned utility in Mali to the privatization of most sector operations in Argentina, Bolivia, and Hungary.

Before 1990 private participation in electricity in developing countries was limited to Chile (which introduced comprehensive reforms in the 1980s to create a competitive private market) and a few isolated experiences in other countries. The investments in electricity projects with private participation amounted to $3.6 billion between 1984 and 1989.

Private participation has grown substantially since 1990, with electricity becoming one of the leading infrastructure sectors in attracting private investments. Between 1990 and 1997, the private sector took on the management, operations, rehabilitation, and construction risk of 534 projects, with total investments of $131 billion. These projects have been implemented under schemes ranging from management contracts with or without investment commitments to divestitures to greenfield facilities under build-operate-transfer (BOT), or similar arrangements. This note provides an overview of the patterns and trends in these projects.

Four Major Trends

The PPI Project Database shows strong, steady growth in private participation in electricity, whether measured in number of countries, number of projects, or value of investments. It also shows four main underlying trends:

A regional and national concentration of projects.
A higher concentration of investments in generation in than in distribution and transmission.

 

Investments Reflect a Regional and National Concentration

A regional breakdown of private electricity projects shows a concentration of projects in East Asia and the Pacific and Latin America and the Caribbean. This trend has also been noticeable in such sectors as water and transport. East Asian countries awarded 165 contracts, representing a total investment of about $50 billion, between 1990 and 1997. In Latin America and the Caribbean 169 private electricity projects, representing a total investment of $45 billion, reached financial closure during the same period.

Although private participation in electricity has been spreading rapidly among developing countries, a few countries still capture most of the investment. The top 10 countries ranked by investments in projects with private participation accounted for 58 percent of the projects and almost 76 percent of the total investment in 1990-97. Two things should be noted in relation to the list of top 10 countries by investment.First, China has taken a more cautions approach to private participation than any other top 10 country. Most of its project have been developed as joint ventures between private sponsors and state-owned enterprises, with a fully private consortium so far. In addition, the private stakes in Chinese projects have been inversely proportional to the size of the projects. Relatively big electricity projects have been developed consortia in which the private sponsors own less than 50 percent of the equity, while in smaller projects the private stake may be upto 70 or 80 percent. Public-private joint ventures of this kind overstate private involvement in electricity projects in China compared with other countries, where private electricity projects tend to be wholly or substantially privately owned. Second, although Chile has had significant investments in private electricity projects, it is not included in the list of top 10 because much of the investment occurred in the 1980s.

The list of top 10 countries changes substantially when the total investment in private electricity projects is expressed in per captia terms. Relatively small countries, such as Belize, Jamaica, and the Lao People's Democratic Republic, appear more active in private participation in electricity by this measure. Lao PDR is an unusual case. Its high per captia investment is explained mainly by its two export oriented private electricity projects, the country's only private electricity projects to reach financial closure till 1997.

A striking characteristic of private participation in electricity has been the concentration compared with transmission and distribution. Of the total investment in private electricity projects in developing countries, 73 percent has been captured by the 377 projects that involve the construction of power generation plants. Most of the projects that involve stand-alone distribution business have been in Latin America and the Caribbean (30 projects) and Europe and Central Asia (63) and Latin America and the Caribbean (11). Only Latin America and the Caribbean have had stand-alone electricity transmission projects with private participation.

Another interesting feature of private participation In electricity has been the predominance of greenfield projects and divestitures. Of the total investment in private electricity projects, about 56 percent has been directed to the 286 greenfield projects, and 40 percent to the e223 divestitures. Divestitures have been a more common rout for introducing private participation in electricity than in the water sector, where privatization have been rare.

Management and operations contracts have been rare in the electricity sector compared with the water sector. By 1997, 25 such contracts had been signed for electricity facilities. Of these, 18 involved significant capital expenditure by private sponsors in expanding or rehabilitating the facilities. The other seven were management of generation or distribution facilities to the private sector while leaving the public sector primarily responsible for new investments.

The dominant type of private participation has varied among regions. Latin America and the Caribbean and Europe and central Asia have favoured divestitures, while Asia has shown a clear preference for greenfield projects. These patterns reflect country policy priorities.

Latin America and the Caribbean

Following the Chilean model, most Latin America countries have introduced private participation in electricity as part of broader reforms of a more competitive market structure. This approach has involved vertical separation of the electricity sector into three basic business units (generation, transmission and distribution) transfer of at least generation and distribution to the private sector and establishment of new regulatory frameworks, and introduction of market mechanisms to encourage competition. This strategy has been reflected in an emphasis on divestitures. Of the 169 private electricity projects in the region, 97 have been divestitures. These projects have been accounted for 67 percent of investment in privatized countries and 77 percent of the total investments in private electricity projects in the region.

The dominance of divestitures in the region has prevailed across the segments of the sector. Argentina, Bolivia, Brazil, Chile, Colombia, and Peru have privatized significant distribution and generation facilities as stand-alone business. Argentina, Bolivia, and Chile have also privatized most transmission facilities, and Brazil and Colombia are planning to divest soon.

In this new business environment investments in private electricity projects have been driven mainly by market signals such s electricity prices and demand growth. Of the $34 billion invested in divestitures in the region, more than $5.5 billion has been invested in expanding or rehabilitating the facilities of privatized companies. Of the 70 greenfields projects that reached financial closure in the region by 1997, 29 were merchant power plants, with a total investments of $5.4 billion. These investments have shown that private financing of power investments in competitive markets is feasible in sound business environment.

The development of private power plants under BOT or BOO contracts have been less popular in Latin America and the Caribbean than in Asia. Thirty-seven BOT or BOO contracts reached financial closure in the region by 1997, representing a total investment of $4.8 billion. Most of that investment was captured by 18 projects in Colombia, Brazil, and Guatemala, countries that had already embarked on comprehensive reform of their electricity sectors. The other 19 countries were signed by Costa Rica, Jamaica, the Dominican Republic, and Honduras, which in most cases have adopted the Asian model of private participation.

Europe and Central Asia

Private participation in electricity in Europe and Central Asia has been concentrated in the Czech Republic, Hungary, Kazakhstan, the Russian Federation, and Turkey. Except in Turkey, the approach has been similar to that in Latin America- privatizing vertically disaggregated companies. This reflects a priority on improving the reliability and efficiency of existing assets rather than expanding capacity. Of 112 private electricity projects, 105 have been divestitures, accounting for 66 percent of the investments in the region. The privatization mechanism has differed across countries, however. Hungary and Kazakhstan have sold controlling stakes to private consortia, while the Czech Republic and Russia have opted for mass privatization programmes.

The new investments that has come along with divestiture has been limited, with additional investments in privatized companies reaching only $2.7 billion by 1997. The main reason has been low retail tariffs, which have been inadequate to provide long term funding for additional investment. Another reason has been the excess capacity in most of these countries. The same reasons explain why greenfield projects have been an exception in the region. Only seven greenfield projects, all under BOT or BOO arrangements, had reached financial closure by 1997; these projects accounted for investments totalling $3.5 billion. Five of these projects, representing a total investment $3.2 billion, have been in Turkey.

Asia.

Asian countries have introduced private participation in mainly through private financing of new generation capacity in the form of independent power producers. This approach reflects the priority given to expanding capacity to keep pace with expected demand growth and the slow progress in implementing deeper sectoral reforms. Of the 165 electricity projects reaching financial closure in East Asia and the Pacific by 1997, 139 involved the construction of new power generation plants. These projects accounted for 57 percent of total investment in private greenfield electricity projects in developing countries and 84 percent of the total investment in private electricity projects in the region. In South Asia 54 of 57 private electricity projects involved the construction of new power plants. These projects represented 21 percent of the total investments in private projects in the region.

The priority given to expanding generation capacity is also reflected in other forms of private participation pursued in East Asia and the Pacific. The 11 management and operations contracts signed in the region have involved investment commitments to rehabilitate existing generating facilities. Most of the 15 partial divestitures in the region have been international public offerings of minority stakes in state-owned generating companies aimed at raising funds for the construction of new facilities, or negotiated sales of shares in small provincial generating plants.

Introducing private participation in generation without first- or at least simultaneously -undertaking deeper sectoral reforms is potentially problematic. In any cases this strategy has reduced pressures to implement cost-covering retail tariffs. Postponing tariff adjustments affects the creditworthiness of power offtakers and usually leads to demands for government guarantees of power purchase agreements, exposing taxpayers to substantial contingent liabilities. In most cases taxpayers are also left to bear the risk of misestimates of future demand for bulk power. Many of these problems have become dramatically apparent in the past year as the region has weathered a major macroeconomic crisis. The crisis will likely lead to a reassessment of past approaches and accelerate progress in introducing private participation in distribution and in implementing related structural and regulatory reforms.

Africa and the Middle East.

Private participation in electricity in Sub-Saharan Africa and in the Middle East and the North Africa at a relatively early stage. This situation reflects limited progress in implementing cost-covering tariffs and in opening the sector to private capital and, particularly in many countries of Sub-Saharan Africa, investor perceptions of high country risk.

In Sub-Saharan Africa private participation has taken different forms. Five countries (Comoros, Core d'Ivoire, Gabon, Guinea, and Guinea-Bissau) have transferred the management of their integrated utilities to private firms through management and operations contracts with major capital expenditure, while three countries (Ghana, Mali, and Sao Tome and Principe) have awarded five management contracts. There have been nine greenfield power projects and two divestitures in the region. The divestitures have been relatively small and have involved isolated cases rather than entire electricity utilities.

In the Middle East and the North Africa private participation in electricity has so far been limited to a few greenfield projects and a management and operations contract awarded by Morocco that covers both power and water. But if recent proposals are implemented, there should be a rapid increase in private participation throughout the region over the next few years.

The electricity sector is at the forefront of the world trend of growing private participation in infrastructure. Although 62 developing countries have made at least some progress in introducing private participation in electricity, the breadth and depth of the private participation remain uneven. The most successful countries have been those that have found the political will to abandon a long history of subsidized tariffs and to establish regulatory frameworks that offer credible commitments to investors. The sustainability of forms of private participation that do not involve these elements is being tested in some countries in Asia, where recent experiences should provide important lessons for countries that are at an earlier stage in framing their private participation strategies.