David G. Victor Program on Energy and Sustainable Development Stanford University

1. Reforming Power Markets:Lessons from Five Developing Countriespresented at:Workshop on Power Sector Reform:Rio de Janeiro, 5-6 April 2004 David G. Victor Program on Energy and Sustainable Development Stanford University http://pesd.stanford.edu/

2. Program on Energy & Sustainable Development • Electricity Market reforms • Five-country comparison (Brazil, China, India, Mexico, South Africa) • IPPs • Geopolitics of Natural Gas • Looking to 2030 • Rural energy supply • Shift from traditional to modern fuels and technologies • Climate change policy • Beyond Kyoto

3. Power Sector Reform in Developing Countries • Causes of Reform • From state-centered to market-oriented power systems • Speed and Character of Reform • Outcomes • Impact on organization of the power sector • Impact on the “social contract”

4. 1. Causes of Reform • In the advanced industrialized nations • Goal: economic efficiency • Expected outcome: tariff reductions • In these five developing countries • Goal: financial solvency and investment • Realistic outcome: tariff increases

5. End of the Declining Cost Paradigm:United States example

6. Expected Future Costs of Power Delivery in South Africa

7. Reform Strategies: No Textbook Model

8. 2. Speed and Character of Reforms • Electricity Reforms depend on other reforms • Factor Markets • Labor; fuels • Judicial • Independent regulators • Corporate Governance and accounting • Essential for regulatory oversight and private investment • Finance • The single most important factor • State sector finance; soft budget constraints • Contrast w/ OECD • reform with “rule of law,” market institutions, and independent financial sectors already in place

9. 3. Outcomes:Organization of the Power Sector • Emergence of “hybrid markets” • Partially state-controlled • Financing; tariffs • Partially market • Project and concession bidding • Brief market experiments • Six provinces in China (1999-2001) • A sustainable model for investment? • Predictability and solvency

11. 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

12. 3. Outcomes (continued) • Impact of Restructuring on Reliability? • Still unclear • Financial reforms probably very positive • Impact on “social contract” • Electric services for the poor • Neutral to positive • Protection of the environment • Neutral to positive • Investment in innovation • Very negative?

13. Final Observations • Central role for “non-electric” reforms • Especially financial and judicial reforms • Importance of building coalitions for reforms • Coalitions that favor reform • “tunneling through” opposition • APDRP in India • Independent regulators as substitutes for government • To create confidence and stability • Regulators overseeing hybrid markets, not textbook markets • Key issues: governance, transparency, IPP tenders • Lesser issues: market power, congestion

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15. 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

16. Five Critical Developing Countries

17. 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

18. Self-financing through retained earnings Financing through the state Financing at margin (e.g., IPPs) Financing through restructuring Need new capacity Electric Power Restructuring: Financing Options PPAs (local & FDI Unbundling SOEs, new governance, independent regulators, market rules, etc.

19. Time for a Change?CFE’s slow expansion in Mexico

20. 74,334 71,191 66,401 66,352 61,723 54,244 53,064 51,468 48,946 38,195 IPPs in Mexico: Visions for the Future • 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. 2002-2011 (Billion pesos of 2002) IPP and FP Federal Budget Source: Energy Ministry with CFE and LyFC data.

21. 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?

22. Total Electric Subsidies in Mexico

23. 3.50 Rs/kWh 2.31* Rs/kWh (no separate cost) 10% D Theft 8% Tr Present (est.) 12% CT CD ? ? Operating Costs + Profit (Returns) Operating Costs + Profit (Returns) CD CT Consumer DistCo Generator TransCo Distribution losses (D) + Theft Transmission losses (Tr) CT CD 10% Future (hypothetical) 25% 7% D Theft 8% Tr 5% 2.20 Rs/kWh 2.63 Rs/kWh 3.74 Rs/kWh India: Present and Future Cost of Supply Unbundling “forces” profitability – raising costs

24. Power Consumption in China

25. 194.4 195.6 449.2 426.3 Prices 239.9 ps/kWh (Average)  5.00 ¢/kWh 378.7 41.6 Power Consumption and Tariffs in India Consumption  315 Billion kWh Source: Planning Commission