Electricity Liberalisation in Developing Countries

Abstract

Liberalisation of the electricity sector by unbundling the networks from generation and creating power markets has been promoted to developing countries by the World Bank and others for nearly two decades, in order to stimulate private sector investment. The paper presents cross-country comparisons of progress with liberalisation in the largest developing economies along with investment indicators of generating capacity and access to electricity networks, showing extensive growth in investment regardless of the extent of liberalisation, predominantly by the public sector. The liberalisation model is now losing credibility even in the global north.

Keywords

Electricity liberalisation investment access generation public

I Introduction and Summary

Since the early 1990s, developing countries have been under strong pressures to introduce market-oriented reforms in their electricity sectors to improve performance and enable private investment. These reforms were inspired by and adapted from the ‘British model’, introduced in the UK privatisation of 1989 and later enshrined in the EU electricity directive of 1993, which involves unbundling vertically integrated SOEs (State-owned enterprise), creating wholesale and retail markets, introducing an independent regulator, and privatisation of state-owned entities. Liberalisation is thus more than just transfer of ownership, it can ‘induce greater improvements in performance than privatisation’ alone (Newbery, 1997).

The argument behind liberalisation is based on the assumptions that electricity can be considered as a commodity and that market forces can give the right signal to buyers and sellers for efficient supply and demand. First, markets are assumed to result in Pareto optimality in production and distribution of resources, especially in the case of scarce energy resources. The historically vertically integrated power systems are believed by neoliberals to operate inefficiently because there is no market, no room for competition, no financial incentive to attract investment. So in order to reach optimal electricity supply, it is important to separate generation, transmission and distribution companies and officially open a market where natural monopolies do not happen (i.e., transmission). Second, private ownership is believed by the Austrian and the Chicago economists to result in economic incentives that drive better performances. The Austrian school of thought, which dates back to the 1870s, argues that private companies should be more alert to market signals and respond accordingly whilst state-owned companies are assumed to be less responsive (Tittenbrun, 1996). Public choice theory, developed by the Chicago economists Gordon Tullock and William Arthur Niskanen in the 1970s, argues that government employees exploit public enterprises at the expense of efficiency, in contrast to profit-maximising private entrepreneurs (Parker, 2009). The IEA (2000) optimistically projected that natural market mechanisms enforce contracts between suppliers and consumers that include a clause for security of supply; therefore, they argue, investment naturally includes reserve capacity. Influenced by the global trend of privatisation and liberalisation programmes in the 1980s and 1990s in the north, developing countries increasingly accepted these arguments and implemented the reform programmes with support from bilateral and multilateral agreements and loans. This liberalisation was presented as a modernising reform which would be expected to enable countries to achieve the scale of electrification needed for economic and social development.

The liberalised systems of the north are now themselves the subject of controversy. In the USA and Europe, expectations of lower prices have been disappointed, and replaced by resentment at higher prices; in the USA, the shock of the California energy crisis in 2000 effectively halted further liberalisation; and there is a growing view that the system is unable to deliver the kind of investment needed for dealing with climate change (Anderson, 2009; Committee on Climate Change, 2009; Florio, 2014). Developing countries have been slower to implement the model in full, with the actual development of policies usually treated as a series of stages on the road to full liberalisation–‘intermediate structures’ which can themselves ‘attract private sector participation’ (Besant-Jones & Vagliasindi, 2013). A growing number of studies in developing countries have documented similar evidence that the expected impact on prices and performance is lacking, compounded by limited progress on renewables (Dagdeviren, 2009; IEA, 2015; Sen, Nepal, & Tooraj., 2016). Most conclude that the reform process itself needs to be revised in various ways, but retain the core approach: ‘a new consistent market framework is needed’ (IEA, 2015), or “reform” of electricity reforms’ (Sen et al., 2016).

This article questions whether such ‘reform of the reforms’ is possible in a way that is coherent with the empirical evidence. The next second section examines the actual implementation of unbundling and market structures resulting from the reform process in 14 of the largest developing countries, using primary data from each country on the dates and the implementation of each power sector policy. This lays the foundation for the third section, which presents cross-country comparisons of investment indicators, constructed using time-series secondary data from IEA, EIA, and WB for the years 1990 to 2014. The final section discusses the lessons to be drawn from the analysis of the extent of investment and the development of markets in developing countries and prospects for the emergence of new models of the investment process in electricity systems.

II Electricity Liberalisation in Large Developing Economies

The phenomenon of power sector reform has been ongoing in almost every region throughout the last 30 years. A global historical picture of the progress of liberalisation during this period is difficult due to the continuous changes introduced because of political unrests and financial crises. However, in developing countries, the progress of liberalisation has been strongly driven by the increasing need to finance investment in expanding systems, as well as by external pressure from the conditionalities of the international financial institutions and donor countries.

This section examines what has happened overall and individually in 14 of the largest developing countries. The countries were chosen according to the size of their economy as measured by GDP within each of three regions––Asia (five countries), Latin America (five countries), Africa and Middle East (four countries). This is a manageable group of countries, which represent a large proportion of the global economy and population, and which might be expected to have the capacity to develop liberalised markets. China and India are excluded because of complicated individual state autonomy in policy-making, as well as their exceptional size.

In order to investigate the results of liberalisation, the article first focuses on the extent to which stages of the British Liberalisation Model of 1989 have actually been implemented in the sector and still remain in place at the point of writing in 2016.

The three key stages of concern are the existence of (i) effective unbundling (when vertically integrated generation, transmission and distribution companies have been legally restructured into separate companies); (ii) an effective wholesale market (when there exists a working wholesale market with trading value more than 0 kWh) and (iii) an effective retail market (when there exists a working retail market where end-customers can choose their service providers).

Table 1 records the years in which there is an enacted legal paper stating clearly the start of each stage of liberalisation. Only 8 out of 14 countries have unbundled effectively. The process of market creation that promises the benefits to end-users from competition actually does not come until later stages in the liberalisation process. Among these eight countries, four countries followed immediately with the establishment of a wholesale market, including three countries from Latin America as well as the Philippines. The swift movement towards liberalisation in Latin America during the late 1990s was supported by the IMF, whilst the Philippines received hundreds of millions of dollar project support from the ADB: opening and operating a wholesale market is a costly process. Without the likelihood of significant financial support or foreseeable private investment, countries such as Vietnam, Thailand and Malaysia have been reluctant to open a liberalisation process. Brazil and the Philippines are the only two countries that have followed the British Model to the final stage of creating a retail market. Theoretically, the further the country is along the line of this sequence, the better the anticipated performance of the sector and the more investment that will have resulted. The third section of the article will challenge this expectation when it comes to investment in generation and networks.

Figure 1 shows the progress of liberalisation in terms of the elements adopted in each country. This figure is a snapshot of where these 14 countries are as of today. The figure also presents another way of involving the private sector, namely the use of independent power plants (IPPs). The figure thus puts countries into one of five sectoral structures: vertically integrated SOEs, vertically integrated SOEs with IPPs, unbundled with IPPs, effective wholesale market and finally effective retail market. The use of private investors through IPPs can be seen to happen regardless of the form of the sector structure. Mexico and Indonesia were both early in introducing IPPs but still have not progressed far along the reform path of unbundling, let alone the introduction of markets. The use of IPPs is not dependent on markets, though it is invariably dependent on government commitments through a Power Purchase Agreement (PPA): indeed, the EU ruled that IPPs were incompatible with the internal market. This also clarifies that unbundling by itself does not create any market mechanisms that involve interaction between wholesale or retail consumers and suppliers. IPPs only need the possibility of ‘public markets’ for government procurement, and this does not even require unbundling. The existence of private sector participation in the form of IPPs is thus no evidence of the existence of market mechanisms in the sense of the British liberalised model.

Table 1.
Largest Developing Countries: Size and Measures of Electricity Liberalisation

Region Country 2014 GDP (US$ billion) Population (at 2014) Year of Effective Unbundling Year of Effective Wholesale Market Year of Effective Retail Market

Asia Indonesia 888.648 254454778 NA NA NA

Thailand 404.824 67725979 2003 NA NA

Malaysia 338.108 29901997 2013 NA NA

Philippines 284.618 99138690 2001 2002 2012

Vietnam 185.897 90730000 2009 2016 NA

Latin America Brazil 2,346.58 206077898 1998 1998 2003

Mexico 1,291.06 125385833 NA NA NA

Argentina 543.061 42980026 1992 1992 NA

Colombia 377.867 47791393 1994 1995 NA

Venezuela 206.252(est) 30693827 NA NA NA

Middle East Iran 416.49 78143644 NA NA NA

Africa South Africa 350.082 54001953 NA NA NA

Egypt 286.435 89579670 2001 NA NA

Algeria 213.518 38934334 NA NA NA

Region	Country	2014 GDP (US$ billion)	Population (at 2014)	Year of Effective Unbundling	Year of Effective Wholesale Market	Year of Effective Retail Market
Asia	Indonesia	888.648	254454778	NA	NA	NA
	Thailand	404.824	67725979	2003	NA	NA
	Malaysia	338.108	29901997	2013	NA	NA
	Philippines	284.618	99138690	2001	2002	2012
	Vietnam	185.897	90730000	2009	2016	NA
Latin America	Brazil	2,346.58	206077898	1998	1998	2003
	Mexico	1,291.06	125385833	NA	NA	NA
	Argentina	543.061	42980026	1992	1992	NA
	Colombia	377.867	47791393	1994	1995	NA
	Venezuela	206.252(est)	30693827	NA	NA	NA
Middle East	Iran	416.49	78143644	NA	NA	NA
Africa	South Africa	350.082	54001953	NA	NA	NA
	Egypt	286.435	89579670	2001	NA	NA
	Algeria	213.518	38934334	NA	NA	NA

Source: GDP data from IMF World Economic Outlook Database, October 2015. Population data from The World Bank Data Archive. Other data are by the Authors.

1 Brazil

Historically, the Brazilian electricity system has been dominated by one company, Eletrobras, controlled by the federal state. It owned and operated the transmission system and a large majority of the country’s generating capacity. Distribution was carried out through 50 regional distribution companies. In the 1990s, the country followed the advice of the World Bank, privatised some distribution companies and set up a regulator to help introduce liberalised markets. In 2001, there was a crisis due to a shortage of generating capacity resulting from the failure of the new market to stimulate investment in new generation. This was followed by the withdrawal of most multinational companies, and the election as President of the Workers’ Party candidate, Luiz Inacio Lula da Silva, who suspended the privatisation and liberalisation programme. Some of the privatised distribution companies were effectively brought back into public sector under Eletrobras (Thomas, 2009). The role of the state has been increased, firstly by the creation in 2004 of a new Energy Planning Company (EPE, Empresa de Pesquisa Energética) under the Ministry of Mines and Energy, which now employs about 250 people. It forecasts demand 20 years ahead, plans required infrastructure and generation, and commissions specified projects. The free market in generation has been replaced by what is, in effect, a single buyer system to supply the majority of consumers. A parallel market for large industrial users, who can choose their electricity supplier, exists (Thomas, 2009).

Figure 1.

Source: Authors’ own.

2 Mexico

A vertically integrated state company, Comision Federal de Electricidad (CFE), controls all transmission and distribution (with minor exceptions), and generates two-thirds of all power. Proposals to unbundle and liberalise the system were rejected as unconstitutional by the Supreme Court in 2002, ruling that it contravened the requirement for state ownership of the system in the constitutional articles 27 and 28. The only private companies are IPPs, although the Supreme Court suggested that these too might contravene Article 27, and every IPP project in Mexico has explicit government guarantees (Carreón-Rodriguez et al., 2003; Gabriele, 2004). Mexico actually increased the integration of the electricity system under a single state-owned utility in 2009 when it transferred responsibility for electricity distribution within Mexico city to CFE. Under new electricity laws in August 2014, the power sector will be increasingly open to private investment in all parts of the sector with unbundling of CFE which will no longer be the only power trader in the market. However, Ibarra-Yunez (2015) criticises the programme as imperfect and with incentives that are misaligned.

3 Indonesia

The electricity system of Indonesia is still dominated by the vertically integrated state-owned utility PLN. The first IPP contracts were signed in 1990 with corruptly generous power purchase agreements (Nikomborirak and Manachotphong, 2007). In 1992, the former dictator, president Suharto, with the encouragement of the World Bank, introduced private sector participation through building IPPs. In 1994, PLN was corporatised into a government-owned limited liability company. The first serious effort in unbundling was made in 1995 when PLN unbundled its Java, Bali and Madura generation, distribution and transmission assets. However, these assets still remain wholly owned by PLN and operate semi-autonomously. By Electricity Law No.30/2009, PLN no longer owns monopoly power to supply and distribute power to end-customers. However, it is still given ‘right of first priority’ in provision for public use before private businesses. In practical terms, PLN is still a vertically integrated state-owned company. As of 2015, PLN is the single buyer and seller of electricity and 80 per cent of IPP-generated power is currently bought by PLN (IBP, 2015, p. 64).

4 Iran

The electricity system of Iran is entirely state owned. There are separate generating and regional distribution companies, all of which belong to the state electricity holding company Tavanir. There is provision for private power stations, but only 2 per cent of electricity is generated privately¹. Iran has an extensive national grid, semi-integrated with neighbouring countries. The power sector is endowed with abundance of natural gas resources which provide for 70 per cent of total generation (Energy Pioneers Ltd., 2015). The economy is expected by the World Bank to grow by more than 5 per cent per annum after the removal of sanctions. But Iran still faces occasional blackouts during peak demand. The government is ambitious to develop the power sector to provide for domestic consumption as well as for exports, but due to financial constraints it is seeking foreign investment. The first move to attract this was to reduce energy subsidies by increasing the electricity prices by 25 per cent in 2014 and a further 20 per cent in 2015 (US Energy Information Administration, 2015a).

5 Argentina

Argentina unbundled and privatised its electrical system in the 1990s, as part of a restructuring programme agreed with the IMF and World Bank. Most generating companies and most distribution companies were privatised, and a wholesale power market was introduced. Retail competition was introduced for industry, but not for households. The country then experienced a major economic crisis in 2001, including a massive devaluation, in which the government froze power prices to protect households, leading to disputes with the companies over the impact on profits. The government of Argentina has refused to honour either the contracts or arbitration rulings in favour of the companies, because they would be unreasonably burdensome on a country whose citizens suffered great economic losses as a result of the crisis, with the expectation that the companies should expect to share that risk as they had tried to profit from the good times. There has been no further privatisation or liberalisation since the crisis. Argentina now needs investment in new generating capacity, especially in renewables, and expects that most of this will come from public finance. It also uses public finance for subsidies to poor consumers, for extension of the system––especially rural electrification, investment in transmission and renewables (Hall, 2007).

6 Venezuela

In 1996, Decree 1558 marked the start of a liberalisation process by privatising one out of five major utility companies. Private sector participation accounted for 20, 10 and 40 per cent in generation, transmission and distribution in 2000, but there was no competition in any market (Millan et al., 2001). In the mid-2000s, the country began reversing the process, and both distribution and generating companies were renationalised (Hall, 2007). The period 2003–2012 witnessed an almost 50 per cent rise in electricity demand, in comparison to only a 28 per cent increase in capacity. In 2013, the Chavez government quadrupled public investment in the sector to deal with power deficits. Transmission lines are heavily stretched, resulting in government-announced electricity interruptions in 2009 and 2010 (US Energy Information Administration, 2015b). Cadafe is still the largest distributor and remains a vertically integrated state-owned company.

7 South Africa

In 2004, South Africa abandoned its earlier plans for the unbundling and privatisation of the electricity industry, and retained Eskom as an integrated state-owned electricity company. The government also decided against introducing private companies into electricity generation, so Eskom remains responsible for virtually all generation (Gaunt, 2008). The only privatised power station, Kelvin, was abandoned twice by multinational owners—first AES, then Globeleq (Hall, 2006). The percentage of the population with access to electricity rose from 40 per cent in 1994 to 66 per cent in 2002, with levels at 79 per cent of the population in urban areas and 46 per cent in rural areas (Dubash, 2002). This contrasts with the rest of Africa, where ‘the emphasis on profitability appears to have relegated expanded electrification of the poor to the bottom of the priority list’ and neither private sector participation nor regulation has made any significant contribution to the extension of access to network services (Estache, 2006; Gaunt, 2008). South Africa also provides subsidies to enable poor households to receive 50 KWh per month free, with reduced tariffs after that point.

8 Thailand

Thailand retains an integrated state-owned utility, EGAT, with a monopoly on transmission and distribution and supply. EGAT has the sole role in supplying electricity to the other vertically linked distributors––PEA and MEA. It has capacity to generate 63,930.68 million kWh, which means 43.14 per cent of total country wide electricity generation. It also has the sole right to purchase power from other private producers under the government regulation of an enhanced single buyer scheme. There has been no further unbundling or moves towards the creation of wholesale or retail markets, and electricity privatisation has itself been a central issue in a decade of political strife. In March 2006, the Supreme Administrative Court declared that the privatisation process started by then Prime Minister Thaksin, was illegal on a variety of grounds, ruling that: ‘the government has abused its power in privatizing the state enterprise’.² Since that ruling, the Thai government has diverted its efforts from privatisation and liberalisation policies to renewable energy policies.

In 2006, the Adder Programme was introduced for VSPPs and SPPs that utilise solar, wind, biogas, hydro and waste energy. In June 2010, the Thai government approved a plan to switch from a premium-price FiT payment to fixed-price FiT payments, and studies to determine the rate for each type of renewable generation (RE) are under way. Approved projects sign a PPA with the utility, which owns the grid to which the project is connected. The contract term is 5 years and is renewed automatically if none of the contract parties express the need to terminate the contract. Once the project commences operation and starts selling electricity to the grid, the adder is paid for 10 years (wind and solar projects) or 7 years (other renewables). Besides FiT, the Thai government has put in place various low-interest loan options for different target groups, including large-scale investors and small-and-medium-sized enterprises. The major source of low-interest funding comes from the Energy Conservation Promotion Fund, which is collected from a tax per litre on all petroleum products sold in Thailand through Thailand’s Revolving Fund Programme. The combination of these financial incentives and government-led programmes has induced an impressive amount of investment in RE since its implementation in 2007. Private investment has also increased alongside because the rates were set at high enough levels and PPAs were stream-lined with government financial back-up. Thailand now has 24 per cent of its capacity generated by two major RE IPPs, although the controlling shareholder of both companies is EGAT.

9 Vietnam

EVN was a vertically integrated utility until the end of 2008. Since January 2009, EVN has been set up as the National Power Transmission Company—a separate legal entity responsible for the operation of the transmission network, and thus legally unbundled (i.e., it has its own accounts, management and board of directors) (Tuan, 2012). The wholesale power pool is now in preparation under Decision 8266/QD-BCT by the Ministry of Industry and Trade, which will enter into trial operation from 2016 to 2018. It will come into full effective operation in 2019 (Electricity Regulatory Authority of Vietnam, 2016).

10 Malaysia

In 2013, Malaysia had 51 per cent of its installed capacity provided by the major state company Tenega Nasional Berhad (TNB), 38.5 per cent from IPPs and the rest co-owned by IPPs and TNB (Zamin et al., 2013). Since electricity consumption demand in Malaysia is above other Asian developing countries, the government has been making efforts to reduce energy subsidies amidst fierce opposition from the public; as a result tariffs have risen by 7.1 per cent on average since 2011 whilst end-user prices in urban areas have increased by more than 15 per cent (US Energy Information Administration, 2014). MyPower Corporation was established in 2010 to manage and deliver the reform programme. Its success includes running a competitive bidding process for generation licenses and the establishment of a Single Buyer Department ring-fenced from TNB.

11 Colombia

In 1994, Laws 142 and 143 laid out a privatisation plan and liberalisation pathway for the Colombian electricity sector. Colombia’s electricity system is a highly decentralised one in which municipal companies have been largely responsible for meeting their local demand, with the remaining distribution companies nominally owned by the central government. The Colombian power system has been open to private participation since 1994 and operates as a wholesale market but is only partly unbundled. The established SOEs are allowed to remain integrated but they need to operate as separate subsidiaries. In the 1990s, 70 per cent of generation came from private companies but market power was concentrated in a very limited number of hands (Millan et al., 2001). However, centralised auctions of generated output has created shocking volatility in electricity prices which recorded a more than 300 per cent increase between 1997 and 1998 and again between 2000 and 2001, followed by similarly shocking plummets in the subsequent years (Larsen et al., 2004).

12 Egypt

Despite being legally unbundled in 2001 by law, the Egyptian Electricity Holding Company owns 90 per cent of generation, all transmission lines and almost all distributions networks in the country. Private companies have been allowed to participate in BOT contracts with the Egyptian Electricity Transmission Company since 1996. So far, 16 private electricity producers and 24 private distributors have been licensed (Osman, 2015). Political unrest since 2011 has drained out government finances and hampered investment. In June 2015, a $9billion deal was signed with Siemens to construct three 4.8 GW gas-steam power plants (Oxford Business Group, 2015). In the same year, the government introduced a new electricity law to legalise power sector liberalisation. The plan involves both practical unbundling and privatisation

13 Algeria

Sonelgaz is the public-owned company that singly provides generation and networks. The power sector thus remains vertically integrated and has no near-future plan for liberalisation and privatisation. Electricity prices are fixed (US Energy Information Administration, 2016) but as oil prices fall, government subsidies for Sonelgaz will be phased out ‘sooner or later’ (Fattouh and El-Katiri, 2012).

14 The Philippines

Under the administration of President Ramos (1992–1998), the Philippines went through an era of privatisation of its major state-owned service companies. This nation-wide neo-liberal trend accumulated more than 40 IPPs contracts by 1994, more than any other developing country. Following this success, Republic Act 9136–the Electric Power Industry Reform Act took effect in June 2001, setting out a definitive plan for unbundling the National Power Corporation, the Wholesale Spot Market was set up in 2002 (with a 40$ million loan from the ADB), a retail market established and 81 per cent of the assets of the National Power Corporation had been privatised by 2013. The government has let power prices increase to a high level, whilst viewing access to electricity for the poor as adequate (Enerdata, 2014; Mouton, 2015). The reform has achieved its primary goal, which is security of supply but it appears to have ignored competitiveness and social equity in its development.

III Liberalisation and Investment in Generation and Power Systems

Among the drivers for liberalising the power sector in developing countries, finance is often presented as ‘the most important’ factor (Williams and Ghanadan, 2006). Investment in the power sector in developing countries is significantly demanding, finance is needed for investment in generating capacity (to ensure sufficient supply), in maintaining and upgrading transmission lines (to ensure network efficiency) and in distribution networks (to increase access to electricity). Governments need to make consistent and increasing investment in this backbone industry but over recent decades have been faced with the challenges of factors such as high levels of debts, significant budget deficits and high inflation. Within such circumstances, there was an urgent need to look for ways to encourage foreign direct investment to bridge the gap between capital demand and government budgets: for example, Nwankwo (2013) found a positive contribution of FDI to sectoral growth in the power sector in Nigeria. Governments were therefore attracted by the core promise of liberalisation that a competitive power market could drive continuous commercial investment to efficiently supply enough electricity to meet the growing demands of developing economies.

This section uses indicators of investment in both generating capacity and network extension to see whether there is any evidence that this promise of liberalisation has been met. It compares three system investment indicators between countries demonstrating different levels of liberalisation, and within the countries before and after each stage, to see if movement along the different stages of the liberalisation road makes any significant difference to the growth of investment in generating capacity or extension of the network to more households. Since the purpose of this exercise is to see if investment levels are different with or without various elements of the liberalisation process, we use indicators of investment in general, rather than seeking data for private investment alone. In any case, data on private investment are particularly problematic to come by, it is often out of date, and sometimes unobtainable (e.g., private equity companies are not legally obliged to publish financial statements).

Figure 2.

Source: Population data from The World Bank Data Archive; generating capacity data from US EIA Historical Statistics.

1 Investment in Generation Capacity

Investment in generating capacity is usually measured by change in installed capacity, but it is important to take into account the impacts on demand of changes in population size, by measuring installed capacity per capita. Any positive change in installed capacity per capita growth rates reflects an increase in materialised investment. In fact, this growth rate changes dramatically year by year: All countries have in some years experienced reduction in installed capacity per capita, that is, a negative investment volume in generation, after 1990, and experienced high increases in capacity in other years, followed by sudden drops.

Figure 2 shows the changes of installed capacity per capita in 14 countries from 1990 to 2014 over 4 year periods, thus smoothing the annual fluctuations. The intensity of colours assigned to each country indicates how far the country is in the process of liberalisation: the darker it is, the further it is in the process. Theoretically, it is expected that more liberalised countries will experience higher growth in installed capacity that consumers can benefit from, and so we would expect to see darker colours up top in the graph. However, the chart shows a blend of colour intensities: it is possible to see both dark and light colours in any period in any range of rates of growth and degrowth. The theoretical expectations are not realised. Contrary to the expectations of liberalisation policies, investment in capacity does not appear to bear any relation to liberalisation progress. Vietnam hit the highest investment point of all countries in 2011, at more than 43 per cent, but it is not the country that has progressed the farthest in reform. Colombia experienced the lowest growth rate of all at –13.6 per cent in 1998, whilst being under liberalisation programmes in the 1990s.

Figure 3.

Source: Data from US EIA Historical Statistics.

In dealing with climate change issues, CO₂ tax is expected to incentivise investment in sustainable generation. What matters, as argued by the IEA (2007), is the provision of the ‘right incentives’ and ‘a stable investment climate’, which seems to assume no incompatibility between investment in renewable sustainable energy and long-term liberalisation processes, and that liberalisation delivers investment in generation regardless of the challenges, if the government persists long enough. By measuring the changes in proportion of RE in total installed capacity from 1990 to 2014, the long-enough time series should theoretically show a positive growth in the RE proportion for countries which have moved further down the path of liberalisation. The conditions for this growth are favourable: climate change issues have been globally recognised over the last 20 years, they have been formally addressed globally over the last 10 years and innovative RE technologies have progressed significantly over the same period. The conditions are there along-side long-term government commitment.

However, Figure 3 shows a different picture. The growth rate for the proportion of RE in installed capacity is almost constant, buffering around the starting points of the early 1990s: in all countries, there is no significant growth in RE use for total electricity generation in the 2010s in comparisons with the 1990s. In Brazil and Venezuela where reform plans were abandoned in the early 2000s, there is little change in the proportion of RE in total capacity. Given that total installed generating capacity has grown alongside the expanding population of these two countries, RE capacity actually increased during the period. The Philippines with its effective retail market displays a similar story with RE remaining at 28 per cent of total capacity over the period. This indicates that what matters in achieving improvements in RE investment levels is not to be found in the progress of liberalisation efforts. Byrne and Mun (2003) suggest that any society, developed or developing, faces choices between power liberalisation and energy transformation and they conclude that power liberalisation is ‘socially, politically, economically and environmentally problematic’.

2 Investment in Power Networks

Besides aiming to ensure generation capacity sufficient for demand, governments are also concerned about electric system losses, which are associated with environmental and economic costs. Technical losses are related to CO₂ emissions and affect actual capacity for use, which in turn impacts on generation capacity. In liberalised markets, all losses are expected to be included in pricing and paid for by users of the network. There are then clear economic incentives, estimated at millions of pounds, ‘to work to reduce measured losses’ (Sohn Associates Limited, 2006). These economic incentives are significant enough for investors, both public and private, to be keen on maintaining and upgrading their networks. Analysing transmission and distribution losses (which are the primary sources of lost supply) produces a good view of the efforts made by investors to actually do so (Gustafson and Baylor, 1988). Theoretically, with the introduction of private participation, it might be expected that profit-maximising firms will be working more efficiently to reduce total losses. Countries which have most liberalised their power sector would be expected to experience a faster rate of loss reduction. However, the 14 developing countries examined here only experienced small changes (low standard deviations) in the rate of system losses over the 23 years from 1990 to 2012. There is also no consistent pattern of changes in this rate between countries with different liberalisation experiences. Thailand, Vietnam, Argentina and Colombia, for example, all show gradual reductions in losses, whilst Brazil, South Africa and Venezuela all fluctuated slightly around the 1990 rates. Therefore, it is difficult to establish a correlation between the progress of liberalisation processes and system efficiency.

The IEA (2015) estimates that 17 per cent of the global population lacks access to electricity. Most of these populations are from developing countries. There have been improvements in electrification rate in the largest developing countries over the last 25 years, with a convergence in higher proportions of population with access to electricity (the standard deviation for this access rate is getting smaller whilst the mean of the access rate is getting higher).

Figure 4.

Source: Data from The World Bank Data Archive and IEA.

Figure 5.

Source: Data from The World Bank Data Archive and IEA.

However, this has happened regardless of power sector structures. In countries where unbundling has not happened, such as Algeria, Iran and Venezuela, the access rate had reached 100 per cent by 2013. In contrast, the Philippines had only achieved a level of 87.5 per cent in the same year. The access rate of course merely shows the status of connection. In measuring investment in expanding electricity distribution networks, this access rate adjusted by population changes should show how investment in distribution network has been materialised into electrifying more people: however, Figure 5 shows there is a downward convergence in this growth rate due to the fact that a higher proportion of the population are getting electricity access, hence there is less need for network expansion. In 1990–2000, Indonesia had a vertically integrated system with no intention to liberalise and experienced a strong 52 per cent growth in population access. As high as 32 per cent growth was also seen in countries that remained dominated by SOEs including Iran, Egypt, Malaysia and Vietnam. Interestingly, South Africa which reversed unbundling programmes in the mid-2000s, hit the highest growth in population access from 2000 to 2010 at 44.4 per cent. The IEA (2000) and Winkler et al. (2011) argue that it is difficult to say if this reduction in the population without access to electricity is the result of liberalisation or central planning. However, the population without access in underdeveloped regions often have lower income than the urban population, and private investors are unlikely to find profitability in investment in extending coverage to poorer or less densely populated areas (Doll and Pachauri, 2010). Vietnam and Philippines started from the same levels of access in 1990 but despite significant liberalisation progress over the period since then, the Philippines showed considerably slower progress in developing power access for its population than was the case for Vietnam.

IV Discussion and Conclusion

A simple but important conclusion is that, after more than 20 years of promotion, the majority of these large developing economies have created very little in the way of functioning electricity markets. A number have unbundled their state-owned enterprises, but by itself this is simply a reform of public, or corporate, administration. It may have beneficial effects—Sen et al. (2016) find that corporatisation of public utilities is one of the few reforms associated with improved performance—but it does not create a market, nor a ‘stage’ in creating a market. A majority of countries have now unbundled in some form or other, but only two countries have created retail markets, and only four or five have set up wholesale markets. Since 2003, there has been very little change—one more country has unbundled, one more is about to create a wholesale market, and one has created a retail market, but a number of others have frozen or reversed their reforms. To the extent that there was ever a trend, it is now either static, or in reverse. There is no need for developing countries, which have not liberalised to feel out of line: they are very much part of the mainstream.

The parallel creation of IPPs is not part of the liberalisation process, in the sense of creating markets. IPPs are a form of private sector investment, which can be, and are, implemented without any form of unbundling or wholesale or retail market structure. On the contrary, they are essentially anti-competitive, and they rely on government commissioning and government guarantees through PPAs. The policy focus on renewable energy has in effect led to an increased use of IPPs—not because of the use of market mechanisms, but because of the renewed active use by the state of its fiscal power. The private sector participation in the electricity systems thus turns out to be a form of privatisation dependent on government action, not on markets (this does not of course imply that IPPs are the most effective, or best value or most transparent way to finance renewable generation, or other forms of generation, but that issue is not addressed in this article).

There are a number of conclusions that can be drawn from the data on investments. The first is that there has in fact been a steady growth in investment, both in generating capacity and in network extensions. The achievement of universal, or near-universal, electrification of households in these countries is a very significant developmental step. The second is that the countries themselves should take credit for this: very little of the generating investment, and virtually none of the network extension, can be attributed to the existence of markets, and the contribution of the private sector to generation has depended on governments. The third is that the unrewarding experience of the ‘reforms’ of the last 20 years points in the same direction as the requirements for the development of renewable energy, that is of active government planning and financing.

Countries which started with some privatisation and some degree of unbundling may continue encouraging private power stations, protected from competition by PPAs, commissioned by an increasingly directive state agency. This seems to be the way forward advocated by those who recognise the failings of the British reform model, but are unwilling to drop its form. Kessides (2012) observed that most developing countries lack commitment, industry scale, financial and legal institutional preconditions. The IEA (2007) believed the process should be ‘backed by ongoing government commitment’. Jamasb (2006) suggests that the state should actually be in a strong position to implement ‘proper subsidy schemes’ to increase companies’ incentives to invest; should stabilise macroeconomic conditions to attract foreign investments; should be active in rural electrification; and should protect low-income consumers. Faced with climate change targets, Newbery (2012) suggests that the governments maintain unbundled structures but should initiate new arrangements, including contracts, to attract new private investment. The IEA (2015) argues that meeting climate change targets requires government commissioning of capacity, using auctions to determine the level of subsidy.

Governments of developing countries seem to share this approach. Iran, in post-sanctions time, immediately looked out for foreign direct investment. Although the sector’s performances have improved, in 2014, the government introduced a total of $28 billion in a series of PPP projects (Energy Pioneers Ltd., 2015). Besides, long-term PPAs are commonly used as measure of financial insurance for private investors at initial stages of liberalisation. Egypt has created legislation to sign 25-year contracts with private generators under which the national transmission company is obliged to buy all output (Bedrous, 2012). Indonesia, in addition to its $145 billion infrastructure investment plan, has since 2005 provided further economic incentives for private investors with tax exemption and subsidies.

These reforms of reform all seem to suggest that rather than reducing the role of the state in the sector, the new model relies on strengthening the role of the state. The state is now expected to attract private investment by making initial and core investments itself (in electrification and networks), providing tax and other subsidies for companies so that they do not have to rely on full cost recovery from consumers, and commissioning investments through long-term contracts under government guarantees. None of these approaches uses wholesale or retail markets for electricity to deliver price signals to investors. All of them rely on the fiscal capacity of the state to invest, subsidise or guarantee.

There is an alternative possibility that countries may consider which is whether their fiscal power might be better used to develop renewable generation through public sector, communal or non-profit institutions, given the clear advantages of cheaper public finance over the cost of capital in infrastructure projects.

Countries which have unbundled their systems may continue to operate with state-owned but separate companies, although there may be growing tensions between the apparent messages of separate accounting systems and the logic of vertical integration. These unbundled structures will remain as fossil evidence of a failed political experiment.

Footnotes

Notes

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