Transcript International Trends in Electricity Industry

International Trends in
Electricity Industry
Rahul Pandey
IIM Lucknow
[email protected]
Why should you be aware of
international trends in power ?
• Economies are fast becoming more liberalized &
globalized
– Technology/equipment suppliers are often international
– Technological progress & investments in advanced countries and
markets influence international equipment costs
– Opportunities for deploying latest management tools
– Opportunities for deploying latest IT tools
• Power industry reforms is a global phenomenon
– International backdrop to Indian power reforms
– Some of the ongoing international reform experiences to rub on
Indian reforms in near future
– Removal of trade and tariff barriers will bring equipment and fuel
prices in India closer to international prices
Outline
• Trends in restructuring
• Trends in environmental regime
• Trends in technologies
Trends in Restructuring
Trends in Restructuring
Vertical disintegration and deregulation:
• Unbundling into generation, transmission and
distribution entities
• Open access to transmission grid
• (Privatization of generation and/or distribution)
Pro De-regulation Case
Unbundling, privatization and deregulation
are likely to result in greater competition in
power markets, in turn leading to higher
efficiency, higher reliability (service) and
lower costs (lower tariffs)
The Case Against…
• In the long-run, imperfect competition in
power markets stems from ‘economies of
scale,’ ‘oligopolistic ownership,’ etc.
• In intermediate term, competition is
imperfect because of capital intensive
production and long construction delays.
• In short-run, prices are volatile, supply side
is technically rigid and demand inelastic,
leading to imperfect competition.
Peculiarities of Electricity Industry
• No finished goods inventory (uneconomical
storage) & demand fluctuations
– Not a commodity
– Not a fuel but an instantaneous phenomenon occurring throughout
an interconnected system
• Real time system synchronization/ coordination/
integration
• Reliability requires reserve margins
• Relatively inelastic demand
• Capital intensive technologies, long life
• Long gestation periods
• Public good
Developed Countries’ Experiences
USA:
• Public Utilities Regulatory Policies Act in 1978  Supply of wholesale
power to utilities
• Energy Policy Act, 1992  Competition in wholesale elec trading
• Investor owned, Municipal, Federal govt. managed utilities, and IPPs
including ‘Merchant Plants’
• Most states remain regulated (a few de-regulated)
• Independent state-level public utility commissions
• Real time dispatch, pricing / tariff setting
• Public participation thru civil society orgns.
• Mixed outcomes
– High costs due to stranded investments
– High efficiency due to integrated resource planning and DSM (thanks to
strict but effective regulation)
– No significant difference between costs of public and pvt. ownership
Developed Countries’ Experiences
California:
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50 GW market size
Restructuring intended to protect retail consumers
Retail tariffs controlled; Wholesale market freed-up
California measured very low on HHI (HerfindalHirschman Index)  Low concentration of firms
Totally de-regulated  Unbridled market power
Uniform price model (as against pay-as-bid)
Collusion among big players
Strategic maintenance scheduling  gaming the market
 Hike in peak prices (reduced peak efficiency)
Market collapse (predicted in 1996); Blackouts; Supply
utilities’ banckruptcies
Developed Countries’ Experiences
UK:
• Restructuring began in late 1980s
• Unbundling; Privatization of generation and distribution; Independent
regulator; Competition commission
• Electricity Pool spot market  Compulsory marginal daily bid system
(uniform price); Incentive for adding capacity
• Increased market concentration (60% of capacity was by 2 firms, in 1996)
 Market power (monopolize price-setting)
• Forced divestments by 2000
• Regulator’s concerns remained for 2 generators (8%, 18%)
• Rejection of Market Abuse Licence Condition in 2001due to difficulty in
benchmarking competitive price (bid prices can change over time) 
Recognition of limits to competition
• Powergen’s strategy:
– From centralized planning to devolved structure (functional to divisional to cluster of
BUs); profit or cost centers; Reduced planning cycle
– From coal-dominant to coal-gas mix (JVs with gas suppliers)
– Internationalization (Germany, Hungary, Indonesia, etc)
– Technical to Strategic focus
Developed Countries’ Experiences
Australia, UK, New Zealand:
• Problems of market power (poor competition)
• Increased prices in peak periods
• Vertical re-integration (UK)
Norway, Denmark, Finland:
• State-controlled generation (hence domestic ownership)
• Independent and effective regulation
• No evidence of market power
Developing Countries’ Experiences
Latin America:
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Few big MNCs (huge foreign investments)
Serious problems in most countries except Chile (Chile witnessed re-integration;
‘Endesa’ owns 55% of Chile, 22% Columbia, 19% Argentina, 24% Peru, 5% Brazil)
Brazil: Reform since 1995; Successful in privatization & revenue improvement from
distribution; Failed in privatizing generation; Capacity constraints continue; Tariffs
increased; Unbalanced retail and wholesale tariff settings
Restriction on cross-ownership of firms in Argentina, Bolivia, Peru
Africa:
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Reforms in 20 countries (justification same as in India)
Unbundling  Corporatization  Commercialization of state-owned utilities with
no change in ownership; Contract management
New generation by IPPs (T&D still state owned)
Independence of ERBs questioned (except in SA and Ghana)
Labour union resistance in West African countries
Protests due to tariff hikes; Corruption in Kenya, Tanzania, Uganda, Zimbabwe
Zimbabwe: Initial improvement in public utility’s management and efficiency; Later
problems due to implementing privatization without tariff and regulatory reform
Increase in capacity; Financial improvement in some cases
Developing Countries’ Experiences
Chile:
• Began in early 1980s in the backdrop of economic globalization (2-way
investment flows; X-country infrastructure of elec lines and gas
pipelines)
• Unbundling and privatization of 2 state owned firms (Pvt pension funds,
unlike foreign investment in rest of LA); Competition in generation (direct
selling to large buyers); Open access to transmission; Licensing
requirement for distribution projects
• Unregulated prices for large buyers; Regulated for others (at marginal
costs, but anchored to competitive price)
• Economic Load Dispatch Center market  Spot prices and Spot
transfers
• High concentration  94% of market by 3 generators
• Endesa (like other sector Chilean firms) grabbed opportunities and
responded on multiple fronts:
– Integrated state-owned firm in Chile until 1975 (Hyd+Thr)  Shed off
distribution & construction in early 1980s  Forced to hike efficiency and
pay dividends to State  Doubled employee productivity  Privatization in
1988  Independent & decentralized profit centers  Orgn.-wide incentives
+ Improved availability+ Improved finances + New project development +
Engineering  Internationalization (via JVs with Local & US partners) 
Gen+Trans in LA by mid-1990s
Developing Countries’ Experiences
Asia and Others:
China:
• Province-owned integrated utilities compete in each province – many
controlled by State Power Co. of China; Provincial Cos. profit centers
• Coal + Hydro ratio similar to India’s; Distances a concern; Deficient T&D
grids
• Least-cost centralized planning by Govt; Govt controlled regulator;
Excess capacity; Time-of-day tariffs
• Recent trend towards mine-mouth power plants and clean coal
technologies
• Govt’s inclination for competitive bidding by generators announced
IPP scandals in Asia:
• India, Indonesia, Pakistan, Philippines
• Tendency of rent-seeking by IPPs
– 30-50% higher cost of gas power projects in Asia and Africa
– High Risk Premiums incompatible with High (RoR+Capital
Costs+Protections)
Other concerns: Reduced access of electricity to the poor
• Argentina, Georgia, Kazakhstan, Bolivia, Moldova, Most African
countries
Lessons from International Experiences
Competition and System integrity in electricity
markets requires:
– Creating large no. of players
– Real time pricing
– Incentives for system reserve margins (capacity
investments)
– Preventing vertical re-integration tendencies to hedge
against price risks
– Independent ERCs
– Effective public participation and oversight in regulation
Effective Re-regulation !
Trends in Environmental Regimes
Tightening environmental norms
• Global environmental concerns
– Climate change caused by GHG emissions, of which CO2
is a key element
– Kyoto Protocol requires immediate mandatory mitigation of
by developed nations, and envisages commitments by
developing nations by 2010
• Economic advantage of Gas w.r.t. Coal in US & Western Europe
already visible (at least 40% less C) due to removal of subsidies
(20-40% decline in coal markets)
• Coal to Gas substitution also visible in ex-USSR & Eastern Europe
(35% decline in coal markets)
• Gas power generation share on a rapid rise, replacing Coal in US &
EU and Hydro in LA; Rapid investments in gas pipelines
• Domestic environmental concerns
– Increasing restrictions on SO2, NOx, Ash particulates, etc
Clean technologies under exploration
• CCGT with efficiency of 60-65%
• Advanced coal power technologies (target to achieve 4555% efficiency at $1000/kW)
– E.g. IGCC (Coal gasification preferably combined with combustion +
Fluidized bed of limestones to capture S and crack tars + Gas
cleaning system to remove S & filter ash + Gas turbine) – US,
Germany, Japan, Spain, Netherlands
– Possibility of integration with Fuel Cell technology
• Carbon sequestration technologies under development
• Biomass (mostly for cogeneration), MSW, and Wind based
generation
• Co-firing of Biomass/MSW (upto 15% of heat input) with
Coal in utility boilers without significant loss of efficiency
• Fuel Cells
– Complementarity with transport sector
Trends in Technologies
Dominant trend since 1890s until 1980s
• Centralized large generating stations
located far away from end users
• Economy of scale effect
– Lower per-unit-cost with increasing scale
• Traditional thermal, large hydro (later
nuclear too) matched the requirements
well, with part of hydro meeting peak loads
Dominant trend since 1890s until 1980s
10000
Gas
Coal
Nuclear
100
Hydro
Mtoe
1
0.01
1800
1850
1900
1950
Year
Primary energy supply in the US
2000
Trend since 1980/90s
• Towards smaller generators closer to users
• Economy of series manufacture effect
– Lower per unit cost with increasing volumes of
manufacturing/assembling subsystems
• First breakthrough: Gas Turbines
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Efficient & economic at smaller sizes
Very low gestation periods
No fuel storage
No solid waste; Much less emissions
Can be used as Cogeneration of elec & heat (eff 80%)
Reduced T&D losses
No need for system coordination & policing
Higher reliability & control of supply
Amenable to commercial free market businesses
Amenable to end-use optimization
Trend since 1980/90s
• Other future prospects:
– Fuel cells
– Modular renewable energy technologies
– Microturbines
– Clean coal technologies
• As few major customers shift to on-site
generation, it will render centralized utility
generation further uneconomical as system
load factor will fall
Costs in 1995 (in US$1990/kW)
1000
0
2000
Radical
Solar PV
Solar thermal
Geothermal power
3000
Incremental
Wind
Nuclear power plant
Biomass power plant
Conventional coal power plant
4000
Combustion gas turbine
Gas combined cycle power plant
5000
Mature
Coal combined cycle power plant
6000
Learning Curves for some Technologies
20000
1982
Solar PV
10000
1992
5000
1982
US$(1990)
/ kW
Windmills
1000
1958
1987
Gas turbines
500
1963
1980
100
10
100
1,000
10,000
Cumulative MW installed
100,000
Factors that drive technology costs down
• Cumulative investments
• Investments in support infrastructure (e.g.
transmission networks, road networks, gas
pipelines)
• Increasing markets, leading to increasing
scale/volumes, leading to maturity, leading
to standardization
• Improvements in production and
management systems with experience
Implications for Indian Firms
• In short to medium run..
– Modernize management and technological
systems; Learn new tools of operations, IT
and financial strategy
– Build innovative capabilities
• In long-run..
– Keep your horizontal, vertical and regional
options open