Every country aspires to provide reliable, affordable, and sustainable electricity to its citizens. Yet during the past 25 years, some countries made huge strides, while others saw little progress. What accounts for this difference?
A new World Bank report—Rethinking Power Sector Reform in the Developing World—looks at the evidence on the ways in which developing countries have attempted to improve power sector performance and on what the outcomes have been.
Since 1990, many countries embarked on market-oriented power sector reforms that ranged from establishing independent regulators and privatizing parts of the power industry, to restructuring utilities and introducing competition. Each of these reforms has a story to tell.
Regulation: Regulation proved to be the most popular of the reforms, with about 70 percent of developing countries creating quasi-independent regulatory entities to oversee the task of setting prices and monitoring the quality of service. Although many countries enacted solid legal frameworks, the practice of regulation continues to lag far behind. For example, while almost all countries give the regulators legal authority on the critical issue of determining tariffs, this authority is routinely overruled by the governments in one out of three countries. While three out of four countries have adopted suitable regulations for quality-of-service, these regulations are only enforced in half of the cases.
Privatization: Thanks to the widespread adoption of Independent Power Projects, the private sector has—remarkably—contributed as much as 40 percent of new generation capacity in the developing world since 1990, even in low-income countries. However, the privatization of distribution utilities has proved much more challenging. Latin American markets drove an initial surge in the late 1990s, but there has been relatively little impetus to continue subsequently. Where distribution utilities were privatized, countries were much more likely to adhere to cost-recovery tariffs. Many privatized utilities also operate at high levels of efficiency; and their performance is matched by the better half of the public utilities. Irrespective of ownership, more efficient utilities have adopted better governance and management practices, including: transparent financial reporting, meritocratic staff selection, and modern IT systems.
Restructuring: Most developing countries continue to operate with vertically integrated national power utilities that operate as monopolies. Only one in five countries implemented both vertical and horizontal unbundling of utilities, separating out generation from transmission and transmission from distribution and creating multiple generation and distribution utilities. Restructuring is intended primarily as a stepping stone to deeper reforms, and countries that went no further tended not to see significant impacts. Indeed, restructuring of power systems that are very small and/or poorly governed—as in the case of many Sub-Saharan African countries—can actually be counter-productive by reducing the scale of operation and increasing its complexity.
Competition: Only one in five developing countries has been able to introduce a wholesale power market during the past 25 years, in which generators are free to sell power directly to a wide range of consumers. Most of these power markets are in Latin America and Eastern Europe. Such countries have reaped the benefits of more efficient allocation of generation resources, but they have typically needed to introduce more incentives to ensure adequate investment in new capacity. A demanding list of structural, financial, and regulatory preconditions for power markets prevents most other developing countries from following suit. Such a transition is rarely possible until power systems reach a size of around 3GW and a wholesale power turnover of around US$1 billion. For countries that are not yet ready, participating in a regional power market can bring many of the benefits of trade.
Reflecting on these experiences leads to conclusions that can inform future efforts to improve power sector performance. The main takeaways from the study are as follows.
Power is political: The implementation of market-oriented power sector reforms raises political challenges. Many countries announced reforms that did not subsequently go through, and some countries enacted reforms that later had to be reversed. In practice, electricity reforms proved to be most feasible in countries that already espoused a broader market ideology and in political systems based on the decentralization of power. Reform champions often played a crucial role in driving the change process, but broader stakeholder alignment proved to be equally important for reforms to be sustained in the longer term. For example, in the Dominican Republic, a far-reaching market-oriented reform was enacted in an unsupportive political environment and a turbulent macro-economic context that eventually led to the renationalization of the power utilities.
Starting conditions matter: Market-oriented reforms are complex and presuppose a power system that is already largely developed, adequately governed, and financially secured. Countries starting from this vantage point generally saw quite positive outcomes from power sector reform. But those that embarked on the process before these basic conditions were in place faced a much more difficult trajectory, with outcomes that often fell short of expectations. Thus, market-oriented power sector reform led to much better outcomes in relatively developed middle-income countries like Colombia, Peru, or the Philippines, than in more challenging environments such as Pakistan or the Indian State of Odisha. For example, in Peru, the power sector was fully restructured by 1994; private sector investment substantially increased in generation, transmission, and metropolitan area distribution networks, amounting to about $16 billion over 20 years. The creation of an effective sector regulator and wholesale power market institutions has driven the efficiency of the Peruvian power sector to best-practice levels and led to a significant reduction in the cost of energy.
One size does not fit all: Power sector reform is a means to an end. What ultimately matters are good power sector outcomes, and there may be different ways of getting there. Among the best-performing power sectors in the developing world are some that fully implemented market-oriented reforms, as well as others that retained a dominant and competent state-owned utility guided by strong policy mandates, combined with a more gradualist and targeted role for the private sector. This reality makes a case for greater pluralism of approaches going forward. In Vietnam, for instance, the central policy focus was on achieving universal access to electricity and rapid expansion of generation capacity to achieve energy security in a fast-growing economy. These objectives were achieved through strong leadership of state-owned entities, complemented by gradual and selective adoption of market reforms and targeted private sector investment.
Goal posts have moved: It used to be enough to achieve energy security and fiscal sustainability, but countries now have more ambitious 21st century policy objectives, notably, reaching universal access plus decarbonizing electricity supply. Market reforms can be helpful in improving the overall efficiency and financial viability of the power sector, and in creating a better climate for investment. However, they cannot—in and of themselves—deliver on these social and environmental aspirations. Complementary policy measures are needed to direct and incentivize the specific investments that are needed. For example, in Morocco, an ambitious scale-up of renewable energy was achieved through the creation of a new institution parallel to the traditional utility, with a specific policy mandate to direct private investment toward the achievement of government policy goals.
Technology disrupts: Rapid innovation is transforming the institutional landscape through the combined effect of renewable energy, battery storage, and digitalized networks. What used to be a highly centralized network industry is increasingly contested by decentralized actors. These include new entrants and consumers who may have the ability to generate their own electricity and/or adjust their demand in response to market signals. How this ultimately reshapes power sector organization will depend on the extent to which regulators open up markets to new players and reconfigure incentives for incumbent utilities to adopt innovative technologies.
In sum, a nuanced picture emerges from the experiences of developing countries that have aimed to turnaround power sector performance in the past 25 years. Drawing on this wealth of historical evidence, and informed by emerging technological trends, this report offers a new frame of reference for power sector reform that is shaped by context, driven by outcomes, and informed by alternatives.
The complete report can also be accessed at http://www.esmap.org/rethinking_power_sector_reform
Energy transition is a global challenge that needs an urgent global response
COP26 showed that green energy is not yet appealing enough for the world to reach a consensus on coal phase-out. The priority now should be creating affordable and viable alternatives
Many were hoping that COP26 would be the moment the world agreed to phase out coal. Instead, we received a much-needed reality check when the pledge to “phase out” coal was weakened to “phase down”.
This change was reportedly pushed by India and China whose economies are still largely reliant on coal. The decision proved that the world is not yet ready to live without the most polluting fossil fuels.
This is an enormous problem. Coal is the planet’s largest source of carbon dioxide emissions, but also a major source of energy, producing over one-third of global electricity generation. Furthermore, global coal-fired electricity generation could reach an all-time high in 2022, according to the International Energy Agency (IEA).
Given the continued demand for coal, especially in the emerging markets, we need to accelerate the use of alternative energy sources, but also ensure their equal distribution around the world.
There are a number of steps policymakers and business leaders are taking to tackle this challenge, but all of them need to be accelerated if we are to incentivise as rapid shift away from coal as the world needs.
The first action to be stepped up is public and private investment in renewable energy. This investment can help on three fronts: improve efficiency and increase output of existing technologies, and help develop new technologies. For green alternatives to coal to become more economically viable, especially, for poorer countries, we need more supply and lower costs.
There are some reasons to be hopeful. During COP26 more than 450 firms representing a ground-breaking $130 trillion of assets pledged investment to meet the goals set out in the Paris climate agreement.
The benefits of existing investment are also becoming clearer. Global hydrogen initiatives, for example, are accelerating rapidly, and if investment is kept up, the Hydrogen Council expects it to become a competitive low-carbon solution in long haul trucking, shipping, and steel production.
However, the challenge remains enormous. The IEA warned in October 2021 that investment in renewable energy needs to triple by the end of this decade to effectively combat climate change. Momentum must be kept up.
This is especially important for countries like India where coal is arguably the main driver for the country’s economic growth and supports “as many as 10-15 million people … through ancillary employment and social programs near the mines”, according to Brookings Institute.
This leads us to the second step which must be accelerated: support for developing countries to incentivise energy transition in a way which does not compromise their growth.
Again, there is activity on this front, but it is insufficient. Twelve years ago, richer countries pledged to channel US$100 billion a year to less wealthy nations by 2020, to help them adapt to climate change.
The Organization for Economic Cooperation and Development estimates that the financial assistance failed to reach $80 billion in 2019, and likely fell substantially short in 2020. Governments say they will reach the promised amount by 2023. If anything, they should aim to reach it sooner.
There are huge structural costs in adapting electricity grids to be powered at a large scale by renewable energy rather than fossil fuels. Businesses will also need to adapt and millions of employees across the world will need to be re-skilled. To incentivise making these difficult but necessary changes, developing countries should be provided with the financial support promised them over a decade ago.
The third step to be developed further is regulation. Only governments are in a position to pass legislation which encourages a faster energy transition. To take just one example, the European Commission’s Green Deal, proposes introduction of new CO2 emission performance standards for cars and vans, incentivising the electrification of vehicles.
This kind of simple, direct legislation can reduce consumption of fossil fuels and encourage industry to tackle climate change.
Widespread legislative change won’t be straightforward. Governments should closely involve industry in the consultative process to ensure changes drive innovation rather than add unnecessary bureaucracy, which has already delayed development of renewable assets in countries including Germany and Italy. Still, regardless of the challenges, stronger regulation will be key to turning corporate and sovereign pledges into concrete achievements.
COP26 showed that we are not ready as a globe to phase out coal. The priority for the global leaders must now be to do everything they can to drive the shift towards green energy and reach the global consensus needed to save our planet.
Pakistan–Russia Gas Stream: Opportunities and Risks of New Flagship Energy Project
Russia’s Yekaterinburg hosted the 7th meeting of the Russian-Pakistani Intergovernmental Commission on Trade, Economic, Scientific and Technical Cooperation on November 24–26, 2021. Chaired by Omar Ayub Khan, Pakistan’s Minister for Economic Affairs, and Nikolai Shulginov, Russia’s Minister of Energy, the meeting was attended by around 70 policy makers, heads of key industrial companies and businessmen from both sides, marking a significant change in the bilateral relations between Moscow and Islamabad.
Three pillars of bilateral relations
Among the most important questions raised by the Commission were collaboration in trade, investment and the energy sector.
According to the Russian Federal Customs Service, the Russian-Pakistani trade turnover increased in 2020 by 45.8% compared to 2019, totaling 789.8 million U.S. dollars. Yet, there is still huge potential for increasing the trade volume for the two countries, including textiles and agricultural products of Pakistan and Russian products of machinery, technical expertise as well as transfer of knowledge and R&D.
Another prospective project discussed at the intergovernmental level is initiating a common trade corridor between Russia, the Central Asia and Pakistan. Based on the One-Belt-One-Road concept, launched by China, the Pakistan Road project is supposed to create a free flow of goods between Russia and Pakistan through building necessary economic and transport infrastructure, including railway construction and special customs conditions. During the Commission meeting, both countries expressed their intention to collaborate on renewal of the railway machines fleet and facilities in Pakistan, including supplies of mechanized track maintenance and renewal machines; supplies of 50 shunting (2400HP or less) and 100 mainline (over 3000HP) diesel locomotives; joint R&D of the technical and economic feasibility of locomotives production based in the Locomotive Factory Risalpur and other. The proposed contractors of the project might be the Russian Sinara Transport Machines, Uralvagonzavod JSC that stand ready to supply Pakistan Railway with freight wagons, locomotives and passenger coaches. In order to engage import and export activities between Russian and Pakistani businessmen, the Federation of Pakistan Chamber of Commerce signed a memorandum with Ural Chamber of Commerce and Industry, marking a new step in bilateral relations. Similar memorandums have already been signed with other Chambers of Commerce in Russian regions.
— Today, the ties between Russia and Pakistan are objectively strengthening in all areas including economic, political and military collaboration. But we, as businessmen, are primarily interested in the development of trade relations and new transit corridors for export-import activities. For example, the prospective pathways of the Pakistan-Central Asia-Russia trade and economic corridor project are now being actively discussed at the intergovernmental level, — said Mohsin Sheikh, Director of the Pakistan Russia Business Council of the Federation of Pakistan Chambers of Commerce and Industry. — For Islamabad, this issue is one of the most important. Based on a similar experience of trade with China, we see great prospects for this direction. That is why representatives of Pakistan’s government, customs officers, diplomats and businessmen gathered in Yekaterinburg today.
However, the flagship project of the new era of the Pakistan-Russia relations is likely to be the Pakistan Gas Stream. Previously known as the North-South Gas Pipeline, this mega-project (1,100 kilometers in length) is expected to cost up to USD 2,5 billion and is claimed to be highly beneficial for Pakistan. Being a net importer of energy, Pakistan will be able to develop and integrate new sources of natural gas and transport it to the densely populated industrialized north. At the same time, the project will enable Pakistan—whose main industries are still dependent on the coal consumption—to take a major step forward gradually replacing coal with relatively more ecologically sustainable natural gas. To enable this significant development in the Pakistan’s energy sector, Moscow and Islamabad have made preliminary agreements to carry on the research of Pakistan’s mineral resource sector including copper, gold, iron, lead and zinc ores of Baluchistan, Khyber Pukhtunkhwa and Punjab Provinces.
A lot opportunities but a lot more risks?
The Pakistan Stream Gas Pipe Project undoubtedly opens major investment opportunities for Pakistan. Among them are establishment of new refineries; the launch of virtual LNG pipelines; building of LNG onshore storages of LNG; investing in strategic oil and gas storages. Yet, it seems that Pakistan is likely to win more from the Project than Russia. And here’s why. The current version of the agreement signed by Moscow and Islamabad has been essentially reworked. According to it, Russia will likely to receive only 26 percent in the project stake instead of 85 percent as it was previously planned, while the Pakistani side will retain a controlling stake (74 percent) in the project.
Another stranding factor for Russia is although Moscow will be entitled to provide all the necessary facilities and equipment for the building of the pipeline, the entire construction process will be supervised by an independent Pakistani-based company, which will substantially boost Pakistan’s influence at each development. Finally, the vast bulk of the gas transported via the pipeline will likely come from Qatar, which will further strengthen Qatar’s role in the Pakistani energy sector.
Big strategy but safety first
The Pakistan Stream Gas Pipeline will surely become an important strategic tool for Russia to reactivate the South Asian vector of its foreign policy. Even though the project’s aim is not to gain a fast investment return and economic benefits, it follows significant strategic goals for both countries. As Russia-India political and economic relations are cooling down, Moscow is likely to boost ties with Pakistan, including cooperation in economy, military, safety and potentially nuclear energy, that was highlighted by Russian Foreign Minister Sergey Lavrov during visit to Islamabad earlier this year. Such an expansion of relations with Pakistan will allow Russia to gain a more solid foothold in the South Asian part of China’s BRI, thus opening up a range of new lucrative opportunities for Moscow.
Apart from its economic and political aspects, the Pakistan Stream Project also has clear geopolitical implications. It marks Russia’s growing influence in South Asia and points to some remarkable transformations that are currently taking place in this region. The ongoing geopolitical game within the India-Russia-Pakistan triangle is yet less favorable for New Delhi much because of the Pakistan Stream Project. Even though the project is not directly aimed to jeopardize the India’s role in the region, it is considered the first dangerous signal for New Delhi. For instance, the International “Extended troika” Conference on Afghanistan, which was held in Moscow last spring united representatives from the United States, Russia, China and Pakistan but left India aside (even though the latter has important strategic interests in Afghanistan).
With the recent withdrawal of the U.S. military forces from Afghanistan, Moscow has become literally the only warden of Central Asia’s security. As Russia is worried about the possibility of Islamist militants infiltrating the Central Asia, the main defensive buffer in the South for Moscow, the recent decision of Vladimir Putin to equip its military base in Tajikistan, which neighbors Afghanistan, seems to be just on time. Obviously, Islamabad that faces major risks amidst the Afghanistan crisis sees Moscow as a prospective strategic partner who will help Imran Khan strengthen the Pakistani efforts in fighting the terrorism threat.
From our partner RIAC
How wind power is transforming communities in Viet Nam
In two provinces of Viet Nam, a quiet transformation is taking place, driven by the power of renewable energy.
Thien Nghiep Commune, a few hundred kilometres from Ho Chi Min City, is a community of just over 6,000 people – where for years, people relied largely on farming, fishing and seasonal labour to make ends meet.
Now, thanks to a wind farm backed by the Seed Capital Assistance Facility (SCAF) – a multi-donor trust fund, led by the United Nations Environment Programme (UNEP) – people in the Thien Nghiep Commune are accessing new jobs, infrastructure and – soon – cheap, clean energy. The 40MW Dai Phong project, one of two wind farms run by SCAF partner company the Blue Circle, has brought new hope to the community.
For the 759 million people in the world who lack access to electricity, the introduction of clean energy solutions can bring improved healthcare, better education and affordable broadband, creating new jobs, livelihoods and sustainable economic value to reduce poverty.
“It’s not only about the technology and the big spinning wheel for me. It’s more about making investment decisions for the planet and at the same time not compromising on the necessity that we call electricity,” said Nguyen Thi Hoai Thuong, who works as a community liaison. “The interesting part is I work for the project, but I actually work for the community and with the community.”
While the wind farm is not yet online, a focus on local hiring and paying fair prices for land has already made a big difference to the community.
“I used the money from the land sale to the Dai Phong project to repair my house and invest in my cattle. Currently, my life is stable and I have not encountered any difficulties since selling the land,” said Ms. Le Thi Doan.
The energy sector accounts for approximately 75 per cent of total global greenhouse gas emissions (GHGs). UNEP research shows that these need to be reduced dramatically and eventually eliminated to meet the goals of the Paris Agreement.
Renewable energy, in all its forms, is one of humanity’s greatest assets in the fight to limit climate change. Capacity across the globe continues to grow every year, lowering both GHGs and air pollution, but the pace of action must accelerate to hold global temperature rise to 1.5 °C this century.
“To boost growth in renewables, however, companies need to access finance,” said Rakesh Shejwal, a Programme Management Officer at SCAF. “This is where SCAF comes in. SCAF works through private equity funds and development companies to mobilize early-stage investment low-carbon projects in developing countries.”
The 176 projects it seed financed have mobilized US $3.47 billion to build over one gigawatt of generation capacity, avoiding emissions of 4.68 million tons of carbon dioxide (CO2) equivalent each year.
But SCAF’s work isn’t just about cutting emissions. It is bringing huge benefits across the sustainable development agenda: increasing access to clean and reliable electricity and boosting communities across Asia and Africa. SCAF will be potentially creating 17,000 jobs.
This is evident in Ninh Thuan province, where the Blue Circle created both the first commercial wind power project and the first to be commissioned by a foreign private investor in Viet Nam.
Here, the Dam Nai wind farm has delivered fifteen 2.625 MW turbines, the largest in the country at the time. These will generate approximately 100 GWh per year. They will avoid over 68,000 tCO2e annually and create more than an estimated 302 temporary construction and 13 permanent operation and maintenance jobs for the local community.
Students from the local high school in Ninh Thuan Province were also given the opportunity to meet with engineers and technicians on the project, increasing their knowledge about how renewable energy works and opening up new career paths.
SCAF, through its partners, is supporting clean energy project development in the Southeast Asian region and African region. SCAF has more than a decade of experience in decarbonization and is currently poised to run till 2026.
Neighbours and Crises: New Challenges for Russia
Through all the discussions that accompanied the preparation of the Valdai Club report “Space Without Borders: Russia and Its Neighbours”,...
Competition to Find Solutions to Reduce Overfishing in Coastal Fisheries
The World Bank Coastal Fisheries Initiative – Challenge Fund (CFI-CF) is launching a competition to seek collaborative solutions to reduce...
Decade of Sahel conflict leaves 2.5 million people displaced
The UN Refugee Agency (UNHCR) called on Friday for concerted international action to end armed conflict in Africa’s central Sahel...
Omicron and Vaccine Nationalism: How Rich Countries Have Contributed to Pandemic’s Longevity
In a global pandemic, “Nobody is safe until everyone is safe”, – it is more of true with respect to...
Canada’s bold policies can underpin a successful energy transition
Canada has embarked on an ambitious transformation of its energy system, and clear policy signals will be important to expand...
SADC extends its joint military mission in Mozambique
The Southern African Development Community (SADC) has collectively decided to extend its force mission mandate in Mozambique for three months...
Green Infrastructure Development Key to Boost Recovery Along the BRI
The Belt and Road Initiative (BRI) presents a significant opportunity to build out low-carbon infrastructure in emerging and developing economies...
Middle East4 days ago
Kurdish Education in Turkey: A Joint Responsibility
Finance4 days ago
Why cash is a critical resource with no substitute in cashless societies
Crypto Insights4 days ago
Investing in the Crypto Sphere: A Guide for Beginners in 2022
Russia3 days ago
Russia’s Potential Invasion of Ukraine: Bringing In Past Evidence
Central Asia4 days ago
A Reflection on President Xi’s message to Kazakh President Tokayev
East Asia3 days ago
Japan’s Rohingya Policy: Deviation From Long-held Distinction
Africa4 days ago
Mali: Security Council warned of ‘endless cycle of instability’
Development4 days ago
Davos Agenda 2022 to Mobilize World Leaders around Global Challenges