challenges for sustainable energy sectors in developing

EED--1 l°rt7

Regine Andersen

Challenges for Sustainable Energy Sectors

in Developing Countries

- with Case Studies from Zambia, Zimbabwe, India and Thailand

EED Report 1/1997

The Fridtjof Nansen Institute and the International Energy Initiative carry out a joint project on energy sector reform in developing countries. The project is supported by NORAD and runs for three years from 1994 through 1996.

© The Fridtjof Nansen Institute Published by the Fridtjof Nansen Institute

I would like to thankGesine Hasselmeier,

MA student from the Free University of Berlin, for her extensive and kind assistance in

collecting data for this report.

DISCLAIMER

Portions of this document may be illegible in electronic image products. Images are produced from the best available original document.

FRIDTJOF NANSENS INSTITUTT THE FRIDTJOF NANSEN INSTITUTE

Tittel/TitleChallenges for Sustainable Electricity Sectors in Developing Countries - with Case Studies from Zambia, Zimbabwe, India and Thailand

Sider/Pages79

Publikasjonstype/Publication Type EED Report

Nummer/Number1/1997

Forfatter(e)/Author(s) Regine Andersen

ISBN82-7613-216-2

Program/ProgrammeGlobal Environmental And Resource Problems

ISSN0802-9458

Prosj ekt/Proj ectSustainable Electricity Strategies, Co-operation Project with the International Energy Initiative, BangaloreSammendrag/AbstractThe power sectors in the majority of developing countries are stuck in deep problems which represent severe constraints on economic development. In this report, the technical and financial situation of the sectors is analyzed from a sustainable electricity strategies perspective. An analysis of political and institutional barriers to reforms towards sustainable electricity strategies is conducted and conclusions regarding development co-operation are drawn. The analysis is based on a categorization of developing countries into four categories, and a selection of one case country from each category. For the purpose of generalization, information from other developing countries has been utilized for cross-checking with the results from the case studies.The core problem of electricity sectors in developing countries has been found to be the severe lack of energy efficiency at all levels from end use to generation. The current emphasis on private participation in new electricity generation projects not only fails to solve the core problem, but diverts attention from the real challenge. As long as weak power sector structures remain, this policy is in the long term most likely to prove a costly exercise for the already highly indebted state economies. An arm's length relationship between governments and utilities is focal to a sound power sector performance. However, more autonomous power sector decisions, such as reformed tariff structures, might contribute to inflation and political unrest. This is one of the main barriers to steps towards power sector autonomy. Lack of institutional capacity - despite overstaffed utilities - is another barrier with several components. Most important is the fact that the organizational structures are designed for supply-side management and that the incentive structures for good performance are often weak. The case of Thailand shows that it is possible to develop end-use efficiency to a considerable extent through incentives and regulations, and that transparency was an important precondition for achieving this success.The real challenge for development co-operation is to support the improvement of energy efficiency at all levels and the institutional and financial preconditions. In addition, it is a central challenge to support developing countries in preparing for future utilization of viable new renewable energy carriers. Apart from this, it is important to continue the work for environmental impact assessments of planned power projects, and to support measures for minimising the environmental impacts of old power plants.Stikkord/Key WordsEnergy, Electricity, Sustainability, Developing Countries, Zambia, Zimbabwe, India, Thailand.

Bestilling til/Orders to:Fridtjof Nansen Institute, Postboks 326, N-1324 Lysaker, Norway.

Tel: (47)6711 1900 Fax: (47) 6711 1910 Email: [email protected]

Table of Contents

1 INTRODUCTION...................................................................................................................1

1.1 Why this focus?.................................................................................................................. 1

1.2 What is a 'sustainable electricity sector'? Definitions and delimitation.................................... 2

1.3 Method............................................................................................................................... 51.3.1 General methodological issues..................................1......................................................................... 51.3.2 Methodological issues regarding the comparative approach.............................................................. 8

2 ELECTRICITY DEMAND AND CONSUMPTION IN DEVELOPING COUNTRIES.......... 11

2.1 Patterns of demand and consumption in the weakest developing countries..............................11

2.2 Patterns of demand and consumption in weak developing countries in transition................... 13

2.3 Patterns of demand and consumption in technically and regulatorily more competentdeveloping countries in transition...................................................................................... 15

2.4 Patterns of demand and consumption in stronger developing countries................................. 16

2.5 Concluding remarks regarding patterns of demand and consumption......................................18

3 TECHNICAL PERFORMANCE OF THE POWER SECTORS........................................... 19

3.1 Performance of generation..................................................................................................193.1.1 Performance of generation in the weakest developing countries...................................................... 203.1.2 Performance of generation in weak developing countries in transition.............................................213.1.3 Performance of generation in technically and regulatorily more competent developing countries

in transition......................................................................................................................................... 233.1.4 Performance of generation in stronger developing countries.............................................................253.1.5 Concluding remarks regarding the performance of generation.........................................................27

3.2 Performance of transmission and distribution.......................................................................283.2.1 Performance of transmission and distribution in Zambia.................................................................. 283.2.2 Performance of transmission and distribution in Zimbabwe..............................................................293.2.3 Performance of transmission and distribution in India...................................................................... 293.2.4 Performance of transmission and distribution in Thailand................................................................ 293.2.5 Concluding remarks regarding the performance of transmission and distribution......................... 30

4 FINANCIAL PERFORMANCE OF THE UTILITIES........................................................... 31

4.1 Tariff structures.................................................................................................................314.1.1 Tariff structures in the weakest developing countries.......................................................................314.1.2 Tariff structures in weak developing countries in transition............................................................. 324.1.3 Tariff structures in technically and regulatorily more competent developing countries in transitions 34.1.4 Tariff structures in stronger developing countries.............................................................................354.1.5 Concluding remarks regarding tariff stmcturcs in developing countries......................................... 35

4.2 Financial situation of the utilities....................................................................................... 364.2.1 Financial situation of the utilities in Zambia.................................................................................... 36

4.2.2 Financial situation of the utilities in Zimbabwe................................................................................. 374.2.3 Financial situation of the utilities in India..........................................................................................374.2.4 Financial situation of the utilities in Thailand.................................................................................... 384.2.5 Concluding remarks regarding the financial situation of the utilities in the case countries............ 39

5 MAIN CHALLENGES FOR THE TECHNICAL AND FINANCIAL PERFORMANCE....... 41

6 POLITICAL AND REGULATORY FRAMEWORKS FOR POWER SECTORS INDEVELOPING COUNTRIES............................................................................................. 43

6.1 Political and regulatory framework for the power sector in Zambia....................................... 43

6.2 Political and regulatory framework for power sector in Zimbabwe........................................ 45

6.3 Political and regulatory framework for the power sector in India...........................................47

6.4 Political and regulatory framework for power sectors in Thailand......................................... 51

6.5 To what extent are the political frameworks conducive to sustainable electricity strategies? ...54

7 INSTITUTIONAL FRAMEWORK CONDITIONS FOR THE POWER SECTORS INDEVELOPING COUNTRIES..............................................................................................57

7.1 Institutional framework of the power sector in Zambia..........................................................57

7.2 Institutional framework of the power sector in Zimbabwe.....................................................60

7.3 Institutional framework of the power sector in India............................................................ 62

7.4 Institutional framework of the power sector in Thailand........................................................65

7.5 Concluding remarks on the conduciveness to sustainable electricity strategies...................... 66

8 CHALLENGES FOR SUSTAINABLE ELECTRICITY SECTORS IN DEVELOPINGCOUNTRIES....................................................................................................................... 69

8.1 The core problem............................................................................................................... 69

8.2 Private participation does not solve the core problem...........................................................70

8.3 Focal barriers to sustainable electricity strategies................................................................. 71

8.4 A way out of the core problem............................................................................................ 73

8.5 Planning for additional generating capacity in a sustainable way........................................... 73

8.6 Concluding remarks regarding key challenges for development cooperation agencies andbanks................................................................................... 74

REFERENCES....................................................................................................................... 77

1 Introduction

1.1 Why this focus?

Improved access to sufficient electricity supply is of crucial importance to the development of low and middle income countries. In these countries electricity cannot be regarded solely as a commodity, but as an essential development factor. However, the power sectors in the majority of developing countries are engulfed in deep problems. As we have documented in an earlier report in this research series1, the situation of the power sectors in these countries have a long range of more or less common features: The quality of power supply is poor and with frequent blackouts. Transmission and distribution losses are fairly high and the plant load factor low. The financial performance of the utilities is poor, in part even showing negative rates of return. Rising costs of the sector are covered through credits, leading to heavy debt burden in many countries. This affects the overall policy and leaves less money for other important purposes. The environmental impacts of the power sectors are often serious, leading to local and regional air pollution, biodiversity losses and climate effects. Electricity is unequally distributed as the majority of the population has no access and utilises other sources of energy. Thus fuelwood consumption has led to immense pressures on the forests and to soil degradation. These factors and many more indicate the severe lack of sustainability in the power sectors of most developing countries.

Since the mid-80s efforts have been made in many countries to reform the sectors. The point of departure for reforms are measures to privatize generation and in several cases also distribution. After some years of reform efforts, it is now timely to ask: Are such measures sufficient to solve the crises of the power sector? Which problems do they solve and which remain unsolved? What are the barriers to implementing such measures, and - not least - what are the pre-conditions for them to provide sustainable solutions to the electricity demand and thereby developmental needs?

Research on the power sector in developing countries mostly concentrates on technical, financial and institutional performance. In-depth analyses of the more fundamental reasons for the performance regarding the political and institutional framework conditions are rare. Power research mostly concentrates on the sector as such, without addressing the questions in the broader societal context of which power is an input for development. One purpose of this study is to provide insight into these fundamental questions.

1 Aarhus, 1994

2 Regine Andersen

This study aims at providing insights into the following issues:

• What are the barriers and options for sustainable electricity strategies in developing countries in general and for categories of countries in particular?

• What are the consequences of these results for development co-operation?

These questions have been analyzed in an earlier case study on the Indian state of Karnataka2 3, in which parts of the analytical framework for the present study were developed. The present study constitutes the final stage of a research project which has produced several reports on sustainable electricity strategies. However, it is conceived as a separate study and can be read independently from the other reports.

1.2 What is a ’sustainable electricity sector’? Definitions and delimitation

The term 'sustainable electricity sector' stems from the concept 'sustainable development'. In order to define sustainability for the electricity sector, we will first turn to this more general concept and then to specific approaches regarding electricity strategies.

The concept of 'sustainable development' was first introduced in 1980 in the World Conservation Strategy of the International Union for the Conservation of Nature and Natural Resources (IUCN), the World Wildlife Fund (WWF) and the United Nations Development Programme (UNEP). In the strategy they state that "for development to be sustainable, it must take account of social and ecological factors, as well as economic ones; of the living and nonliving resource base; and of the long-term as well as short-term advantages and disadvantages of alternative action. "4

In the Report of the World Commission on Environment and Development the concept of 'sustainable development' was further elaborated and used as the fundamental concept for the report. It was defined as "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs." According to this concept, the first priority of development must be to meet the basic needs of the world's poor

2 Andersen, 1996.3

Three reports have been been finalized in this research series earlier and form the basis for this study: Knut Aarhus: The Power Sector in Developing Countries, EED Working Paper no. 5, 1994; Knut Aarhus: Which Way to Power Sector Autonomy. Institutional and Regulatory Reform in Developing Country Power Sectors, EED Working Paper no. 1 1995; Regine Andersen: Challenges for a Sustainable Electricity Sector in Karnataka, EED Report 1996/2. All reports are published by The Fridtjof Nansen Institute.

4Quoted in Barry Dalal-Clayton: The History of the Sustainable Development Concept. In: Froydis Kvaloy

(ed.), Oslo, 1994, p. 6.

Sustainable Energy Sectors in Developing Countries 3

and of the population in general. This implies an average annual income growth of at least 3% for the inhabitants of the developing countries and a comprehensive redistribution of income in the world. As second priority, this development has to be co-ordinated with resource management in order to secure sustained access to the resources. That means that renewable resources should be managed in a way that allows them to recover, and that nonrenewable resources should be utilised as transitional resources while developing the use of alternative resources. This also implies minimising the negative environmental effects of human activities on the resource base to an extent that allows further access.

The concept of sustainable development has been discussed widely. Through the emphasis on the concept, the Brundtland Commission drew the world's attention to crucial challenges for development and thus contributed to more awareness among politicians and practitioners. But the concept has also been criticised. One of the main criticisms is that the trade-off between economic growth and sustainable resource management has not been sufficiently elaborated and is in part inherently contradictory. The report failed to deliver an operational approach for purposes of meeting this fundamental dilemma.

Regarding the energy sector, however, the Commission does identify measures to bridge the gap between developmental and environmental concerns. Energy is seen as a crucial determinant for development both in terms of economic growth and social improvement of living conditions. But conventional energy utilisation has major negative effects on the environment locally, regionally and globally and the non-renewable sources for energy utilisation are depleted over time. To meet energy demand in a sustainable way would involve improving energy efficiency, developing the utilisation of renewable energy sources and, for the transitional phase, implementation of measures to limit pollution and other negative environmental impacts of conventional energy supply.5

One of the most comprehensive contributions to the understanding of sustainable energy strategies has been presented in the book "Energy for a Sustainable World"6. The analysis shows that the energy demand over the next decades can be met with about the same level of energy use as today. A pre-condition is that the conventional supply biased energy planning would be replaced by a primarily end-use focused way of planning. That means that the point of departure for all energy planning must be the way energy is used - the efficiency of energy services. Electricity demand is not about amount of kWh the system can provide, but about what you can get for the kWh: How much lighting, heating and other services. That is in turn

5 World Commission on Environment and Development, 1987, p. 131 - 149.

6 Goldemberg et. al., 1988.

4 Regine Andersen

a question of the efficiency of the equipment utilising the electricity. This is what is meant by efficiency of energy services. Expansion of energy supplies should be subordinate to this priority. Efficiency and least-cost planning are concepts penetrating the approach from the end-use level via distribution and transmission to the supply level. Through the focus on end- use, new options also arise for the utilisation of different renewable energy sources and for decentralised energy systems. Both in financial as well as in environmental terms the key principles of "Energy for a Sustainable World" are considered more viable than the conventional approach. Furthermore this approach is consistent with developmental goals, because it focuses on the demand side and thus also on the developmental needs. The analysis has been widely discussed in developing countries and has found broad support among energy researchers.

However, strategies for energy planning are determined by the political, institutional and economic framework of the energy sector. Unless the framework is conducive to sustainable energy strategies, reforms in this direction will not take place. The OECD principles on effective aid7 propose an extended understanding of the term 'sustainability' which is relevant also in this context. The principles comprises i.a. political priorities conducive to development targets, institutional capacity and effectiveness, financial capacity and efficiency, sociocultural legitimacy - in addition to the basic environmental soundness. These principles are regarded as indispensable for development projects to succeed and are thus oriented towards the micro level. For the subject of this study they provide a basis for the further understanding of the term "sustainable electricity sector".

On the basis of these elaborations, the term 'sustainable electricity sector' is understood as sustainable electricity strategies embedded in viable political, institutional and financial structures. For the purpose of this study the following variables will be of importance.

Specific variables for the analysis of the sustainability of electricity strategies:

• The extent to which the demand for electricity services is met;• Level of efficiency in utilisation of power at end-use level;• Extent of incentives for electricity conservation;• Level of capacity utilisation at generation level;• Dimensions of negative environmental effects of generation ;

7 OECD, 1989.g

In this study environmental issues are elaborated on within the chapter on performance of generation.


• The extent to which environmental sustainability and cost effectiveness counts in decisions on new power generation projects - in addition to considerations on technical feasibility.

• Level of efficiency at transmission and distribution level;

General variables for the analysis of the sustainability of an electricity sector:

• The extent to which the political priorities regarding the electricity sector are conducive to sustainable electricity strategies;

• The extent to which the regulations secure a conducive organisation of the electricity sector and incentives for sustainable electricity strategies;

• The extent to which the institutional system works efficiently in order to implement the regulations and secure sales revenue;

• The extent to which the price structure ensures sufficient but not exorbitant return to the utilities and provides incentives for sustainable electricity strategies;

• The extent to which there is sufficient "fresh capital" for the implementation of necessary maintenance and new investments.

These variables are lines along which this study will discuss the sustainability of the power sector in developing countries. It would not be adequate to fix quantitative norms for e.g. which level of efficiency could be labeled as "efficient" or go in detail on e.g. criteria for conducive regulations. Rather this will be discussed within the framework of the specific potentials and pre-conditions in various developing countries.

1.3 Method

This report is conceived as a comparative study. I will here first elaborate on the general method and then turn to the special methodological issues regarding the comparative analysis.

1.3.1 General methodological issues

What are the barriers and options for sustainable electricity strategies in developing countries? In order to answer this focal question, we first need to know the situation of the electricity sector and the status regarding sustainability. With the variables for sustainable electricity strategies above as points of departure, this is the subject for the first part of the report. Simplified, the following model describes the approach for investigations in Part I:

6 Regine Andersen

Realistic potentials for sustainableelectricity strategies countries

in developing

*

Performance of the Indications on possibleelectricity sector in a norms regarding sustainabledevelopmental context electricity strategies

Fig. 1: Model for investigations in Part I of the report

In order to describe the performance of the electricity sector in a developmental context, official documents and statistics on the developmental situation in general as well as the electricity sector in particular have been used as basis. In addition to this, research reports and conference papers have provided insight. Regarding indications on possible norms for sustainable electricity strategies, reports on this issue for developing countries have been utilised. The most important research in this regard is the analysis made by the International Energy Initiative (IEI) regarding a Development Oriented, End-Use Focused (DEFENDUS) electricity scenario for Karnataka, where the approach from the book "Energy for a Sustainable World" has been used as basis for the estimations of a sustainable electricity scenario for Karnataka.9 This last category of reports together with the above mentioned documentation form the basis for considerations on potentials for sustainable electricity strategies in developing countries.

The problem with statistics in developing countries is that they are difficult to interpret. We often notice that two statistics on the same issue provide different data. This is why it is difficult to present exact figures on e.g. energy saving potentials. As this report is written by a political scientist and not by an engineer, that is also no goal. Rather the first part of the study aims at presenting the broader lines of the situation and potentials.

In Part II we go one step further to analyse the reasons for the situation. Why are the potentials for sustainable electricity strategies not utilised to a much larger extent? Where are the more fundamental barriers and where are the options? In order to answer these questions, an analysis of the political, institutional and economic framework is necessary. This is to find

9 Reddy, et. al., 1991.


out in which ways the framework influences the electricity sector and to what extent the influence is conducive to sustainable electricity strategies. The variables on a sustainable electricity sector above serve as points of departure for this in-depth study. Simplified, the following model describes the approach for investigations in Part II:

Political priorities Economic/financial framework

&

Regulations

&

4 Institutional framework

&

Barriers and options for a sustainable electricity sector in developing countries

Fig. 2: Model for analysis in Part II of the report

Political priorities regarding the power sector are defined on the basis of the economic situation and trends - due to the political ideology and interests of the rulers and with reference to the democratic legitimacy. The main pre-conditions for implementation of political priorities is that they are followed by appropriate operationalization, monitoring and control mechanisms. We will first investigate to what extent and in which ways the priorities are transformed into acts and regulations. Next, we will turn to the institutional framework, which comprises organisational structures and decision making processes as well as other preconditions for a functioning institutional setting, in order to analyse compliance with the priorities and correlation with the characteristics of a sustainable electricity sector. The institutional setting and performance is influenced i.a. by the financial situation. However, the financial framework is in turn a result of regulations as well as the economic conditions. To complete the picture an indepth study of the economic framework conditions would be necessary. However, due to limited time for this research, it has not been possible to go into depth on the economic conditions in this comparative context. Thus the focus will be on

8 Regine Andersen

political an institutional issues. Relevant economic issues are dealt with in the chapter on financial performance of the utilities and in the chapter on political framework conditions. After the political, regulatory and institutional analysis, the barriers and options for a sustainable electricity sector are finally identified and brought together in the conclusions of the report.

Political statements in official documents as well as secondary literature on the political structures and processes are the main sources of information on political priorities. Regarding the regulatory framework, the analysis is based on acts and regulations. The institutional and economic framework is analysed on the basis of official documents as well as various secondary literature. Thus the basis of materials for this study is relatively broad. However, it has not been possible to get access to all the information we aimed at. This gives certain limitations for some parts of the analysis. It is my hope that the important features are covered in this report.

1.3.2Methodological issues regarding the comparative approach

This study is conceived as comparative research. That implies in-depth studies of some selected sample countries as well as cross-checking with the situation in other developing countries, in order to make conclusions with general relevance for these countries or groups of countries. There are several variables along which sample countries could be selected. One could choose to categorize developing countries i.a. with respect to their macroeconomic situation related to variables as transforming socialist economies, island economies, less developed countries and least developed countries. Another possibility would be to group the countries with respect to level of sustainability of their power sectors. However, as the objective of this study is to identify barriers and options to sustainable electricity strategies, we need a categorization based on central characteristics of the power sectors and their framework conditions. The selection of sample countries for this study is thus related to the technical performance of their power sectors and the political and institutional structures in which these are embedded. The categories are as follows10.

A. The weakest developing countries: Developing countries with very weak state structures, with small and inefficient power sectors that are operated as government departments, such as most of the countries in sub-Saharan Africa;

10 This categorization is based on a taxonomy from the World Bank Industry and Energy Department and further developed. Source: World Bank, Industry and Energy Department, 1993, p. 77.


B. Weak developing countries in transition: Developing countries with weak state structures, with relatively inefficient power sectors that are operated as government departments with relatively low technical competence, but where reforms are underway, such as some few countries in sub-Saharan Africa, in South Asia and in Indochina;

C. Technically and regulatorily more competent developing countries in transition: Developing countries with technically competent state-owned power utilities, despite a relatively poor performance, that operate under boards of directors and with limited private sectors, where reforms are underway, like India and China;

D. Stronger developing countries: Developing countries with relatively well developed power sectors, with an active private sector, nascent capital market and significant institutional capability, like most of Latin America, North Africa, parts of East-Asia and of South-East Asia.

This categorization is not to be understood as a general ranking of developing countries. It is developed solely for the purpose of this study and may not even be relevant for other studies on electricity issues in developing countries.

One sample country has been selected from each category and studied more in-depth. In addition, information from other countries has been utilized for the purpose of cross-checking the potential for generalization. When choosing sample countries, Latin America has been left out of the scope because of language barriers. The sample countries selected are:

A. ZambiaB. ZimbabweC. IndiaD. Thailand.

Thailand must be regarded as a newcomer to category D, and thus not the most representative example. However, a study of Thailand is interesting because this is a country with a particularly high level of sustainability regarding its power sector policy. As the country has more similarities with the first categories than most of the other "D-countries", it might provide lessons to learn of particular interest to the countries of the first three categories, which make up the vast majority of developing countries.

The box below gives an overall view of basic data for the sample countries, selected from various sources, such as the World Bank and the UNDP:

10 Regine Andersen

Basic data for 1995: Zambia: Zimbabwe: India: Thailand:Population 9 million 11 million 937 million 60 millionPopulation growth 3,2% 3,1% 1,77% 1,24%

GDP pr. capita $ 374 (1994) $ 446 (1994) $ 283 (1994) $ 239 (1994)

GDP total $ 3,5bn(i994) $ 4,9bn(i994) $ 252bn(i994) $120bn

GDP growth from 1994 - 0,5% (1994) 4% 4% 9%

Installed power capacity 1.800 MW 1.961 MW 80.880 MW 13.427 MWAnnual power consumption 6.059 GWh 10.044 GWh 213000GWh 72.000 GWhSupply/demand gap + 16%(export) -23%(import) - 7,3% (1994) + 17,5%

System losses not known 11% 19,5% 9,1% (1993)

With this system of in-depth studies on the basis of a distinct categorization and crosschecking with overall data from developing countries there should be a good foundation for drawing some general conclusions regarding barriers and options to sustainable electricity strategies in developing countries.

The report is conceived as a synoptic comparative analysis. We will analyse the single issues case by case for each chapter. The reader who wishes to follow one single case/country thus would need to 'jump' in the text from chapter to chapter. The synoptic approach is seen to be the most efficient for purposes of highlighting the general features of the situation in developing countries or categories of them.

PART I: DESCRIBING THE POWER SECTOR PERFORMANCE

2 Electricity demand and consumption in developing countries

Strategies for industrial development and in some cases also for agricultural development have been driving forces behind electricity development in most developing countries. Ambitious electrification goals have been established in most countries in order to enable economic growth. One consequence of this emphasis was heavy burdens on the countries public finance, resulting in increasing debt problems. Thus, in most cases the power sector development slowed down or stagnated at different stages. This trend have led to various situations. In chapter two, the consequences for the demand situations in the various categories of development countries will be described.

2.1 Patterns of demand and consumption in the weakest developing countries

One main feature of the weakest countries is a limited or negative economic growth based on primary production. There is generally a poor quality of electricity supply. Economic development is still the main target for electricity supply, compared to social development. Only a small share of the urban population has access to electricity and rural areas have virtually no supply. The capability for improving this situation is limited due to weak state structures and heavy economic constraints. The economic reform processes which have been introduced, are moving very slowly and/or showing unsatisfactory results in terms of economic and social development. Thus the main challenge for the power sectors in these countries is not an increasing power demand, but poor performance of the power sectors in terms of utilization of capacity and supply quality. The options for meeting these challenges within the framework of the present policies are very limited indeed.

Regarding Zambia, the recession in the manufacturing and mining sectors, due to the economic crisis currently ravaging the country has led to a negative economic growth in the first half of the 90s and reduced the power demand to 10% below installed capacity.11 Zambia's economy is typical of this category of countries. It is heavily dependent on one or some few export goods and thus on the international prices for these - and - at the same time production for the domestic market is threatened due to liberalization. Copper is the main export commodity for Zambia (77% of total export income), and the recession in the mining

11 Ranganathan and Mbewe, 1995, p. 1093.

12 Regine Andersen

sector can be explained as a result of decreasing copper prices. The manufacturing sector (22% of GDP) is suffering due to the effects of liberalization, making imported goods cheaper than domestic ones. This situation, where there is ample capacity for electricity production because of deep economic crises, is aptly described as a "feast and famine" situation12.

However, the level of installed capacity does not always give a realistic picture of the situation. There are various reasons for why it is not always possible to utilize the installed capacity. In Zambia, the severe drought in the beginning of the 1990s caused serious problems for the hydro generation on which Zambia is heavily dependent. It takes a long time to fill the reservoirs after such extreme situations - even it is possible to reach the pre-drought water levels at all. The result has been load shedding affecting consumers in Zambia and reduction of the already agreed long-term power exports to Zimbabwe. Zambia was also forced to import electricity from Zaire in periods. In the second half of 1995 ZESCO imposed quotas on electricity consumption. These efforts will most probably in turn affect the production in the country as well as perspectives for power exports and thereby direly needed foreign currency.

The split-up of electricity use in Zambia shows that the mining sector accounts for about 73% of total electricity consumption, the industry and commercial sectors about 12%, the government about 9%, agriculture about 2% and the households about 2% of the electricity consumption. Only 11% of the households in Zambia have access to electricity. In urban areas the electrification level is about 42%, but with wide disparity between the various income groups:13 14 Of the high income households, 87% are electrified, of the medium income households 72% and of the low income urban households only 11% are electrified. The electrification of rural areas, where 40% of the population live, has not been emphasised, due to lack of funding for extending the grid. Instead relatively large amounts of electricity, due to the comprehensive excess capacity, has been exported to neighbouring countries. In 1995 exports accounted for about 16% of total supply.15 An electrification programme mainly targeting urban and peri-urban areas has been embarked upon by ZESCO. During the period 1996-2000 100.000 customers are to be connected, according to the plan.16

13 Ibid, p. 1096.

14 ESMAP/DOE: Zambia Household Energy Strategy Project, ESMAP, Washington D.C. 1990. Referred to in: Hilbajene, S.H. and S. Kaweme, 1993, p. 9.

15 Data for 1995 reckoned in terms of percentages by the author. Source: SAD-ELEC & MEPC, London 1996, p. 225.

16 SAD-ELEC & MEPC, 1996, p. 227.


It has not been possible to obtain data on the energy efficiency of the electricity end-use in Zambia. However, a National Energy Conservation Committee under the chairmanship of the Department of Energy, has been set up. This indicates what we can assume, that the end-use energy efficiency is poor - as is the case in most developing countries.

2.2 Patterns of demand and consumption in weak developing countries in transition

These countries mainly show a moderate degree of economic growth, although they still belong to the low income countries. There is generally more diversity in the production patterns and more emphasis on industrial production than is seen in the first category of countries. Thus a most critical constraint to further economic development is the poor performance of the power sector - which is not able to meet demand. Frequent power shortages and poor quality of the supply is characteristic for this group of countries. However, the economic reform process is moving somewhat faster than for the first group of countries, despite the highly unequal distribution of burdens of this process and the failing positive effects of this policy on economic and social development in most of the countries belonging to this category. The pace of the economic reform process shows a somewhat stronger capability to introduce changes and thus leaves more scope for solutions to the power sector crises than is the case for the first category of countries. The main challenge is to meet the steadily increasing power demand in a reliable manner.

In Zimbabwe the economy is more diversified than in the majority of African countries and relies on a substantial share of industrial production (23% of GDP), which consumes about 40% of the supplied electricity. The other sectors use respectively 18% for domestic consumption, 17% goes to the mining sector, 15% to commercial and street lighting use, and 10% to agricultural use. There has been a steady economic growth and a growth in power demand of about 3.3% per year in the period from 1985 to 1990, with a system peak demand at 3.9%.17 18 This situation was distorted in the beginning of the 1990s, as severe drought resulted in reduced hydro power generation. The distortions were further deepened by the unstable conditions in the neighbouring countries (Mozambique and South Africa), which resulted in shortages of imported power. The power cuts resulted in losses of approximately US$ 6 million per month and an estimated decline of 10% in GDP.19 This was a serious

17 Ibid, p. 238.18 Hepner, Maury P.: Zimbabwe Energy Efficiency Project. In: Energy for Sustainable Development, Vol. 1,

No 3, 1994, published by the International Energy Initiative, Bangalore, p. 19.

Robinson, Peter, cited in: Rowlands, 1994, p.131.19

14 Regine Andersen

setback for the economy as a whole, which has shown a cautious economic growth from 1990to 1995. The overall GDP growth was 4.6% over the period. The supply demand gap is stillsubstantial. In the Fiscal Year 1994/95 electricity imports from Zambia, Zaire and South

21Africa accounted for 23% of the total supply.

Access to electricity is highly unequal. The rural electrification is said to be 15%20 21 22. However the number of rural households actually connected amounts to no more than 9,000.23 24 25 26 Only about 3% of the population in so-called communal and resettlement areas live in electrified areas, but only 6% of these households are actually connected to the grid. 55% of the urban households have access to the grid. Access to electricity for households has been a declared policy of the government, however, electrification programmes have not been crowned with success so far.

The end-use energy efficiency is relatively low, and the overall saving potential is estimated at 15 - 25% of current electricity use. Approximately half of this potential could be mobilized at no or low costs. A large saving potential has been identified for the households and public buildings. For the industrial sector, the saving estimations range from 5% to 15% of facility’s total consumption . The lowest hanging fruits regarding industrial energy end-use efficiency have already been harvested. To further increase efficiency, the production processes themselves require to be revised, either by improving control of existing equipment or by replacing it with alternative technologies. However, the lack of affordable high efficiency replacements is one problem and the lack of foreign exchange combined with high costs of imported materials another. These are some important obstacles to further energy efficiency achievements in the electricity sector of Zimbabwe. However, the incentive structure for such investments is about to change. Traditionally, the enterprises tend to focus on the investment costs rather than the life-cycle costs. This perspective together with low electricity prices has left few or no incentives for further efficiency investments. However, with rising power prices the short- and longterm cost-benefit scenario might change and open for a new wave of efficiency measures in the industry.

20 Nziramasanga, 1996, p. 10.21ZESA, 1995, p. 7.22 Nziramasanga, 1996, p. 35.23 Ibid, p. 42.

24 SAD-ELEC & MEPC, 1996, p. 237.

25 Department of Energy Resources and Development (DOERD) /World Bank/UNDP/ESMAP, 1992, p. 48.26 Hepner, Maury P.: Zimbabwe Energy Efficiency Project, in: Energy for Sustainable Development,

published by the International Energy Initiative, Bangalore, Vol 1, No. 3 1994, p. 20.


2.3 Patterns of demand and consumption in technically and regulatorily more competent developing countries in transition

This category comprises countries with a relatively strong economic growth, although most of them still belong to the low income countries. They have technically relatively competent state owned utilities and in several cases also a limited private power sector. However, due to the sharply increasing power demand and the financial and institutional constraints of the power sectors, the demand cannot by far be met. Also here the quality of electricity services is poor. Relatively comprehensive power sector reforms are being implemented, but still they are far from being sufficient to meet the enormous challenges in these countries with regard to the immense demand-supply gap, due to the present planning approach (which fails largely to consider the potential of energy efficiency). However, these countries show capability for reforms and thereby scope for further change.

Due to the political priorities of Swaraj (self-reliance) and Swadeshi (self-production), India has developed a significant diversity in its production and own technologies in a wide range of sectors. The economy is booming and in desperate need of electricity. The demand supply gap is 10% and in peak periods nearly the double. The regional variations are large, with the state of Bihar as the worst case, with a deficit of 35.4% in 1993-94. Despite an annual electricity consumption growth at about 8%, the demand supply gap is steadily widening, resulting in severe power shortages - in addition to the poor quality of supply. The National Development Council of India stated in 1993 that non-availability of power is likely to be the

29single most critical constraint to development in the coming years.

Industrial production consumes about 40% of the total electricity supplies, whereas irrigation of agricultural lands consumes approx. 30%. The latter indicates a comprehensive use of electrified irrigation pump sets, which has been prioritized policy of the Government. This category has been the fastest increasing one regarding power consumption. The domestic sector consumes about 19% of the total supplies. A substantial share of this consumption is accounted for by an increasing number of all-electric-homes in urban areas. According to the official statistics, 85% of the Indian villages are electrified. However, this only means that the grid itself has been extended to these villages. It does not tell how many households are 27 * 29 30

27 Petroleum Economist Country Report: India - Its Energy Potential, Petroleum Economist Ltd., London, May 1995, p. 42.

Breeze, 1996, p. 80.29 Stated at the NDC meeting held in April 1993. Quoted in: Ministry of Power, Government of India and

ESMAP, 1993, p. 5.30

Central Electricity Authority: General Review 1993-94, 1995, p.167.

16 Regine Andersen

actually connected and to what extent. Generally the electricity supplied at village level has extremely poor quality and serves mostly for lighting purposes - where it is utilized.

A comprehensive investigation of end-use efficiency in India in 1991 showed that there was a substantial potential for electricity saving due to a limited number of measures in the various consumer categories. If the suggested measures were implemented wherever cost- effectively and technically feasible, the peak generating requirements in year 2004/2005 could be reduced by 20%. The costs for such measures would be substantially less than the cost of both baseload and peaking power plants. Electrified irrigation pump sets represented one of the largest efficiency opportunities, as the energy use of existing pumpsets could be reduced by 30% or more at low costs. Lighting efficiency would account for approximately 35% of the saving potential, with the introduction of fluorescent bulbs as the most important measure. Industrial efficiency was the third large group of saving potentials, which would require improvements to motors and processes. Despite the identification of these opportunities, there has been no emphasis on end-use efficiency in the energy policy and no supportive incentive structure. Therefore they have been widely disregarded so far. Newer

32studies of end-use saving potentials in India at national and state levels confirm this picture.

2.4 Patterns of demand and consumption in stronger developing countries

Regarding the last category, these countries are in a totally different position. Most of them belong to the middle income countries. There is steady economic growth and the power demand for economic development has largely been met. The majority of the urban population are supplied with electricity and also a substantial share of households in rural areas have access to electricity (some variation from region to region). The quality of electricity services is generally good. However, in the recent years power shortages have become a problem in some countries. The capabilities to deal with such problems are generally good. The most successful demand side management projects are found among these countries. 31 32

31 Nadel, Steven, Virendra Kothari and S. Gopinath, 1991.32 Gutuierrez, Luis E.: International Power Sector Experience: A Comparison with tire Indian Power Sector.

In: Ministry of Power, Government of India and ESMAP: 1993,Reddy, Amulya: DEFENDUS in Energy for Sustainable Development, published by tire International Energy

Initiative, Bangalore, 1996Andersen, Regine: Challenges for a Sustainable Electricity Sector in Karnataka. EED Report 1996/2, The

Fridtjof Nansen Institute, 1996.


Thailand has a fast emerging economy, which has doubled in size during the six years up to 1994. The GDP growth in 1995 was 8-9%.33 When classified by income, Thailand belongs to the low middle-income countries.34 35 36 37 38 39 However, due to the tremendous economic growth and structural changes in the economy, the country is well on the way to transforming into a so- called newly industrialized country. The speed of economic integration is among the fastest in the world, according to World Bank rating. Agriculture and manufacturing industry are the most important economic sectors. Around 70% of the population rely upon agricultural production for their livelihood. The major activities of the manufacturing industry are cement, integrated circuits, vehicle assembly, petroleum, petroleum products and textiles. The main electricity consumption sectors are the households (20%), commerce (25%), and industry (45%). Agricultural production consumes only 0,2%, other users account for 7% and the so-called EGAT direct sales for 3%. The power demand growth is fast accelerating at a rate of approx. 10% per year or more. However there is still no demand-supply gap, as the generating reserves by peak demand are estimated to 17%. As for access to electricity, the latest records from the Provincial Electricity Authority (PEA) shows that 98% of all villages in Thailand are connected to the grid. The remaining 2% would be located in very remote areas. However, the largest consumption of power takes place in Bangkok and its environs.

At the beginning of the 1990s it was recognized that the continuous demand growth in Thailand could lead to energy-induced setbacks to the development path followed, if the demand was not tamed. Therefore the Electricity Generating Authority of Thailand (EGAT) introduced a comprehensive five-year master plan for demand-side management in 1993 with energy conservation measures and financial incentives to install energy-efficient systems. The measures are primarily aimed at switching to fluorescent lights, energy efficient air conditioners and refrigerators as well as high efficiency motors and load management facilities for power consumers.40 These are all measures that cost less than installing new capacity. At the time the plan was initiated, EGAT estimated that the total savings resulting

33 Breeze, 1996, p. 142.34 World Bank: Global Economic Prospects and the Develping Countries 1996, p. 90.35 Chongpeerapien, 1991, p. 216.36 Only exceeded by 5 other countries. Source: World Bank: Global Economic Prospects and the Develping

Countries 1996, p. 67.37 Based on the 1995 data of the Electricity Generating Authority of Thailand refered to in: Breeze, 1996, p.

151.38 The Bangkok Post, Post Publishing PLC: Energy - Insatiable Power Demand. Bangkok 1995. Internet:

http://www.nectcc.or.th/bureaux/bkkpost/95econ/95econ-2.01htm, p.3.39 Referred to in The Bangkok Post, Ibid., p.14.40 Ishiguro and Akiyama, 1995, p. 43-44.

18 Regine Andersen

from the measures would correspond to an installed capacity of 225 MW. However, based on the experiences with the master plan, EGAT revised its estimations already in 1995 to a total saving up until 1998 corresponding to 1,400 MW of installed capacity (about 8% of the total installed capacity by 1998).41 This shows the great success so far of the demand-side management programme. As the Global Environmental Fund (GEF), which has contributed to the funding of the DSM-programme in Thailand, evaluated 110 of the worldwide projects it granted, it found 8 projects to be successful, among them the DSM-programme in Thailand.42

2.5 Concluding remarks regarding patterns of demand and consumption

Power supply is a key barrier to economic development in countries like Zimbabwe and India, which belong to the categories of weak developing countries in transition and the technically and regulatorily more competent countries in transition. In these countries power shortages and poor quality of supply account for major setbacks in the economic development and represent a most critical constraint for further development. In the weakest developing countries power supply can not be said to be a key barrier to economic development, as there are other and more basic problems to be solved first. The demand-supply gaps are also not pressing in the same way in these countries. In the stronger developing countries electricity supply is essential for economic development, but here the countries are mostly able to cope with the challenges of managing and meeting demand.

In all countries there are large potentials for end-use savings. We note that the most advanced country in terms of demand side management and end-use energy efficiency is Thailand. However, Zimbabwe has also made efforts in this direction.

41 Breeze, 1996, p. 153.42 Egat, Demand Side Management Office: Demand Side Management in Thailand, Bangkok 1996. Internet:

http://www.egat.or.th/dsm/conclu.html, p. 1.

3 Technical performance of the power sectors

3.1 Performance of generation

The most important sources for electricity generation in developing countries are hydro and coal. The era of major hydro power projects is, however, fading out and being replaced with more moderate medium sized projects. Environmental concern is one reason for this development. Also, hydropower is a vulnerable source for electricity generation because of its dependence on conducive climate conditions. In southern Africa for instance, the drought in the beginning of the 1990's reduced the water levels drastically and thus the ability to utilize the installed capacity for hydro generation. Due to the unstable climatic conditions in several regions of the developing world, many countries are searching for alternatives to hydro power for further extension of their generating capacity.

The utilization of coal has gained importance in this situation. However, in most regions in Africa and southern/south-eastern Asia the available coal is of very poor quality. Thus the environmental impacts of coal fired power generation are severe. When considering the immensely increasing power demand in some of the regions, this option for new capacity would represent a serious threat to the climate situation. Still, most countries settle for this option, as they consider it the most viable one.

Nuclear power has gained more attention in Asia in recent years and new nuclear power plants are under construction in China, Pakistan and India. Most of all China is opting for nuclear for meeting future demand. This is a remarkable development in view of the fact that western countries largely abandoned this option for further capacity extension for environmental security reasons. However, further investments in nuclear power in developing countries might be limited by financial constraints. Gas is utilized in some countries, but in the larger context the contribution is rather marginal.

New renewable energy is on its way in, and India is an absolute forerunner in this regard. Wind and solar photovoltaic power are becoming ever more technically and financially viable. But in the larger context, their contribution to the total power generation is infinitesimal. However, developments are taking place at a rapid pace and in a decade or two, several renewable technologies will probably have become commercial viable.

In chapter 3.1 the energy sources and performance of power generation in the various categories of countries will be elaborated on and the potentials for new renewable energy utilization described.

20 Regine Andersen

3.1.1 Performance of generation in the weakest developing countries

The development of generating capacity in the weakest developing countries is slow paced due to financial constraints and general economic recession. Many of the weakest countries are heavily indebted, which makes new major power project investments unlikely. However, there is an urgent need for maintenance and rehabilitation of the existing systems.

As for Zambia, the total installed generating capacity is about 1.800 MW and the electricity production has fluctuated between 8,903 MWh in 1992 and 8,080 MWh in 1995.43 The state owned Zambia Electricity Supply Corporation Limited (ZESCO) owns and operates 91% of the installed capacity. The rest is owned and operated by the still state owned Zambia Consolidated Copper Mines (ZCCM).

Hydropower is the main source of electricity generation in the country with 93% of the total capacity. The main hydro capacity stems from large scale power projects, whereas medium and minor hydro power projects account for about 170 MW.

In addition to the hydro power, ZESCO has installed about 65 small diesel stations with a total capacity of some 9 MW for purposes of serving isolated networks. ZCCM has installed a waste heat plant with a capacity of 40 MW and four gas turbines of capacity 80 MW. Due to the present power situation in Zambia, the thermal stations are on cold standby only.44

All the major hydro power stations in Zambia are in need of comprehensive maintenance and rehabilitation. A first evaluation of the specific needs of two of the power plants is currently being carried out. If Zambia fulfils the requirements for continued support by the World Bank, the Bank will probably together with a number of other international financing agencies support ZESCO’s comprehensive power sector rehabilitation project.

Hydro power is in general a vulnerable source for electricity generation in locations where the water levels are unstable. The severe drought in the beginning of the 90's caused serious problems for power production, resulting in load shedding and reduced power exports. Thus a mix of energy sources is essential for secure supply. However, the future plans for capacity development are totally dominated by hydro, as only about 20% of the total hydro potential

SAD-ELEC & MEPC, 1996, p. 226.44 Ibid.


has so far been developed. There are no plans for any other investments in capacity development apart from hydro.45

Regarding new renewable energy sources, there have been some investments in the past. About 6000 lighting systems and 40 refrigerators are 'fueled' with photovoltaic electricity.46 The Post and Telecommunication Corporation has 62 solar or hybrid solar/diesel power supply systems for microwave repeater systems and Zambia Railways uses photovoltaic power for communication and signaling. All technical equipment for this power production is imported. Furthermore some few solar water heaters have been imported and nine biogas plants have been installed in selected rural areas for demonstration purposes. One windmill has been installed. Most of the efforts within the field of new and renewable energy can be regarded as research and development activities.

The future prospects for new renewable energy sources in Zambia do not look very promising. This is due to the political situation in the country, which is becoming increasingly unstable and the financial situation which is further deteriorating - resulting in withholding of important aid. However, the potentials are there. Commercially available wind pumps have been found to be economically viable for irrigation needs in certain regions of the country. The solar radiation flux and environmental conditions for photovoltaic electricity generation are conducive. At the present stage of development of this technology, the most realistic potential for utilisation is electrification of remote areas where grid connection is not economically feasible. In these areas photovoltaic generation sets would be financially more viable than diesel generation sets.47 Research on new renewable energy systems is being carried out by the University of Zambia, the National Council for Scientific Research and the Small Scale Industrial Development Organisation. One important barrier to the further development of renewable energy systems in Zambia has been identified as the lack of skilled manpower. There are no institutions for formal training in this field.48

3.1.2 Performance of generation in weak developing countries in transition

New capacity is a central topic in the weak developing countries in transition, where the demand is steadily increasing. Due to the reform capability, these countries are considered to

45 According to SAD-ELEC & MEPC, ibid, p. 229.46 Munyeme, G. and P.C. Jain: Energy Scenario of Zambia: Prospects and Constraints in the use of renew able

energy resources. In: Renewable Energy, Vol. 5, No. 5/8, 1994, p. 1369.47 Munyeme, 1994, op. cit. p. 1369.

22 Regine Andersen

have a higher level of creditworthiness, an essential criterion for further investments. Traditionally the emphasis for investments has been directed on new capacity more or less alone. However, recently this situation has changed, and also maintenance and rehabilitation of existing systems receives more attention - and more investments. Some efforts are made in the field of new renewable energy with most emphasis on solar energy and for some countries geothermal energy (e.g. the Philippines). But still the contribution of renewables to the total installed capacity is mostly infinitesimal.

The total installed capacity in Zimbabwe in 1994 was 1,961 MW and the electricity production in the Fiscal Year 1994/95 was 7,836.8 GWh. The mix of energy sources for electricity generation consists of coalfired thermal power with about 66% of the total capacity and hydro power with about 34% of the capacity. The two most important power stations are Hwange Thermal Station (920 MW) and Kariba South Hydropower Station (666 MW). The three so-called 'old thermals' have a total installed capacity of 375 MW. Almost all power is produced by Zimbabwe Electricity Supply Authority (ZESA), which is a vertically integrated parastatal.

The power plant availability and load factor vary. In 1994/95 the plant availability of Kariba South was 92,2% with a plant load factor of 39%, which is fairly low and probably mainly caused by persistently low water levels in the dam. The coalfired station in Hwange had an availability of 80% with a plant load factor of 65,3%, which is quite high. This is due to extensive maintenance and renovation work. The combined availability of the three 'old thermals' was 31.3% in 1994/95 and the load factor was only 21.36%, which is very low.49

Due to experience of hydro power in drought situations, thermal power is gaining in importance. New hydropower projects are even being reconsidered due to the decreasing reliability of rainfall. The further plans for capacity development include four new coal-fired generation units (Hwange 7 & 8 and Sengwa 1 & 2) with a total capacity of 1,320 MW, and three new hydro units (Kariba South extension 1 & 2 and Batoka Gorge Zimbabwe section) with a total capacity of 1.200 MW. However, financing for these projects is highly uncertain. First priority will be given to the planned extension of Hwange.50

Regarding new renewable energy, Zimbabwe is suited for the use of solar energy, whereas the use of wind energy will remain insignificant.51 Research is being carried out by

49 ZESA: Annual Report 1995, p. 10-11.

50 SAD-ELEC & MEPC, 1996, p. 244.

51 Nziramasanga, p. 17.


universities and polytechnical colleges. As a part of the rural electrification programme, ZESA seeks to supply solar energy to remote areas. One of the motives for this is said to be the development of a demand for electricity before the grid is set up, in order to develop the necessary market for grid extensions.52 53

3.1.3 Performance of generation in technically and regulatorily more competent developing countries in transition

These countries are in dire need of fresh generating capacity. In their desperation they seem to miss the obvious. Placing so much importance as they do on new capacity development they disregard the potentials already in place within the existing system. Great potentials are there not only at end-use, transmission and distribution levels (for the latter see section 4.1.3) but also within the already installed capacity. Little emphasis has been put on maintenance and rehabilitation of existing systems, and the power plants are often operated until they collapse - in order to meet the immediate and pressing demand.

India's installed capacity is steadily increasing and was 81,164 MW as of March 31, 1995. Power production in 1993-94 totalled 323,525 GWh. Despite the steady capacity increase, the demand-supply gap is growing faster. Coal-fired thermal power is the most important source of electricity with 64% of the total installed capacity, followed by hydro with 26%, gas- and diesel-fired thermal power plants with 8% and nuclear with 2% of the total capacity.54 Thermal power shows by far the strongest increase in terms of capacity development. A special feature of the Indian power sector is the aim to develop further the nuclear power capacity. India has ten nuclear plants and is currently constructing four further plants. Another 12 plants are planned.55 Further development might, however, be heavily curtailed by financial constraints. China, which belongs to the same category of countries, has three nuclear plants and two under construction. They are planning to build eight plants in the near future.56 The possibilities for China to realize these plans are, however, considerable larger than for India, due to the relatively stronger financial situation of the Chinese power sector.

52 ZESA: The Megawatt Bulletin. 1996.53 Government of India: Economic Survey 1995-96, p. 147.54 Based on Breeze, 1996, p. 84-85.

55 Uranium Information Center: Plans for new reactors worldwide, Nuclear Issues Briefing Paper 19, June1996.

56 Ibid.

24 Regine Andersen

The general plant load factor of the electricity generating plants in India is about 60%, but there are strong variations between utilities and over time. The availability of the plants also varies with weather conditions (hydro), coal availability (coal fired thermal plants) and operation cycles. This is one of the reasons for the comprehensive dimensions of brown-outs in the country.

India has one of the world’s strongest and best technologies for harnessing energy from non- conventional sources, according to a recent study by the Worldwatch Institute. The previous State Minister Kumar stated that India is established in every renewable energy technology.57 58 59 Research and development have made non-conventional options for power supply increasingly viable and India is striving to head the global renewable energy movement, according to the State Minister.

The most rapid development within the field of renewable energy technologies in India is wind and solar power, but also the utilization of biomass and mini hydel is in progress. Although renewable energy does not show in the general split up of energy sources for electricity generation in India, it is increasing. India's wind energy programme is the fastest growing in the world60 and the former State Minister S. Krishna Kumar claimed, as he was in charge of renewable energy development in India, that 25% of the country’s electricity needs could be met with wind energy.61 62 The new government of H.D. Deve Gowda follows up this emphasis and their estimates show that 10% of the total generating capacity in India might stem from wind power already in year 2000. As the current installed capacity for wind power is 750 MW, these estimates seem a bit too optimistic. Two major solar photovoltaic power plants each of 150 MW are currently being set up by private enterprises in Rajasthan and Madhya Pradesh. The expected costs of the electricity produced by these power plants are at the same level as the costs of thermal power. Up to the present, solar photovoltaics has mainly been utilized for public and domestic lighting, with 29,000 solar domestic lights, 36,000 solar lanterns, 30,000 street lights and 141 solar power packs.63 This kind of utilization is also sharply increasing. The most promising utilization of biomass for electricity purposes is the use of industrial waste. There is an estimated potential of 3,500 MW of

57 Government of India: Economic Survey 1995-96, p. 147.58 Quoted in The Economic Times, Bangalore, June 19, 1995, p.6.59 Ibid.

60 Study of the Worldwatch Institute in 1995, quoted in The Economic Times, ibid.

61 In The Economic Times, ibid.62 Nyhetsbrevet India 15/96 September 3, 1996, published by Richter Consulting, Valby, Denmark, p. 7.63 Government of India: Economic Survey 1995-96, p. 154.


surplus power solely from the utilization of bagasse in 420 sugar mills in the country. Also biogas plants in rural areas are being set up. According to the Government of India about 2,188,000 biogas plants had been installed up to March 1995 and the trend shows a sharp

64increase.

India’s contribution to local and regional air pollution as well as to climate emissions is dramatically increasing. If future electricity demand were to be covered by further emphasis on coal fired thermal power, this would drastically increase India’s contribution to climate emissions. The poor quality of Indian coal is further deteriorating this option. In this light, the strong development of renewable energy sources for electricity generation is a promising trend.

3.1.4 Performance of generation in stronger developing countries

The stronger developing countries have shown an immense capability for capacity development in order to meet their drastically increasing demand. There is quite a diversity of sources for electricity generation, where coal and hydro are temporarily losing proportional importance. Gas and partly geothermal energy are gaining in importance. However all options are more or less being launched in order to respond as flexible as possible to the demand. Surprisingly, new renewable energy sources have hitherto received little attention in these countries - with the exception of geothermal energy (Indonesia). However, a crucial barrier to the breakthrough of geothermal energy as a key energy carrier is likely to be financial constraints. Whereas the prices of manufactured technologies like wind and solar are likely to fall steadily in the years to come, the prices of geothermal energy will stay at the same level.* 65 Thus geothermal energy is assumed to play a relatively important but still modest role in the relevant countries in the 21st century. Despite the promising developments in the field of wind and solar technologies, these options are largely not being emphasized in the stronger developing countries.

Thailand’s installed capacity has been rapidly increasing in recent years and was 13,427 MW in 1995. Gas was by far the most important source of electricity generation with altogether 7,802 MW (gas fired steam, gas turbine simple cycle and combined cycle). Hydropower followed in second place with 2,690 MW and coal fired (steam) power plants came third with 2,659 MW. Oil fired steam made up 263 MW of the capacity and diesel 14 MW. Last but not least solar photovoltaic accounted for 0.4 MW. The trend shows that gas is the fastest

64

65

Ibid.

Flavin and Lenssen, 1994, p. 191.

26 Regine Andersen

increasing source for electricity generation. According to EGAT's own predictions, gas will continue to grow in importance.66 67 68

Thailand’s traditional mix of energy sources for electricity generation has been the subject of comprehensive discussions and protests. The large scale hydropower development in Thailand came to an end in the late 1980s, after massive protests. The protests were based on the fact, that the power production from the dams was steadily declining. The water levels were sinking and the water got sandy as a result of deforestation along the coastlines (sandy water disturbs the generation machinery). However, Thailand intends to start importing power based on hydro generation from Laos around year 2000, according to a recent deal. This will be equivalent to an installed capacity of 1,500 MW. Thailand has also proposed a 470 MW hydro power project in Cambodia as a joint undertaking.

Nuclear power was an option for the Government of Thailand until 1993. There were strong objections to such plans among politicians, government bureaucrats, media and the public. Thus Thailand has abandoned this option.

At the end of the 1980s coal was seen as one of the central energy carriers for electricity production in the future. Thailand has extensive reserves of brown coal (lignite) in the Mae Moh Valley in the north of the country. This is also where most of the coal fired power plants are located. However, in 1992 a serious accident occurred. During a climatic inversion the sulfur dioxide contamination in the air increased rapidly to dangerous levels. Cattle died and approximately 1000 persons had to be brought to hospital for medical treatment.69 70 Agricultural products were damaged. After massive protests as a reaction to the accident, the EGAT installed cleaning technology for the power plants. This was the first time such filters were installed in South-East Asia. The plans for further development of coal fired power plants were slackened. Estimates from EGAT shows that the total installed capacity of coal fired power plants will slightly decline in the coming years, from 2,659 MW in 1995 to 2.625 MW in year 2000. However, the long term plans show that hydro, oil and coal will see a strong comeback as sources for electricity generation in the next century - if other options are not developed by then - and if protests do not put a stop to it.

66 Breeze, 1996, p. 145-146.

67 Sander, 1996, p. 137.

68 Ibid, p. 139.

69 Ibid, p. 138.70 Referred to in Breeze, 1996, p. 145.


In the field of renewables Thailand is quite a latecomer. There is an estimated potential of 16,500 GW of solar power of which only a relatively small proportion is being utilized. Wind power resources are estimated to a capacity of 640 MW. Only 32 kWh are being produced. Geothermal reserves are estimated to 200 MW, but only 300 kWh is generated from these sources. Finally there are vast reserves of biomass, which include fuelwood, and agricultural waste such as straw, cassava, bagasse, maize and rice husks. The first series of small waste- to-energy projects is currently being set up. However, the development of new renewable energy sources is not given priority in the energy policy of the country.

The energy related climate emissions from Thailand, as well as from other countries in South- East Asia, are sharply increasing. In the event of a continuation of a 'business as usual-policy, Thailand would account for the emissions of three million tons of S02 by the year 2010, a figure equal to the annual emissions of S02 by The Federal Republic of Germany in the beginning of the 1980s. The Demand Side Management programme (see section 2.1.4.) is regarded as the most important contribution to climate protection from Thailand.

3.1.5 Concluding remarks regarding the performance of generation

Whereas the weakest developing countries have very limited capacity to maintain their already installed capacity and to extend this, the weak developing countries in transition do make some modest achievements in both these fields. The technically and regulatorily more competent countries in transition are to a much larger extent concentrating on new capacity, expelling the potentials of the already installed capacity. For all three categories problems with plant availability and plant load factors lead to more or less massive brown-outs. The stronger developing countries have to a greater extent managed to cope with the situation and do not by far experience the same frequency and extent of brown-outs.

Regarding supply mix, coal and hydro are the main energy carriers. Gas, which has also been labeled a transitional fuel, and which is environmentally sounder than coal and oil, is on the way in the stronger developing countries. Geothermal energy is also on the way in in some few countries, but cannot be expected in future to play the most important role in the electricity supply of these countries. Renewable energy plays an infinitesimal role in most 71 72 73

71 All data from Breeze, 1996, p. 144.72 Bundesministerium fur Wirtschaft: Energiedaten 1994, referred to in: Sander, Ingvar: Die Okologischen

Folgen der wirtschaftlichen Entwickung Siidostasiens. In: Platz, Roland und Gerhard Rieger (Hg.): Siidostasien im Wandel, Schmetterling Verlag, Stuttgart 1996, p. 131.

73 Government of Thailand: Thailand Country Report to the United Nations Conference on Environment and Development, Bangkok 1992. Referred to in: Sander, ibid, p. 141.

28 Regine Andersen

developing countries, but some few are going in for these technologies. Here India is in the forefront. It is surprising that Thailand, in many respects such an innovative country, does not show more interest in this field of the power sector. India has a long tradition in developing its own technologies, and this might be some of the explanation for its forerunner role for renewables.

3.2 Performance of transmission and distribution

In many developing countries the transmission and distribution system accounts for major constraints for reliable electricity supply. As it is more expensive to build high tension transmission lines and the respective transformer equipment than low voltage equipment, the tendency is to opt for low voltage systems. The result is systems with high technical power losses and disturbing voltage variations in the vast majority of developing countries. Attention has constantly been directed towards new capacity development in most of these countries, and one might be justified in wondering why more importance has not been given to upgrading of the existing distribution system. Another source of distribution losses are the non-technical losses, i.e. non-metered electricity consumption and theft - due to inefficient revenue collection procedures. However, these losses are naturally more difficult to estimate. Anyway, one can safely say that the potential for energy savings in the transmission and distribution systems is considerable.

This picture is representative for most of the developing countries belonging to the first three categories of countries. Regarding the last category of countries, the picture is somewhat different. In recent years the transmission and distribution systems have been substantially upgraded and can now be characterized as fairly good. In Chapter 3.2 we will briefly describe the situation in the sample countries of the four categories, which illustrates what has been presented in this introduction, before further conclusions are drawn.

3.2.1 Performance of transmission and distribution in Zambia

The high voltage transmission grid in Zambia has a total length of 1,814 km, whereas the subtransmission network has a line length of 5,905 km and the medium and low voltage transmission lines are altogether 8,800 km. System transmission losses are moderate at about 4%.74 It has not been possible to obtain data on technical and non-technical distribution losses.

74 All data from SAD-ELEC & MEPC, 1996, p. 224 and 227.


Zambia is traditionally an exporter of power to Zimbabwe, Botswana, Namibia and Tanzania, but has also been in the position of having to import power from Zaire.

3.2.2 Performance of transmission and distribution in Zimbabwe

The high voltage transmission grid in Zimbabwe has a total length of 3,500 km, whereas the subtransmission network has a line length of altogether 3,615 km. Transmission and distribution losses are 11%, according to ZESA. Most inadequacies in the distribution system are found in Harare and Bulawayo. Zimbabwe is an importer of power, mainly from Zambia, but in future also from South Africa and Mozambique when the commissioned interconnections have been set up.

3.2.3 Performance of transmission and distribution in India

The high voltage transmission grid in India has a total length of 101.712 km, whereas the subtransmission network has a line length of 130,542 km. The medium and low voltage transmission lines are 1,696,579 km. long. In addition distribution lines of up to 500 volts have a line length of 2,949,195 km. Transmission and distribution losses are high, at around 19%. In 1993 they were 20.55%, which indicates that improvements achieved have been minimal. The losses comprise technical as well as non-technical losses. However, there are strong variations between the states, with Jammu and Kashmir leading with 46.37%, followed by Arunachal Pradesh with 42.04%, Nagaland with 33.45% and Delhi with 32.54%. These figures reveal severe inadequacies in the transmission and distribution system.

3.2.4 Performance of transmission and distribution in Thailand

Thailand has a well developed transmission and distribution system and has improved the performance substantially during the 1990s. EGAT and MEA (the latter being responsible for distribution in and around Bangkok) had a high voltage grid of altogether 10,291 km, whereas the subtransmission network had a line length of 12,693 km. and medium to low voltage lines of 9,622 km.75 76 77 * 79 However it has not been possible to obtain data on the performance of PEA, which is mainly responsible for distribution to rural areas. In 1990 the

75 Ibid, p. 241.

76 ZESA: Annual Report 1995, p. 7.77 All data from 1994. Source: Central Electricity Authority: Public Electricity Supply, All India Statistics.

General Review 1993-94. CEA, New Delhi 1995, p. 151.7R

Breeze, 1996, p. 92.79 Breeze, 1996, p. 148-149.

30 Regine Andersen

total system losses were 13.6%, but by 1993 had fallen to 9.1% for EGAT and 4.1% for MEA.

3.2.5 Concluding remarks regarding the performance of transmission and distribution

When comparing the relation between the length of high voltage transmission lines with low and medium ones, India is the country with the most skewed situation. The country has an enormous length of low voltage lines in comparison to high voltage ones. This is one important reason for the large and frequent brown-outs and wide voltage variations. It is difficult to understand why this is not given much higher priority in the policy and this will be subjected to further analysis below.

In the African countries the relation between the two voltage categories tends to be fairly equal and the transmission and distribution losses low when compared to countries like India. One reason for that is the marginal access of rural areas to the grid. Thailand has upgraded its transmission and distribution systems comprehensively most of all in the decade up to 1995. This has been - and still is - an essential task for purposes of modernising the power sector of the country and utilizing optimally the existing potential.

Most developing countries could substantially improve the energy efficiency of their electricity generation, transmission and distribution through proper maintenance programmes, rationalizing operations and load management programmes. This would open up for large potentials for savings and reduce the demand projections for the future. In addition, the comprehensive potentials in the field of end-use could further reduce the demand scenarios. However, most countries are still supply biased and to a large extent concentrated on new capacity.

80 Meyers et al, 1993, p. 1129.

4 Financial performance of the utilities

The financial performance is both a part of the description of the situation as well as a part of the analysis of the driving forces behind the power sector performance. The question of the financial aspects of power sector performance has been dealt with in many reports on which this chapter is based. Since the focus of this analysis is on the political and institutional conditions for the power sector performance, the financial performance will thus be dealt with in this descriptive part of the report.

4.1 Tariff structures

The basic reason for the poor financial situation of the power sector in most developing countries is skewed tariff structures and unsatisfactory revenue collection procedures. Power tariffs is a hot political issue in most developing countries. One reason for this is that electricity is viewed as a social good - despite the fact that it is most utilized by better situated people and that the debt situation caused by electricity development is negatively affecting the social policy for the population as a whole. Another reason is that low electricity prices are viewed as a comparative advantage for industrial production in an economic environment which leaves few other advantages. There are good reasons to believe that raising power prices in many cases might contribute to political instability - if it is not implemented very cautiously.

4.1.1 Tariff structures in the weakest developing countries

A general feature for the weakest developing countries, is that their electricity has been, andin most cases still is, heavily subsidized. Tariff increases in such vulnerable economies couldhave major effects on the economic life. Several southern African countries with subsidizedtariffs for electricity have been reluctant to implement substantial tariff reforms for fear ofpossible inflationary consequences. The tariff increases were to be introduced in tandem witheconomic reforms which i.a. required substantial devaluation of the currency. This was aparticularly critical point. In addition, governments feared that the increases would adverselyaffect the international competitiveness of major power users in their countries, at a timewhen export competitiveness was a major priority. The World Bank pointed out these factorsas reasons for lack of progress in the issue of tariff reforms and concluded that governments’concern about the complexities of managing macroeconomic reform in a fragile environment

81appeared to justify caution in the implementation of tariff reform.

81World Bank, Industry and Energy Department, 1993, p. 39.

32 Regine Andersen

The average tariff level for electricity in Zambia is according to Zambian energy researchers probably the lowest in the world, with less than one US cent per kWh in 1995,82 83 84 85 and Zambia is a typical case for what is described above. An attempt in the beginning of the 1990's to raise the country's unrealistically low power tariffs by 500% was a measure largely counteracted by an inflation rate of over 200% per year. Increased tariffs cannot give effective price signals in an environment that is already highly inflationary. However, the average electricity prices were increased in real terms by 1996.

The tariff structure in Zambia is related to consumer categories and levels of consumption. For metered residents the prices in 1996 were 1.0-1.2 US cents/kWh. Industrial and commercial consumers were to pay 2,5 - 3,6 US cents/kWh - dependent on consumption level. The higher the consumption, the lower the tariffs. An exception is Zambia Consolidated Copper Mines, which has secured a negotiated price of 1.2 US cents/kWh. ZCCM accounts for 60% of total sales. If ZCCM were to pay a price which covered the actual costs, this could turn ZESCO into a financially viable utility. However, that would seriously affect the

84competitiveness of the ZCCM and is thus a highly political issue.

Revenue collection is an other problem. As of February 1993, there were unpaid bills amounting to USD 6.74 million. A key issue for purposes of improving the financial performance of the power sector in Zambia is therefore to improve billing procedures. A study of the billing procedures in ZESCO is currently in process and a target established for the installation of a new customer billing and debtor management system.86 87 The question is whether implementation of such a system is feasible under the current political, financial and institutional conditions. Time will show.

4.1.2 Tariff structures in weak developing countries in transition

The electricity prices of weak developing countries in transition are also mostly below the estimated long run marginal cost of supply (LRMC), which is a level of costs including the building of new capacity. However, the tariffs are improving and are in some cases higher

87than the economic costs. This is the case particularly in West Africa.

82 Ranganathan and Mb ewe, 1995, p. 1094.83 World Bank, Industry and Energy Department, 1993, p. 39.84 All data fom SAD-ELEC & MEPC 1996, p. 222-223.85 Ranganathan and Mbewe, 1995, p. 1094.86 SAD-ELEC & MEPC, p. 223-224.87

World Bank, Industry and Energy Department, 1993, p. 37.


Regarding Zimbabwe, the tariffs of ZESA have not yet reached cost recovery level, but theyare moving towards the LRMC level, with approximately 50% of the requirements in 1995.That was with average prices per kWh at about 3 US cents. However, there are strong pricevariations. Domestic and agricultural customers as well as the largest consumers are beingcross-subsidized by other tariff categories. Commercial consumers pay two or three times

88more than domestic consumers with a comparable consumption level.

Revenue collection from customers has improved in recent years resulting in a reduction in the average length of time that debts are outstanding from 99 days in 1993 to 50 days in 1995.88 89

4.1.3 Tariff structures in technically and regulatorily more competent developing countries in transition

In China a so-called "dual-track producer prices and dual track consumer prices" system has been introduced. The first refers to new plant generation and old plant generation in order to balance the two and create a better investment environment. The latter refers to quota of electricity with a ceiling of low-price supply.90 The result is that the price levels are increasing in the coastal regions and the major cities and nearing the world market prices, whereas the economically weaker regions still have more moderate price increases. However a system of additional fees complicates the picture and makes an efficient price management difficult.

In India, the prices have traditionally been far below the LRMC level. Electricity was looked upon as a social benefit and a developmental tool rather than a commercial service. As the utilities are state owned, the electricity was not distributed along with commercial lines. The price variations between consumer groups were wide. The agricultural sector was partially exempted from charges or paid symbolic or infinitesimal prices. Various Indian states even competed for lowest possible tariffs for agriculture. As this consumer group is by far the largest, financial losses incurred through this policy were disastrous and incentives for water and electricity conservation almost non-existent.

The sector that emerged loser in the system was industry. Industrial enterprises were obliged to pay the highest tariffs and thus cross-subsidize the other consumer groups. However, as a

88All data fom SAD-ELEC & MEPC, 1996, p. 236.

8QSAD-ELEC & MEPC, 1996, p. 237.

90World Bank, Industry and Energy Department, 1993, p. 38.

34 Regine Andersen

reaction to the poor electricity supply, many industrial enterprises built their own captive power generating sets, as referred to above. Thus a large share of the potential revenues from this consumer group remained unrealized, which in turn further exacerbated the power sector. As a consequence, the agricultural sector also suffers from an unreliable power supply. The system has entered a vicious circle.

Despite the relatively high tariffs payable by industry, these failed to cover the production costs. The average tariff for all consumer groups was far below actual production costs by approximately US cents 3-4 per kWh in 1995-96. On average there was a gap of approx. 20% between production costs and realized revenues during the 1980s and the beginning of the 1990s. Thus, the financial losses accumulated and gave rise to severe financial crises for the utilities and a tremendous deterioration of the sector as such.

The acute need for increased power prices in India has been frequently addressed. Most of all the World Bank has demanded tariff reforms. After the election of the new Indian government, headed by Mr. Deve Gowda, an Operational Financial Action Plan was worked out, which opened up for price increases at state level. The result has been massive price jumps in several states. However, again it is industry that has to carry the heaviest burdens with an overall price of approximately 6 cents per kWh. Whereas the price increase for the industry ranges between 10% and 43% in the various states, agriculture escapes with a mere 5% increase.* 92 93 Industry objects to this policy of extended cross-subsidies and are in addition provoked by the fact that the quality of supply remains poor, while they have to pay substantially more. The prices fail to reflect the quality of supply.

A new trend is now evolving, where industries move out of the high price states to those charging lower prices. Another potential remedy is more investment in captive generation sets by industry, which though costly and environmentally negative, are at least reliable. In other words, not only the tariffs as such need to be changed, but the entire tariff structure. As long as no change is made to the tariff structure as such, tariff increases without improved availability and quality of power supply might well have an overall negative impact on the economy. Inflation, stagnation of economic growth and flight of capital might be the results; we do indeed already discern the first signs of such a development.

Government of India: Economic Survey 1995-96 p. 149.92 Administrative Staff College of India: The Power Sector in India: A Macroeconomic Perspective. In:

Ministry of Power, Government of India and ESMAP, 1993, p. 36.93 Nyhetsbrevet India 14/96, Richter Consulting, Valby, Denmark, 20 August 1996, p. 4.


4.1.4 Tariff structures in stronger developing countries

The tariff structures of the stronger developing countries give probably the most differentiated picture. However, a common feature is that prices here to a greater extent reflect the actual cost, than is the case for the other categories of countries. It is also more common among the countries of this category to design the tariff structures paying regard to demand-side management measures.

In theory, the average retail tariffs in Thailand are regulated at long run marginal costs. However, the government has permitted the utilities to take account of social and other considerations when setting the rates. This has in earlier years resulted in lower rates for domestic and industrial consumers and higher tariffs for commercial customers. However, these differences are diminishing and a new set of tariff categories taking over. An automatic power tariff adjustment formula has been introduced for purposes of improving peak load management. Prices are related to the time of the day, peak hours being the most expensive. The average tariff for electricity in Thailand was US cents 7 kWh in 1995. Tariff structure adjustments are frequently made and in 1996 the National Energy Policy Committee resolved that a period of at least 4-6 months should elapse between each change.94

4.1.5 Concluding remarks regarding tariff structures in developing countries

There is a clear correlation between the level of electricity prices and the category of countries for this analysis. We note that the weakest developing countries have the lowest prices whereas the stronger developing countries have prices close to the Long Run Marginal Cost level. In the first three categories of countries the tariff structure is characterized by a cross-subsidizing policy, where industry (with some exceptions) pay the highest prices, whereas other consumer groups pay substantially less and some groups nothing at all, due to general policy or theft. However, the largest cross-subsidy comes from the state to the electricity consumers, and thus indirectly from other political priorities and potential target groups toward the power consumers.

In the stronger developing countries, peak load management is an important feature of the tariff system, which has resulted in a reduced peak demand as compared to average demand. These features clearly show how skewed tariff structures negatively affect the financial and technical performance as well as how tariff structures can be utilized actively as an instrument for demand side management.

94 Power Policy 213/96, Published by the Financial Times, London, 25 October 1996, p. 19.

36 Regine Andersen

The most interesting feature however, is the correlation between energy efficiency potentials and electricity prices which are not cost covering. If the feasible potentials for electricity efficiency measures were utilized, this would justify an increase in power tariffs - and thus reduce the economic effects for the consumers as well as some of the pressure on the inflation rates.

4.2 Financial situation of the utilities

The degree of revenue collection efficiency is one of the determinants for the financial situation of the utilities. In addition to pace of new investments and choice of fuel mix, the general management of the utilities plays an important role for the overall financial situation. We will turn to these issues regarding our case countries here, however with some limitations due to poor access to some of the information.

4.2.1 Financial situation of the utilities in Zambia

According to the World Bank, developing countries in Africa "face such a paucity of available investment capital that they have been forced to concede extremely high rates of return on equity (25% is not unusual) in order to attract foreign partners."95

The financial performance of ZESCO is generally very poor, the most important reason being the chronic currency devaluation. This has resulted in comprehensive exchange losses and losses due to enhanced interest and loan repayment obligations. Another reason is that reduced electricity consumption has led to reduced revenues. Furthermore a serious outbreak of fire in the Kafue Gorge power plant in 1989, due to a design fault led to a loss of USD 55.4 million. Due to missing binding clauses in the contract with the foreign constructor, ZESCO was unable to recover the indemnity from them. In addition, overstaffing of the utility, poor collection of revenues and the high costs of diesel generation in some rural areas contributed to the poor financial performance of ZESCO.96

Improvements are urgently needed at all levels, from tariff structure and revenue collection procedures via the financial and operational reporting systems, to treasury management and accounting systems. ZESCO has planned several studies and activities for purposes of improving its financial performance. The target until the year 2000 has been set to a self-

95 World Bank, Industry and Energy Department: Power Supply in Developing Countries, 1993, p. 72.96 All facts from: Ranganathan and Mbewe, 1995, p. 1093-94.


financing capability of 25% for the sector, including a 4% return on revalued assets.97 Due to the present situation, this target seems to be rather unrealistic.

4.2.2 Financial situation of the utilities in Zimbabwe

ZESA's financial performance is improving. The level of self-financing reached 35% for the financial year which ended in June 1995, after having been negative for several years.98 * Several tariff adjustments as well as improved revenue collection procedures have been decisive for the improvements. Also cost efficiency measures have been introduced. However the capacity expansion plans of ZESA will require substantial additional investments and thus represent a further burden to the national economy. As for 1995, the ZESA-related debt amounted to approximately USD 464 million with a currency composition of 40% USD, 41% local currency and the rest in other currencies.

4.2.3 Financial situation of the utilities in India

The structure of the Indian power sector is characterized by central power utilities, which are assigned with generation and related transmission at a national level, and state utilities, most of them so-called State Electricity Boards, responsible for generation, transmission and distribution at the level of federal states.

For both categories of utilities, the financial situation is highly critical. The central power utilities rely heavily on budgetary support as well as internal and extra budgetary resources. The regular budgetary support is steadily declining as compared to the approved plan outlays and reached 9.9% in 1995-96." Also the internal extra budgetary resources are declining. The result is a paucity of resources, which the government hopes to fill with participation by private enterprises.

The State Electricity Boards currently show an average negative rate of return of 18.2%. A chronic decline in average rate of return has been recorded from year to year i.e. from 12.7% in 1991-92.100

97 SAD-ELEC & MEPC, 1996, p. 224.QO

Ibid, p. 237.

Government of India: Economic Survey 1995-96, p. 149.

Ibid, p. 150.

99

38 Regine Andersen

Such losses have been balanced by the state governments providing interest-bearing loans to the Boards, which have to be fully repaid. The terms and conditions for these loans were comparatively soft in the beginning, but they became harder in the later years, leading to heavy burden of interest and repayment of loans every year.101 As a result, a considerable share of the capital employed by the Boards comprises loans from state governments, financial institutions and commercial banks. This leads to temporary relief of the financial situation, but to severe financial problems in the long term, as the price policy hinders any chance of recovery. As a result several State Electricity Boards have been periodically 'black listed' by the World Bank.

The direct consequence of the situation is a lack of investment capital. The response is twofold. On one hand further loans are entered into, government, as well as commercial, leading inevitably to a debt burden negatively affecting the economy as a whole. On the other hand privatization has been introduced for a wide range of new power generation projects.

Based on the conventional energy planning approach in India, the total investment required for the period 1993-2000 amounts to USD 117 billion (1993 value) in order to meet future demand.102 103 However, only about 5% of these required investments are expected to stem from own resources, 4% are expected to stem from multilateral agencies and 6% from other sources. The remaining 85% is planned to be covered by private investments. Such a large proportion of foreign participation seems to be quite unrealistic given the current overall situation of the sector. Investors’ financial security is highly uncertaint, due to the skewed tariffs. Moreover the present government guarantees represent a hazardous policy for the national economy in the absence of a radical restructuring of the price system. Though private participation might relieve the financial situation of the utilities in the short term, in the long term it is thus liable to lead to financial crises of unknown dimensions.

4.2.4 Financial situation of the utilities in Thailand

EGAT delivers 92% of the electricity in Thailand to various distributing agencies. It has a significant financial performance. Net profits rose by 58% from 1994 to 1995.104 In the same period revenues from energy sales rose by 25% whilst total energy sold increased by 14%.

Shri Sharad Pawar: Keynote address on State Electricity Board: Issues and options. In: Ministry of Power, Government of India and ESMAP, 1993, p. 8.

102 Gutierrez, Luis E.: International Power Sector Experience: A Comparison with the Indian Power Sector. In: Ministry of Power, Government of India and ESMAP, 1993, p. 28.

103 iu-jIbid.

104 Energy Policy 211/1996, September 30. 1996. Published by the Financial Times, London. P. 7.


The investments for forthcoming power expansion in the next five-year plan is estimated at408.5 billion bath, of which 58% will go to EGAT projects and 42% to projects developed by the private sector. The deregulation programme for the power sector in Thailand assumes transformation of EGAT from a state-owned utility to a corporatised and partially privatized company. The utility is regarded as an attractive investment opportunity for private

. • 105enterprises.

4.2.5 Concluding remarks regarding the financial situation of the utilities in the case countries

Skewed tariff structures represent a serious barrier to sound financial performance in most developing countries of the first three categories. The result is varying degrees of poor financial performances. These structures are in general unconducive to sustainable electricity strategies, as they imply incentive structures which are counterproductive for such strategies.

Whereas a clearcut trend emerges between tariff structures and categories of countries, this picture is a little more differentiated regarding the overall financial situation of the utilities. The Zambian utilities and the Indian State Electricity Boards show the poorest performance - in most cases with a negative trends, whereas the ZESA is on its way up and EGAT shows a promising development. These findings fail however to provide an adequate basis for generalization at this stage. We can assume that the reasons for diverging results between the findings in chapter 4.1 and 4.2 have to do with economic framework conditions, investment policy and general utility management. These issues will be analyzed in the next part of the report.

105 Breeze, p. 153.

5 Main challenges for the technical and financial performance

Whereas there is a tremendous demand for electricity in many developing countries, there are also large potentials for end-use savings. These potentials are only realized to a small extent and in few countries. Utilizing these potentials would to a large extent be financially more viable than building new capacity in order to meet present demand. This is the first challenge for the electricity sectors in developing countries. Thailand has progressed farthest amongst our case countries in meeting this challenge.

A substantial potential for electricity savings is also found in the transmission and distribution systems of many countries. Technical upgrading and maintenance is a key challenge.

Regular maintenance of generating plants is another challenge for developing countries’ power sectors. Maintenance is often given less priority than the building of new capacity, and thus leaves another huge potential for a financially viable electricity supply.

A sufficient supply mix is necessary to keep electricity supply at a stable level. If the supply mix is heavily based on hydro, it will be highly sensitive to weather conditions. If it is highly dependent on coal, it will be sensitive to the proliferation of coal (and thereby to other infrastructure and to labour conditions) and to the quality of the coal. In India strikes among coal miners, rail transportation deficiencies and inferior coal quality lead to severe bottlenecks for coal based electricity generation. Thus there is an urgent need for new, more reliable and environmentally sounder energy carriers. Renewable energy carriers continue to play an infinitesimal role in developing countries, but are well on the way to becoming financially viable. A main challenge for developing countries to secure meeting future demand would be to utilize renewable energy carriers as soon as these technologies become financially viable. India is the most advanced of our case countries in this regard.

The tariff structures in many countries is skewed in several respects: They do not reflect the costs, they mostly fail to reflect the availability of electricity at the different times of day and from season to season and frequently strongly favour certain consumer groups at the expense of others. Thus the financial basis for the sector is drying up, the potential for demand management is left unrealized whilst financially strong consumer groups start producing their own electricity instead of paying high prices for poor quality power. Reformed tariff structure has long been seen as a key challenge for developing countries’ power sectors. However, we have also noted that major obstacles stand in the way of such reforms.

42 Regine Andersen

In the next part of the report we will seek to analyze the driving forces behind the present policy and identify key barriers to meeting the challenges presented in Part I.

PART II: ANALYSING THE DRIVING FORCES

6 Political and regulatory frameworks for power sectors in developing countries

As the political, regulatory and institutional framework conditions differ within our categories of countries, we will take the case countries as sole points of departure for analysis. Afterwards we will summarize the findings with relevance for the general situation of the power sectors in the categories of countries which form the basis for this study.

6.1 Political and regulatory framework for the power sector in Zambia

Zambia was a one party state ruled by President Kenneth Kaunda and the United National Independence Party from independence in 1964 until the first multiparty election in 1991. As a result of this election, Kaunda lost to Frederic Chiluba and his party 'Movement for Multi- Party Democracy'. Central items of the Chiluba election campaign were the development of democracy and liberalization of the economy. However, whereas the privatization has been implemented to a great extent, the development of democracy has tended to move in a negative direction.

As one of the most deeply indebted developing countries, Zambia has followed up the structural adjustment programmes thoroughly, in order to uphold support from the Bretton Woods institutions which is vital in such a situation. The result of the structural adjustment policy has been serious aggravation of the living conditions in the country and political unrest. In November 1996 new elections were held, which have been heavily criticized. The fiercest opponent and challenger to the ruling party, former president Kaunda, was not accepted as candidate for the election due to new rules introduced by the Chiluba government. After the elections, President Chiluba placed the security forces on alert threatening with reprisals if protests were made. The present situation is liable to destabilize the country. As most donors have been withholding aid pending stabilisation, the balance of payment, the ability to import essential goods and to service debt repayments are seriously threatened. Zambia is bankrupt and a sustained boycott by the donors would result in heavy crisis, which in turn would further threaten peaceful politics and democracy.106

106 Africa Confidential. Vol 37. No. 24: Zambia - No Confidence. London, 29. November 1996, p. 6.

44 Regine Andersen

The liberalization of the electricity sector must be viewed in the light of this political situationand the severe economic conditions of the country. The National Energy Policy (NEP), whichwas released in 1994, pointed out as an ultimate goal:

Zambia's Energy Policy is aimed at promoting optimum supply and utilization of energy,especially indigenous forms, to facilitate the socio-economic development of the country andmaintenance of a safe and healthy environment. This entails establishing a viable institutional

107structure that will ensure the attainment of these objectives.

108The priorities of the NEP are as follows:

• the monopoly position of ZESCO concerning generation, transmission and distribution shall be loosened up to encourage privatization of distribution to improve service delivery;

• low-cost electrification is to be promoted to improve accessibility of electricity, especially to the household sector;

• support of rural electrification, especially in productive areas and social institutions;• develop unutilized hydro potentials;• institutional change in the electricity sector such as establishment of an inspectorate under

the Ministry for Energy and Water Development for enforcing technical and safety standards;

• reconstruction of the Electricity Council, which has not been in function since its creation in 1960.

In 1995 the parliament went one step further and passed the Electricity Supply Bill and the Energy Regulation Bill which deregulated the electricity sector in Zambia. The Electricity Act No. 15 of 1995 provides for any entity to establish an undertaking for generation, transmission, distribution or supply of electricity for own consumption, sale locally or abroad upon obtaining a licence for the purpose from the Energy Regulation Board.107 108 109 The establishment of the Energy Regulation Board was provided for in the Energy Regulation Act No. 16 of 1995. The Board has the regulatory power for the energy sector as a whole, defining its functions and powers and outlining the procedures by which private entities may apply for licences. The Energy Regulation Board is in charge of making the provisions for tariff arrangements.110

107 Energy Policy for Zambia, Ministry of Energy and Water Development, Lusaka 1994. Quoted in: Mbewe etal., 1996, p. 13.

108Mbewe et al., 1996 p. 34.

109 SAD-ELEC & MEPC, 1996, p. 222.


As we see, the first steps have been taken to restructure the electricity sector in Zambia. Not only generation is focused on, but the whole cycle from generation to supply, and thus the opportunities are there for efficiency improvements in all parts of the electricity sector. This opens up for the possibility of more sustainable electricity strategies. However, no clear directions have been forthcoming from the Government for a shift to more sustainable electricity strategies and no operationalization has been presented. To what extent the reform will work out, is a question of institutional and financial arrangements as well as the macroeconomic framework.

6.2 Political and regulatory framework for power sector in Zimbabwe

Zimbabwe has been led by Robert Mugabe and his party Zimbabwe African National Union - Patriotic Front (ZANU-PF) since independence in 1980. In the first decade after independence, the policy was socialistically orientated. The policy was characterized by a strong social profile, with education campaigns, health care development and rural development in general. The achievements attracted wide attention also internationally. However, at the end of the 1980's the level of investments declined, unemployment rose and the need for a new investment policy was realized. In 1990 the Economic Structural Adjustment Policy of Zimbabwe (ESAP) was proclaimed. Although the ESAP entails all the important ingredients of the general adjustment policy of the International Monetary Fund, the government maintained that the new policy would represent a continuation of the specific socialist policy of Zimbabwe.111 Reduced public spending, price reforms and privatization of the public and parastatal sectors are main elements of the new economic policy. Despite the cautious economic growth, the policy has so far led to a dramatically increased debt and a decline in living standard for the vast majority of the population in terms of income, purchasing power and access to social services. There is increasing political unrest due to the deteriorating living conditions.

The electricity sector in Zimbabwe is undergoing a reform process in line with the developments described above.Whereas the Electricity Act of 1985 replaced the former Electricity Supply Commission by the parastatal body Zimbabwe Electricity Supply Authority, the plans are now to transform ZESA into a public company by the end of Junel997.112 So far the most important decisions of ZESA, such as tariffs, investments and procurement of foreign credits, are determined by various governmental bodies. The focal question now is to what extent the proposed new organization of ZESA as a public company

111 Saunders 1996, p. 63.

112 SAD-ELEC & MEPC, 1996, p. 235.

46 Regine Andersen

will improve an arm’s length relationship to the Government. A central issue in this regard is the question of whether or not ZESA should be managed in accordance with commercial principles. This has been the subject of comprehensive discussions, despite clear directives from the ESAP.

Private participation is another feature of the new policy. Until 1994 ZESA had a virtual monopoly of electricity generation in Zimbabwe. Since 1994 the first small generation projects with private participation have been introduced. However, the new privatization policy is not mirrored in the legislation so far. Though there are no legal constraints on the production of electricity by private enterprises, there are also no regulations for the improvement of private participation. ZESA is in charge of implementing important regulations of the Electricity Act and thus has a central position regarding privatization efforts. A new regulatory framework is urgently needed, if the invitation for private participation is to be taken seriously.

Furthermore, the ESAP expects the Government to follow a least-cost supply strategy and promote efficient energy use through long run marginal cost pricing."3 This is a good point of departure for sustainable electricity strategies, if followed up, but no regulations or directives have been made in order to implement this on the part of the Government. The limited achievement in the field of energy efficiency is understood to be the result of higher electricity prices and not of a specific Government policy.

In 1992, with background in the shortages caused by the drought, the Zimbabwe Energy Efficiency Project (ZEEP) was initiated by a cooperation between the Department of Energy (DOE) the Ministry of Transport and Energy and the International Energy Initiative (IEI). Main objectives are to improve energy efficiency in industry, motors and domestic hot water systems. In addition further investigations were to be carried out on the efficiency situation. ZESA was integrated into the project in an attempt to draw it away from the "supply-side mentality" towards an integrated resource approach that takes the demand side into account. The participation of the utility was considered crucial for the success of the project, as it was supposed to be the institution that should carry on with the efforts. However, this attempt proved difficult. ZESA was still hesitant to integrated resource planning after the first phase of the project. Its only commitment was an interest in exploring the issue further on a research and development basis.114 113 114

113 Government of Zimbabwe: Zimbabwe. A framework for Economic Reform (1991-95), Government printers, Harare 1991, p. 18.

114 Hepner, Maury P.: Zimbabwe Energy Efficiency Project. In: Energy for Sustainable Development, Vol 1, No. 3, 1994, p. 19.


Although several efforts have been undertaken to introduce solar photovoltaic power, i.a. through a GEF funded pilot project, the general policy fails to emphasise development and implementation of renewable energy. Limited financial resources are the most important argument against such an emphasis.115

The general picture of the political and regulatory framework for the power sector in Zimbabwe is that the main objectives are not followed up with detailed directives and plans. The Government fails to provide for the necessary regulatory preconditions to enable implementation. One possible reason for this might be the attempt of the Government to combine ESAP with an originally socialistically orientated policy, which might result in a dissipated and reserved attitude to the reforms in general. Regarding the questions of energy efficiency, the government seems to neglect exercising its power over the ZESA and thus leaves it up to the utility whether or not to follow up the efforts of the ZEEP. Neither does the government mainstream the efforts for renewable electricity generation. This shows a rather unmotivated attitude towards sustainable electricity strategies on the part of the Government.

6.3 Political and regulatory framework for the power sector in India

As India comprises 25 federal states and has a concurrent jurisdiction, the following analysis will necessarily be more extensive than for the other cases.

After decades of central planning with focus on the nationalistic strategy of self-reliance (Swaraj) and self-production (Swadeshi), the newly elected Narashima Gao government in 1991 introduced privatization in the power sector. Private domestic and, most of all, foreign enterprises were invited to participate in the development of new power generating projects. The reform, which was part of a more comprehensive liberalization effort, came as a surprisingly sudden and unprepared reaction to the severe economic crises afflicting the country at that time. Irrespective of the underlying causes, the crisis was characterized by a fiscal deficit at 8,4% of GDP and a foreign exchange reserve at an alarming level, not sufficient to finance more than 2-4 weeks of imports.116 Moreover, inflation was out of control and a 20% devaluation of the Rupee in 1990 had resulted in excessive capital flight. As a consequence of this extremely fast evolving crisis, India was about to lose its creditworthiness - a crucial prerequisite to further economic development.

115 Nziramasanga, 1996, p. 63.

116 Sinha, R.K. (ed.), 1995, p. 9.

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However, the Narashima Rao government which came into power in 1991 gave no indication during its electoral campaign of any major departures from past policies. On the contrary, they promised a continuation of the Party's policies in the 1980s. Nevertheless, a meeting with the International Monetary Fund right after the election changed this pattern radically. This and other indications show that the reforms were most likely not imposed so much as a matter of ideological conviction and democratic legitimacy than as a matter of absolute necessity for relief measures and immediate financial support. The government tried to do the splits between the Swaraj/Swadeshi ideology on one hand and the ideology of liberalization on the other - in order to improve the legitimate basis for the policy.

The fact that privatization was introduced without proper preparation explains the weak regulatory and institutional basis for the power sector reform. Despite the perceived need for a fast paced involvement of private enterprises in the power sector in order to meet demand, the government responded with a comprehensive and time consuming bottleneck of a selection process. There is an obvious conflict between the targets of legitimacy and effectiveness in this situation. Although some slight improvements have been made regarding this bottleneck by the new Deve Gowda government, which was elected in 1996 and represents a coalition of left wing parties, the main features of the policy followed by the former government are maintained by the new. What is implemented presently, does not follow one 'golden mean', as intended, but two parallel and disconnected pathways.

The power sector reform was an attempt to solve the acute need for fresh financial resources in the power sector, but without addressing the real causes for the crisis. Additional generation capacity, installed by private enterprises, will not improve the technical, institutional and financial performance of the already established utilities. The reform does not provide any solution to the problems outlined in this report within sight. Thus the reform can be seen as a response to the symptoms of the power sector crises but not to the causes.

A positive feature regarding sustainable electricity strategies is, however, that the political priorities open for decentralized generation initiatives at e.g. end-use level and for non- conventional electricity production. The incentives for investments as such are fairly good, however the question is how the long run costs are to be covered as long as the price system does not reflect them. Thus the uncertainties with this kind of investments are still high. 117 118

117 Kurien, C. T.: Economic Reforms: Big Claims, Little Preparation. In: Frontline, Vol 12, No. 24, published by The Hindu, Madras, December 1, 1995, p. 97.

118 I.a. the reflections of former finance minister Manmohan Singh: India's Economic Reforms: The Experiences and Options. In: Sinha, R.K. (ed.), 1995, p. 18.


Energy efficiency questions receive surprisingly marginal attention from the political stakeholders and the incentives for such efforts are almost non-existent. The increased price- level for industrial power consumers is the only incentive so far, but this measure was probably not introduced so much as a matter of efficiency-incentive than as a matter of intended financial recovery for the State Electricity Boards. A positive feature regarding sustainable electricity strategies is, however, that a comprehensive legislation on environmental issues119 provides for a framework for the abatement of the most serious environmental effects of conventional power generation projects. This legislation is relatively strict, maybe one of the strictest in the developing world and an institutional set-up is established in order to follow up the enforcement. The extent to which the legislation is actually followed up is another matter - and beyond the scope of this report. The legislation is most likely applied predominantly for new power-generating projects.

The State Electricity Boards constitute the backbone of India’s electricity sector, as they produce about 65% of the electricity in the country (including states where the production has been delegated to another state-owned utility, like Karnataka Power Corporation Ltd.). They are also responsible for all public distribution. In addition, several central generating utilities are involved in power production, with 30% of the total installed capacity. The most important central utilities are the National Thermal Power Corporation and the National Hydroelectric Power Corporation. Furthermore India's Atomic Energy Commission is responsible for nuclear power in India. In addition, an increasing number of private enterprises are participating in power production. They accounted for approx. 4% of the production in 1995.120

As electricity is a "concurrent" subject under the Indian Constitution, both the central and the state governments have powers to enact legislation affecting the power sector. In general, the central government has taken the lead in defining the main legislation and in providing the policy framework through the Ministry of Power. The state governments have focused on specific issues relating to generation and supply of electricity in their states as expressed in the state-amended sections of the Electricity (Supply) Act.

The Electricity (Supply) Act of 1948 actually prescribes several of the criteria for a sustainable electricity sector as the duties of the State Electricity Boards, such as to coordinate the development of the supply and distribution of electricity in the most efficient and

119 Central Pollution Control Board: Pollution Control Acts, Rules and Notifications issued thereunder. March. 1996.

120 All data from Breeze, 1996, p. 84.

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economic way (section 49). At the same time, however, it organizes the sector in a manner which hinders the Board in performing these tasks autonomously. One important barrier for this is that the State Governments are to appoint 3-7 members of the Boards. Thus all important decisions are cleared with the authorities. Though the State Electricity Boards are enabled to prepare several of the regulations regarding their own performance and price policy without any reference to the authorities, the reality looks different, with little authority invested in the Boards. Thus one can say that the legislation is concurrent though incompatible.

The 1948 Act also prescribes that the State Electricity Board shall perform the duties of a generating company until this begins to operate in the state and it regulates the duties of generating companies defined as publicly owned monopolies. In the vast majority of states the State Electricity Boards are still performing as generating companies. The rates of return are fixed by the respective promoting government.

In 1991 the Electricity Laws (Amendment) Act opened up for private ownership of Generation Companies, including the possibility of 100% ownership. The Act provides the main regulation for the terms, conditions and tariffs for sale by generating companies. The current tariff guidelines of the Government of India enable the generating companies to recover a 16% return on equity, capital costs and operating costs (including interest costs) subject to achieving the required performance criteria including a Plant Load Factor of 68% and a specified heat rate. As the legislation and guidelines leave a lot of questions unanswered, these are subjects which have to be dealt with individually in the negotiations for Power Purchase Agreements. This has led to extensive and time-consuming negotiation processes which have hampered implementation of the reforms. As the new regulations do not deal with the organization of the sector as such, it leaves the basic issues unsolved. The traditional institutional set-up is supposed to deal with negotiations with private enterprises - without detailed direction and on the background of a financial framework which is captured in state politics. Thus the states are in a weak position when negotiating with private counterparts, which may lead to power purchase agreements not favourable for India - as the case of ENRON in Maharashtra showed. This may in the long run be a very costly solution to the acute financial crisis of the power sector at the beginning of the 1990s. *

121 Newbery, Mark and Stephen Murray, Reform of the power sector in India: No push-button solutions. In: Petroleum Economist, February 1995, p. 23.


6.4 Political and regulatory framework for power sectors in Thailand

Thailand is one of the very few developing countries which have not been colonialized. The kingdom proclaimed its first constitution in 1932, after centuries of absolute rule. The decades after 1932 were characterized by frequent military coups and periods of military dictatorship - however, always with the king as the head of state. The king is highly respected among the Thais and is widely regarded as the central guarantor for stability and continuity. During his 51 years of reign. King Bhumibol Adulyadej has experienced 15 constitutions, 17 military coups and 22 prime ministers. He has built up the modern Thai monarchy as superior to any government and to the military with a moral authority based on the force of his personality. As a monarch he sees his own role foremost as an adviser and arbitrator and emphasises the contact with the people. He is much engaged in rural development and has initiated around 2000 development projects. The mass popularity of the king and associations with the monarchy has lent political legitimacy to the various governments in power. However, due to the frequent military coups, a parliamentary culture was not enabled to develop.122 123 124 *

In the 1980s a relatively stable period of democratization began, with Prime Minister Prem Tinsulanond as head of the government. He sought for decision making processes which were transparent, rational and which opened up for participation. This gave rise to increasing pressure from the strong military forces in the country. In 1991 they carried through a new military coup and replaced Prem with Anand Panyarachun in an interim government. His target was to liberalize the economy in an irreversible way.

Until then Thailand had followed a policy with emphasis on the development of industrialization, which balanced economic protectionism and control with private and partly foreign investments. The result was that Thailand was able to establish own production in a long range of technologies, a matter of fact which was of great value for the Demand Side Management Programme later on. This should enable the Thai government to impose regulations on the production of important electrical end-use equipment for energy efficiency

122 Tasker, Rodney: Thailand: Souereign Guide - King serces as bedrock of national stability. In: Far Eastern Economic Review, June 13, 1996, p. 20.

123 Ibid, p. 21.124tu^Ibid.

Rieger, Hans Christoph: Die Bedeutung staatlichen Handelns fur die Wirtschaftsentwicklung in Indonesien, Malaysia and Thailand. In: Draguhn, Wemer (Hrsg.): Neue Industriekulturen im pazifischen Asien. Eigenstandigkeiten und Vergleichbarkeit mit dem Westen, Mitteilungen des Instituts fur Asienkunde, Hamburg, 1993, p. 209.

125

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126and thus achieve impressive results with this strategy. Despite the liberalization effortssubsequent to 1991, Thai products have mostly not been ousted, as the domestic productswere in many other developing countries after liberalization. However, Thailand was betterprepared for liberalization, due to the relatively low degree of state participation in theeconomic production as compared to other developing countries and due to the cautious movetowards liberalization during the 1970s and 1980s. Not least, Thailand was better prepareddue to the relative strength of its economy by 1991, with an average annual GDP growth of10,5% in the years from 1987 to 1991. Since 1991 there have been several elections, thelatest in 1996, which led Chavalit Yongchaiyudh to power. He is expected to promote acontinuation of the economic policy followed in the 1990s. However, the democratizationprocess might be in danger. In the first two months of his reign, Chavalit has centralizedcertain decision-making structures, harnessed civilian and military intelligence organizations

128and moved to impose control over the official broadcasting media.

Due to the democratization efforts since the late 1980s, the possibility of participation in political decisions became increasingly stronger. The Thais knew how to use this opportunity and there has been a high level of participation in decisions regarding the power sector, not least regarding the choice of energy sources for power generation. Although Thailand has not had much expericence with democratic rule in the western sense of the word, the people seem to be familiar with the participatory approach. One reason for this might be the comprehensive experience of communication with the king. A certain kind of democratic culture has evolved in the country. However this culture might be harnessed by the new government.

The electricity policy of Thailand follows a supply-side as well as a demand-side approach. Due to the extreme energy demand, both approaches have been considered as focal. The demand-side approach provides for the most efficient use of the electricity distributed and is implemented with state control measures as well as public campaigns. The supply-side approach provides for new future generation capacity. A central element of this approach is private participation. Although the publicly owned utility in charge of generation, EGAT, has shown high efficiency, the need for fresh investment capital is immense. This is the main motive for the policy of private participation. 126 127 128

126 Sander, 1996, p. 142.127 Breeze, 1996, p. 142.128 Far Eastern Economic Review, February 6, 1997, p. 20.


In 1990 the government first introduced private participation in the power sector as a target for the power policy. This resulted in the creation of the Electric Generating Company Ltd. (EGCO) as a private company and the first independent power producer in Thailand. It accounts for 1,232 MW generating capacity. A huge independent power producers programme was introduced which opens up for bids to build, own and operate power plants and transmit electricity. The limit for the present programme is 3,800 MW, but might be extended to 5,000 MW as there has been good response from the international power industry. However, there are also plans to corporatize EGAT itself and subdivide it into limited liability units prior to becoming a full publicly quoted company in 1998. Domestic and foreign consultancy groups are highly involved in this process. The main objectives for this move are to reduce the government's financial burden on the public sector investment and to enhance competitiveness in pricing and efficiency.

It has not been possible to get access to basic acts and regulations for the organization of the power sector for this study. These are also not referred to in the secondary literature collected prior to this study. The Energy Conservation Act, which was passed in 1992 has been mentioned in the literature, but only in connection with the follow-up Demand-Side Management Programme which was introduced in 1993. Except for this, the key terms for Independent Power Producers set by the government have been available for the study. These

131are:

• Any power prices submitted by IPPs should not exceed EGAT's avoided costs;• The contract for the power purchase agreement, on the base load or intermediate-load

basis, must be between 20 and 25 years;• The capacity of each project for commissioning in 1996-2002 must not exceed 1,400 MW

but may be expanded during the years 2003 to 2006.;• Investors must have proven technological capability matching the required performance

specifications;• Fuel choices must be clean, acceptable to the public, have stable pricing structure, have

secured supply and support the Government's policy on fuel diversification for the country. 129 130 131

129 The Bangkok Post, Post Publishing PLC: Energy - Insatiable Power Demand. Bangkok 1995. Internet: http://www.nectec.or.th/bureaux/bkkpost/95econ/95econ-2.01htm, p. 5.

130 Power in Asia, Issue No. 211, Sept. 30, 1996, published by the Times, London, p. 6.131 The Bangkok Post, Economic Review Year-End 1994. Internet:

http://www.nectec.or.th/burcaux/bkkpost/94ycarcnd/encrgy, p. 3.

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Thailand’s investment opportunities are regarded as some of the most secure and attractive in south-east Asia.132 133 The competition is expected to be fierce. This might explain why the key terms are mainly expressions of limitations for the private investors and not e.g. incentives for them to invest in the country - like in the equivalent Indian terms.

6.5 To what extent are the political frameworks conducive to sustainable electricity strategies?

Structural adjustment policies are sweeping over virtually all countries in the developing world. Privatization is a key word regarding the power sector (although price reforms and arm’s length relationship between utilities and authorities have also been emphasised, but with less weight). In most cases this means opening up for private participation on new power generating plants. As we have seen, building new capacity is not an answer to the main challenges for the electricity sectors. For meeting future demand it will be necessary to develop new capacity, but in order to meet the present challenges (as described in chapter 5) quite different measures are required, as e.g. in the case of Thailand. Thus the privatization policy, as currently implemented in the first three categories of countries, diverts attention from the basic roots of the crisis. It might for a period of time relieve the symptoms of the crisis but it will not solve the root causes.

In the case of Zambia comprehensive political objectives have been set up, but implementation is hampered by poor institutional capability, despite the establishment of the Energy Regulating Board. In other cases, like Thailand, the objectives are held at a clearly realistic level and are thus achieved and well over that. A general problem in many countries is that the objectives are not followed up with detailed directives and plans. Necessary regulatory preconditions for implementation are often not sufficiently sought after. There is a danger that externally driven reform programmes underestimate the capacity requirements of effective reform, like the difficulties of enforcing complex new rules where the judicial system is relatively weak, the paucity of highly trained policy makers in most developing country bureaucracies and the similar paucity of highly trained local public utility

133managers.

Arm’s length relationships between regulatory bodies and utilities is one precondition for effective reforms in any direction. However, often a high degree of political control or influence over the power sector has dominated in the developing countries. Establishing

132 Breeze, 1996, p. 154133 World Bank, Industry and Energy Department, 1993, p. 29.


regulatory boards can be seen as a development in a more autonomous direction, dependent on how they are conceived. But in most cases there is still a long way to go. Thus political targets and motives which are not conducive to sustainable electricity strategies often appear as driving forces of the power policy, such as e.g. low electricity prices to farmers in order to maintain political support from the masses.

Both India and Thailand have a sharply increasing electricity demand. Both countries have a technological level which would make it possible to develop and implement end-use saving technologies, but only one of them has made use of this opportunity. India, which has huge potentials of electricity savings in this field is not realizing or making use of its opportunity.

In the next chapter we will search further for the causes for these findings in the institutional framework.

7 Institutional framework conditions for the power sectors in developing countries

The term 'institution' is used in many ways. Often it is used quite similarly to the term 'organisation'. This term refers primarily to the structure and processes within a unit, and this has also traditionally been the focus of organizational theory. However, in recent years more attention has been given to the surroundings of'organizations', i.e. actors and structures which have an influence on them. Relevant actors can be beneficiaries/customers, owners, sponsors, regulators and relevant structures can be e.g. the legislation. When focusing more on the surroundings, the organizational tasks get another meaning. It is not the output of the organizational performance that is essential, but rather the outcome. To illustrate this by an example, the essential task of a railway company would not be to build railways, but to offer an adequate railway service to the customers. Equally, the essential task of e.g. a power distribution utility is not to build transmission and distribution lines, but to provide adequate electricity services to the customers. In order to understand the performance of an organization it is crucial to understand its surroundings and how they influence performance - in addition to the internal factors. In the following, the term 'institution' will be used for this wider context.

According to this understanding, the following issues will be sought emphasised in the institutional analysis:

• Structure of the power sector;• Tasks and organizational structures of the electricity utilities;• Staff and capacity (recruitment and training);• Institutional surroundings;• Sociocultural aspects.

However, again failing access to relevant information places some limitations on the analysis, so that not all these issues can be covered for each case country.

7.1 Institutional framework of the power sector in Zambia

The Ministry of Energy and Water Development was established in 1992. It develops government policy and strategies in the energy sector and provides for the implementation of these. The Ministry regularly reviews energy-related legislation and provides for revision and new legislation when needed. These reviews are also aimed at bringing energy issues in line with developments in other sectors of the Zambian economy. All significant energy capital

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expenditures are to be reviewed by the Ministry. The Ministry consists of two departments on respectively water and energy.

The Department of Energy was created in 1982 in the former Ministry of Power, Transport and Communication and was later integrated in the new Ministry of Energy and Water Development. The Department has the following responsibilities:134 135

• advise the Ministry of Energy on energy policy;• set priorities regarding potential energy investments, taking into consideration financial

and economic viability;• review energy sector investment proposals in line with national energy strategies;• collect and analyse energy prices in relation to proper and efficient running of the national

economy;• collect and analyze data for all energy sub-sectors and maintain a national energy data

bank;• act as the national contact point for the regional co-operation on energy in the Southern

African Development Community.

Before the Department of Energy was created, a National Energy Council was established whose task it was to advise the energy minister on energy policy. This was in 1980. However, as the Department of Energy came into function in 1982, the National Energy Council was not reformed, nor was it integrated into the new department. Thus these two institutions have overlapped. Not until the beginning of the 1990s was a proposal approved by the Government to integrate the National Energy Council into the Department of Energy.

The Zambia Electricity Supply Corporation (ZESCO) is, as we have seen, the government utility responsible for generation, transmission and distribution of electricity in the country and thus the implementing agency for government policy on electricity, whereas the Zambia Consolidated Copper Mines, also a public utility, is in charge of some generating plants (see section 3.1.1).

A new development at the institutional scene of the energy sector in Zambia, as mentioned in chapter 6, is the creation of The Energy Regulatory Board. It will i.a. take over those functions of the National Energy Council which are not transferred to the Department of

135Energy. The main functions will be:

134 Mbewe and Yamba, 1995, p. 19.135 Ibid, p. 20.


• to regulate against monopolistic tendencies in the energy sector;• to ensure that energy price adjustments and levels are justified;• to act as an appeals body for aggrieved energy consumers, and arbitrator between energy

stakeholders.

All energy-related environmental regulations are subject to approval by the Environmental Council of Zambia, which is a body of the Ministry of Environment and Natural Resources.

Concerning hydropower, the Zambezi River Authority, an independent agency jointly run by the Zimbabwe and Zambia Governments, is responsible for assessing the hydro-potential of the Zambezi River and for allocating water to ZESA and ZESCO. Furthermore it operates, monitors and maintains the Kariba Dam (excluding the power stations) and reservoir and is responsible for investigating the viability of constructing new dams on the Zambezi river.136 137 The Zambezi River Authority was initiated in 1987 by Acts of Parliament of the Governments of Zambia and Zimbabwe to improve the management of the water and to coordinate the electricity policies of the two countries. Zambezi River Authority is responsible to the Council of Ministers, which in both countries comprises the ministers of Energy and Finance.

Whereas the formal institutional surroundings of the ZESCO is currently being restructured, the question is what will happen with ZESCO itself. Privatization efforts are underway, mainly targeted at the distribution segment of the utility. The distribution segment is of focal concern for the sector because of the disastrously inefficient collection of revenues. However another crucial concern for the utility is the overstaffing. The customer/employee ratio in the beginning of the 1990's was 25, as compared to 49 for India, 50 for Ethiopia, 396 for China and 311 for Korea.138

International institutions such as the World Bank are most likely more involved in Zambian policy formulation than the Zambian public. There are two reasons for that. One is the general level of public participation, which is fairly low, the other is the lack of competent organizations in the field of electricity. Regarding the first reason, the level of public participation in the policy formulation of the Structural Adjustment Programmes is a characteristic indicator. The Structural Adjustment Programmes have had the most far reaching consequences for Zambian society, but research shows that democratic concerns and

136 SAD-ELEC & MEPC, 1996, p. 235.

137 Mbewe and Yamba, 1995, p. 19.

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interest group participation had no influence on the policy formulation. There are only few signs of consultations with key interest associations in the initial stages. Regarding the second reason, research in the field of electricity policy is rare in Zambia. Thus an Energy Research Institute has recently been established by the National Council for Scientific Research. It has also been proposed to turn this institute into a National Energy Research Institute in order to strengthen this field of research.

7.2 Institutional framework of the power sector in Zimbabwe

ZESA, as a government owned utility, reports to the Minister of Transport and Energy through the Department of Energy. The Minister of Transport and Energy approves all investments by ZESA. In addition, annual investment programmes are to be approved by the Minister of Finance. This forms the basis for the annual budgets of ZESA. The General Manager of ZESA is appointed by the Minister of Transport and Energy. Other key decisions are also to be approved by the Minister, such as tariff increases and negotiation of agreements with supply authorities in neighbouring states. Some ministers have assumed even greater control over ZESA.139 140 It is political considerations that have dominated the energy policy decisions, not commercial principles. Successive ministers have resisted tariff increase proposals put forward by ZESA, usually on the grounds that this would adversely impact on poor consumers. Political control and influence were institutionalized at independence to ensure that national goals were pursued.141 This has had unintended negative effects, resulting in inefficient performance of the utility.

The Department of Energy Resources and Development is divided into five units each headed by an assistant director:142

• Energy Planning, Conservation and Coordination;• Power;• New and Renewable Sources of Energy Research and Development;• Liquid fuels. Planning and Management;• Administration;

139 Rakner and Skalnes, 1996, p. 13.140 Robinson,, 1994, p. 169.

141 Ibid, p. 170.142 Nziramasanga, 1996, p. 26.


This indicates that the issues of conservation and renewables are not integrated into the power sector activities, which might be one reason explaining the supply focused energy planning in Zimbabwe. The organizational structure hampers the mainstreaming of sustainable electricity strategies.

ZESA's workforce counts 8,000 employees, giving a customer/employee ratio of 47.5. The utility is the largest employee after the Government and the National Railways of Zimbabwe.143 The customer/employee ratio has improved in the recent years. In 1992 it was 42, which is still fairly high as compared to other African countries such as Botswana (8), Malawi (17) and Kenya (33). However it is low when compared to high performance developing countries such as Korea (311), Bolivia (210) and El Salvador (188).144 The reason for a low customer/employee ratio and thus overstaffing of utilities is often the bloating of the public sector in order to create employment opportunities and ensure political support.

The negative effects of political control over ZESA has been called the "parastatal malaise" of the utility.145 Bureaucratic delays is one characteristic feature of this "malaise", another is the blatant misuse of political influence. Examples of misuse are the placing in key positions of appointees without necessary qualifications, experience and motivation to do the job adequately, personal interest being taken in projects leading to stand-offs with donors, and decisions about electrification being made on non-economic grounds. An example for illustration is the extension of transmission lines over considerable distances in order to serve two customers only, which was done during the first programme of rural electrification.146

A new Board of Directors for ZESA was appointed on April 1st 1995. The Minister appointed an Independent Audit Committee for ZESA for the first time. Its chair is one of the non-executive directors and comprises three other independent members who are not members of the board management.147 * A Corporate Business Plan for the utility has been developed to "consolidate the new corporate culture of maximizing service efficiency to the customer". It was put into operation on 1 July 1995. These are some first steps to organize ZESA more in line with commercial principles. To what extent this path will be followed,

143

144

145

146

147

148

ZESA: The Megawatt Bulletin. ZESA In-House Publication, Issues No. 14, June 1996.

Schramm, Gunther: Issues and problems in the power sectors of developing countries. Energy Policy, vol. 21, no. 7, July 1993, p. 742.

Robinson, 1994, p. 170.

Ibid.

ZESA: Annual Report 1995, p. 8.

Ibid, p. 19.

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will become apparent when the final decisions on the new ownership structure of the utility have been approved.Regarding the institutional surroundings, an important actor in the field of hydro power is the Zambezi River Authority. This is an independent agency jointly run by the Zimbabwe and Zambia Governments, and is responsible for assessing the hydro-potential of the Zambezi River and for allocating water to ZESA and ZESCO. Furthermore it operates, monitors and maintains the Kariba Dam (excluding the power stations) and reservoir and is responsible for investigating the viability of constructing new dams on the Zambezi river.149 The Zambezi River Authority was initiated in 1987 by Acts of Parliament of the Governments of Zambia and Zimbabwe to improve the management of the water and to co-ordinate the electricity policies of the two countries. Zambezi River Authority is responsible to the Council of Ministers, which in both countries comprises the ministers of Energy and Finance.

Another government body with potential influence on the electricity sector is the Ministry of Environment. However, there are few indications of political influence by this Ministry in the literature on which this study is based.

7.3 Institutional framework of the power sector in India

As the backbone of India’s electricity sector is the State Electricity Boards (SEBs) it is natural to take them as a point of departure for our analysis. The vast majority of SEBs are publicly owned monopolies. The majority of the board members are appointed by the governments. In some cases all members are appointed by the governments.Thus the SEBs are afflicted by a severe lack of autonomy. By focal questions, such as price issues, the governments are in reality the decision makers. Political considerations - not commercial - are decisive for the outcome of the decision making process. The board members are changed when a new government comes to power. This has serious consequences for the planning horizon of the boards and the continuity of their work.

The boards are assisted by chief engineers, financial advisors and chief accounts officers, who all head various SEB departments. These leaders are usually on deputation from other services or organizations like banks, railways etc. due to the system of public services in India.150 Subsequently they will return to other government services after a while. At this level of the organizations the turnover tends to be high. The result is a serious erosion of responsibility.

149 SAD-ELEC & MEPC, 1996, p. 235.

150 Singh, and Singh, 1993, p. 266.


The SEBs are voluminous organizations and heavily overstaffed. The Karnataka Electricity Board for instance, which is mainly vested with the function of transmission and distribution (and not in addition generation, as is usual for most SEBs), employed 54.927 people in the fiscal year 1993-94. It has an average expansion of 1.000 employees per year.151 152 153 The organizations are strongly hierarchical in their structures with the vast majority of employees in lower positions and few positions (in relation to ground staff) at the higher levels where most decisions are taken. The structure alone causes a bottleneck for decision making. This feature is strengthened by sociocultural aspects: It is considered as a norm not to make decisions which would not be accepted by the superior. Although the decision level would formally be below the superior, it is important to make sure that he would agree. Not least this is important for one's future career. As clear directions fail for a large number of decisions, these are pursued through the different levels of the bureaucracy and take time. Thus the organizational structure causes a bottleneck for decision making in a double sense of the word, with a high level of inefficiency as the result.

There is one more reason for the delays in the decision making processes, which is difficult to point out concretely as it is of a fairly sensitive character, but which most likely plays an important role. That is corruption. There are many ways to define corruption. One is "any action or failure to take action in the performance of a duty by a Government servant for some advantage". Corruption takes place at all levels in the Indian administration and politics. According to a well-informed Scandinavian newsletter, India is considered to be among the seven countries in the world with the most corrupt practices.154 The Jain Havala scandal in 1996 gave shocking insights into the dimensions of corruption at the highest level of Indian politics and bureaucracy, both in terms of amounts of money and number of politicians and bureaucrats involved.

However, corruption is penetrating the administrative system down to low levels where 'speed money' has the role of a brake on administration, slowing it down even further.155 Delay is caused in order to invite the payment of a bribe to accelerate it again. The bribes are

151 Estimations based on Karnataka Electricity Board: Power Supply in Karnataka. Statistical Profile 1969-86, Bangalore 1986, p. 85, and Karnataka Electricity Board: Annual Administration Report 1993-94,Bangalore 1994, p. 84.

152 Martiniussen, 1993, p.106-107.153 Chairman of the Committee on Prevention of Corruption, K. Santhanam, quoted in Singh, and Singh, 1993,

p. 563.154 Nyhetsbrevet India 2/95, published by Richter Consulting, Valby, Denmark, October 5, 1995, p. 10.155 Singh, and Singh, 1993, p. 562.

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distributed up-streams in the system and thus preserve the practice. At lower levels, where the wages are low, this practice seem to be seen as a more or less legitimate way of topping up the salary. One source for bribes is electricity bills. Organized theft is many a time done with the collusion of the SEB staff.156 157 158 The corruption which stems down from the top is more difficult to identify. In general it is considered a serious problem in the Indian power sector. In cases where legal or illegal commissions might play a role in the decision making, the size of the commission is more or less proportional to the expenditure on the projects. In such cases there is an inherent tendency to favour large scale maximum cost planning. This might be a serious barrier to sustainable electricity strategies.

As the general turnover in the levels below the heads of departments is low, the staff competence is determined by the recruitment of earlier years. Training is therefore a major issue. The SEBs have own training centres for this purpose. However, the incentive structure for staff performance is not very distinctive. The possibilities for promotion are low, due to the pyramidical organization structure with the enormous size of staff. It might take 25 years or more for an assistant engineer to reach the level of an executive engineer. There is little hope to move further from there to the level of a superintending engineer. Thus disenchantment is part of the enterprise-culture, which in turn influences performance and efficiency.

It has not been possible to collect the organizational charts of all SEBs prior to this study, but there is reason to believe that the main features do not differ significantly. For the purpose of this study the organizational incorporation of energy efficiency and renewables issues are of interest. In the case of Karnataka a system improvement cell is placed at a medium level of the KEB-structure, parallel to the executive zonal units. Equally the Unit for Investigation and Renewable Energy is placed at the medium level of the Karnataka Power Corporation. This is too low to have any significant impact on the organizations. The issues are isolated to certain cells and not streamlined in the organizations. The Karnataka Electricity Board has also established a separate Energy Conservation Cell, headed by the chairman of the Board and entrusted with the study of energy conservation in various fields. However, this cell has only introduced some information campaigns and has had no notable influence on the efficiency situation. Three factors are most likely the main reasons for this:

156 Shri Sharad Pawar: Keynote adress on State Electricity Boards: Issues and Options. In Ministry of Power, Government of India and ESMAP, 1993, p. 7.

157 Singh, and Singh, 1993, p. 565.158 Tata Energy Research Institute: Regulation and Managenent of the Power Sector in India. In: Ministry of

Power, Government of India and ESMAP, 1993, p. 140.


• The KEB has no authority over the basic incentive potentials such as the price system;• The organizational structures are not conducive to the mainstreaming of energy efficiency

issues and implementation of such measures;• There is generally low awareness of the potentials of energy efficiency;• The working culture is not conducive to efforts in the field of energy efficiency.

These are also some of the main obstacles to sustainable electricity strategies in India from the institutional perspective.

The main actors with potential influence on the power sector are various non-governmental organizations (NGOs) and research institutes. The NGOs are mainly concerned with questions of environmentally sound electricity generation and choice of sources. The research institutes are also working on these issues, in addition to general questions of sector management. Whereas the TATA Energy Research Institute (TERI), based in Delhi, has its main emphasis in the field of energy sources and policy, the International Energy Initiative (IEI), based in Bangalore, is mainly vested with energy efficiency issues and the methods for integrated energy planning. TERI might have had some influence regarding the political emphasis on renewables, which has also been strongly promoted by international development agencies. IEI has not found resonance in the energy policy of India with its emphasis on energy efficiency so far, an emphasis which has also got conciderably less attention from international development agencies.

7.4 Institutional framework of the power sector in Thailand

The central authority for policy decisions is the National Energy Policy Council (NEPC), which is chaired by the prime minister and includes a number of deputy prime ministers and heads of other government departments such as energy.159 NEPC has a secretariat which is in charge of implementing its decisions. This secretariat, the National Energy Policy Office (NEPO) has a central role in co-ordinating energy sector policy. In addition the National Economic and Social Development Board, which is responsible for five year plans, makes recommendations regarding approval or rejection of power projects to the Council of Ministers.160

EGAT has traditionally been a publicly owned utility in charge of generation and transmission for Thailand in the position of a monopoly. This picture is gradually changing

159 Breeze, 1996, p. 142.160 Ibid.

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due to the private sector participation which the government is encouraging. It has not been possible to get access to an up-dated organization structure, staff and capacity profile of EGAT. The only known data in this regard is the payroll of the organization. It counted 33.900 in the fiscal year of 1995 which is 773 employees less than in 1994.161 162

The generating companies sell their power to two distribution organizations: The Metropolitan Electricity Authority (MEA), which covers Bangkok metropolitan area, and the Provincial Electricity Authority (PEA), which serves the rest of the country. The first plans for privatizing the distribution utilities have recently been put forward, but there are no concrete plans for such a step presently.

The institutional surroundings in terms of relevant research institutes and NGOs of various types are actively engaged in the power policy formulation. It is an outspoken policy of the government to involve broad parts of the society in policy planning in order to achieve legitimacy for the various projects. Research institutes such as Thailand Development Research Institute have been invited to formulate input for the policy formulation. The public is invited to open discussion arrangements on power policy issues with panels consisting of advocates and opponents to the suggested policy. The planning procedures comprise various forms of involvement of NGOs, scientists, etc. Also debates in the written media are taken account of. In NEPO the opinions of the public receive comprehensive attention.

7.5 Concluding remarks on the conduciveness to sustainable electricity strategies

A common feature of poor performing utilities is the permanent and in several cases even increasing overstaffing, which is often politically motivated. The overstaffing causes a range of problems. First of all it is expensive in terms of wages for the employees. Secondly it causes inefficiency when too many employees are fit into an hierarchical organization structure. The decision structures can thus often be characterized as bottlenecks. Lack of sufficient know-how further deteriorates the performance and severely limited possibilities of promotion result in poor incentive structures for good performance. Thus overstaffing becomes costly in many respects.

In most cases the utilities have own units assigned with the responsibility of promoting energy efficiency issues and/or renewables. These issues are mostly not mainstreamed in the

161 Power in Asia, Issue No. 211, Sept. 30, 1996, published by tire Times, London, p. 6.

162 Sander, 1996, p. 140.


organizations. The extent to which they are followed up in planning and implementation is dependent on the levels of the units in the organizational hierarchies as well as the political will. Awareness of the potentials of energy efficiency measures and renewable energy carriers is one necessary precondition for political will. This awareness tends to be low in most countries. The decision makers in the utilities are mostly still caught in a supply biased thinking.

Public participation on policy formulation is mostly low, due to generally low participation on policy formulation, to lacking know-how on electricity questions or to failing openness and transparency of the electricity policy. Thailand is an exception in this regard. Openness, transparency and public participation on the formulation of electricity policy are important pre-requisites for the success of demand side management programmes in order to create consumer acceptance, understanding and consent. Openness and transparency are not synonymous words. The fact that the public has access to information is not in itself transparency, but rather openness. Transparency has been defined as:163

1) a clear set of rules, known in advance;2) rules actually in force;3) mechanisms to ensure application of the rules;4) conflicts resolved through binding decisions of an independent judicial body or through

arbitration;5) known procedures for amending the rules when they no longer serve their purpose;6) a framework of regulatory incentives (including the possibility of price capping) to support

competition and induce efficiency.

In most utilities there are examples of misuse of positions regarding appointment of staff and planning decisions. If the term 'corruption' is understood as any action or failure to take action in the performance of a duty for some personal advantage (see 7.1.3), this seems to be a common problem in many developing countries. Due to the sensitivity of the issue, it is difficult to collect information on concrete cases regarding the power sector. However, it is generally accepted that corruption is influencing the power sector performance in a substantial number of developing countries. For some countries, like India, information of the general features of corruption is available. Such information is a first prerequisite for developing strategies towards the combating of corruption. It might also give points of

163 World Bank, Industry and Energy Department: Power Supply in Developing Countries, 1993. p. 55.

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departure for understanding decisionmaking processes and why certain issues are given more priority than others when other options would be technologically, environmentally and/or economically more viable.

PART III: CONCLUSIONS

8 Challenges for sustainable electricity sectors in developing countries

As indicated in the introduction, this study is a follow up of an earlier study on challenges for sustainable electricity strategies in the Indian state of Karnataka. In that first study a methodology for analysis was developed, which formed the basis for this study. One of the aims for the two studies has been to investigate to what extent there is correlation between the features of developing countries’ power sectors and whether it is possible to identify common challenges regarding sustainable electricity strategies. This study shows that there is a large degree of correlation of the focal features among the power sectors of the first three categories of developing countries, whereas the performance and framework conditions are quite different for the last category of stronger developing countries. In this chapter we will take the common features of the three first categories as point of departure for identifying key challenges and then move to the last category in order to illustrate a way out of the core problem. Finally key challenges for development agencies and banks will be discussed in the light of our findings.

A point of departure for this study has been the severe lack of sustainability in the power sectors of the majority of the developing countries. The investigations in Part I show what this means in detail and in which ways the lack of sustainability determines the fundamental crises of the power sectors in these countries. They also show the potentials which are there for solving the crises - if sustainability was taken seriously as a political objective. However, Part II of the study indicates clearly that sustainability is not taken seriously as a political objective. In many cases the issue is part of the political rhetoric, but only very few and cautious steps have hitherto been taken in that direction, with some few exceptions. Regulatory and institutional framework conditions contain focal barriers to the development of sustainable electricity strategies, but they also contain opportunities - if the barriers were removed. We will turn to these questions in more detail in this chapter.

8.1 The core problem

The core problem of electricity sectors in most developing countries of the first three categories of countries is the severe lack of energy efficiency at end-use as well as at transmission and distribution levels. In Zimbabwe, for example, the overall savings potential at the end-use level alone is estimated at 15 - 25% of the current electricity use. Approximately 50% of this potential could be mobilized at no or low costs. In India the cost

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effective and technically feasible potentials are estimated at 20% of the peak generating requirements. Such savings could i.a. be achieved by introduction of fluorescent bulbs for lighting efficiency, improved electrified irrigation pumpsets and low / medium cost industrial and public sector energy efficiency improvements. In addition, substantial electricity savings could be achieved if the transmission and distribution systems were improved and a better maintenance of already existing power generating plants was implemented.

However, these potentials are largely ignored. Supply biased electricity planning is dominating the sectors in the vast majority of countries. The main bulk of investments are channelled to new capacity developments. Although capacity development will be required to meet future demand, it is not an answer to the current problems in the sector. It might relieve the symptoms of the crises but will not remove the causes. In addition, it is a costly policy, not only because it is more expensive to build new capacity than to improve efficiency - but also because the new generated capacity will be utilized just as inefficiently as the old one. Supply oriented electricity planning thus obviously does not meet the current key challenge of the electricity sectors in developing countries.

8.2 Private participation does not solve the core problem

Private participation has been introduced in a considerable number of developing countries as a reform concept for the power sector. It implies that private (mostly foreign) enterprises are invited to build, own and operate new generating plants. A focal motivation for such a policy is the anticipated financial requirements for the development of new generating capacity, which the public sector would not be able to meet. It is obvious that this kind of privatization is no appropriate answer to the core problem identified in this report, though it will provide for future capacity. But it does not reform or improve weak structures of power sectors. As long as such structures remain or deteriorate further, private participation will most likely be a costly exercise for the state economies - because they will carry most of the burden when distribution systems, tariff structures and/or levels as well as billing procedures fail. Focusing on private participation as the ultimate solution for the power crises is turning the whole problematique upside down and starting at the wrong end. Inviting for private participation can only be an additional measure to core activities regarding energy efficiency - if the power crises are to be solved.

Another, sometimes additional, reform model is the privatization of public utilities in order to improve technical, institutional and financial performance. Such reforms have only been introduced in few developing countries until now, but several others are about to introduce them. This model is more promising with regard to efficiency. However in many developing


countries with only one private utility, privatization in these terms would mean having to create a new and private monopoly. Appropriate legislation and institutional follow-up structures are thus required to prevent negative effects of such a situation. Experience with this model in developing countries is still too limited to enable any evaluation of success in terms of sustainable electricity strategies. However, there is reason to believe that commerciality will improve the efficiency of the general performance in these utilities.

8.3 Focal barriers to sustainable electricity strategies

A key barrier to sustainable electricity strategies is the lack of an arm’s length relationship between governments and utilities. Often the utilities are governmental bodies or parastatals, or they are conceived as separate bodies but with full governmental control. This hinders a commercially sound performance of the sector due to the following main causes: First of all, politically motivated tariff decisions usually undermine commerciality and the introduction of an incentive structure conducive to sustainable electricity strategies. In many cases power has traditionally been seen as a social good and thus as a case for public expenditure. This attitude is deeply settled in these developing countries. Increased power tariffs are thus unpopular measures and might cause severe lack of political support. Second, politically motivated appointments to utility managements might result in less competent leadership. Also overstaffing is mostly politically motivated.

As long as utilities are used as instruments for government policies in the way it is usually practised in developing countries, they will not be able to perform in a commercially sound manner and the power sectors will be unable to meet most of the challenges presented in this report.

However, the barriers to reformed tariff structures are not removed solely by introducing an arm’s length relationship between utilities and government. Weak macroeconomic structures and a too fast increase of tariffs might lead to massive inflation and thus, like in Zambia, leave the increase with little effect in the end. In other cases, a relatively strong economy might lose strength on the introduction of too rapid or too large price increases, due to higher production costs and capital flight. This has been the case in several Indian states, i.a. Karnataka recently. The prices were dramatically increased for industrial enterprises without reforming the basic structures of the tariff system, which were already highly skewed in the industry’s disfavour. The result was recession and capital flight. The industrialists argued that it was unacceptable to charge increased prices for poorer services, as the power sector performance was steadily deteriorating. It is important that the pace be adjusted to the

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macroeconomic framework conditions and the tariff reforms reflect implemented or planned improvements of power supply services.

A whole variety of efforts are being made to reform the power sectors of developing countries. Mostly they are induced by development agencies or banks. A common feature of many such efforts is an impressive set of comprehensive and promising reform targets. However, the input needed for implementing such targets are not always in place. Most of all a lack of institutional capacity oftens hamper such efforts: In some cases the targets have not been operationalized into rules and directives and thus a focal precondition for monitoring the process is lacking. Second, overstaffed but strong hierarchical organizations combined with paucity of skilled labour hamper the implementation of new reforms. We have also seen that motivation is a central precondition for the employees to perform their tasks and implement reforms. Motivation is determined by incentive structures in the organizations and the general working culture. Whereas it is relatively easy to identify possible measures to improve the incentive structures, it is more difficult to identify measures conducive to improving the general working culture. This question is related to the issues of sociocultural conditions for different kinds of reforms and is an interesting field for future research.

When reforms are introduced to a power sector, it is important that they are conceived in such a way that there is sufficient capacity to implement them, or that there are concrete plans to improve the capacity for this purpose. The case of Thailand shows this clearly. Modest and obviously realistic targets were set for the new model of end-use management in the electricity sector - and achieved with great success.

An important barrier to the introduction of sustainable electricity strategies is organizational structures which are conceived for the purpose of supply side management alone. Although separate units assigned with responsibility for promoting energy conservation and/or renewables have been established within utilities and regulatory bodies/governments, the organizations as such have not been reformed for this purpose. The units often live more or less isolated lives within their organizations. The extent to which they win through with their suggestions, is dependent i.a. on their level in the organizational structures. Often they are placed at a medium level in the organizations. Examples show that such units might do very promising work - whereas the rest of the organization continues with the conventional approach. As long as such issues do not penetrate all levels of the organizations, the introduction of sustainable electricity strategies will be hampered. In order to enable units assigned with the responsibility of introducing sustainable electricity strategies to adequately perform their tasks, they should be placed at the top level of the organization, and vested with the necessary authority to carry through such reforms.


8.4 A way out of the core problem

The case of Thailand shows that it is possible to develop end-use efficiency to a considerable extent through incentives and regulations. The introduction of this reform was accompanied by transparency of, and public participation in, the decisionmaking process as well as motivation campaigns for individual follow-up.

The important question with regard to this comparative study is the extent to which Thailand can serve as an example for other countries. This is dependent on similarities in relevant framework conditions. Thailand has a relatively successful political and institutional performance with regard to electricity strategies and is thus well on the way to dismantling the barriers presented above. To what extent other countries will succeed in following the example of Thailand is thus dependent on their ability to remove such barriers.

However, there is one framework condition aside from that, which has been of special importance in the case of Thailand. This is that the country has comprehensive own production of electrical equipment. On the one hand, this is often a negative feature with regard to efficiency, as the production is isolated from international improvements in the respective fields. On the other hand, however, it is a good precondition for regulation of the end-use equipment market, due to the fact that regulating national equipment production will strongly affect the whole end-use market in the country. This is an advantage of which Thailand has made extensive use.

India is similair to Thailand in this respect, but has not used national electrical equipment standards as an instrument for end-use efficiency at all. The other case countries and most small economies do not have this framework condition. In such cases conducive incentive structures will be relatively more important for the introduction of sustainable electricity strategies. Regulations on import of selected end-use equipment is also a possibility. However, market liberalization might hinder such measures.

8.5 Planning for additional generating capacity in a sustainable way

If sustainable electricity strategies were introduced, this would have comprehensive effects on future demand projections in those countries. The demand forecasts would be substantially reduced. It would not be necessary to develop additional capacity at the same pace as for supply-focused electricity planning.

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Choice of energy carriers is an important question for further capacity building in developing countries. Developing country power sectors based mainly on a single energy source tend to be more vulnerable than differentiated power sectors. As hydro and coal based power generation (the main present energy carriers in developing countries) have limitations in terms of environmental consequences, weather conditions (hydro) and future availability (coal), there is a need for the development of additional and alternative energy carriers. Natural gas is an option in those countries where it is available. Natural gas has often been labelled as a transitional fuel until the introduction of commercially and technically viable new renewable electricity technologies. New renewable energy sources are on the way as viable options for electricity generation. India is the furthest ahead in developing this subsector among developing countries and is established in all renewable technologies. Thus India might have an important advantage when these technologies have made a breakthrough.

A positive feature of private participation is that it has opened up for electricity generation based on new renewable electricity sources - just as it has opened up for other energy carriers. In some cases special incentives have been introduced to advance these technologies within the framework of private participation. This is the case in India, and they have attracted a wide range of investors in the field of renewables there. Such measures might, however, be perceived as interference with the market mechanisms regarding the conditions for competition between different energy carriers. Thus they might encourage investments that fail to adequately reflect costs and risks. However, in India such measures are regarded as a way of pushing renewables into a position which will make them commercially viable more rapidly.

8.6 Concluding remarks regarding key challenges for development cooperation agencies and banks

The vast majority of developing countries are caught in a heavy supply biased electricity policy and might follow this track for some time yet. However, the World Bank group has now become more restrictive to new capacity development. Thus, the affected countries are forced to either search for other sources of financing (like private participation) and/or reform their electricity policy towards more sustainable electricity strategies with regard to efficiency improvements. These processes are moving slowly, because of barriers described earlier in this report. At the same time there is only limited interest among private enterprises for investments in developing countries’ power sectors, partly because of the same barriers. The situation is like a vicious circle. Therefore a good many countries might move into an even more critical situation than today, where they are not able to improve the efficiency of the


present systems and there is severly limited finance for new capacity development. This might in future cause crucial bottlenecks of supply due to increased demand.

Thus, the real challenge for development cooperation in the field of electricity is to support the improvement of energy efficiency at all levels and to improve the financial and institutional preconditions for that. In addition, it is a central challenge to support developing countries in preparing for future utilization of viable new renewable energy carriers. Apart from this, it is important to continue the work for environmental impact assessments of planned power projects, and to support measures to reduce environmental impacts of old power plants.

The World Bank Group reformed its policy towards sustainable electricity strategies in 1992. Demand side measures and institutional development were given increased attention. However, in a review of the World Bank's implementation of its new energy policy two years after its approval, it was found that the performance failed largely to comply with the policy. It did not increase support for end-use energy efficiency and conservation and the policies were not incorporated into the loan preparation processes. The only element which was emphasised in such procedures was pricing.164 A comparative study on World bank induced price reforms in the power sector until 1996 shows that the Bank has largely not succeeded in promoting tariff reforms and has supported utilities despite long periods with extremely poor financial performance. There have however been slight improvements in these policies in latter years.165 These trends indicate that the Bank is moving in the direction of more support for sustainable electricity strategies, but that there is still a long way to go.

The bilateral development aid is diversified with regard to support for sustainable electricity strategies. Whereas some countries (like Denmark and the Netherlands) give extensive support in the field of new renewable energy, most countries are concentrating on conventional electricity supply. Some countries are also supporting institutional improvements. However, compared to supply side support, energy efficiency is receiving marginal attention.

Changing the approach to electricity planning involves changing individual and institutional attitudes, the tasks and structures of organizations as well as the know-how profiles of their

164 Environmental Defence Fund and Natural Defence Council: Power Failure. A Review of the World Bank's Implementation of its New Energy Policy, New York 1994, p. 5.

165 Ingeberg, Kjetil, Torleif Haugland and Kjell Roland: Price Reforms in the Power Sector: The World Bank’s Role. The Research Programme on Multilateral Development Assistance, Working Paper no. 6. January 1996, ECON, Centre for Economic Analysis, Oslo, p. 9.

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manpower. Such profound changes take time - in developing countries’ utilities as well as in development agencies and banks. The crucial precondition for letting them take that time is to make sure that there is unflagging political will. This is a key challenge for public influence on power sector policies.

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