Re-Thinking Energy In A Power Hungry World- Part Two
Reflecting on the experiences in part one of this article leads to conclusions that can inform future efforts to improve power sector performance. The main takeaways from the study are as follows.
Power is political: The implementation of market-oriented power sector reforms raises political challenges. Many countries announced reforms that did not subsequently go through, and some countries enacted reforms that later had to be reversed.
In practice, electricity reforms proved to be most feasible in countries that already espoused a broader market ideology and in political systems based on the decentralization of power. Reform champions often played a crucial role in driving the change process, but broader stakeholder alignment proved to be equally important for reforms to be sustained in the longer term. For example, in the Dominican Republic, a far-reaching market-oriented reform was enacted in an unsupportive political environment and a turbulent macro-economic context that eventually led to the renationalization of the power utilities.
Starting conditions matter: Market-oriented reforms are complex and presuppose a power system that is already largely developed, adequately governed, and financially secured. Countries starting from this vantage point generally saw quite positive outcomes from power sector reform. But those that embarked on the process before these basic conditions were in place faced a much more difficult trajectory, with outcomes that often fell short of expectations. Thus, market-oriented power sector reform led to much better outcomes in relatively developed middle-income countries like Colombia, Peru, or the Philippines, than in more challenging environments such as Pakistan or the Indian State of Odisha. For example, in Peru, the power sector was fully restructured by 1994; private sector investment substantially increased in generation, transmission, and metropolitan area distribution networks, amounting to about $16 billion over 20 years.
The creation of an effective sector regulator and wholesale power market institutions has driven the efficiency of the Peruvian power sector to best-practice levels and led to a significant reduction in the cost of energy.
One size does not fit all: Power sector reform is a means to an end. What ultimately matters are good power sector outcomes, and there may be different ways of getting there. Among the best-performing power sectors in the developing world are some that fully implemented market-oriented reforms, as well as others that retained a dominant and competent state-owned utility guided by strong policy mandates, combined with a more gradualist and targeted role for the private sector. This reality makes a case for greater pluralism of approaches going forward. In Vietnam, for instance, the central policy focus was on achieving universal access to electricity and rapid expansion of generation capacity to achieve energy security in a fast-growing economy. These objectives were achieved through strong leadership of state-owned entities, complemented by gradual and selective adoption of market reforms and targeted private sector investment.
Goal posts have moved: It used to be enough to achieve energy security and fiscal sustainability, but countries now have more ambitious 21st century policy objectives, notably, reaching universal access plus decarbonizing electricity supply. Market reforms can be helpful in improving the overall efficiency and financial viability of the power sector, and in creating a better climate for investment. However, they cannot—in and of themselves—deliver on these social and environmental aspirations. Complementary policy measures are needed to direct and incentivize the specific investments that are needed. For example, in Morocco, an ambitious scale-up of renewable energy was achieved through the creation of a new institution parallel to the traditional utility, with a specific policy mandate to direct private investment toward the achievement of government policy goals.
Technology disrupts: Rapid innovation is transforming the institutional landscape through the combined effect of renewable energy, battery storage, and digitalized networks. What used to be a highly centralized network industry is increasingly contested by decentralized actors. These include new entrants and consumers who may have the ability to generate their own electricity and/or adjust their demand in response to market signals. How this ultimately reshapes power sector organization will depend on the extent to which regulators open up markets to new players and reconfigure incentives for incumbent utilities to adopt innovative technologies.
In summary, a nuanced picture emerges from the experiences of developing countries that have aimed to turnaround power sector performance in the past 25 years. Drawing on this wealth of historical evidence, and informed by emerging technological trends, this report offers a new frame of reference for power sector reform that is shaped by context, driven by outcomes, and informed by alternatives.
(World Bank Group)
