Private ownership of electric power is more efficient and reliable than public-owned plants

Private ownership of electric power is more efficient and reliable than public-owned plants

Worldwide, developing countries are now finding the advantages of privately owned and operated electric power plants

By Douglas J. Smith

Managing Editor

Privatization and regulatory reform of electric utilities has taken off worldwide since passage of the Public Utilities Regulatory Policies Act in 1978 by the United States` Congress and privatization of Britain`s Central Electricity Generating Board (CEGB) in 1989. In the early 1980s the world`s national electric utilities were, in general, vertically integrated, centralized and publicly owned. Since the late 1980s many countries have seen a transition of their electric power industries from public ownership to private and private/public ownership.

In many developing countries, high growth in the demand for electricity, plus limited capital for power plant construction, has led to consideration of independent private power generation. Two of the most popular ways of structuring private power projects are: build-own-transfer (BOT) or build-own-operate (BOO). Projects structured this way allow countries to develop new power plant capacity without major capital investment by the government. Industrial growth in developing countries is the major reason for electricity demand growing at 10 percent to 15 percent or more per year.

Under BOT a plant is constructed and operated for a predetermined period of time by a private electric power company. At the end of a specified period the plant is transferred to the country`s electricity generating authority at no cost. Usually, a power plant has approximately another 10 years of life when it is handed over. A BOO developed power plant, on the other hand, is built and operated by the private electric power company for the life of the plant.

Whether a plant is a BOT or BOO, the local electric generating authority generally pays the company, the plant`s builder and operator a fixed capital recovery and operating fee. In addition, they are paid a variable operating fee in c/kWhr. Sometimes the electricity generating authority supplies the fuel. Figure 1 shows typical financing structures for a variety of international power plant projects.

Not all countries are the same

How a country`s electric power industry is privatized depends to a large extent on how it is structured. It defines the jurisdictions, rights, obligations, regulations and responsibilities of public and private electric utilities. According to Ir Zurin Z. Abidin, senior manager Tenaga National Berhad, Kuala Lumpur, Malaysia, it is important to determine and define the future structure of the electric industry in countries which have begun, or are about to begin, the privatization process.

The Unites States` electric power industry is very diverse and is a conglomeration of investor and public-owned utilities, government agencies, cogenerators and independent power producers. In general, the electric power industry in the United States is regulated by federal, state and local governments. The Federal Electric Regulatory Commission (FERC) has overall authority in regulating the electric industry in the United States. This agency issues regulations and guidelines for pricing, transactions of electricity and coordination of the operations of interconnected electric systems.

The privatized electric supply industry in England and Wales consists of one distribution company, National Grid Co., and two electric generation companies, National Power and PowerGen. National Grid Co., a holding company owned by 12 regional supply companies, inherited all of CEGB`s transmission assets and a 2,000-MW pumped storage plant in Wales upon privatization. The National Grid Co. is responsible for dispatching all of the electric generating plants while the regional supply companies have the responsibility for the distribution and supply of electricity in their particular areas.

A Director General of Electricity Supply, the regulator, allows the price of electricity to increase by set amounts relative to inflation. It is not based on any rate of return.

Day-to-day commercial operation of the system centers on the “pool” into which all major generators of electricity sell their output. Each day generators make offers for the following day by unit availability and price. Based on the daily offers, and National Grid`s estimate of demand, National Grid produces a generation schedule ignoring any constraints which the transmission system may impose on actual generation.

India`s Central Electricity Authority is responsible for the country`s national power policy and overall planning and development on the national level. At the state level in India, state electricity boards are responsible for the generation, transmission and distribution of power. The Power Grid Corp., an Indian government enterprise, is responsible for the construction and operation of the central transmission system. Its goal is to establish and operate regional and national power grids in India. In addition, the Power Grid Co. is taking the initiative to develop the overall coordination procedures for the government and private companies connected to the national grid.

Developing private hydroelectric power

To keep up with its fast growing economy, Asia is looking at private power to help it meet the need for additional electric generation capacity. While most of the private power projects developed in Asia have been thermal power plants, hydroelectric power projects should not be overlooked. According to a United Nations` report, 21 percent of electric power production in developing countries is supplied by hydroelectric power plants. In 1990, hydroelectric power supplied 3.8 percent of the total energy in Asia. By 2020 this figure is expected to increase to 6.1 percent (Table 1 and Figures 2 and 3).

The amount of electricity supplied from hydroelectric plants in Asia represents 16 percent of the total electricity generated. Hydroelectric power accounts for 20 percent in Central America, 16 percent in Africa, 9 percent in Central Europe and 77 percent in South America. Because the percentage of hydroelectric capacity is low, in relation to its potential (Table 2), the opportunities for developing private hydroelectric power plants is good. China presents the greatest potential but India and the Philippines are also good prospects.

A speaker, from Harza Engineering Co., Chicago, Ill., USA, at POWER-GEN Americas `94, stated that private power projects are expected to provide most of the 21,000 MW of new generating capacity needed by the Philippines during the period 1993 to 2005. Hydroelectric power will account for 9 percent of the new capacity in the Philippines.

India is looking at adding 150,000 MW to 200,000 MW of new electric capacity by 2010. Although most of the new capacity will be provided by coal-fired thermal plants, hydroelectric power could contribute a significant amount but only if adequate financing can be arranged.

With plans to almost double its installed electric capacity over the next 10 years, China represents the world`s largest power market. China has a need to add 125,000 MW of new capacity by the turn of the century and almost half of this capacity is expected to be developed by the private sector. According to Harza, the Chinese government and its utilities have issued, or are in the process of issuing, solicitations for more than 170,000 MW. In addition, there are outstanding proposals for 57,000 MW of private power.

Hydroelectric power supplies 20 percent of the total electricity produced in China. However, this is only 8 percent of the exploitable hydroelectric potential of the country. Table 2 shows the installed hydroelectric capacity compared to the technology`s potential capacity in the different regions of China.

Asian Development Bank loans (US)$9.4 billion

At the end of 1993 the Asian Development Bank (ADB) had made 187 loans totaling (US)$9.4 billion for 162 power projects. ADB`s emphasis on the power generation side is the utilization of indigenous energy resources–hydropower, geothermal energy, natural gas and coal. Substantial funds have also been made available by ADB for the development and upgrading of electric power and distribution systems.

The total installed capacity of the developing member countries of the Asian Development Bank more than doubled in the 1980s. By 1990 the total installed capacity had reached 300,000 MW. In 1990 coal accounted for 56 percent of the total installed capacity followed by hydropower with 19 percent, oil 12 percent, nuclear 7 percent and natural gas with 5 percent. Only 1 percent of the capacity was geothermal energy.

According to ADB, approximately one-third of the world`s proven coal reserves are located in the developing member countries of ADB. As a result, coal-fired power plants will continue to dominate. Despite the expansion of generating capacity in developing member countries many of them still face severe electric power shortages. India and the Peoples Republic of China each have a shortfall of approximately 18,000 MW at this time. Plans call for ADB`s developing member countries to increase their installed capacity to approximately 540,000 MW by the year 2000.

In a speech at the 1994 American Power Conference in Chicago, Ill., USA, P.N. Fernando, Asian Development Bank senior energy specialist, said that the electric power expansion program is too large for many of the regions electric utilities. If the developing member countries are to meet their expansion goals, Fernando said that restructuring of the power sector must occur. Fernando believes this will entail:

– Allocating a greater role to the private sector.

– Introducing competition.

– Separating the roles of owning and regulating electric generation.

– Providing transparent regulations.

– Broadening the financial base.

Fernando believes that electric transmission systems and hydroelectric plants will continue to be owned by electric utilities. However, the utilities might be privatized and existing thermal power plants will be privatized. Although the private sector is expected to develop most of the new thermal power plants they would most likely be jointly owned by the private sector and the utility.

Moving to privatization

Electricity Generating Authority of Thailand (EGAT) is one government electric utility that is developing new power plants jointly with the private sector. Once the plants enter commercial operation EGAT will look at full privatization of the plants. At the end of 1994, the Thai government announced that they would allow foreign investors to bid in a program to privatize Thailand`s electricity sector without the need for a Thai joint venture partner.

The program will allow private investors to build power plants and sell electricity to the state-run electric utility. Within the next 12 months contracts are expected to be awarded for several power plants that are scheduled for commercial operation by the year 2002.

EGAT is looking at the private sector to supply 3,800 MW of new capacity over the next few years. Savit Bhotiwihok, minister in charge of EGAT, expects electricity demand to grow by 1,000 MW annually. Currently, Thailand has an installed capacity of 12,180 MW and a demand of 10,500 MW.

An EGAT pilot privatization project, the Mae Kham 300-MW project, is to be constructed in northern Lampang province. Environmental permits for the project have already been issued. EGAT has also signed contracts with nine small power producers to buy 58.5 MW of electricity.

In the Philippines, most of the distribution of electricity has been privatized. The Philippine government also allows the private sector to participate in electric power generation through build-own-operate-transfer (BOOT) and BOO type of contracts. An independent energy regulatory board has jurisdiction over energy supply entities in the Philippines.

Malaysia`s government has privatized its electric power industry and authorized the Director General of the Electricity Department to regulate and issue licenses for the construction and operation of electric generation plants. Under the Malaysian government`s utility privatization program the National Electricity Board of Malaysia was restructured as a corporation in 1990. The corporation, now called Tenaga National Berhad (TNB), is 25 percent publicly owned. A license to operate was issued to TNB, which in effect gives the company jurisdiction over 97 percent of the Malaysian peninsular.

Malaysia is encouraging private development of electric power generation by giving the overall responsibility for electricity regulation to the office of the Director General of Electricity. Since 1990 the government of Malaysia has given power generation licenses to five independent power producer (IPPs) companies.

However, because of concern about the drop in TNB stock in 1994, Samy Vellu, Malaysia`s Energy Minister, has asked the government to guarantee TNB a 70 percent share of the country`s electric generation market. Although TNB retains a legal monopoly the company is required to purchase power from IPPs. A limited number of other licenses have been issued to companies to generate, transmit and distribute electricity in other areas.

Electric power generated by these IPPs will be supplied to Malaysia`s national grid system. Privatization has become a central economic policy in Malaysia and is part of a wider process of economic reform and deregulation. The major reason for privatizing the electric power sector is to make the industry competitive, efficient and more productive. Another objective of privatization is to distribute the financing burden for electric power development between TNB and the private sector.

As of 1994, five IPPs had received concessions and licenses from the Malaysian government to construct electric generating plants. Plans call for the five plants to be in commercial operation by 1997. TNB has entered into a power purchase agreement with the five IPPs to purchase the approximate 4,000 MW of electricity that will be generated.

The Malaysian government is considering spending (US)$1.2 to (US)$1.7 billion on upgrading two of TNB`s power plants: the Port Dickson plant near Kuala Lumpur and the Prai plant in Penang. The upgrade would increase each plant`s capacity from 600 MW to 1,000 MW.

Pakistan is another country aggressively pursuing privatization of its electric generation sector. This will be accomplished through a set of rules and procedures, issued by the government, which will allow development of large electric generating plants by the private sector. In July 1994, Pakistan`s Water and Power Development Authority signed a power purchase agreement with Tenaska of the United States to purchase power from a 586-MW natural gas-fired power plant. The other partners in the project are: Central Power (Holdings) Ltd., a subsidiary of Midlands Electricity plc, UK, General Electric Financing, and Hawkins Oil and Gas, both from the USA, and Hasan Associates (PVT) Ltd., Pakistan.

India is privatizing the generation of electricity by offering a range of incentives and guarantees to local and foreign investors who wish to set up new power generation units. China also is allowing construction of privately owned power generating facilities.

Asia not the only market for private power

Power International, a subsidiary of CINergy and an affiliate of The Cincinnati Gas & Electric Co., USA, has signed an agreement with the government of the Republic of Kazakhstan to develop and implement privatization programs for the country`s electric power industry. Under the agreement, Power International will develop a plan to privatize Kazakhstan`s electric supply industry. The long-term goal is to provide reliable, economic and environmentally clean electric energy.

The company will develop case-by-case privatization plans for individual generation, transmission and distribution facilities. It will also act as the government`s exclusive agent in selling and privatizing the assets of the country`s energy sector. Most of the country`s electric power plants will require upgrading and additional capacity will have to be constructed.

Argentina started privatization of its electric supply industry as early as 1989 when it passed laws for the privatization of the state owned electric company, Servicios Electricos del Gran Buenos Aires (SEGBA). Under the privatization plan, SEGBA was divided into four generating and three distribution companies. Central Puerto S.A., with an installed capacity of 1,009 MW, was the first part of SEGBA to be privatized.

Two Chilean electric generation and distributed electric companies, Chilgener and Chilquinta, won the bidding for 60 percent of Central Puerto S.A`s shares (CPSA). The Argentinean government retained 40 percent while 10 percent was sold to ex-SEGBA workers. Acquisition of CPSA has cost the Chilean companies (US)$90 million in cash plus (US)$60 million in debts owed to various contractors and suppliers. In addition, it is estimated that approximately (US)$100 million will be needed to rehabilitate the units.

Houston Industries independent power unit, Houston Industries Energy (HI Energy), announced at the beginning of 1995 the acquisition of 90 percent of an Argentine power utility system of Santiago del Estero, a rural province in north central Argentina (Figure 4). Houston Industries also became owner and operator of the La Plata power plant and distribution system in 1992. According to Lee Hogan, HI Energy president and chief operating officer, Brazil, Ecuador, Columbia, Bolivia, Venezuela and Peru all offer potential investment opportunities over the next two years.

When Peru nationalized its electric supply industry in the early 1970s it became the country`s largest state-owned segment of the economy. Over the years the electric industry became costly and unreliable and has been unable to keep pace with Peru`s demand for electricity. Today, the transmission and distribution systems are in poor condition and at times the country is forced to ration electricity.

Because of the need to provide a more efficient and reliable electric service to its people, Peru has decided to privatize the industry. Currently, Peru is in the process of privatizing Electroperu and Electrolima. Between them they account for more than 90 percent of Peru`s electric supply industry. In July 1994, 60 percent of Electrolima`s distribution assets were sold. The company`s generation assets are also being offered to international investors.

Peru`s government has restructured the country`s electric utilities into separate, but independent, generation, transmission and distribution companies. To help Peru restructure the World Bank has agreed to loan Peru up to (US)$150 million, in increments of (US)$50 million over a two-year period. However, the incremental payments are contingent upon the privatization plan`s progress and the government`s legal and regulatory reform program.

The World Bank, the United States Agency for International Development (USAID) and the International Finance Corp. support a major role for the private sector in the supply of electric power. Policies were adopted by the World Bank in 1992 that encourage private participation in the power sectors of developing countries. Not only is the private sector more efficient in operation they are able to tap resources for financing power projects.

Because the electric industry in many developing countries has always been government run the concept of private ownership of electric power is not always accepted with open arms. However, no country can privatize its electric industry without also changing the regulations and laws governing its operation.

According to Ambassador Sally Shelton, USAID assistant administrator, the need to provide electricity in developing countries is crucial for sustainable economic growth. Privatization of electricity can accelerate the economic growth and social development of a country by helping to meet the energy needs of its agriculture, industrial and commercial sectors.

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