Roy Adair, President & CEO, Senoko Power Ltd., Singapore
Adair: countries must face challenges head-on in order to reap the benefits of deregulation
The Asian electricity industry is undergoing significant structural change driven by healthy rates of economic growth. The industry restructuring objectives vary across the region but are aimed at improving power supply reliability and efficiency, providing competitively priced electricity and, in some instances, providing choice to customers.
The deregulation models utilized within Asia range from the involvement of independent power producers (IPPs) selling output to state electricity entities, to national electricity markets which despatch plant on a competitive commercial basis. Clearly, there is the opportunity for a range of different deregulation models to exist across that spectrum. The exact form of the deregulated model will be driven by each nation’s political and economic strategies and the status of the country’s existing electricity supply industry.
Countries in Asia are economically diverse. However, they all have a need for competitively priced power to achieve economic growth. A broad review of the region highlights the multiplicity of deregulated models in place, or being considered. Australia, Korea, New Zealand and Singapore have competitive electricity markets, albeit in differing forms and stages of implementation. The Philippines and Vietnam are also both reasonably advanced in their plans for introducing wholesale market pools. In Malaysia, Taiwan and Thailand, private sector involvement through IPPs has been successful in introducing competition into the electricity price.
The surge in power demand in several countries has given rise to a shortage of power generation capacity and tightening of reserve levels. This backcloth of growing economic and electricity demand places pressure on the public sector power industry in a number of countries and heightens the need for some kind of structural reform to ease the burden. The attraction of introducing an effectively operating electricity market is that it should provide clear and early signals of the size, type, location and timing of new capacity. Any intervention with that market mechanism, however, will distort these market signals.
Electricity is a capital intensive industry where new tranches of capacity are expensive and have a high opportunity cost. It is this competition for scarce investment resources which often provides the impetus for deregulation and an opportunity for private sector involvement. The need in many countries to meet growing demand effectively and in a timely manner is often the strongest driver behind a move towards deregulation. The current economic climate in Asia is one of growing economic activity which poses a challenge to the region’s electricity industries. A challenge that effective deregulation can help meet.
The privatization/deregulation of the electricity supply industry around the world gathered momentum in the 1990s. The experiences of the UK, Europe, South America, Australia, New Zealand and Singapore provide excellent case studies on the deregulation process and vital lessons on design and implementation. There is no ‘one size fits all’ solution and the design of the deregulated solution for each country should be set very firmly within a clearly defined framework of policies and objectives that are compatible with economic, energy and environmental policies.
The challenges of evolving markets
The main benefits of restructuring or deregulation are, inter alia:
- Greater efficiency in the operation of the existing generation plant
- Competitive pressure on prices
- Improved reliability and service
- Investment decisions driven by commercial, not political imperatives
- The ability to give customers choice
- Avoiding the use of public sector funds.
Achieving the above benefits depends on confronting the major challenges that affect any country considering the deregulation process. These challenges are invariably common to all evolving deregulated electricity supply industries and cover some of the following main issue areas:
- What is the nature of the deregulated market structure to be implemented, how is it intended to work and what is the process and timing for transitioning from the extant electricity supply arrangements to the deregulated form?
- What constraints apply to asset ownership?
- How is any perceived problem of market power to be equitably addressed?
- The style and accountability of the regulatory regime to protect both customers and investors while providing the basis for an ongoing viable electricity industry.
- What form of transmission pricing arrangements need to be implemented that allow open access and equitable tariffs? These arrangements should deal with any congestion within the existing system.
- Dealing with customer expectations in terms of efficiency, supply reliability, supplier choice and electricity prices.
- The format, timing and implementation of retail contestability.
- Ensuring fuel supply and energy security within the deregulated arrangements.
- Increasing environmental constraints. The incorporation of a market based solution for dealing with carbon emissions will be a major future challenge for all.
Window of opportunity
The strong growth environment within the Asian electricity supply industry will cause many countries to review how deregulation can help solve the growing tightness in electricity supply and demand. The benefits of deregulation are well documented. The model for deregulation, however, requires considerable thought, not only in its design and implementation, but in its operation and evolution.
The next few years affords the Asian electricity industry the opportunity to review these challenges and refine the model most suited to its needs.