2.5
Forces for Change
2.5.1 Efficiency:
By the middle part of the 20th Century, electricity was
viewed as a national strategic asset, in much the same way that coal, and then
oil, were viewed. A stable and secure supply of electricity to all consumers
was considered an essential ingredient of the national infrastructure by the
more developed economies, and a goal to aim for by the developing economies.
Obligations to supply were commonplace, along with vertically-integrated and
state owned monopolies. Heavy-handed regulation has also been a common feature
of the sector.
This view of the electricity sector has undergone
significant change. Not only as a result of economic pressure to increase
economic efficiency through deregulation and restructuring, but also as a
result of a paradigm shift with respect to the delivery of services – brought
on by the information revolution and other technological advances. This is most evident in the
telecommunications sector, where deregulation has resulted in an explosion in
the array of services available, and rapid technological innovation.
Many leaders in government and industry alike are now
recognizing that electricity sector deregulation can make it more responsive to
changes in business and technology, and more open to the forces of free-market
competition.
2.5.2 Technological
Innovation:
Next
to the drive to achieve greater economic efficiency, the greatest force for
change is quite probably the inexorable advance of technological innovation. In
the electricity sector, two important areas of innovation are having a major
impact on the industry. The first is the development of the natural gas
combined cycle turbine (CCGT). In comparison with the 30 – 40 percent
efficiencies achieved by the old single cycle turbines installed 20 years ago,
today’s systems are running at 50 – 60 percent efficiency, and improving with
time. High thermal efficiency means low emission levels, and this in turn means
that power plants can now be situated closer to centers of demand.
Power generation plants using these turbines (CCGT) also
have low capital costs and rapid construction times when compared with other
options. Fuel costs may in many places still be higher, but the low capital
costs and rapid installation offset this disadvantage, especially for peaking
plants that may run at low capacity factors. However, because modern CCGT
plants run at high levels of reliability, they are increasingly being used for
base load, and because they come in small sizes, adding extra capacity matches
increments in demand more closely than was possible in the past when additional
capacity was likely to cause considerable “lumpiness” in the match between
supply and demand.
 |
| Fig 2.3 Energy and heat flows in a typical modern combined cycle gas turbine |
The second innovation likely to have a major impact on the
electricity sector is the electronic information revolution. Markets, such as
wholesale power pools can now be operated largely through electronic means such
as the Internet, with buying and selling designed to match demand on a five
minute basis throughout the day and night. With the ability of market players
to have access to real time information on all aspects of their operations, and
on constantly changing market prices for electricity, it is now feasible to
operate a disaggregated industry structure with high levels of economic
efficiency. This has been an underpinning argument supporting the view now
widely held that competitive markets lower transaction costs over the old
vertically-integrated bureaucracies of the past.
2.5.3 Consumer Choice:
If one looks at recent reforms in the telecommunications
industry, one prominent feature has been an explosion in technological innovation
and in the bewildering choice of goods and services consumers can now enjoy.
Many energy industry experts are now becoming increasingly convinced that
change on a similar scale could occur in the energy sector once the effects of
deregulatory reform become widespread.
In fact, substantial changes that will bring a wide array
of new goods and services to electricity consumers are already emerging in economies
that have fully deregulated their electricity markets. Already, the market
power of large industrial electricity consumers is having a significant impact
on the behavior of electricity industry participants. As the power to choose
between suppliers reaches down to smaller businesses and residential consumers,
this will act as a further spur to the development of even more goods and
services tailored to meet individual needs. Although there are barriers to
switching suppliers, there is evidence to suggest that new metering technology
and a better understanding of the market by small consumers will in time lead
to true retail competition, and then to further stimulation of electricity
markets as retailers compete to provide a more diverse and higher quality range
of goods and services.
2.5.4 Global Competition:
Energy intensive commodities tend to be traded globally,
and hence the cost structure of competing firms is vitally important to their
international competitiveness. For industries where energy costs form a
significant part of the total cost structure, the price of electricity is
important enough for firms to be important stakeholders in the debate over
electricity sector reform. Because large industries have considerable market
power, they stand to benefit from reforms that may allow them to negotiate
favorable tariffs with competing electricity suppliers. For these reasons,
global trade in energy-intensive products and services is an important force
for change.
2.5.5 Interconnection:
Interconnection can drive reform by opening up
opportunities for wholesale power competition. For interconnection to work
effectively, some kind of wholesale pool or market is desirable, although not
necessary. The benefit of the development of a wholesale market is the facilitation
of power transfers to meet demand on an efficient real-time basis. Ample
opportunities exist for regional trade in electricity. In the Indian region,
all states have for many years engaged in cross-border trading in electricity.
This trade is likely to increase in the future as Indian electricity markets in
particular become more competitive. For example, Tata Power has created a new
unit with the goal of expanding export opportunities in the other states, where
its rates are more competitive, in order to enhance its value on the open
market. And the government in state is considering a legislative proposal that
would open up Tata power's transmission grid to electricity trade from other
provincial utilities and from independent power producers. Such a move would
give access to electricity markets in India. Within economies, the practice of
wheeling (the transmission of power across common power lines from one
independent entity to another) is on the rise. In India, one benefit of
cross-border electricity interconnection will be closer political as well as
economic cooperation. The introduction of micro-economic reform, including
restructuring of the electricity sector will serve as a key facilitator of
cross-border electricity interconnection.
2.5.6 Financial
Constraints:
The demand for additional generation capacity, as well as
the need to upgrade existing distribution and transmission networks, is placing
a large financial and organizational burden on the rapidly industrializing
economies in India. New power plants for example, the most expensive assets in
the electricity chain, can require 100 million or more in capital investment
per MW of electricity. With demand for electricity over the next decade
measured in the tens of thousands of megawatts, governments have found it
impossible to finance additional capacity themselves at the rate of investment
needed.
Self-financing in the energy sector is low in most
developing Indian economies. In combination with severe budget constraints in
the public sector, an option is to allow a substantial degree of private
participation in the power supply system, and this is happening. The
opportunities for financing through private channels depend on the financial
viability of the proposed projects, which is closely linked to electricity
prices.
Some Indian economies, are now attempting to attract
private capital into the electric power sector by privatizing government-owned
assets, or encouraging IPPs to invest under attractive conditions. In some
cases, this results in Power Purchase Agreements (PPAs) very favorable to the
investor. An increasing reliance on foreign capital for infrastructure
development is a two-edged sword. On the one hand, the capital is needed to
support infrastructure development. On the other, significant problems can
arise when global capital is attracted into markets which are immature or in
which substantial subsidization and cross-subsidization exist. For example,
where financial institutions and laws are immature, there are questions concerning
the rule of law, and other questions arise (such as the ability to repatriate
earnings), then private investors will demand substantial premiums in order to
invest.
Meanwhile
economies under International Monetary Fund (IMF) supervision have to abide by
its prescriptions in order to meet requirements for financial assistance and
restore the industry to a level where it can attract private funds. IMF conditions
are explained below:
The requirements are:
·
Corporate
restructuring and privatization of utilities
·
Financial
restructuring of utilities and tariff reform
·
Establishment
of independent regulator
·
Establishment
of competitive power market
·
Integration
of transmission grids and sub regional power trade
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