Drifting Away from the Textbook Model - Emerging Institutional Arrangements of Power Sector in Developing Countries

About a year ago, a smart colleague  working in German Development Cooperation uttered -  in German - a bold  conjecture, which became an underlying working hypothesis during my work on ‘Profound Change in the Power Sector of Developing Countries’[1]. It goes like this:  “Developing countries officially still claim to implement the market paradigm for the power sector formulated 30 years ago. In reality and driven by innovations in the power sector, they develop divergent forms, which may converge to a new hybrid model”. Today, I dare to say that the guy has sensed correctly some important trend in the institutional development of the power sectors of DCs.

 



[1] Forthcoming work for GIZ TechCoop vRE Programme, which is financed by the German Federal  Ministry for Economic Cooperation and development.  

 

Energy and regulatory policy in economies with mature power sectors respond to the current challenges from integration of variable generation from renewables, decentralization, digitalization and other innovations with more unbundling of redefined services, more markets for such services etc.  This means that they pursue a refined version of the market oriented   ‘textbook model’[1].   Responding to these challenges  and dealing with short term flexibility   and  long term supply  availability  Germany, UK, US-States and other OECD countries modify and introduce  short term markets  and platforms for power and ancillary services  and  as well as  capacity markets  or regulated capacity reserve.

 

Some doubts, however, are already voiced about the appropriateness of the ‘textbook model’ under the changed conditions, e.g. on the wisdom of separating transmission and distribution[2], when generation and feed-in happens at all levels of the grid, and transmission cannot be defined any more as interconnection of generators and  very large consumers or transformer stations  to distribution systems for all other consumers.  

 

In developing countries (DCs) trends are different although the rhetoric sticks to the market oriented reform. Already during the last decades one could observe a split in the institutional development.

 

Mostly in Latin America, we saw reforms towards the ‘textbook model’ at least at the wholesale level.  Chile was even one of the first movers worldwide, and Argentina, Peru, Colombia, Brazil and even smaller Central American countries followed, supported by Multilateral Development Banks and others. In Asia on the contrary, we saw the Independent Power Producer (IPP)/Single Buyer (SB) model rising to dominance. This model also gained hold in several African countries. This is a partial opening seen by many as an intermediate step to the full opening for direct competition on the wholesale level. The IPP/SB  is combined more frictionless with  the classical integrated institutional set-up, which in most countries continue to resist. The incumbent fully integrated organization may act as SB, at least in the first place. The long term delivery contracts or Power Purchase Agreements (PPA) may be awarded on the basis of negotiations with proactive project developers or on the basis  of competitive bidding. In many countries, IPP are restricted to a limited share in generation or to specific technologies including hydropower

 

By the way: The retail market competition feature of the ‘textbook model’  has not been implemented at all in DCs.

 

What can be observed in the last few years  should be upsetting the institutional mainstream which sustains the global validity of the market oriented ‘textbook model’ as a paradigm.  In the countries which use the IPP /SB system, there is  hardly a  further step towards the full direct competition for wholesale electricity.[3]  Instead, we see a refinement of the model  towards advanced Public Private Partnership (PPP)  systems, in which functions  of the integrated power organization (i.e. transmission, SB,  distribution) are unbundled, but the long term contracts system and the SB remain in  place. This is observed in  South East Asian countries as well as in East and West African countries, aside from the specific Renewable  Energy- IPP model in South Africa, and the many other limited  IPP admission. 

 

Most significantly, we recently noticed long term contracting of power even within  established wholesale market oriented systems in Latin America,  after Brazil, Peru even in Chile, on the basis of tender competitions and auctions. This  seems not to be  in systemic  conformity  to ‘textbook model’, since these are not individual bilateral contracts but rather contracts of IPP with the system. At first sight, this may look astounding, but it seems logical in the face of the new realities in the power sector. And one substantial reason for the shying away from the full market model  is the uncertainty of having sufficient capacity in the long run, when relying on the energy-only-market plus capacity markets.  

 

Noting the central and growing role of long term contracts not only for renewable energy  we see, with some phantasy, a convergence of systems on the bulk power level,  if not to a single new paradigm,   but towards a family of hybrid models!  The wholesale market model is saddled with long term contracts, whereas the IPP/SB model is  facilitated by multiplication of players. The challenge here will be to build-in sufficient flexibility in spite of long term fixes in contracts.

 

In any case, this unsettles the concept of the future institutional arrangement in DCs many people still nourish. Realistically,   the development community needs to come to terms with these  new hybrid models, at the time of  profound change in many other aspects.


[1] This ‘textbook model’ is enumerated by Littlechild, S.  The Market versus Regulation, as well as Joskow, P.L.,  Introduction to Electricity Sector Liberalization,: Lessons learned from Cross-Country Studies,  both in: see  Sioshansi, F.P., Pfaffenberger, W.,  Electricity Market Reform - An International Perspective, Elsevier Global Energy Policy and Economics Series, 2006,  http://www.sciencedirect.com/science/book/9780080450308;.

[2] This searation is questioned e.g. by Mark O’Malley UCD School of Electrical and Electronic Engineering

[3] China seems an important exception, since she plans to introduce wholesale power markets in 2016. However,   contrary to some categorization, China did not introduce the IPP/SB model and actually abandoned the IPPs from the 1990s; China   instead redistributed all generation assets to separate companies, which for the time being supplied power under regulated prices  and not under PPAs. see Paul H. Suding Chinas Energy Economy and Policy, Feature Article in the Annual Report of Weltenergierat – Deutschland e.V., German Chapter of World Energy Council Berlin 2005

 


  

 

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