81729 MANAGING AN ELECTRICITY SHORTFALL A Guide for Policymakers Energy Cluster Sustainable Development Department Latin America & Caribbean Region The World Bank Managing An Electricity Shortfall Supply-demand tension has taken its toll in various countries around the world over the last several years. Governments and utilities have faced gaps between electricity supply and demand, which has led to blackouts and load shedding and translated into electricity shortfalls. While countries look to avoid the prospects of supply shortages by, in- ter alia, strengthening their planning capacity and working to achieve a sounder and more sustainable electricity sector, the possibility of short- ages in the future remains. This document summarizes the framework for action and a broad menu of options available to policymakers to bridge a supply- demand gap in the short- to medium-term. These topics are covered more extensively in the report “Managing an Electricity Shortfall: A Guide for Policymakers.” It is our hope that the information in this note will provide valuable insights for energy policymakers around the world. Elements of While it may not be known when or why, it is certain that there will be future a Program electricity crises and that they are likely to occur in both industrialized and to Manage an developing countries. Electricity An electricity crisis is characterized by an occurrence of electricity Crisis shortages which can find their origin in: »» Capacity constraints: the available capacity (generation and/or transmission) is insufficient to meet peak demand; or »» Energy constraints: the desired electricity consumption of all end- users, over an extended period of time, exceeds the production levels (e.g., as a result of insufficient fuel availability, such as water resources or fossil fuels or a surge in energy demand). Elements of a tailored response to an electricity crisis will depend on: (i) the origin of the supply-demand gap, (ii) the expected duration of the shortfall (and the lead time available), (iii) the identification and evaluation 2Managing an Electricity Shortfall of measures that can realistically be implemented (from both the supply and demand side) and, (iv) the institutional organization of the sector. There is no one-size-fits-all solution to an electricity crisis. Policymakers should de- sign a tailored response on the basis of these four factors. One of the most important elements of an electricity emergency re- sponse program is anticipating and preparing for the possibility of a crisis. Emergency Response Actions Managing an electricity crisis involves actions to alleviate the capacity or energy constraints through a combination of measures affecting either the demand for electricity or the supply. International experience shows that successful management of an electricity crisis requires the implementa- tion of a range of measures including strong energy conservation campaigns, actions to reduce end-use consumption, efforts to reduce energy production losses and remove transmission bottlenecks, and measures to increase supply. Managing an Electricity Shortfall  3 Demand Side Measures Demand side measures are an essential dimension to mitigate electricity crises. Demand side measures focus on reducing the quantity of electricity consumed such as through modifying tariffs, increasing energy efficiency, or affecting consumption behavior. Because the demand for electricity is a derived demand for lighting, cooling, heating, power for commercial and industrial processes, and other electricity uses, demand side measures will seek to affect end-uses. International experience indicates that successfully dealing with electricity crises entails using demand side instruments to limit the quantity of electricity consumed. The optimal mix of instruments will depend on the timing and nature of the crisis. Demand side adjustments act through direct or indirect price signals and through quantity restrictions. Direct price signals—increases in the price of electricity­ create incentives for users to save electricity (through the price elasticity mechanism). Indirect signals include, for example, subsidies for the purchase of more energy-efficient appliances. Quantity restrictions­—or rationing­ —are an alternative way of ensuring that demand and supply balance in the short run. Rationing can be specific or general. Specific rationing takes the form of an administrative rule determining which users will cut back, when, and by how much. A general rationing rule will be based on geographical area or economic activity (such as a neighbor- hood or an industry) or type of users (such as consumers with an electricity load exceeding 1 MW). Electricity tariffs are one of the key elements in determining the rational use of energy. There are two important caveats, however, to keep in mind when considering the effectiveness of tariffs. First, for many small users there is a time lag be- tween when electricity is consumed and when the electricity bill is paid. For a short-term crisis, this delay could limit the impact of a tariff adjustment. Secondly, the effectiveness of tariffs will depend on the nature of the crisis. For example, capacity constraints require a reduction in peak demand which occurs at specific times during the day and World Bank financed varies according to seasons. Unless the tariff structure includes time-of- Nicaragua Off-grid Electrification Project. day or seasonal pricing, rather than the typical structure based on the Source: Project Coordinating Unit of overall volume of consumption, a general tariff increase will not amelio- Nicaragua Ministry of rate a capacity-constrained crisis. Energy and Mines. Table 1 provides a list of demand side options available for managing an electricity crisis, covering adjustments in electricity prices, behavioral chang- es, and the introduction of more efficient technologies. 4Managing an Electricity Shortfall Table 1. Menu of Demand Side Options for Managing Electricity Crises Time Est Cost Measure Main characteristics Frame US$/KWh Prerequisites Best Practice Comments Increase electricity prices Increase Signal through price Short (Varied) Need smart meters in place; Powerful signal to induce Industrial mechanisms crisis Term use of wire transfers avail- desired changes in behavior Tariffs intensity; decentralize able; existence of long-term acting on both supply and savings decisions. contracts, ability to resell demand. Efficient structure will contracted energy signal advantage to consume or shut down an sell power to the market. Increase Signal scarcity to Short and (Varied) Need ata on residential Chile 2007- Best suited for energy crisis as Residential residential users. Medium consumption (load curve and 08 Electricity residential consumers have no Tariffs Term elasticities), political willing- Crisis Man- time of use meters. Comple- ness, able to wait for delayed agement ment of media campaign rather response than substitute. Induce Changes in Behavior Launch a Involves communicating Immedi- (Varied) Need to identify channels South Africa This is a key element of a crisis Mass Media to consumers about elec- ate Term and choose message content Power Alert strategy, but often needs to Campaign tricity crisis information to use; ability to sustain be complemented by other and proposed measures media campaign over time measures. Users need to under- for saving energy stand that their actions affect the outcome of the crisis. Mandate/ Re-allocating public Short and (Varied) Need to conduct energy Chile Energy High visibility of government Encourage sector uses of energy to Medium audits and data on energy Efficiency Poli- actions signals strong com- Public Sector more socially responsible Term consumption. cies for Public mitment and increase likely Energy purposes that conserve Sector response by public. Increasing Conservation electricity public service uses of energy can have large impact (water pumping). Encourage Involves voluntarily Immedi- VOLL Need appropriate data to Government Often the government is the Voluntary reducing electricity ate and implement efficient partial voluntary ra- first to engage in voluntary Rationing consumption Short rationing tioning: Brazil, rationing, with hopes that in- Term Ontario, and dustry and residential consum- Tokyo ers will follow by example. Mandate Consumers are given Immedi- VOLL Need data to implement effi- Norway “10 Involuntary rationing should Compulsory restricted electricity ate Term cient partial rationing; ability for 10” Cam- be used only as a last resort Rationing usage by mandate. to compensate for or justify paign to preserve the integrity of the the social and economic electricity system in the imme- disruption costs. diate term. Introduce More Energy-Efficient Technologies Launch CFL Improvement of light Medium 0.023 Need an in-place distribution Cuba CFL Introduction of efficient light- Replacement bulb efficiency, including Term channel and mechanism; a Replacement ning through the distribution of Program public lighting (traffic method of ensuring destruc- Program CFLs is the most cost effective lights, street lights) tion of old bulbs measure to reduce demand. Launch Replacement inefficient Medium 0.150 Need an in-place distribution Cuba Need detailed information on Appliance appliances for residential Term channel and mechanism; a Appliance existing stocks and use habits Replacement & industrial users. method of ensuring destruc- Replacement to design efficient campaign. Program tion of refrigerators Program Managing An Electricity Shortfall  5 Supply Side Measures Supply side responses to electricity crises primarily involve increasing generation capacity and its availability. In addition to a country’s long- term electricity expansion plan, there are short- and medium-term oppor- tunities to improve the performance of currently installed equipment which can be the most expeditious means to increase effective generating capacity. This can include increasing the availability of generating capacity (such as by improving maintenance), or by reducing losses in transmission or distri- bution. Any measures which involve investments in capital equipment are unlikely to be effective in relieving a short-term electricity crisis. However, if the crisis is longer than a few months, such measures may become feasible. Although many countries perceive diesel fuel based power generation as the most effective way to increase generating capacity, this may not al- ways, or even generally, be the case. Most countries have implemented emer- gency generation plans that include reciprocating high speed engines using diesel fuel or medium speed engines using heavy fuel oil (HFO). However, diesel fuel is a high-cost option and also suffers from price volatility. In addi- tion, time can still be a constraint to implementing petroleum-based genera- tion capacity. Medium speed engines may take as long as 24 to 30 months to engineer, procure, and construct. The rehabilitation of existing facilities, repowering, and the mobilization of back-up generation are typically quicker and more efficient ways to increase the supply of electricity. To manage electricity crises, the authorities in several countries have resorted to leasing temporary mobile generating stations and implement- ed other measures focusing largely on increasing electricity supply. This is often a costly and suboptimal solution. Deciding which technology or solution to implement will depend on the particular circumstances of the country. The costs of bringing in new capacity quickly should be analyzed against slower measures that are cheap- er. Also, every solution will have implementation costs such as for incentive payments, expediting costs, spare parts, and additional capital, which should also be assessed on a case-by-case basis. Table 2 provides a menu of supply side options for managing electricity crises. Crafting an The selection of measures will depend on an evaluation of the options Emergency given the nature of the crisis and other key factors. The choice of measures Response will depend on how rapidly the impacts need to be felt. For any system there Program will be multiple combinations of options to increase supply and reduce de- mand. In the short run (less than six months) there are generally very limit- ed opportunities to increase generation capacity. Some supply side measures 6Managing an Electricity Shortfall Table 2. Menu of Supply Side Options for Managing Electricity Crises Time Est Cost Rank Measure Main characteristics Frame US$/KWh Prerequisites Best Practice 1 Improve Generation Allows improvements in the output Short (Varied) Data on availability limita- Philippines and Transmission of existing assets in the sector; Term tions needs to be readily Overhaul of Outputs (Increase valid for generation and transmis- available. Diesel Plant Availability) sion assets. 2 Rehabilitate This increases capacity by Improv- Short (Varied) Data on capacity limitations Philippines Existing Equipment ing the operation of existing equip- Term needs to be readily avail- Overhaul of (Increase Capacity) ment or rehabilitates retired or able. Diesel Plant de-rated units 3 Expedite Completion Start with plants and transmis- Medium (Varied) Cost of expediting efforts or of Plants Under sion lines in Expansion Plans and Term incentives to contractors and Construction advance the comopletion date to owners to adhere to reduced prevent schedule slippages. schedule; need to determine effectiveness of expediting the schedule 4 Offer PPAs on a Integrate backup generation into Immediate (Varied) Need to create PPAs with ap- short term basis the dispatch pool for peaking by and Short propriately lined and priced offering PPAs to make use of Term incentives to effectively existing operating equipment. target backup generation options. 5 Increase availability Bagasse fueled plants are used by Immediate 0.147 Need to obtain data on of bagasse fueled sugar cane mills only during the and Short existing on-site generation plants sugar cane harvest —use for alter- Term available plants. Rules and native fuels after harvest tariffs for use of wires and standardized PPA needed. 6 Add Capacitor Add capacitor banks at sites which Short $4.5 mil- Need to cover cost of ca- Banks to Reduce reduce transmission system losses Term (8 lion for 90 pacitor installations; need to Transmission Losses and can increase the operating months) MVAR at update transmission system MW capacity of existing generators. 230 kV data 7 Install Advanced Reducing technical and non- Short and (Varied) Data on sources of losses Colombia Metering Systems technical losses through Medium (technical, commercial); Integrated to Reduce Losses installing new metering Term social and political feasibility; Power System technologies public acceptance of new (Cartagena) metering technologies. 8 Install High Speed Install high speed reciprocating Immediate 0.151 Need to obtain pricing data; Reciprocating engines to operate on a temporary Term (90 need to be able to pay for Engines basis. days) high fuel costs and rental fees. 9 Lease Power Install leased power generation Immediate $500 to Need to obtain pricing and Generation barges equipped with Term $700/kw other available data, and be Barges, or Fixed reciprocating engines or for used able to pay high cost fuel Gas Turbine, combustion turbines. barges; and rental fees or purchase Simple Cycle $650/kw to costs, cost to prepare water- $850/kw front site, or land site for simple cycle 10 Lease or Purchase Lease or purchase used power Short and (Varied), Need a defined schedule to Used Power Plant plant equipment with a warranty Medium with high implement use power plant Equipment less than for new equipment. Term risk due equipment as soon as pos- to limited sible to minimize warranty warranty risks Managing an Electricity Shortfall  7 targeting the availability of existing plants and/or purchases from captive generators can be effective in this time period. This means that in the short run the burden of adjustment will generally lie on the demand side. The impacts of measures can be classified according to the time pe- riod in which they take effect: »» Very short run (a few weeks): No supply response is easily available. Demand responses are limited to changes in behavior given existing technology (such as switching off lights, air conditioning, hot-water heaters, and other non-essential equipment) that are normally in- duced voluntarily or through quantity restrictions (general rationing). »» Short run (within six months): Little supply response is easily avail- able. A wider range of demand responses is available, including some minor technical changes which involve capital expenditure to replace existing appliances (such as CFLs). A wider range of price (changes in tariffs) and quantity incentives (specific rationing) can also be used. »» Medium run (up to 24 months): Some supply responses are likely to be available (such as increasing the availability of existing plants, co-generation from existing capacity, and speeding up projects under construction). Demand responses include making ‘easy’ switches in technology. A full set of price and quantity incentives are available. »» Long run (years): The full range of supply and demand responses is possible. Lessons from a wide range of international experience show that suc- cessful crisis management depends on implementing an emergency re- sponse package composed of a variety of complementary measures. Those measures will depend on the cause and nature of the crisis, the institutional capacity of the country to rapidly deploy short-term measures, and the cost and benefits of those measures as well as their public acceptance. Identifying emergency responses will require a thorough examination of the effectiveness of individual measures, and of combining measures, to achieve the desired results. For example, in some cases, price and ration- ing mechanisms can be used simultaneously. A useful principle is to assign each customer with a quota of electricity. If their consumption exceeds that quota, they face a financial penalty. If they save in relation to the given quota they receive a financial bonus. To be efficient and cost effective, rationing should be designed in such a way that it provides an incentive for consum- ers to reduce their lowest-value consumption. When the crisis arises from a capacity constraint, energy savings are needed during peak consumption. In many cases the metering equipment in place does not measure the time of consumption and thus cannot send an appropriate price signal to miti- 8Managing an Electricity Shortfall gate the crisis. Only a few countries use peak-load tariffs for large electricity consumers, which can reward off-peak and penalize on-peak consumption. Residential users typically pay energy-only tariffs and have meters which only record total electricity usage. Measures to mitigate the social impacts of the crisis are needed and should be well targeted. In a market-based system, there is always a danger that a severe supply-demand gap could result in a price spike. If shortages last for more than a few days, price increases to final consumers are some- times necessary. This in turn, can generate affordability problems, especially for low income consumers. However, responding to an increase in electricity prices with direct or indirect subsidies could exacerbate the energy crisis if there is no incentive for consumers to reduce their electricity consumption. Large-scale subsidies could also create a fiscal crisis. Market-based pricing and rationing schemes should be used to reduce electricity demand, while direct or indirect subsidies should be used to guarantee minimum electricity supplies for the poor. Regulatory constraints can affect the range of options available and the impact on different stakeholders. Legal or administrative restrictions often prevent the use of certain instruments. For example, tariff changes may have to be approved through a pre-defined administrative process that involves public hearings, which means that increasing tariffs may not be a possible solution in the short term. The regulatory regime can also affect the impact of emergency response measures on different stakeholders. For example, a demand reduction can negatively affect the financial situation of a distribution company working under a price cap, even if the crisis originated in the generation sector. Taking into account possible negative effects on stakeholders is there- fore critical. The challenge facing decision makers is to find the optimal combination of demand and supply measures which will impose the least cost on the economy in terms of reduced output, employment, and social disruption. In addition, demand-side management, as a general proposition, has a smaller environmental footprint (for both local and global pollutants) than supply-side interventions involving increased generation. When formulating an emergency response to an electricity crisis the fol- Steps to lowing steps should be taken: Formulate an Emergency »» Identify the nature of the problem, including: Response • The nature of the electricity shortfall. Every crisis is unique and Program the shortfall could be in peak capacity or in energy. • The probable duration of the shortfall. Appropriate responses will depend on the estimated duration of the shortfall. Managing an Electricity Shortfall  9 World Bank • The breakdown of energy consumption by end-uses during the financed Peru Rural Electrification Project. shortfall period to understand potential crisis impacts and to Source: Rural Electrification better define mitigation measures. The most reliable approach Department of Ministry is to build on existing detailed customer surveys, provided these of Energy and Mines. include end-use monitoring, load surveys, appliance saturation surveys, and other available data. Obtaining details on the energy consumption of the largest customers is essential. This informa- tion will detail how much electricity is consumed by each sec- tor, what appliances and equipment are responsible for the energy used, and under which contractual terms energy is consumed. This can in turn allow an assessment of the feasibility of tempo- rarily disconnecting some large users. »» Identify a wide array of emergency measures to both reduce/man- age demand and increase supply. Emergency responses tend to focus more on supply responses than on demand. International experience shows that success in mitigating electricity crises comes from an inte- grated use of demand and supply measures. »» Identify and measure the impacts of the proposed emergency re- sponses to ensure their fiscal feasibility and social acceptability. Having a fair distribution of costs and having people perceive it as such is critical to effectively implement emergency response mea- sures and to obtain broad public support. Good practice in this re- gard involves providing funds to shield the poor from price increases through a clear and transparent targeting mechanism. 10Managing an Electricity Shortfall »» Rank measures according to their costs and benefits to understand orders of magnitude and to set expectations. A rapid evaluation car- ried out by the World Bank on six different measures showed that demand side measures focused on appliance replacement (lamps, refrigerators and electric showers) have lower costs for the savings achieved (levelized cost per kWh saved) than supply side measures focused on adding short term capacity. Costs range from $0.02 per kWh saved for a program replacing light bulbs with efficient compact fluorescent lamps (CFLs) to $0.20 or more for leasing high speed diesel engines. In addition, supply side measures add a significant energy price volatility element through the added fuel price risk. International experience shows that emergency response preparation and Preparing crisis management has been better handled in countries that anticipated a for the potential crisis and that prepared a detailed emergency response plan before “Next” the crisis struck. Some of the key enabling factors are: Crisis »» The ability to mobilize a coordinated response, which combines de- mand and supply measures and draws on a variety of existing entities (electricity utilities, regulators, line ministries) and policy mecha- nisms. »» The quality of information on energy supply and demand. »» The quality of information available to clearly identify entities and citizens at risk of being most impacted by an electricity crisis, and those which could potentially contribute to mitigate the impact of a crisis (such as identifying large consumers whose electricity con- sumption can be interrupted or rescheduled). Ideally, countries will be able to reduce the likelihood of a crisis through strong planning. However, external shocks and the possibility of weaknesses in planning, or the combination of various factors, make the probability for an electricity crisis sufficiently high to warrant the active preparation of an emergency response plan. In addition, many of the actions set out above (such as energy efficiency, rehabilitation, or repowering) remain relevant under normal planning situations and may in fact be least-cost. Most im- portantly, experience shows that the better a government is prepared and equipped to address a potential electricity crisis, the higher the chances for sound energy sector growth and for mitigating the social and economic im- pacts in the event of such a crisis. Managing an Electricity Shortfall  11 The Energy Unit of the Sustainable Development Department of the Latin America and Caribbean Region of the World Bank is responsible for writing and producing this document. Authors: Photo Credits: Production Credits: Pierre Audinet Cover Photo: Landscape of city Design: The Word Express, Inc. Senior Energy Economist apartments illuminated in the paudinet@worldbank.org night. Source: Shutterstock. Copyright March 2010 Martin Rodriguez Pardina Photo on pages 2 and 3: The International Bank Independent Consultant, Courtesy of iStockphoto LP. for Reconstruction and marp@macroconsulting.net Development/THE WORLD K&M Engineering and All images remain the sole BANK GROUP Consulting of USA property of their source 1818 H Street, NW and may not be used for Washington, D.C. 20433, USA any purpose without written permission from the source. The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by The World Bank and assists low- and middle-income countries to increase know how and institutional capability to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. For more information about ESMAP’s energy assessments and strategy work, please visit us or write to us at: Energy Sector Management Assistance Program The World Bank 1818 H Street, NW Washington, DC 20433 USA email: esmap@worldbank.org web: www.esmap.org Further information: Please visit the World Bank’s website: www.worldbank.org 12Managing an Electricity Shortfall