RepoRt No. – 52106–LAC MANAGiNG AN ElEctricity ShortfAll A Guide for Policymakers Central America Regional Programmatic Study for the Energy Sector November 2010 Pierre Audinet Martín Rodriguez Pardina Energy Unit Sustainable Development Department Latin America and Caribbean Region The World Bank MANAGING AN ELECTRICITY SHORTFALL: A Guide for Policy Makers November 2010 Copyright page Energy Sector Management Assistance Program (ESMAP) reports are published to communicate the results of ESMAP‘s work to the development community with the least possible delay. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this report are entirely those of the author(s) and should not be attributed in any manner to the World Bank or its affiliated organizations, or to members of its board of executive directors for the countries they represent, or to ESMAP. The World Bank and ESMAP do not guarantee the accuracy of the data included in this publication and accept no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations or other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement of acceptance of such boundaries. Abbreviations and Acronyms AMI Advanced metering infrastructure AMR Automatic meter reading CC Combined cycle CCGT Combined cycle gas turbine CFL Compact fluorescent lamp CPC Confederación de la Producción y del Comercio de Chile CTP Critical peak pricing DSM Demand-side management EPC Engineering, Procurement, Construction ERNC Energías renovables no convencionales GDP Gross domestic product GT Gas turbine GW Gigawatt GWh Gigawatt hour HFO Heavy fuel oil HVAC Heating, Ventilation, Air Conditioning ICE Instituto Costarricense de Electricidad IEA International Energy Agency IPP Independent power producer kW Kilowatt kWh Kilowatt hour LDO Light distillate oil LFO Light fuel oil MVAR Mega Volt Ampere Reactive MW Megawatt MWh Megawatt hour O&M Operation and maintenance OCGT Open Cycle Gas Turbines PPA Power Purchasing Agreement RTP Real-time pricing SC Single cycle SIEPAC Sistema de Interconexión Eléctrica para América Central SOE State-owned enterprise TOU Time of use VOLL Value of lost load W Watt Acknowledgments This report has been produced by the Energy Unit of the Sustainable Development Department of the Latin America and Caribbean Region of the World Bank, with the support of ESMAP. This report was written by a team comprising Pierre Audinet (Team Leader, Senior Energy Economist) and Martin Pardina (Consultant), with inputs from K&M Engineering Company (Consultants), Pamela Sud (Junior Professional Associate), Alan Meier (Consultant), and Laura Berman (Energy Specialist, Consultant). The team is grateful for valuable guidance provided by Fernando Lecaros (Consultant) and Philippe Benoit (Energy Sector Manager). The financial and technical support by the Energy Sector Management Assistance Program (ESMAP) is gratefully acknowledged. ESMAP—a global knowledge and technical assistance partnership administered by the World Bank and sponsored by official bilateral donors—assists low- and middle-income countries, its ―clients,‖ to provide modern energy services for poverty reduction and environmentally sustainable economic development. ESMAP is governed and funded by a Consultative Group (CG) composed of official bilateral donors and multilateral institutions, representing Australia, Austria, Canada, Denmark, Finland, France, Germany, Iceland, the Netherlands, Norway, Sweden, the United Kingdom, and the World Bank Group. TABLE OF CONTENTS PREFACE ........................................................................................................................................... 9 EXECUTIVE SUMMARY ............................................................................................................. 11 CHAPTER ONE: INTRODUCTION ............................................................................................ 19 CHAPTER TWO: MEASURES TO RAPIDLY REDUCE THE DEMAND FOR ELECTRICITY................................................................................................................................ 25 2.1 Available Measures ................................................................................................................ 25 2.1.1 Communicating with Customers ..................................................................................... 25 2.1.2 Rationing............................................................................................................................. 29 2.1.3 Economic Incentives ......................................................................................................... 31 2.1.4 Appliance Replacement .................................................................................................... 34 2.1.5 Importance of the Public Sector ...................................................................................... 37 2.2. Tariffs ..................................................................................................................................... 38 2.2.1 Residential Tariffs ............................................................................................................. 38 2.2.2 Large Users......................................................................................................................... 43 2.2.3 Tariff Regime ..................................................................................................................... 46 2.3 Quantifying Appliance Replacements ................................................................................... 47 2.3.1 Refrigerator Replacement ................................................................................................. 48 2.3.2 Refrigerator Efficiency Choice – Private Valuation ..................................................... 50 2.3.3 CFL Replacement .............................................................................................................. 52 CHAPTER THREE: MEASURES TO RAPIDLY INCREASE THE SUPPLY OF ELECTRICITY................................................................................................................................ 54 3.1 Introduction ............................................................................................................................ 54 3.2 Ten Measures to Increase Electricity Supply......................................................................... 54 3.3 Analysis of the Ten Measures to Increase Electricity Supply ............................................... 56 3.3.1 Increasing Availability and Capacity of Existing Generating Plants ......................... 56 3.3.2 Expediting Projects in Expansion Plans ......................................................................... 58 3.3.3 Transmission System Upgrades and Reduction of Losses ........................................... 59 3.3.4 Integration of Backup Generation ................................................................................... 61 3.3.5 Sugarcane Bagasse-fueled Power Plants ........................................................................ 62 3.3.6 Reduction of Nontechnical Losses with Advanced Metering Systems ...................... 62 3.3.7 Addition of Capacity Using Reciprocating Engines ..................................................... 66 3.3.8 Addition of Capacity Using Leased Power-generation Barges ................................... 67 3.3.9 Addition of Capacity with Used Power Plant Equipment ............................................ 68 3.3.10 Environmental Considerations in Rehabilitating Existing Thermal Plants ............... 69 3.4 Ranking of Measures to Increase Electricity Supply Capacity .............................................. 69 3.5 Ranking of Measures to Increase Electricity Supply and Characteristics Matrix ................. 71 CHAPTER FOUR: PRACTICAL RECOMMENDATIONS...................................................... 75 4.1 Identify the Type of Electricity Shortfall ............................................................................... 75 4.2 Estimate the Probable Duration of the Shortfall .................................................................... 76 4.3 Establish a Breakdown of Energy Consumption by End Use during the Shortfall Period .... 76 4.4 Define Whether Specific Electricity Pricing Measures are Needed ...................................... 77 4.5 Develop a Prioritized List of Measures ................................................................................. 77 Annex 1. Case Study: Chile ......................................................................................................................... 80 Annex 2. Case Study: Cuba ............................................................................................................... 86 Annex 3. Case Study: South Africa ................................................................................................... 91 Annex 4. Replacing Electric Showers in Costa Rica ......................................................................... 96 References .......................................................................................................................................... 98 Table Index Table 1 – Responses to Electricity Supply-Demand Crisis - International Cases ............................. 23 Table 2 – Demand Measures – International Experience .................................................................. 25 Table 3 – Immediate Energy Saving Measures ................................................................................. 29 Table 4 – Energy Saving Targets in Brazil ....................................................................................... 30 Table 5 – Tariff Increases in Cuba .................................................................................................... 32 Table 6 – Participation, Savings and Costs of the California ―20-20‖ Program ............................... 33 Table 7 – Appliance Replacement Ratio – Cuba June 2008 ............................................................. 36 Table 8 – Most Common Energy Consuming Equipment Replacements ......................................... 37 Table 9 – Tariff Structure – Residential Sector Central America ..................................................... 38 Table 10 – Residential Tariff Structure – Central America ($) ......................................................... 39 Table 11 – Avoidable Costs and First Block Tariff ........................................................................... 40 Table 12 – Individual electricity consumption quotas and equivalent block prices .......................... 42 Table 13 – Medium Voltage Tariff – Central America 2009 ($) ....................................................... 44 Table 14 – Dynamic Pricing Alternatives .......................................................................................... 44 Table 15 – Emergency Demand Response Programs ........................................................................ 45 Table 16 – Tariff Regime Central America ....................................................................................... 46 Table 17 – Refrigerators Average of Annual Energy Consumption kWh ......................................... 48 Table 18 – Refrigerator‘s Energy Efficiency Increase ...................................................................... 48 Table 19 – Average Refrigerator Efficiency in Costa Rica ............................................................... 49 Table 20 – Refrigerators Stocks in Central America ......................................................................... 49 Table 21 – Potential Energy Savings (% Residential Consumption) ................................................ 50 Table 22 – Refrigerator Parameters ................................................................................................... 51 Table 23 – Required Subsidy to purchase energy efficient refrigerators ($) ..................................... 51 Table 24 – Estimates of Total Lamps Stock per Country .................................................................. 52 Table 25 – Estimated Savings (MWh/year) ....................................................................................... 53 Table 26 – Transmission System Changes ........................................................................................ 59 Table 27 – Characteristics of Capacity Technology .......................................................................... 70 Table 28 – Technology Sorted in Order of Installation Time and Thermal Efficiency ..................... 70 Table 29 – Technology Sorted in Increasing Order of O&M & Fuel Cost ....................................... 71 Table 30 – Technology Sorted in Increasing Order of Capital Cost.................................................. 71 Table 31 – Cost and time to implement different alternatives ........................................................... 73 Table 32 – Characteristics Matrix ...................................................................................................... 74 Table 33 – Appliance Replacement Levelized Cost .......................................................................... 79 Table 34 – Ranking of Levelized Costs ............................................................................................. 79 Table 35 – Efficient Electric Shower Economic Impact Estimation ................................................. 96 Table 36 – Cost Analysis of Risk Mitigating Measures: Sensitivity Analysis ............................... 91 Figures and Graphs Index Figure 1 – Decision matrix ................................................................................................................ 55 Graph 1 – Appliance Replacement in Cuba ....................................................................................... 36 Graph 3 – Percentage of electricity consumption variation from one year to the other .................... 42 preface Economic growth in Central America has increased rapidly over the past 20 years. Currently, the gross domestic product (GDP) per capita for the six Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama averages approximately US$3,600. However, masked behind this average figure is a subregion of 40 million people with a wide variety of income, where more than half of the population lives in poverty. Energy in general and electricity specifically are critical for economic development. Electricity is needed to power the machinery that supports income-generating opportunities. Capital (both domestic and foreign) is attracted to countries that are able to offer an affordable, reliable source of electricity for businesses. Investment in secure, reliable and reasonably priced sources of energy that promote efficient consumption is necessary for sustained economic growth. Although the individual electricity markets of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama are not large, together the six countries collectively generated nearly 38 Terawatt-hours (TWh) of power, equivalent to around 70 percent of the annual electricity supply of a medium-sized country in Latin America. However, individual electricity markets in this subregion are very different, ranging from vertically integrated to totally unbundled systems. Electricity markets also vary significantly in their quality of service and in their efficiency in production and delivery. In addition, the fragmentation of the subregion‘s electricity market into small units has presented challenges for meeting a growing demand and has raised supply costs. The SIEPAC Electrical Interconnection System, which will link the six countries in 2010, could bring a number of associated benefits such as the improvement of energy security through increased reserve margins, as well as efficiency gains and lower costs through economies of scale. Integration is necessary, but not sufficient, to meet the subregion‘s electricity needs and there remain a number of steps to be taken in both the short and long terms to be able to fully exploit the benefits of integration. These include addressing physical, regulatory, institutional and political issues on national and regional levels as part of an effective integration plan. The World Bank has undertaken a series of studies to better understand the energy challenges facing these six Central American countries that are to be joined by SIEPAC and to identify actions to promote the sound development of the sector. These studies have been prepared by a team of policy experts, engineers and economists as part of an integrated series entitled the Central America Programmatic Energy Studies, with a primary focus on the electricity subsector. The initial phase of this programmatic series includes three modules: I. General Issues and Options: sets the stage for further analysis by systematically examining the electricity subsector and identifying major challenges at the individual country and regional levels. 9 II. Managing an Electricity Shortfall: evaluates the effectiveness of supply- and demand-side actions to address actual or looming shortages. III. Structure and Regulatory Challenges: identifies barriers to electricity integration and proposes actions to overcome them. This particular document, the Managing an Electricity Shortfall module, provides a framework for action and a broad menu of options available to policy makers to bridge a supply-demand gap in the short- to medium-term. The World Bank is also proposing additional modules, including one on the potential for further development of geothermal energy in the subregion. It is our hope that this series of studies will help policy makers and other stakeholders in these six countries to address the issues necessary to create a reliable and efficient energy system that serves as a solid foundation for economic growth in the subregion. Laura Frigenti Philippe Benoit Country Director Sector Manager Central America Energy Unit Latin America and Latin America and the Caribbean Region the Caribbean Region 10 EXECUTIVE SUMMARY I. Introduction 1. Supply-demand tension has taken its toll in various countries around the world over the past several years. Governments and utilities have faced gaps between electricity supply and demand, which have led to blackouts and load shedding and translated into electricity shortfalls. While countries look to avoid the prospects of supply shortages by strengthening their planning capacity and working to achieve a sounder and more sustainable electricity sector, the possibility of shortages in the future remains. 2. This document summarizes the framework for action and a broad menu of options available to policy makers 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 Policy Makers.‖ It is our hope that the information in this note will provide valuable insights for energy policy makers around the world. II. Elements of a Program to Manage an Electricity Crisis 3. Although it may not be known when or why, it is certain that there will be future electricity crises and that these are likely to occur in both industrialized and developing countries. 4. An electricity crisis is characterized by an occurrence of electricity shortages whose origin can be found 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). 5. 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 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. Policy makers should design a tailored response on the basis of these four factors. 6. One of the most important elements of an electricity emergency response program is to anticipate and prepare for the possibility of a crisis. A. Emergency Response Actions: 7. Managing an electricity crisis involves actions to alleviate the capacity or energy constraints through a combination of measures that affect either the demand for electricity or the supply. International experience shows that successful 11 management of an electricity crisis requires the implementation 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. B. Demand-side measures: 8. Demand-side measures are an essential dimension to mitigate electricity crises. Demand-side measures focus on reducing the quantity of electricity consumed, such as by 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. 9. 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 subsidies for the purchase of more energy-efficient appliances, for example. Quantity restrictions, or rationing, are an alternative way of ensuring that demand and supply are balanced in the short run. Rationing can be specific or general. Specific rationing takes the form of an administrative rule that determines 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 neighborhood or an industry) or type of users (such as consumers with an electricity load exceeding 1 MW). 10. Electricity tariffs are one of the key elements in determining the rational use of energy. However, two important caveats should be kept in mind when considering the effectiveness of tariffs. First, for many small users there is a time lag between 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. Second, 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 varies according to seasons. Unless the tariff structure includes time-of-day or seasonal pricing, rather than the typical structure based on the overall volume of consumption, a general tariff increase will not ameliorate a capacity-constrained crisis. 11. Table 1 provides a list of demand-side options available for managing an electricity crisis, covering adjustments in electricity prices, behavioral changes, and the introduction of more efficient technologies. 12 13 C. Supply-side Measures: 12. 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 opportunities to improve the performance of currently installed equipment, which can be the most expeditious means to increase effective generating capacity. These can include increasing the availability of generating capacity (such as by improving maintenance) or reducing losses in transmission or distribution. Any measures that 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. 13. Although many countries perceive diesel-fuel-based power generation as the most effective way to increase generating capacity, this may not always, or even generally, be the case. Most countries have implemented emergency 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 addition, time can still be a constraint to implementing petroleum-based generation 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. 14. To manage electricity crises, the authorities in several countries have resorted to leasing temporary mobile generating stations and have implemented other measures focused largely on increasing electricity supply. This is often a costly and suboptimal solution. 15. The decision on 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 cheaper. Moreover, 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. III. Crafting an Emergency Response Program: Evaluating the Options and Choosing a Plan of Action 16. The selection of measures will depend on an evaluation of the options, given the nature of the crisis and other key factors. The choice of measures will depend on how rapidly the impacts need to be felt. For any system there will be multiple combinations of options to increase supply and reduce demand. In the short run (less than six months), opportunities to increase generation capacity are generally very limited. Some supply-side measures that target 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. 14 15 17. The impacts of measures can be classified according to the time period in which they take effect:  Very short run (a few weeks): No supply response is easily available. Due to existing technology, demand responses are limited to changes in behavior (such as switching off lights, air conditioning, hot water heaters and other nonessential equipment) that are normally induced voluntarily or through quantity restrictions (general rationing).  Short run (within six months): Little supply response is easily available. A wider range of demand responses is available, including some minor technical changes that 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 is available.  Long run (years): The full range of supply and demand responses is possible. 18. Lessons from a wide range of international experience show that successful crisis management depends on the implementation of an emergency response package composed of a variety of complementary measures. Those measures will depend on the cause and nature of the crisis, the country‘s institutional capacity to rapidly deploy short-term measures, and the cost and benefits of those measures as well as their public acceptance. 19. 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 rationing mechanisms can be used simultaneously. A useful principle is to assign customers 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 consumers 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 mitigate the crisis. Only a few countries use peak-load tariffs for large-scale electricity consumers; such tariffs can reward off-peak and penalize on-peak consumption. Residential users typically pay energy-only tariffs and have meters that only record total electricity usage. 20. 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 sometimes necessary. This in turn can generate affordability problems, especially for low-income consumers. However, 16 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. 21. 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 predefined administrative process that involves public hearings; this 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. 22. It is therefore critical to take into account possible negative effects on stakeholders. The challenge facing decision makers is to find the optimal combination of demand and supply measures that 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. IV. Steps to Formulate an Emergency Response Program 23. The following steps should be taken in the formulation of an emergency response to an electricity crisis:  Identify the nature of the problem, including: - The nature of the electricity shortfall. Every crisis is unique and 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. - The breakdown of energy consumption by end uses during the shortfall period in order to understand potential crisis impacts and better define mitigation measures. The most reliable approach is to build on existing detailed customer surveys, provided these 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 information will detail how much electricity is consumed by each sector, 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 temporarily disconnecting some large users.  Identify a wide array of emergency measures to reduce and/or manage demand and increase supply. Emergency responses tend to focus more on 17 supply responses than on demand. International experience shows that success in mitigating electricity crises comes from an integrated use of demand and supply measures.  Identify and measure the impacts of the proposed emergency responses to ensure their fiscal feasibility and social acceptability. Having a fair distribution of costs and having people perceive it as such are critical to effectively implement emergency response measures and to obtain broad public support. Good practice in this regard involves providing funds to shield the poor from price increases through a clear and transparent targeting mechanism.  Rank measures according to their costs and benefits to understand orders of magnitude and to set expectations. A rapid evaluation carried 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 US$0.02 per kWh saved for a program to replace light bulbs with efficient compact fluorescent lamps (CFLs), to US$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. V. Preparing for the “Next” Crisis 24. International experience shows that emergency response preparation and crisis management have been better handled in countries that anticipated a potential crisis and that prepared a detailed emergency response plan before the crisis struck. Some of the key enabling factors are:  The ability to mobilize a coordinated response, which combines demand and supply measures and draws on a variety of existing entities (electricity utilities, regulators, line ministries) and policy mechanisms.  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 that could potentially contribute to mitigate the impact of a crisis (such as the identification of large consumers whose electricity consumption can be interrupted or rescheduled). 25. 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 importantly, 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 impacts in the event of such a crisis. 18 CHAPTER ONE INTRODUCTION 1. Electricity shortages can be divided into three different categories. These three types of problems are not independent from each other. Nevertheless, they have different causes and will require different remedies.  Capacity constraints: the available capacity (generation and/or transmission) is insufficient to meet peak demands;  Energy constraints: the desired consumption of electricity by all users, over a period of time, exceeds the capacity of the system to supply it;  Reserve margin constraints: the difference between installed capacity and peak demand is less than what is required. 2. A system is capacity constrained when the operational generating and/or transmission capacity is not enough to cover peak demand. Solutions can be implemented from the supply side (investment in new capacity) and/or from the demand side (reduction in peak demand through load shifting or peak clipping). 3. Energy problems are caused by a gap between consumption levels and the ability to generate electricity over a period of time. Generation is determined by a combination of operational capacity (given by installed capacity and availability) and the ability to run it over sustained periods. This in turn depends in part on technical requirements for maintenance and in part on availability of primary energy sources. In general, systems with a large share of hydro generation are more prone to energy constraints because it depends on the availability of water. The most likely type of problem will depend on the particular characteristics of each system. Hydro systems—and hydro thermal systems with a high hydro component—will typically be more prone to energy restrictions while pure thermal systems will generally be capacity constrained. 4. Most electricity systems usually require reserve margins of 10 to 20 percent of normal capacity as insurance against breakdowns in part of the system or sudden increases in energy demand.1 Reserve margin problems are generally caused by investment in generation or transmission, which lags behind demand increases. A reduced reserve margin results in less time to allow routine maintenance, to meet unanticipated surges in demand and to cope with an unanticipated lack of availability. A tight reserve margin will also leave less time for maintenance and induce the use of equipment above the optimal level. This in turn will increase the probability of outages leading to energy and/or capacity problems in the system. In this sense a reserve margin problem can be seen as a leading indicator of the other two issues. 5. All three problems can be solved through demand and supply measures. For any system, multiple combinations of increased supply capacity and reduced usage will eliminate the problem. One of the key elements in determining the optimal mix of supply 1 Hydro-thermal systems usually work with a much higher margin due to the relatively low capacity factor of hydro generators. 19 and demand measures will be the timeframe. In the short run (less than six months), there are generally very limited possibilities for increasing generation.2 This means that during this time frame, the burden of the adjustment will generally be on the demand side. 6. Demand-side adjustments act through direct or indirect price signals and through quantity restrictions. Direct price signals—increasing the price of electricity—create incentives for users to save electricity (through the price elasticity mechanism). Indirect signals, such as subsidies for installing appliances, are more energy efficient. 7. Quantity restrictions (rationing) are an alternative way to ensure demand and supply balance in the short run. Rationing can be specific or general. Specific rationing takes the form of an administrative rule that determines which users will cut back, when and by how much. A general rationing rule will be based on geographical area or economic activity (i.e., cement plants) or type of users (i.e., loads over 1 MW of demand), rather than on specific users. In some cases, price and rationing mechanisms are used simultaneously, as in Brazil during the 2002 crisis. The principle is that customers have a quota of what is available. If they consume above that quota, there is a negative financial implication (penalty); if they save in relation to the given quota, there is a positive financial incentive (bonus). 8. The policy problem is to find the optimal combination of supply and demand measures that will impose the least cost on the economy in terms of reduced output, employment and social disruption. The optimal policy mix will be a direct function of the nature of the crisis. Both peak demand and total consumption can be affected by price but they are not necessarily affected in the same way. In addition, because many supply-side interventions involve increased thermal generation, demand-side interventions generally have a smaller carbon footprint. This is an issue that is likely to become increasingly important in power sector management. 9. For an efficient policy design, it is important to understand the specific problem we wish to address and the appropriate instruments for doing so. Reaching users with the proper signal (price or quantity) is often the binding constraint. In many cases the necessary equipment is already in place. For example, in most countries large users are charged tariffs based on agreed peak demand. They pay penalty prices if they exceed these limits and have installed complex meters that track capacity and energy on a continuous basis. On the other hand, residential users will pay energy-only tariffs and have meters that only record total energy. 10. Total energy consumption is affected by the cost to the user, although this is not the only determinant. For example, the possibility of fuel switching varies across users. Peak demand depends not only on the level of consumption but also on its pattern. In many cases the level of consumption can be reduced without changes in peak demand. In these cases, a general price rise may accentuate the difference between peak and average demand, with no reduction of the peak. Reducing demand through a price increase requires a time-of-use tariff structure for the user to see the proper economic signal. Similar considerations apply to rationing measures. Even when rationing reduces 2 Some supply-side measures that target the availability of existing plants and or purchases from captive generators can be effective in this time period. 20 consumption, it may not reduce peak demand, and vice versa. To affect peak demand, the rationing instrument has to target a specific time of day or seasonal use. 11. The time dimension is also a key element when one thinks about supply and demand policy responses to shortages. Impacts can be classified according to the time period in which they take effect:  Very short run (a few weeks): No supply response is possible. Demand responses are limited to changes in behavior within existing technology (i.e., switching off lights, air conditioning, hot water heaters, etc.) normally induced voluntarily or through quantity restrictions (general rationing).  Short run (several months): No supply response is possible. A wider range of demand responses is available, including some minor technical changes that involve capital expenditure to replace existing appliances (i.e., CFLs). A wider range of price (changes in tariffs) and quantity incentives (specific rationing) can be used.  Medium run (up to 24 months): Some supply responses are available (i.e., increasing the availability of existing plants, co-generation from existing capacity, speeding projects under construction, etc.). Demand responses include making ―easy‖ switches in technology. A full set of price and quantity incentives is available.  Long run (years): The full range of supply and demand responses is possible. 12. This classification is only tentative and will clearly lie on a continuum that will differ among systems, industries and firms. The expected duration of the shortage will also influence the choice of instrument and the likely response of different types of users. In principle, a shortage that is expected to last only a short period (hours or days) and not be repeated will produce a different response than one that is expected to be sustained for some time. 13. The institutional organization and institutional setting of the sector will also play a key role in the choice of instruments and the likely response of the different agents to the incentives. The main dimensions to be considered include:  Degree of private sector participation;  Degree of vertical integration and competition in generation;  Regulatory mechanism;  Available instruments; and  Availability of information. 14. A sector with large private-sector participation based on a competitive generation market will be more conducive to the use of price signals instead of rationing. In theory, a competitive market will produce efficient price signals and there will always be a price high enough to ensure supply-demand equilibrium in the short run. Even in the case in which quantity restrictions are needed, a well-developed market will optimize the 21 outcomes because some users will choose to close production and sell their energy to the market. 15. The problem is that under this institutional setting, a severe supply-demand gap will cause the energy crisis to turn into a price crisis. If the energy or capacity shortage lasts for more than a few days, the price increases needed to balance supply and demand can generate affordability problems for many users (particularly low-income residential users who have low price elasticity). Consequently, the price crisis evolves into a political crisis. Alternatively, an attempt by the government to mitigate the price crisis through direct or indirect subsidies aimed at insulating the population from the price increases can create a fiscal crisis (and can exacerbate the energy crisis because users isolated from price signals will not reduce consumption). Thus, even if in theory a market-based system can rely only on the price mechanism to solve shortages, in practice a combination of price and quantity measures will be needed to ensure long-term sustainability. 16. Private sector participation, particularly in distribution, can also condition the response of consumers to appeals for lower consumption or requests for adoption of energy-saving measures. In Latin America, there is some dissatisfaction with private-sector participation in infrastructure. A recent study by Latinbarómetro3 shows that in Latin America only 32 percent of the respondents are more satisfied with private utilities (servicios públicos privatizados) than with the previous state-owned companies. For Central American countries, the degree of acceptance of private utilities is, with the exception of El Salvador (47 percent), even lower: 28 percent in Guatemala, 22 percent in Nicaragua and 20 percent in Panama. The same report shows that only 16 percent of respondents in Latin America believe that electric utilities should be in private hands. This opposition to private-sector participation might condition the response by consumers and is an important factor to be taken into account in the design of a campaign to induce energy savings. 17. Information availability will also be highly conditioned by the sector‘s institutional setting. In general, restructuring and privatization of the electricity sector have two impacts on data availability. First, vertical and horizontal unbundling will generally produce a fragmentation of information because no single player or entity has a comprehensive set of data. Second, the introduction of competition turns information into a private good with a high market value. Reliable and timely information is a key ingredient in designing and implementing short-term measures to reduce supply-demand gaps in the electricity sector. A liberalized sector will require strong actions by the government to ensure that the needed information is available during a crisis. 18. Regulatory mechanisms will also influence the set of instruments available and the impact that each of them will have on the different stakeholders. The first elements to consider are the potential legal and administrative restrictions that might prevent the use of certain instruments. For example, tariff changes may have to be approved through a predefined administrative process that includes public hearings; this means that it would not be possible to substantially increase tariffs in the short run. 3 Latinbarómetro Report 2008. 22 19. The regulatory regime—price cap or cost of service—is mainly designed to provide different incentives for productive efficiency (cost minimization), sustainability (cost recovery), allocative efficiency (cost reflecting tariffs) and equity (access and affordability). But these mechanisms will also condition the impact that alternative measures used to cope with demand-supply imbalances will have on the different stakeholders, particularly in a vertically unbundled sector. For example, a demand reduction can negatively affect the financial situation of distribution companies working under a price cap, even when the crisis has originated in the generation sector. It might be necessary to take into account possible negative effects that disproportionally affect some stakeholders, particularly when the crisis is relatively long. 20. In summary, the optimal response to a supply-demand gap in the electricity sector will depend on the origin of the problem (energy, capacity or reserve margin constraints), the expected duration of the shortfall (and the lead time available), the available instruments (from the supply and demand sides) and the sector‘s institutional organization. Examples abound of countries that have experienced an imbalance in electricity supply and demand. Their responses have varied, as the following nine examples show. 21. The first six cases considered—Brazil, California, New Zealand, Norway, Ontario and Tokyo—are drawn largely from IEA 2005. The other three cases—South Africa, Cuba and Chile—are prepared by the authors; details can be found in the annexes. The shortfalls occurred in many different forms of electricity markets and for diverse reasons. The table summarizes the main elements of each crisis: source, duration, advance warning, main measures and savings obtained. 22. Four of the cases are pure energy shortfalls: Brazil, New Zealand, Norway and Chile. The first three were generated by droughts while the Chilean case was originated by a drought combined with the interruption of gas exports from Argentina. The common element in these cases is the need to cut total energy consumption during a period of time. The other five cases involve capacity restrictions, meaning that the main objective was to reduce peak demand in the system, rather than total energy. The cases included in IEA and the Chilean case relate to external events that affected the electricity system during a relatively short period of time. On the other hand, the South African and Cuban cases are crisis situations that arose mainly from structural problems in the systems. 23. The rest of the report is organized as follows: Chapter 2 discusses demand-side measures. Chapter 3 presents supply-side alternatives for solving short-term electricity crisis. Chapter 4 presents some practical recommendations for dealing with short-term electricity crises and data requirements for designing and implementing an efficient response to a crisis. 23 Table 1. Responses to electricity supply-demand crisis: International cases Case Source of Advance Duration Main Measures Estimated Problem Warning Savings Brazil Drought 5 months 10 Electricity rationing 20% months Penalties for failure to cut consumption Extensive press coverage Distribution of conservation devices to the poor Higher savings goal for public sector Fuel switching California ―Perfect Storm‖ 12 9 months Over 200 programs involving all sectors 14% months Rebates to customers who used less than in previous year Public awareness campaign Extensive media coverage Rebates for purchasing efficient appliances Higher prices to some customers Updated efficiency standards New Droughts 2001 2001 Media campaign with suggested measures 10% Zealand 1 month 3 months Establishment of individual goals for all consumers 10% 2003 2003 Consumer hotline 2003 1 month 6 weeks Rebates to some customers for successful conservation Norway Drought 2 months 4 months Extensive media campaign urging conservation 8% Subsidy scheme for household conservation measures Fuel switching Close down of electricity-intensive factories (to sell in the spot market) Ontario Recovery from None 2 weeks Appeals in mass media for conservation 17% (Canada) Shutdown of government offices blackout Closure of electricity-intensive industries Curtailments Tokyo Nuclear plant 8 months 3 months Frequent paid appeals and voluntary discussions on TV 4-5% closure Utility staff visited thousands of customers to request conservation Leadership by example in government buildings Renegotiation of interruptible contracts Shifting and rescheduling of factory production South Rapid growth 1 year Mass media campaign 400 MW Africa Voluntary conservation campaign (Power Alert) (2006) 2006 Cape Efficient lighting (CFLs) Region Industrial, municipal and commercial efficiency measures Subsidies on efficient appliances Extensive conservation drive Fuel switching (gas cooking and heating) Water heating load management Cuba 2004– Lack of over 2 Energy Revolution (EE, increase availability and loss reduction, NCRE) 20% 2005 Investment years Mass media campaign (grassroots organizations) saving in Appliance replacement for residential sector (CFLs, fridges, fans, TVs,etc) primary EE measures in government sector energy Price increases Chile 2007– Gas imports over 1 Fuel Price Stabilization Fund 10% 2008 interruption + year Electricity subsidy for 40% most vulnerable population (direct subsidy) average drought Reduction in voltage 12% Media campaign (Energy Savings) some Daylight saving time (extension) months Financial offers from generators for consumption reductions by regulated 2009 CFL campaign Source: IEA 2005 and authors. 24 CHAPTER TWO MEASURES TO RAPIDLY REDUCE THE DEMAND FOR ELECTRICITY 2.1 Available Measures 1. Reducing the demand for electricity can be achieved through changes in the quantity demanded or through changes in demand patterns. Changes in quantity demanded are responses to changes in prices (tariffs). Demand for electricity is a derived demand for lighting, cooling, heating, power, etc. Therefore, changes in demand will reflect changes in the demand for each one of these or to changes in the efficiency of the equipment using electricity. 2. There are three major instruments to reduce demand in the short run:  Increases in electricity prices;  Changes in behavior; and  Introduction of more energy-efficient technologies. 3. The international experiences reviewed show that most countries use more than one instrument.4 The optimal mix of instruments will depend on the time available to prepare before the shortfall arrives, the anticipated duration of the shortfall and the structure of the electricity markets (IEA 2005). 4. Time to prepare clearly depends on two variables: advanced warning and preparedness of the system. Even if the nature of the crisis means that there will never be a very advanced warning, preparing for the eventuality of the next crisis is the key measure that needs to be taken. 5. Table 2 presents the measures taken by several countries that faced an emergency situation. Measures have been grouped into four main categories: communicating with customers, rationing, economic incentives and appliance replacements. We examine each measure separately in Table 2. 2.1.1 Communicating with Customers 6. Communication actions aim at changing users‘ behavior. Two dimensions are considered: a) The channel used to communicate with customers; and b) The content of the message. As we can see from the table, all of the countries considered resort to some form of a broad communication campaign. 4 Some cases reviewed in IEA 2005 and not included here show the use of a single instrument. For example, this is the case of Arizona where, given the short period to prepare (the crisis originated in a fire in a substation), only requests to the population to reduce consumption were used. 25 7. Although this may appear to be a soft measure as compared to physical investments, good communication proves to be absolutely indispensable to rapidly influence electricity demand behaviors. Mass media are the main tools for reaching consumers during an electricity crisis. No other tool can be as quickly mobilized and reach as many consumers as television, radio, newspapers and (increasingly) the Internet (IEA 2005). 8. The objective of mass media campaigns is to inform and motivate consumers to take actions that will quickly reduce electricity consumption. The chain of events needed to achieve actions is listed in the box below. Table 2. Demand measures: International experience Brazil California New Norway Ontario Tokyo South Cuba Chile Zealand Africa Communicating with customers Channel - Media campaigns x x x x x x x x x - Press releases - Consumer Hotline x - Internet x x - Individual visits x x Contents - General information on crisis x x x - Evolution of situation x x - Requests for reducing consumption x x x x x x x x - Specifc Measures x XXX Rationing Voluntary - Government x x x - Industry x x - General x x x Compulsory - Industry x x - General x x Fuel Switching x x x Day light Saving Time x Economic Incentives Own Price - Tariff increases x x x - Tariff Rebates x x - Penalties for not acheving goals XXX - Subsidies to protect poor x Price of Complements - Subsidies for EE meassures x x x x x Appliance Replacement - CFLs x x XXX x - Others x Source: Authors 26 Box 1. Chain of events needed to stimulate consumer action The challenge of mobilization can best be appreciated by examining the chain of events leading to the implementation of an electricity conservation measure. The steps are shown below:  Consumer learns that a shortfall exists.  Regardless of the cause, consumer recognizes that measures to reduce electricity use must be taken.  Consumer recognizes that his/her contribution will help mitigate the shortfall.  Consumer decides to reduce electricity use.  Consumer selects feasible measure from universe of alternatives.  Consumer selects measure(s) to implement.  Consumer arranges for implementation of measure (buys, hires contractor, studies operating manuals for thermostats).  Consumer implements measure.  Electricity use declines (assuming that the measure actually works as intended). The corporate consumer‘s decision path can become even more complicated as it balances costs, impacts on revenues and its public image. The scale of this task can best be appreciated by quantitatively examining the chain of events. If an 80 percent success rate is achieved at each step, then less than 10 percent of all consumers will actually achieve electricity savings. An electricity conservation program will not deliver savings if any of the steps above have a low success rate. 9. To be effective, a mass media campaign has to link the solution to the shortfall in order to direct customer behavior. The choice of the channel to be used and the content of the message will be crucial to stimulate consumer actions. The content of the messages will be different when dealing with a capacity or an energy shortfall. Capacity crisis requires users to take measures at specific times of the day (peaks). 10. Most utilities resort to qualitative appeals for conservation through television, radio and newspapers when a problem arises. But even when a real-time price is not available, utilities have found that other quantitative, non-price signals are also valuable. This information can more effectively describe the severity of a crisis and possibly help avert a blackout. Such signals alert customers to unstable situations and encourage more effective conservation. For example, during their droughts, Brazil, New Zealand and Norway broadcasted or published the key reservoir levels every day. The status was typically translated into remaining days of electricity supplies. These reports often became the starting point for many informal discussions among consumers and unquestionably raised awareness. 11. The Power Alert mechanism implemented in South Africa (see Box 2) is an innovative solution for providing real-time information on the situation of the system and at the same time giving users information on specific measures to be taken at that moment. The system, which can also be viewed online, has a very high impact at a very low cost. According to information from Eskom, the average impact per message of the National Power Alert ranges from over 500 MW for brown alerts to slightly less than 100 MW for green alerts. 27 12. In terms of the content of the message, one of the main objectives is to inform the population on the available measures that can be taken to help reduce the supply-demand gap. A list of the most commonly suggested measures is presented in Table 3. Box 2. South Africa Power Alert Power Alert is a residential load reduction Demand-side Management (DSM) project. Visual inserts in the form of Power Alert meters are broadcast on the main television channels at 30-minute intervals on weekdays between 17:30 and 20:30 pm. These Power Alert meters provide an indication of the strain on the electricity supply and will urge people to switch off their appliances if the need arises. This is not a permanent intervention. The Power Alert meters create real-time awareness and voluntary reaction by the public when broadcast. Four status levels occur, each calling for specific measures to be taken by consumers in all geographical areas. These are: Green: indicates that there is only limited strain on the system. Consumers are requested to save power as part of their everyday activities to achieve energy efficiency. Orange: the demand on the system is increasing. Consumers are prompted to switch off some nonessential power-consuming appliances. These include tumble dryers, dishwashers, pool pumps and unnecessary lights during peak periods. Red: strain on the system is increasing and load shedding is imminent. Consumers are asked to take action by switching off geysers, stoves, microwave ovens, kettles, heaters, air conditioning units and unnecessary lights. Brown: the most serious state indicates that there is significant strain on the national grid and that load shedding is being undertaken. Consumers are requested to switch off all appliances that are not absolutely necessary and rely only on essential lighting and their televisions (which, at this stage, indicate changed status as it occurs). Source: Eskom webpage –www.poweralert.co.za 13. The measures most quickly implemented typically require energy consumers to change operations or procedures. These actions sometimes result in inconvenience, discomfort or reduced productivity. Changes in procedures include switching off lights (or lowering lighting levels), adjusting thermostats, taking shorter showers, and reducing (or shifting) hours of operation. Such measures are attractive because they can be implemented almost immediately and cost almost nothing. On the other hand, changes in behavior or operating practices may be difficult to sustain (IEA 2005). 14. Unplugging appliances that are not used can have a major impact. Standby power represents up to about 10 percent of the electricity in homes and much of it is used by appliances that are ―switched off‖ or inactive. It is an attractive operational measure because consumers easily understand the waste and they are not intimidated by unplugging most appliances. 28 Table 3. Immediate energy-saving measures Implementation Relevant Measure Effects Comments Time Cost sectors Changing Short Low Seasonal Public Can help save electricity(public hours of Commercial and commercial sector) or save operation Industry peak demand (industrial production shifts) Fuel Medium Medium Permanent All Only relevant for countries with switching other efficient energy source (gas) Unplug Short Low Permanent Residential A refrigerator or freezer draws freezer/second Commercial 400 to 1,000 kWh/year refrigerator Reduce Short Low Permanent Public Some new escalators switch elevator/ Commercial themselves off when not in use escalator and elevator speeds can be service and automatically varied depending speed on demand Eliminate Short Medium Permanent Industrial Most systems are very leaky leaks in and waste much of the energy pressurized air used to pressurize them systems Replace belt Short Medium Permanent Industrial Friction losses in motor belts drives in represent up to a 10 percent loss motor systems in motor output Enable power Short Low Permanent All Automatic in some peripherals. management Might need assistance from IT features on department for computers computers Shift pumping Short Low Temporal Public Many operators are not even for water and Utilities aware of peak electricity sewage to off- consumption and opportunities peak to shift to off-peak. Shorter Short Low Temporal Residential Applies only where water is showers/fewer heated electrically baths Reducing Short Low Temporal All Pros: can be implemented light levels almost immediately at Adjusting Short Low Temporal All negligible cost. Cons: changes thermostats in behavior or operating Unplug Short Low Temporal All practices may be difficult to appliances sustain. Source: Adapted from IEA 2005. 2.1.2 Rationing 15. The second group of measures commonly adopted by countries facing an emergency situation includes voluntary and involuntary rationing for different categories of users: government, industrial and general. Rationing electricity and mandating reductions in consumption are the most drastic forms of electricity conservation. 16. The main objective of an electricity system, even in a crisis situation, is to avoid power cuts. This is not always possible and in certain cases some level of rationing is needed to preserve the stability of the system. During the 2001 crisis, Brazil decided to 29 implement mandatory energy savings for all electricity consumers in the country, with the aim of reducing power consumption by 20 percent. Sectoral targets are listed in the table below. Table 4. Energy-saving targets in Brazil Savings Sector (%) Street lighting 35 Public service agencies and some industries (steel, cement, chemical, mining, 25 paper, wood, furniture) Households (over 100 kWh/month) 20 Industry (electric equipment, food, beverages, textiles, leather, oil and gas) 15 Households (less than 100 kWh/month) 0 Source: IEA 2005. 17. During the 2001 crisis, the Government of New Zealand called for a voluntary 10 percent reduction in electricity use for ten weeks. This period was chosen as the duration because heating demands would have diminished and further rains were expected. This became its ―10 for 10‖ campaign. It also called for 15 percent savings in the public sector. Similar measures, sponsored by industry rather than by the government, were implemented during the 2003 crisis. 18. Norway is an example of self-administered rationing based on market signals. Electricity-intensive industries (such as aluminum) with long-term, fixed-price contracts with local utilities found that it was more profitable to temporarily shut down operations and sell the electricity on the spot market (and did so). This was in line with the government‘s stated objective of finding market-based solutions to the crisis. 19. In the Canadian province of Ontario, the provincial government requested a 50 percent reduction in consumption from all commercial and industrial customers. To achieve this goal, energy-intensive industries, such as automobile manufacturing and refining, shut down operations instead of facing unpredictable curtailments. Provincial and federal governments shut down all nonessential operations. 20. During the crisis, several factories in Tokyo, Japan, created plans to increase production at night or on weekends when electricity demand is lower. Other factories sought to cease production entirely during the critical period—late July—by scheduling all holidays for that time (IEA 2005). 21. The continuing crisis in South Africa has forced the continuation of load-shedding measures. In 2008, the government announced plans to cut the country‘s general electricity use by 10 percent to cover the needed 4,000 MW reduction. In order to achieve this target, a three-point plan would be used to counter the electricity crisis:  The first phase involved electricity cuts (load shedding).  The second phase, lasting four months, involved a power-rationing phase of the plan. This is aimed at cutting usage by 3,000 MW.  The third phase of the plan will include a quota-based incentive scheme for residents and businesses, as well as penalties for those exceeding their electricity rations. 30 22. Cuba‘s 2002–2006 electricity crisis involved severe blackouts throughout the country. In July 2005, for example, lost load represented 18 percent of total system demand (OLADE 2008). In this case, rationing was not an instrument used to solve the crisis but rather the result of the system‘s inability to solve it. 2.1.3 Economic Incentives 23. Economic incentives for reducing energy consumption can be separated into two groups. One incentive affects the price of electricity (tariffs) to induce a market-based reduction (through the price elasticity mechanism). The other alternative is to change the relative price of efficient appliances through rebates, subsidies or tax breaks. Tariffs 24. Cost-reflecting tariffs are a key element of long-term energy efficiency programs and also play an important role during a short-term crisis. To be effective, programs aimed at changes in consumer behavior have to be implemented hand-in-hand with efficient pricing signals. Increasing prices to final consumers during a shortfall is the single most effective action to reduce the supply demand gap. In market-based electricity systems, an energy or capacity shortfall will translate automatically into higher prices that signal the scarcity to consumers.5 25. For the price mechanism to be effective in a short-term crisis, some conditions must be met. First, the wholesale market must be competitive to ensure that prices reflect the true scarcity of the product. Second, there must be a clear and efficient pass-through mechanism going from the wholesale market to final consumers. In most liberalized markets, this link is direct for large users (which have direct access to the wholesale market) but not for small residential and commercial users. 26. It is important to consider two other elements. First, for most small users there is a lag between the moment they consume and the moment they pay for their electricity. This means that for a crisis of relatively short duration, there will be no time for consumers to see the true cost of electricity. Added to this are the delays and transaction costs associated with changing billing procedures in most utilities. Second, the nature of the crisis will also condition the use of the price instrument for certain users. Capacity constraints require the reduction of peak demand. Most small users do not have time-of-use tariffs and their meters only record total energy, making it impossible for the needed signal to reach them. 27. Electricity markets have been liberalized in Norway, New Zealand and Chile, and the shortfalls in these cases translated into price crises. But even if spot prices rose substantially during the crises, retail prices did not always reflect the increases. As a result, the price mechanism only affected large industrial users. Even when these users had long-term contracts that isolated them from price increases, in some cases they found it profitable to shut down production and sell the energy to the wholesale market (as in the case of Norway, discussed above). 5 Competitive electricity markets have often been less successful in accommodating reserve margin constraints. In practice, it is difficult to distinguish between true scarcity and market power; therefore, regulators and market administrators are reluctant to allow high prices. 31 28. In Chile, the government allowed price signals to work and at the same time introduced a direct subsidy for poor residential consumers to protect them from the sharp increases that would have had a substantial impact on the affordability of the service. 29. Even if in theory the price mechanism is an important tool to solve energy shortfalls, technical (outdated metering technologies, lack of real-time price information reaching consumers), institutional (regulated retail prices) and political (opposition to high prices) constraints will prevent most systems from relying efficiently on this mechanism in the short run. 30. In summary, the price mechanism is most useful for large users and for prolonged energy crises, and is of more limited utility for small users and during short crises stemming from capacity shortfalls. This by no means implies that there is no use for the price mechanism to induce energy consumption reductions for small users. For residential and commercial users, the price mechanism must be seen as a necessary complement to other measures rather than as a tool to be used in isolation. 31. This is the experience in Cuba, Brazil and South Africa. In Cuba, in support of all of the program‘s other measures, residential electricity tariffs were increased by over 300 percent (see table below). To preserve the progressive nature of the increasing block tariffs, consumers using less than 100 kWh/month were not included in the tariff adjustment. For the other blocks, the rise was progressive, making the tariff blocks steeper. Brazil, facing an energy crisis expected to last several months, implemented a tariff mechanism aimed at achieving reductions in consumption by all user categories. Table 5. Tariff increases in Cuba in 2006 Consumption range Tariff US$/kWh kWh Previous New Over 300 0.30 1.30 251–300 0.20 0.80 201–250 0.20 0.60 151–200 0.20 0.40 101–150 0.20 0.30 0–100 0.09 0.09 Source: Case studies in annex. 32. Tariffs for electricity consumed in excess of the quota (80 percent of previous year‘s consumption) by the low-load demand sectors (residential and commercial) were increased. This increase was 50 percent for consumers with a demand between 201 kWh and 500 kWh and 200 percent for consumers using more than 500 kWh. In addition, a bonus of one Brazilian real was offered for each kWh saved in excess of the quota for consumers with a demand of less than 200 kWh per month. High-load consumers paid the spot price for any demand above their quotas (although this price was capped at about US$250 per MWh). 33. In South Africa, following the 2006 Cape Region crisis and given the structural nature of the shortfalls faced by the entire country, a new tariff system designed to achieve an overall savings target of 10 to 15 percent over time is being considered. The proposed tariff scheme is similar to the one adopted by Brazil with penalties for 32 consumers exceeding their allotted quota (based on past consumption) and cutoffs for a specific period for repeat offenders. The government is also considering schemes for large consumers to trade in their unused portion of the quota allocation and a ―take or pay‖ of their allocated portion. These tariff structure adjustments are coupled with substantial increases in the tariff level to ensure Eskom‘s financial viability.6 34. California adopted a tariff rebate scheme. In 2002, Governor Davis established the ―20/20‖ utility rebate scheme through an executive order. The 20/20 program offered a 20 percent rebate to customers who consumed 20 percent less electricity than in the previous year. The rebate applied only to the summer months of June through September. The program was quite successful in achieving substantial savings (see table below). All customers were eligible to participate, but the rebate for large commercial and industrial customers with time-of-use meters was based on savings in on-peak demand. A 30 percent rebate was available for customers who saved more than 30 percent of their bill. Table 6. Participation, Savings and Costs of the California “20-20” Program Customer type Customer receiving Electricity savings Total rebate credit (%) (GWh) ($ million) Residential 33 3,021 134 Non-residential 26 2,237 153 Total 32 5,258 286 Source: IEA 2005. Subsidies for Energy Efficiency 35. An alternative form of economic incentives is to subsidize the adoption of energy-efficient appliances and investments. California, Brazil, Norway, South Africa, Cuba and Chile adopted this type of measure. In California, appliance rebates and low-income weatherization programs totaled US$95 million and saved over 100 MW by 2002. In Brazil, the government subsidized CFLs and efficient appliances for low-income customers. In Norway, the government launched an electricity savings program called the Household Support Scheme. The program offered investment aid to households for air-to-air heat pumps, wood pellet stoves and energy management systems. The government subsidized 20 percent of the total cost, which was capped at about US$700. Cuba, in addition to the massive residential appliance exchange program (see below), also implemented a subsidized credit mechanism for new appliances for residential users (OLADE 2008). 36. In South Africa, a Demand-side Management (DSM) Fund was created in 2002. Following the major electricity blackouts experienced during the first quarter of 2006 in the Western Cape, a regional Eskom Energy Crisis Committee was established. This committee was responsible for the complete strategy and activities to alleviate the energy constraints experienced in the Western Cape. Eskom‘s DSM initiative was incorporated as a key part of the action plan, with the allocated target to reduce demand in the Western Cape by 400 MW by June 2006. It required an acceleration and amplification 6 Government of South Africa: National Response to South Africa‘s Electricity Shortage, 2008. http://www.info.gov.za/otherdocs/2008/nationalresponse_sa_electricity1.pdf 33 (approximately 2.5 times the annual national target) of the existing DSM initiative, with an intensified regional focus (Eskom).7 37. Specific financial instruments to promote longer-term energy efficiency measures are also valuable tools to consider when the need arises to implement an extra conservation effort. For example, the existence of Chile‘s CORFO (Production Development Corporation) funding for pre-investment research and detailed engineering, preferential financing lines, guarantee fund and risk capital contributed to help the country face the challenge of the 2007–2008 electricity crisis. These instruments are aimed at the industrial sector, particularly small enterprises, and provide long-term finance (up to 12 years) for energy efficiency investments.8 38. Although the financing of energy-efficient appliances can have a relatively rapid impact, the implementation of this mechanism during a short-term crisis will normally not be possible. The pre-existence of a long-term energy efficiency strategy then becomes a prerequisite for implementation. California, Brazil and South Africa all had energy efficiency programs in place before the crisis; these were used as a platform during the crisis period. 39. Norway, which lacked an established tradition of energy efficiency policies, faced difficulties in implementing financial mechanisms for efficient appliances during the crisis. According to IEA (2005), the program was created to meet mostly political objectives rather than to save electricity quickly because none of these technologies could be installed soon enough to make an immediate, widespread impact on electricity consumption. Furthermore, the technologies were selected without regard to standard requirements for cost-effectiveness used by the Norwegian Government. 2.1.4 Appliance Replacement 40. Replacing inefficient appliances with more efficient equipment is a medium-term alternative for saving energy and capacity. Time to install the new appliances and their cost will be important elements in the decision to use this alternative (see Box 3 below for an example). 41. Brazil, South Africa, Chile and Cuba all implemented campaigns to replace appliances with more energy-efficient ones. All of them developed CFL programs. Of all these programs, the Cuban case is the most comprehensive; it involves a massive campaign that replaced almost the entire stock of existing home appliances in less than two years. This was a nationwide program, conducted and financed by the government. Through the Social Workers Program, inefficient home appliances are replaced with energy-efficient equipment. The table below presents the replacement ratio reached for each appliance type by June 2008. 42. The Cuban program was not only widespread (covering all commonly used appliances) but also extremely fast. The graph below shows monthly replacements for CFLs, cooking modules and refrigerators since 2005. 7 http://www.eskom.co.za/live/content.php?Item_ID=2787 8 http://www.corfo.cl/lineas_de_apoyo/programas/credito_corfo_eficiencia_energetica 34 Box 3. Costs per MW, time to roll out and sustainability of DSM technologies: South Africa Residential Sector Short-term implementation programs include CFL street lights, geyser blankets and gas cooking. Medium- to long-term implementation projects include solar water heating, smart metering (limited to 20 amps), Product Lifecycle aerated showerheads. Commercial Sector Motor efficiency savings have high sustainability and can be quickly implemented. Efficient lighting and air conditioning (HVAC) can be quickly implemented but offer less in the way of sustainable Product Lifecycle savings. Industrial Sector Motor efficiency initiatives can be quickly implemented and offer the most sustainable MW savings. All other technologies can be implemented within a shorter year horizon but offer less sustainability in terms of MW savings. Note: Bubble size indicates Rand per MW; the larger the bubble, the more expensive the cost per project. Source: ESKOM. Maximizing DSM‘s Potential as a Response Option. June 2008 35 Table 7. Appliance replacement ratio: Cuba, June 2008 Appliance Ratio Refrigerators 91% CFLs 100% Air conditioning 9% Electric fans 100% Televisions 21% Water pumps 97% Source: Case studies in annex. 43. As shown in the graph, the CFL program (brown line) began in July 2005; by January 2006 it had replaced nearly nine million bulbs. The cooking module program (green line) also ramped up very quickly (nearly two million in three months,) while the refrigerator program (red line) shows a more steady path of around 100,000 refrigerators per month. Graph 1. Appliance replacement in Cuba Equipos 10,0 10.000.000 kWh Día / Vivienda 9.000.000 8,0 8.000.000 7.000.000 6,0 5,4 5,5 5,4 5,3 5,3 6.000.000 5,2 5,2 5,3 5,4 5,3 5,2 5,1 5,2 5,2 5,3 4,8 5,0 4,9 5,0 4,8 4,9 4,9 4,9 4,9 4,8 4,9 5,0 4,7 4,7 4,7 4,3 4,1 4,3 5.000.000 4,0 4,0 4.000.000 3.000.000 2,0 2.000.000 1.000.000 0,0 0 jul-05 jul-06 jul-07 jun-06 jun-07 mar-06 mar-07 mar-08 may-06 may-07 abr-06 abr-07 abr-08 sep-05 ene-06 sep-06 ene-07 sep-07 ene-08 dic-05 dic-06 dic-07 ago-05 nov-05 ago-06 nov-06 ago-07 nov-07 oct-05 feb-06 oct-06 feb-07 oct-07 feb-08 Consumo por Vivienda Bombillos Módulo Cocción Refrigeradores Lineal (Consumo por Vivienda) Source: OLADE 2008. 44. During the 2001 crisis, the Government of Brazil distributed over five million CFLs among the poor. At the same time, sales of CFLs by one company jumped from 14 million in 2000 to 50 million in 2001. During this time, sales of incandescent lamps in 2001 were about half those of the previous year (IEA 2005). In South Africa, Eskom embarked on a national program to exchange incandescent bulbs for CFLs in selected areas. Since the program began in 2004, more than 18 million CFLs have been exchanged for incandescent bulbs. Following the 2006 crisis in the Western Cape, the program was intensified in this area and in the Northern Province, Gauteng and Free State where four million incandescent bulbs were exchanged for CFLs. 36 45. Depending on the duration and advance notice of the crisis and the preparedness of the system, the set of possible technical fixes will vary. Table 8 presents a summary of the most commonly available measures. Table 8. Most common energy-consuming equipment replacements Implementation Relevant Measure Comments Time Cost sectors CFLs Medium Medium ALL The most common measure. Cuts power consumption by about two-thirds Direct load Medium High Residential Can have a major effect on controls on key Commercial peak demand with little cost devices to users Aerated Medium Medium Residential Only relevant if water is showerheads heated with electricity Smart meters Medium Medium All Improves signals to consumers Replacement of Medium Medium Public LEDs draw less than a traffic lights quarter of the power of a traditional bulb Replacement of Medium Medium Public street lights Replacement of Medium High Industrial Retrofits to motor systems motors with more Commercial can cut use by 75% efficient units Public Replacement of Medium High Residential Technical and financial major appliances constraints with efficient ones Source: Adapted from IEA 2005. 2.1.5 Importance of the Public Sector 46. Although electricity consumption by the public sector is not very high in relation to total consumption, energy-saving activities in this sector are important due to its high visibility and its exemplary role in other sectors. This is explicitly acknowledged by Chile in its overall energy efficiency strategy. All countries that used rationing or economic signals imposed more demanding targets on the public sector than on other sectors. In this way the government increased its credibility when requesting sacrifices from the general population. 47. Not only is the public sector important due to this demonstration effect, but it also has the advantage that measures can be implemented through a centralized decision-making mechanism rather than through incentives. This allows fast implementation of highly visible measures. In Cuba, a special project was implemented in the public sector in order to regulate demand and distribute the load among 1,720 selected services (large users). The actions performed in relation to these services included the appointment of 200 energy supervisors, the introduction of the Energy Efficient Management Program, the design and control of electricity consumption 37 programs, and the training of personnel in charge of energy control and subsequent inspections to test results. 48. As a result of these actions, while electric power consumption in the overall Cuban economy grew 7.5 percent from 2006 to 2007, in the state sector this growth was down to 4 percent. In the selected public services impacted by specific energy conservation measures, electricity demand growth was a mere 1.2 percent. These services account for 45.6 percent of state consumption. The electricity intensity in the state sector fell from 0.16 GWh/MMP in 2005 to 0.13 GWh/MMP in 2008. 2.2 Tariffs 2.2.1 Residential Tariffs: Situation in Central America 49. Tariffs are one of the key elements in the determination of incentives for rational use of energy. Tariffs that do not reflect the economic cost of the service create allocative distortions in the economy. In the particular case of electricity, in many cases this means adopting inefficient appliances—which cost less but consume more energy—and using them more than what is economically efficient. 50. Two elements relating to tariffs must be considered when analyzing incentives to save energy. First is the overall tariff level. Electricity tariffs in the Central American region have generally experienced a sharp increase in recent years as a result of high international oil prices and an increasing share of thermal generation. A second element to consider is the tariff structure for each of the user categories. Considering in first place residential consumers, we find that four countries in the region (Costa Rica, Guatemala, Honduras and Nicaragua) have increasing block tariffs, one (Panama) has a linear tariff and the remaining one (El Salvador) has a decreasing block tariff (see table below). Table 9. Tariff structure: Residential sector in Central America Number Structure Fixed charge of blocks Costa Rica Increasing block 3 No Guatemala Increasing block 2 Yes Honduras Increasing block 4 No Nicaragua Increasing block 7 Yes Panama Linear 1 Yes El Salvador Decreasing block 3 No Source: Authors. 51. Given a general tariff level that ensures sustainability, the tariff structure will determine the degree of allocative efficiency and equity (affordability) in the sector. These two objectives generally present a clear trade-off. 52. Increasing block tariffs are generally aimed at distributional objectives. Under the assumption that richer households consume more than poor households, increasing block tariffs seek to incorporate a redistributive effect in the tariff structure.9 On the other hand, 9 This assumption usually holds at the individual level. But with poor households generally having more individuals than rich households, this is not always true. Furthermore, in many cases several households share a connection, with 38 decreasing block tariffs will generally reflect the cost structure (particularly of distribution) and therefore will create a good allocative signal for the economy. This is generally true under the assumption that there are no supply restrictions in the sector. In the face of supply restrictions, the allocative efficiency requires increasing tariffs to signal the high cost of incremental investments needed to overcome supply shortages. 53. In terms of energy efficiency, it is clear that increasing block tariffs will create stronger incentives for energy savings. The prevalent increasing block structure in the region therefore serves not only a redistributive objective, which was probably the original intention, but also creates the proper signals for the efficient use of electricity. The number, size and price of the different blocks are key elements that need to be considered. A summary of the main characteristics of the residential tariffs in the six countries of the region is presented in the table below. Table 10. Residential tariff structure: Central America (US$) Costa El Categories Guatemala Honduras Nicaragua Panama Rica Salvador Fixed Charge 0.0000 1.4592 0.0000 0.9173 2.0400 0.0000 US$/month Variable Charges $/kWh 000–025 kWh 0.0660 026–050 kWh 0.0743 0.1421 0.1018 051–100 kWh 0.1087 0.1488 0.1726 101–150 kWh 0.1967 0.1008 151–200 kWh 0.1321 0.1811 201–300 kWh 0.1960 0.1834 301–500 kWh 0.1651 0.1001 501–1000 kWh 0.2691 0.2141 0.2914 0.1816 Over 1000 kWh 0.3266 Source: Authors, based on official tariff information. 54. The tariff structure of Costa Rica and Honduras is very similar despite the differences in the number of blocks (three and four, respectively). In fact, the ratio of the last to first block is almost the same in the two countries (2.47 and 2.44, respectively). The structure in Guatemala, with only two blocks, shows much less differentiation (with a ratio of only 1.2). At the other extreme, Nicaragua has the most blocks (seven) and the highest difference between the first and last blocks (4.95). 55. Panama shows a single block, or linear tariff, but has a direct subsidy for users with consumption of less than 100 kWh/month (see below). El Salvador has a decreasing block tariff, with the difference among blocks being very low. 56. Two elements are central in terms of the trade-off between social affordability concerns and incentives for energy efficiency: the size of the blocks (in kWh/month) and the values of the subsidized blocks (in US$/kWh). Ideally, the size of the first tariffs fixed for each connection and no information about the number of households per connection. Thus, the increasing block could even be regressive in some cases. 39 (subsidized) block should be determined based on the consumption of a poor household. This appears to be the case in Costa Rica where the average consumption of the low-income group is slightly less than the first block of consumption in the tariff structure (193 kWh versus 200 kWh). 57. No information is readily available on consumption by income group for the other Central American countries. As an initial estimate, we can look at average residential consumption and compare it to the block size for the different countries. Available information shows that the level of the first block appears to have a relationship to consumption levels of the poor groups in Honduras and Nicaragua. In Guatemala, on the other hand, the first block is several times higher than average consumption, meaning that a disproportionately high percentage of the population is receiving the reduced tariff. The second element to be analyzed is the value of the different blocks and their relationship to the economic cost of providing the service. Because data on economic costs of service by user category and consumption level are not readily available, an initial estimate can be made by comparing the tariff of the first block with the wholesale price of electricity. 58. In order to preserve incentives for allocative efficiency and the efficient use of electricity, the price of the first block should at least cover the direct avoidable costs of providing the service. Data on wholesale prices, losses and value of the first block for the four countries with increasing block tariffs in Central America are presented in the table below. Table 11. Avoidable costs and first block tariff Costa Rica Guatemala Honduras Nicaragua Wholesale price (1) 0.0569 0.0896 0.0719 0.1234 Losses (2) 11% 16% 21% 28% (1) + (2) 0.0632 0.1039 0.0870 0.1580 First block 0.1087 0.1726 0.0743 0.0660 Source: Authors. 59. A first measure of avoidable costs is the production cost of electricity. In sectors with vertical unbundling, this price is directly observed as the wholesale price of electricity. For vertically integrated sectors, the price has been approximated by high voltage tariffs. To make this number comparable for residential users, we must take into account losses in the system and calculate a price including losses. 60. As indicated in the table, while Costa Rica and Guatemala meet this basic allocative efficiency criterion, Honduras and Nicaragua fail the test. In fact the first three blocks in Nicaragua (including consumptions up to 100 kWh/month) show values below the avoidable production costs.10 61. A subsidized price for the first consumption blocks that is below the avoidable costs creates a clear disincentive for energy efficiency and serious allocation inefficiencies in the sector. Two approaches can be used to solve this problem while preserving the redistributive effect of the subsidy. One initial approach would be to replace the actual system of tariffs with one using fixed-amount subsidies. This means 10 This means that the subsidized tariffs cover users with consumption above the average for the residential sector, which is 92 kWh/month. 40 defining a fixed amount of subsidy and setting the tariff equal to the economic cost of the service. If the fixed subsidy is set properly, and with no changes in consumption, the median household will show no difference between the new and the old tariff. By valuing the variable charge at the economic cost of service, the incentives for allocation efficiency and rational use of energy are preserved; at the same time, poor households receive the same amount of subsidy. For example, under the current tariff structure in Nicaragua, a residential user with consumption equal to 92 kWh/month (average residential consumption) pays a bill of US$12.4/month while the cost of service is US$15.5/month. Changing the tariff structure to a fixed subsidy of US$3.1/month plus a variable charge equal to avoidable costs (US$0.1580/kWh) makes no difference to users with consumptions of 92 kWh/month and improves the situation of anyone with consumption below that level. 62. An alternative approach would be to channel the subsidies through energy-efficient appliances rather than through the price of electricity. By subsidizing the purchase of energy-efficient appliances and at the same time increasing tariffs to their economic costs, households could end up with the same energy bill but with a more efficient use of energy. At the same time, the fiscal cost for the government could be less than under the actual arrangement, depending on the level of the subsidy and the relative price of appliances. Using residential tariffs as an instrument during crisis 63. International experience with short-term electricity crises shows that most countries use tariff mechanisms to induce energy savings during the shortfalls. Of these, the Brazilian case (also being discussed for adoption in South Africa) is worth analyzing in detail. As described in the previous section, Brazilian tariffs for electricity consumed in excess of the quota (80 percent of previous-year consumption) by residential and commercial users were increased by 50 percent for consumers with a demand between 201 and 500 kWh and 200 percent for consumers using more than 500 kWh. 64. Formally, this can be seen as a form of increasing block tariffs in which the size of the block is determined by each user‘s past consumption. In other words, a stock of ―cheap‖ energy is allocated among users based on their individual past consumption. This mechanism has a number of problems. In the first place, there is a targeting problem. In a typical electricity system, a number of users will vary their consumption from one year to another for completely exogenous causes. According to IEA 2005, natural variation in energy use ensures that about 20 percent of customers will use 20 percent less energy than in the previous year. For a sample comparing consumption of individual residential customers between 2003 and 2005 in a distribution company in Latin America with fixed tariffs, we found significant variations, as shown in the figure below. Second, the administrative costs of the implementation of this kind of program can be very high. Normally, utilities‘ billing systems are not prepared for this tariff structure and the time and costs to adapt them can be substantial. Third, this rule has negative distributive effects. By allocating ―cheap‖ energy on the basis of past consumption, this rule privileges ―old wealth.‖ This can be very regressive in the context of a fast-growing middle- or low-income economy (e.g., South Africa). 41 65. The bars in the graph show, on the left axis, the frequency distribution of users varying their demand in relation to the previous year. On the right axis, the lines show the cumulative value. In the 2002–2004 period, 30 percent of customers reduced their consumption by 20 percent or more. As shown in the figure, the number goes up to 50 percent if we consider a 10 percent variation in relation to the previous year. In 2004-2005, 15 percent of customers reduced their consumption by 20 percent or more and 25 percent showed a variation of over 10 percent. This indicates that making tariff reductions or penalties rely on past consumption is prone to a large targeting error. This problem will be compounded by exogenous variables affecting average consumption of the entire system (e.g., air temperatures), as shown by the differences in the two periods considered in the graph above. Graph 2. Percentage of electricity consumption variation from one year to the other 2003–2004 2004–2005 20% 100% 20% 100% 18% 90% 18% 90% 16% 80% 16% 80% 14% 70% 14% 70% 12% 60% 12% 60% 10% 50% 10% 50% 8% 40% 8% 40% 6% 30% 6% 30% 4% 20% 4% 20% 2% 10% 2% 10% 0% 0% 0% 0% 0% -90% -80% -70% -60% -50% -40% -30% -20% -10% 10% 20% 30% 40% 50% 60% 70% 80% 90% -100% 100% 110% 0% -100% -90% -80% -70% -60% -50% -40% -30% -20% -10% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% Frec Acum Frec Acum Source: Authors. 66. At the core of all these problems is the allocation of a quota for each individual user. With an increasing block tariff, changing the price or the size of the blocks can generate the same type of incentives while avoiding the discussed drawbacks. This is illustrated using the tariff structure of Costa Rica. The different options are illustrated in the table below. Table 12. Individual electricity consumption quotas and equivalent block prices Equivalent Actual Actual 50% Equivalent blocks 2 tariff tariff penalty block 3 and 3 Period T T+1 T+1 T+1 T+1 Consumption (kWh) 381 342.9 381 381 381 Tariff block < 200 0.109 0.109 0.109 0.109 0.109 < 300 0.196 0.196 0.196 0.196 0.220 >300 0.269 0.269 0.269 0.332 0.302 > T-1 0.404 Monthly bill ($) 63.13 52.88 68.26 68.26 68.26 Variation bill -16% +8% Source: Authors 42 67. Column 2 in the table shows the initial situation. Average consumption is 381 kWh/month and there is an increasing block tariff with three blocks: less than 200 kWh, between 200 kWh and 300 kWh, and more than 300 kWh. This results in a monthly bill of US$63.13. Column 3 shows the effect on the monthly bill of a 10 percent reduction in consumption under the current tariff (with no incentives). Given the increasing block structure, a 10 percent drop in consumption generates savings of US$10 (-16 percent) in the monthly bill. 68. The fourth column shows a tariff including a 50 percent surcharge on the third block for all consumption exceeding 90 percent of the consumption in the previous period. For a consumer who fails to adjust his consumption at all, the monthly bill goes up by US$5 (+8 percent). The following column shows the increase in the price of the third block, which results in the same monthly bill for a constant consumption. This is achieved by increasing the tariff of the third block from US$0.269 to US$0.332/kWh (+23 percent). If we adjust the second and third blocks (column 6), the resulting tariff structure shows an increase of 12 percent in both tariffs to keep the monthly bill constant.11 69. As this exercise shows, a change in block prices can produce the same economic effect as the allocation of quotas based on past consumption. This avoids the implementation and equity problems discussed while at the same time it produces the economic signal to induce the desired savings. 70. By working with a homogeneous consumption block, rather than the individual one implicit in the quota system, this alternative is more progressive as higher consumption is penalized with higher increases in the monthly bill. It must be stressed that this alternative replicates the economic incentives implicit in the individual quota approach but is no replacement for the complementary measures (media campaign, consumer information, etc.) needed to ensure the necessary demand reduction during a crisis. The way in which the tariff increase is presented to the public is also important because it should be viewed as part of a crisis energy-saving package rather than as an attempt by the electric companies to increase their revenue. 2.2.2 Large Users: Situation in Central America 71. This section presents a brief summary of tariffs for large users in Central America. The main elements of medium-voltage tariffs in each of the six countries are summarized in the table 13. 72. All countries have energy and capacity charges and hourly metering for medium-voltage customers. Guatemala and Honduras have a single charge for both energy and capacity while the other four countries differentiate between peak and non-peak periods. Costa Rica shows three periods with a high differentiation of the price among periods. Panama has two periods; El Salvador has three energy charges but a single capacity value; and Nicaragua has two energy charges and a single capacity charge. Hourly metering makes it possible to send more precise signals that are particularly important during periods of capacity shortfalls. Unlike the case of residential 11 A similar exercise varying the size of the blocks instead of the price results in a constant bill by reducing the third block from 300 to 230 kWh/month, or alternatively reducing the second block from 200 to 174 and the third from 300 to 261 kWh/month. 43 consumers, for which only total energy consumption can be limited due to the lack of time-of-use metering, signals for medium-voltage users can target total energy and peak demand separately. Table 13. Medium-voltage tariff: Central America 2009 (US$) El Costa Rica Guatemala Honduras Nicaragua Panama Salvador Energy charge US$/kWh Peak 0.0980 0.1733 0.2082 0.1227 Valley 0.0374 0.1164 0.1246 0.1191 0.1677 0.1184 Night 0.0214 0.0984 Capacity charge US$/kW/month Peak 15.4460 10.9300 Valley 11.0339 5.6965 5.8986 17.5455 3.3646 1.2400 Night 7.0655 Source: Authors, based on official tariff data from each country. Using large-user tariffs as an instrument during crises 73. Demand response to price changes is a useful alternative to traditional supply-side remedies in constrained electricity markets. Demand response offers a highly flexible and naturally distributed resource to network operators, and reduces the need for investment in peak supply capacity. Critically, demand response enhances security, particularly on constrained networks, because higher concentrations of demand are typically located at network nodes where congestion is high and network security is most vulnerable. 74. The key element for inducing efficient consumption by large users is a pricing mechanism that reflects real-time costs of production known as dynamic pricing. Dynamic pricing includes time-of-use (TOU) pricing, critical-peak pricing (CPP) and real-time pricing (RTP), as described in the table below. Implementation of these pricing mechanisms requires substantial investment in metering, communications and data processing systems. Table 14. Dynamic pricing alternatives Pricing Description mechanism Traditional time-of-use programs, which vary the price according to the Time-of-use hour, day or season of consumption, have long been used by utilities as a (TOU) tool for balancing demand. More advanced form of pricing designed to increase the transparency between wholesale and retail markets. The basic principle is that the Real-time (RTP) end-user price is linked to the wholesale market clearing price. Also known as dynamic pricing, these products refer to any electricity tariff where the timing and prices are not known or set in advance. Hybrid of real-time-pricing and time-of-use; a typical design will feature a traditional time-of-use rate in effect all year except for a contracted Critical–peak number of peak days, the timing of which is unknown, in which a much (CPP) higher price is in effect. The number of these critical peak days is known in advance, but their price and timing are not. Source: Based on IEA 2005. 44 75. During a crisis, these alternatives can be used only if the required equipment is already in place. At present, most electricity systems, particularly those based on a competitive wholesale market, have this kind of system implemented in at least some of the largest users. For these users, international experience shows several emergency demand response programs, as described in the table below. Table 15. Emergency demand response programs Source: IEA 2003. 76. These emergency demand response programs are measures designed to deal with declared emergencies in the system. The trigger for the emergency ―event‖ will be defined by network reliability and security standards. 77. In terms of tariffs for large users, several steps can be taken as a means of ensuring a flexible set of instrument during a crisis. The main ones are:  A set of clear tariffs and rules for use of the distribution network by captive generation (co-generation and auto-generation by large users). This would allow captive generators to sell excess power during an energy or capacity shortfall.  An existing secondary market or clearing rules for large users with long-term contracts so they can resell contracted power. With proper incentives, in some cases large firms might choose to shut down production or shift it outside the peak, and sell contracted capacity back to the market.  A wholesale price allowed to reflect the true cost of energy during the crisis. Large users should face rationing prices in order to receive proper incentives during a crisis.  Rules that will allow interruptible contracts for large consumers. Typical interruptible contracts will include the number of interruptions allowed per year; the size of load reduction; the period of reduction; and the season or 45 period during which interruptions are possible. Payments for participation are based on all of these factors. 2.2.3 Tariff Regime 78. The tariff regime is the set of rules by which tariffs are updated and modified over time. This is the key to the incentives that firms face for productive efficiency. There are three main types of regulatory regimes: cost of service or rate of return; price or revenue caps; and hybrids. Tariff regimes are not only central to the creation of productive efficiency incentives but they also have a large impact on the incentives electricity distribution firms face for promoting or supporting energy efficiency measures among their customers. 79. In general, price caps create not only an incentive for cost minimization but also a perverse incentive for firms to maximize sales as a way of maximizing profits, especially when the share of fixed costs is large, as in electricity supply. In theory, this problem is not present under traditional cost-of-service (or rate-of-return) regulation, although in the practical application some disincentives exist. Under this regulatory regime, utilities‘ earnings are based on capital invested and electricity (kilowatt-hours) sales, which result in financial incentives biased toward increased electricity sales and system expansion. 80. In Central America, following the reform wave of the 1990s, most countries have vertically unbundled sectors with some degree of competition in generation and high incentive regulatory regimes based on some form of price cap for transmission and distribution companies. The only exception is Costa Rica where the integrated utility is subject to rate-of-return regulation (see table below). Table 16. Tariff regime: Central America Review Tariff Country Period Regime (years) Costa Rica Cost of service Guatemala Price cap ? Honduras Price cap 5 Nicaragua Price cap 5 Panama Price cap 4 El Salvador Price cap ? Source: Authors. 81. In Costa Rica, ICE, the vertically integrated state-owned company, is regulated by a rate-of-return mechanism. There appear to have been no problems for the company to implement energy efficiency programs, which have been accepted by the regulator as part of the regulatory asset base.12 82. Following the reform of the electricity sector in the UK, the adoption of price caps with pass-through of generation costs was part of the standard sector reform. Although price caps have proved effective in providing incentives for cost reductions, 12 According to ICE officials interviewed by the authors in January 2009. 46 they have some disadvantages that have led regulators to consider alternative mechanisms. In particular, they provide an incentive for companies to sell as much as possible at the maximum allowed price, perhaps more than would be efficient in the absence of such a cap. This is of particular concern when supply-demand balances are relatively small and when environmental considerations are important. 83. One way to correct the incentive to sell large quantities is to cap revenue rather than price, allowing companies to earn a particular allowed revenue and compensating them if they sell too few and removing revenue that arises from excess sales.13 There are two main disadvantages.14 First, the company will have to set its prices in advance, but can only check the revenue that they yield afterwards. This means that the company may quite innocently earn more than the price control allows. 84. For example, if the company has a fixed charge for each consumer and a unit rate, the average revenue per unit falls as demand increases. If demand is lower than expected, then the company‘s average revenue per unit will be higher, leading it to breach the price control. Therefore, the control must include a correction factor, so that the company‘s allowable revenues in one year are reduced if it over-recovers in the previous year. (The correction factor also allows the company to recover the revenue forgone if its prices turn out to be lower than the control would have allowed.) Second, the cap is likely to be more complicated to specify. If the cap simply specifies the revenue per unit of sales, the company can effectively ―ease‖ the cap by expanding sales to low-price customers, since this will increase its volume by a greater proportion than its revenue. More generally, a combination of price and revenue cap mirroring the cost structure of the company (revenue cap to cover fixed costs and price cap for variable costs) could result in the same incentives for productive efficiency while eliminating the incentives to sell as much as possible. 2.3 Quantifying Appliance Replacements 85. Promoting appliance replacement is often used as a measure to reduce electricity demand. In this section, we use available data to present some quantifications of the likely impact and costs of three appliance replacement programs. Evaluating the costs and benefits of such programs is the first step in assessing the feasibility of a replacement effort. The success of implementing such measures will rely on a sustained effort and strong local knowledge to reduce leakage or rebound effects to a minimum. Appliance replacement can be implemented rapidly with energy savings achievable in a year and more. However, those programs typically take a little more time to be designed and implemented and should be included as a complementary set of measures to an emergency response. 86. The replacement programs examined below focus on refrigerators and lamps, which are two major sources of residential electricity consumption. There are other items that could be worth investigating. For example, Brazil launched a program to replace electric showerheads, an appliance used extensively in that country. An assessment of a similar program in Costa Rica is presented in Annex 4. 13 In the US, this is known as revenue decoupling. See Kushler et al. 2006 for a discussion of the US experience. 14 See Green et al. 1997 for a general discussion of price and revenue cap formulas. 47 2.3.1 Refrigerator Replacement 87. There is no information on the average efficiency of the existing stock of refrigerators in the Central American countries. For illustrative purposes, the analysis uses historical data from North America on the likely impact of a replacement policy. The table below shows the evolution of average annual energy consumption of refrigerators of different sizes in the US since 1980. Table 17. Refrigerators: Average of annual energy consumption kWh Year Size (cubic feet) 1980 1985 1990 1995 2000 2005 2008 6 503 517 489 429 306 8 554 585 483 407 10 626 611 668 474 427 304 12 909 889 733 533 558 14 1,093 954 801 571 601 16 1,160 1,019 841 620 626 456 Source: Energy Information Administration (EIA). 88. As we can see, there was a significant increase in energy efficiency in refrigerators during this period. For example, for 10 cubic feet refrigerators the average annual consumption fell from 626 kWh in 1980 to 304 kWh—less than half—in 2005. A comparison of the maximum and minimum annual consumption for each size yields a measure of energy efficiency gains during the period (see table below). Table 18. Refrigerators: Energy efficiency increase Annual consumption Efficiency Size (cubic feet) Max Min gain 6 517 306 -41% 8 585 407 -30% 10 668 304 -54% 12 909 533 -41% 14 1,093 571 -48% 16 1,160 456 -61% Source: Authors. 89. The energy efficiency gains range from a minimum of 30 percent for 8 cubic feet refrigerators to a maximum of 61 percent for 16 cubic feet refrigerators. It is also worth noting that the minimum efficiency levels for the smaller refrigerators are not associated with 1980s values but rather to 1985 and 1990 values. This seems to suggest that increases in energy efficiency occurred mainly in the last two decades. Based on the available information for Costa Rica, we can estimate the average efficiency of refrigerator stocks in that country. There are two approaches. The first is based on macro data (total residential consumption, percentage of energy used in refrigerators and total number of refrigerators). The second is based on average energy consumption and energy used data from the household surveys. Both estimates are presented in the table below. 48 Table 19. Average refrigerator efficiency in Costa Rica15 Rich Poor Number of refrigerators 1,111 Penetration 92.7 Number of households 1,198 Annual consumption 3,284,000 4,571.8 2,319.6 % Consumption refrigerator 36.9% 30.1% 40.3% Total refrigerator consumption (GWh) 1,211.8 Average refrigerator C (kWh/year) 1,091.1 1,376.1 934.8 Source: Authors. 90. First, we use the share of refrigerators in total electricity consumption and the estimated number of refrigerators to calculate average refrigerator consumption for the population as a whole. For the second approach, we use only the household survey data to estimate the average consumption of the refrigerator in a poor and middle-rich household. The results of both methods are consistent and show annual consumptions ranging from 935 kWh/year for poor households to 1,376 kWh/year for rich households, with an average of 1,091 kWh/year for the population as a whole. 91. Given the lack of data for Central America and based on the evidence from Costa Rica, we can assume that the existing stock is on average a 1980 16 cubic feet refrigerator. Under this assumption, a replacement plan would replace a refrigerator whose annual consumption is 1,160 kWh with for an efficient one consuming 601 kWh. This implies savings of 569 kWh per year for each replacement. To estimate the aggregated effect of a refrigerator replacement plan, we need to consider the existing stock of refrigerators in each country. The table below shows the penetration ratio of refrigerators in five of the six Central American countries. Table 20. Refrigerator stocks in Central America Costa El Guatemala Honduras Nicaragua Panama Rica Salvador Refrigerator penetration 92.7 N/A 50.9 26.4 61.7 58.91 Population 4,400 13,030 6,970 5,530 3,290 6,760 Number of households 1,198 3,548 1,898 1,506 896 1,841 Number of refrigerators (thousand) 1,111 NA 966 398 553 1,084 Source: Authors. 15 Please refer to footnote two of the Encuesta de Consumo Energético Nacional en el Sector Residencial de Costa Rica Año 2006 for more details about the Rich (medio-alto) and Poor (Popular) socioeconomic group classification. 49 92. The penetration ratio shows that the situation is very heterogeneous, ranging from nearly universal access in Costa Rica to only a fourth of the households having a refrigerator in Nicaragua. Based on the penetration ratio and the number of households, we can calculate the stock of refrigerators in each of the countries in the region. We find three countries with around one million refrigerators (Costa Rica, Honduras and El Salvador) and two countries with 400,000 and 550,000 each (Nicaragua and Panama). In the first group the results are more homogeneous as a result of the lower penetration ratio being compensated by relatively large populations in El Salvador and Honduras. Based on the estimated stock, the energy savings associated with different replacement ratios in each country are calculated and presented in the table below. Table 21. Potential energy savings (% residential consumption) Costa El Replacement Guatemala Honduras Nicaragua Panama Rica Salvador 10% 1.9% ND 2.7% 3.4% 1.9% 3.8% 20% 3.8% ND 5.3% 6.9% 3.9% 7.6% 30% 5.8% ND 8.0% 10.3% 5.8% 11.4% 40% 7.7% ND 10.7% 13.7% 7.7% 15.2% 50% 9.6% ND 13.3% 17.2% 9.7% 19.0% Source: Authors. 93. The electricity savings impact ranges from 2 percent to nearly 20 percent of total residential consumption, depending on the percentage of refrigerators replaced. A key underlying assumption in this exercise is that old refrigerators are effectively replaced by new ones. This could be problematic, particularly in countries with low levels of penetration (such as Nicaragua) in which the incentive to keep the old refrigerator (or give it to a friend or relative) is extremely high. Similarly, it may be necessary to consider income threshold effects while preparing the implementation of a refrigerator replacement program, to ensure that low-income groups can benefit from the program. 2.3.2 Refrigerator Efficiency Choice – Private Valuation 94. In this section, we analyze the incentives to buy an efficient refrigerator under current tariffs in the six Central American countries. Based on available information from the Web, two refrigerators with different efficiencies are compared, using published prices in Costa Rica. The information on the refrigerators—prices and efficiency—is presented in table 22. 95. Based on these published prices and efficiencies, the subsidy needed to induce consumers to choose the more efficient refrigerator is estimated given the residential tariffs in each country and assuming two different discount rates: 10 percent and 15 percent per year. The estimation was made using a simple financial model that compares the net present value of the two alternatives over a 15-year life period. Results for each country and tariff block are presented in the tables 23 for the 10 percent and 15 percent discount rates, respectively. 50 Table 22. Refrigerator parameters Frigidaire Frigidaire Model FRT8S6ESB FRT18HB5JW Size (cubic feet) 18 18 Price in Costa Rica (US$) 2,574.0 3,015.1 Consumption (kWh) 479.0 383.0 Source: Compiled by authors from the sources below. Model Price Efficiency Frigidaire http://articulo.mercadolibre.co.cr/MCR- http://www.fixya.com/support/p5 FRT8S6ESB 182862liquidacion-refrigerdor-100- 21020- nuevo-en-oferta-_JM frigidaire_frt8s6esb_stainless_ste el_top Frigidaire http://www.gollotienda.com/productosInf Energy Star FRT18HB5JW o.asp?dep=60&prod=6001130036&ncat= Table 23. Required subsidy to purchase energy-efficient refrigerators (US$): At a 10% discount rate Residential electricity El Costa Rica Guatemala Honduras Nicaragua Panama tariff categories Salvador 000–025 kWh 389.94 026–050 kWh 383.61 330.71 361.99 051–100 kWh 356.38 325.27 306.60 101–150 kWh 288.16 362.76 151–200 kWh 338.49 300.30 201–300 kWh 288.71 298.51 301–500 kWh 312.82 363.31 501–1,000 kWh 231.92 274.70 214.49 299.60 Over 1,000 kWh 187.11 At a 15% discount rate Residential electricity El Costa Rica Guatemala Honduras Nicaragua Panama tariff categories Salvador 000–025 kWh 399.47 026–050 kWh 394.41 351.44 376.84 051–100 kWh 372.29 347.01 331.85 101–150 kWh 316.87 377.47 151–200 kWh 357.76 326.73 201–300 kWh 317.31 325.27 301–500 kWh 336.90 377.92 501–1,000 kWh 271.18 305.93 257.02 326.16 Over 1,000 kWh 234.77 Source: Authors. 51 96. The tables indicate that Nicaragua is the country with the widest variation. At a 10 percent discount rate, the subsidy ranges from just below US$390 for the first block to US$187 for the last tariff block. With a higher interest rate, subsidies are higher: between US$400 and US$235. With the prices used in this example, current tariffs in Central America are not enough to induce a private consumer to adopt the most efficient technology. 2.3.3 CFL Replacement 97. In this section, costs and possible impacts of a CFL program are estimated for Central American countries. Table 24. Estimates of total lamp stock per country Costa El Guatemala Honduras Nicaragua Panama Rica Salvador Electricity coverage 96% 63% 50% 40% 74% 69% Consumption kWh/month 237 102 180 92 206 107 GDP per capita 9,889 4,311 3,553 2,441 10,135 5,477 Number of households 1,198 3,548 1,898 1,506 896 1,841 Residential clients 1,153 2,252 954 597 660 1,268 % Lighting* 12.2% 25.0% 15.0% 25.0% 12.2% 25.0% Lighting consumption 29 26 27 23 25 27 Number of incandescent lamps per household 8 7 8 6 7 7 Total number of incandescent lamps (thousand) 9,261 15,952 7,155 3,814 4,608 9,422 *: estimates. Source: Authors. 98. Starting from coverage ratios, average consumption, and number of households, we calculate the total number of lamps for each country. The average the number of lamps per household is estimated from consumption in lighting, assuming that 40 W lamps are used three hours per day. Total lamps are calculated by multiplying them by total residential users. Assuming that 40 W incandescent lamps are replaced by 10 W CFLs producing a 30 W saving per lamp, savings are estimated in the table below. 52 Table 25. Estimated savings (MWh/year) Replacement Costa El Guatemala Honduras Nicaragua Panama Ratio Rica Salvador 10% 28 48 21 11 14 28 20% 56 96 43 23 28 57 30% 83 144 64 34 41 85 40% 111 191 86 46 55 113 50% 139 239 107 57 69 141 Source: Authors. 99. Given the unit cost per CFL lamp replaced, the total cost of each replacement ratio can be estimated. In reality, replacement costs will vary across countries and even within regions in each country. In the Dominican Republic, for example, a program to replace 10 million incandescent light bulbs with energy-saving compact fluorescents (CFLs) in 840,000 homes is valued at US$18.5 million, or about US$1.85 per bulb.16 The total light bulb replacement program costs, assuming a cost of US$2.5 per lamp, are presented in the table below. Table 26. CFL replacement program costs (US$ millions) Replacement Costa El Guatemala Honduras Nicaragua Panama ratio Rica Salvador 10% 2,315 3,988 1,789 954 1,152 2,355 20% 4,630 7,976 3,578 1,907 2,304 4,711 30% 6,945 11,964 5,366 2,861 3,456 7,066 40% 9,261 15,952 7,155 3,814 4,608 9,422 50% 11,576 19,940 8,944 4,768 5,759 11,777 Source: Authors’ calculations. 16 Source: http://dr1.com/blogs/entry.php?u=environment&e_id=3990 53 CHAPTER THREE MEASURES TO RAPIDLY INCREASE THE SUPPLY OF ELECTRICITY 3.1 Introduction 100. Central America is faced with capacity shortages to meet growing demand in the short term. In addition to the available data on demand, generating capacity and load forecasts, there is most likely suppressed demand that will contribute to the increase in the load as the regional grid becomes more reliable. This chapter presents possible solutions to bridge the gap between the potential power shortages in the near term and the installed capacity in accordance with the expansion plans in the long term. 101. Most of the countries have implemented emergency generation plans that include reciprocating engines using diesel fuel for high-speed engines or heavy fuel oil (HFO) for medium-speed engines. Diesel fuels are high in cost and suffer from volatile pricing, but diesel power plants are quick to set up, which explains the general preference for this solution when it comes to rapidly filling a supply-demand gap. For example, the Barranca Plant in Costa Rica, rated 90 MW, was operating within 90 days of contract signing. Nicaragua used high-speed diesel engines for the Hugo Chávez Plant and replaced them with medium-speed engines burning HFO for the long term. Medium-speed engines may take as long as 24 to 30 months to engineer, procure and construct. 102. Each Central American country also has an ongoing expansion plan that is expected to meet the capacity requirements for long-term growth, but delayed progress in building the expansion plan may result in continued use of emergency generation units. The private sector will be relied upon to build a portion of the expansion plan. Private sector participation currently ranges from 17 to 85 percent in installed generating capacity among the countries in the region. 3.2 Ten Measures to Increase Electricity Supply 103. The ranking of specific measures gives preference to the modification of equipment, systems or structures that are already installed or are in the process of being installed, rather than to the addition of temporary capacity through the use of rental equipment. Measures considered range from increasing capacity by improving the availability and effective capacity through improved maintenance practices, corrective maintenance and supply of spare parts, to expediting schedules of plants being built under expansion plans. Plants that become candidates for modification must be identified through an analysis of the availability and effective capacity of the operating units. 104. Total system losses in the Central American region average 16 percent, ranging from 10 percent for Costa Rica to as high as 27 percent for Honduras. High losses in the region also provide a significant opportunity for reduction, which could free up the capacity needed to meet demand. Advanced technology metering can significantly reduce 54 nontechnical losses. Upgrades to the regional transmission system, such as the addition of capacitor banks at the 230 kV level, provide a minimal reduction of technical losses in the transmission system but the improved system conditions can allow nearby generators to increase the power factor and produce additional megawatts. 105. Increasing capacity by utilizing existing backup or ―inside-the-fence‖ generation to offer temporary incentives is another option. It may require only limited hardware additions to include the capacity in the dispatch pool, but a standard PPA would need to be developed and regulatory or legal changes may be required. The ranking of measures will depend on the impact of increasing capacity, the schedule to implement the alternative and the cost to implement the alternative. Each step in the decision matrix will need to be measured against criteria for cost, schedule and impact in order to make the decision to implement the solution. Figure 1. Decision matrix Source: Authors. 106. The measures examined have been subdivided into actions that can be considered and are ranked on a preliminary basis. The effectiveness of each of the actions can only be determined after additional data have been collected and analyzed for a specific application. In general, the measures proposed are as follows, in priority order: a) Increase availability of existing operating plants identified as having low availability by increasing reliability and improved schedules for maintenance outages. b) Increase capacity of existing operating plants identified as having low effective capacity by obtaining necessary parts and conducting corrective maintenance. Rehabilitation of units that have been retired or derated can also be considered. c) Expedite completion of plants in the expansion plans and transmission lines being built under SIEPAC that are currently being planned or are under construction to advance the completion date or prevent schedule slippages. d) Integrate backup generation into the dispatch pool for peaking by offering Power Purchase Agreements on a short-term basis to make use of existing operating equipment and prevent blackouts rather than have the on-site generation operate as backup after the blackout occurs. e) Increase the availability of bagasse-fueled plants that are used by the sugar mills only during the sugarcane harvest, by using alternate fuels after the harvest. 55 f) Upgrade transmission systems by the addition of capacitor banks at selected sites; these banks reduce transmission system losses and can increase the megawatt operating capacity of existing generators. g) Install advanced metering systems to reduce nontechnical losses. h) Install high-speed reciprocating engines to operate with diesel fuel on a temporary basis. i) Install leased power generation barges equipped with reciprocating engines or combustion turbines. j) Install a fixed-combustion turbine (GT) plant, simple cycle (SC), at a prepared land site to operate on light distillate oil. 107. Measures 1 through 7 can be initiated simultaneously to determine their impact on increased capacity; the balance of the required increase in capacity can then be installed using measures 8 through 10. 3.3 Analysis of the Ten Measures to Increase Electricity Supply 3.3.1 Increasing Availability and Capacity of Existing Generating Plants 108. Increasing the availability of existing generating plants can be accomplished by increasing the reliability of the plants or by reducing the time required for scheduled and unscheduled maintenance. The former will require either improved operation and maintenance (O&M) or partial or full rehabilitation of plants. The latter can be accomplished by improved outage management and planning. Working with existing generating plants to increase effective capacity through repairs or refurbishments can increase capacity available during peak operating times. A review of the existing power plants with effective capacity significantly lower than nameplate capacity would be required to determine the necessary corrections, cost, schedule and effectiveness. Costs are likely to be less than other fixes because the modifications are being made to existing operating equipment unless it is determined to be advantageous to refurbish a unit, in which case the unit must be retired from service. 109. Information required for this analysis includes:  Availability of operating power plants.  Outage history of operating power plants.  Nameplate and derated capacity of operating power plants.  Reasons for derating. Effective Capacity 110. Many of the countries reported installed capacity and effective capacity. The effective capacity of the hydro plants is dependent on water level. The thermal plants with effective capacity less than installed capacity indicate that capacity could be improved with correction of problems, overhaul of equipment or a change in a regulation, contract or operating time. 111. The effective capacity of the Central American countries that report such a statistic is 83 percent of the installed capacity, representing a potential capacity of 653 MW. If improved maintenance, correction of equipment deficiencies, and 56 modification of agreements could recapture 90 percent of that capacity, this would amount to a 588 MW power plant. Additional information about the effective capacity of thermal plants in the region is required to determine the opportunities for improvement. Availability 112. Availability is the long-term performance of a component or system in service and available to satisfactorily perform its intended function. For a power plant unit, the definition of availability is the measure of time in which a generating unit is capable of providing service, whether or not it actually is in service. 113. Generating units with low availability can be targets for repairs or corrective maintenance outages to improve the system‘s availability, increased capacity and reliability. Reciprocating engines and diesels have industry-reported availability between 91.5 and 97 percent. Gas turbines have industry-reported availability between 93.5 and 97 percent. Lower figures would point to deficiencies worth investigating in case of a lack of available capacity to determine the opportunities for improvement. 114. For example, in a Middle Eastern country, a utility owned and operated a plant that consisted of two 165 MW gas turbines working in combined cycle. In the first year of operation, the plant experienced 91 percent availability, which is reasonably good, especially for the first year. For the second year, the O&M contract was given to a local contractor whose experience was questionable. The availability deteriorated to 69 percent. Following that year, and for the succeeding three years, O&M has been in the hands of an internationally known operator and availability has increased to 98 percent, although the current operator continues to correct inherited problems. Capacity Factor 115. Existing units, including retired units, units that have been derated, and units with low capacity factors, may be subject to rehabilitation. Rehabilitated units can be available to increase capacity for use in the short term and provide generation capacity that can be called on to meet peak demand. Additional information about the condition of retired, derated and low-capacity-factor thermal plants in the region is required to determine the opportunities for improvement. 116. Examples from international experience abound. For example, in Tanzania, a plant in Dar es Salaam consisted of two Asean Brown Boveri (ABB) GT10s and two General Electric LM6000 aeroderivative turbines. Only one of the GT10s was operable and both of the LM6000s were out of service due to blade problems, for an operating capacity of approximately 15 MW. All units had been operating on Jet A fuel. When the plant was taken over by an independent power producer, all units were removed and overhauled, and the ABB GT10s was upgraded to GT10B. The reinstalled units were then put into service using natural gas from offshore of southern Tanzania. The operating capacity was increased by 98 MW, totaling 113 MW. 57 Incentives 117. To increase the capacity factor and availability of existing power plants, a benchmark can be set for each type of plant. If the plant achieves the benchmark, after an allowance period, to make repairs or schedule outages, then the plant will be expected to continue to achieve the benchmark. If the benchmark is exceeded, the power plant can be rewarded with a bonus. If the power plant falls short of the benchmark, the plant will receive a penalty equal to the cost of the rental of reciprocating engines to replace the shortage of available capacity. 3.3.2 Expediting Projects in Expansion Plans 118. Each country in the region has developed expansion plans to meet increasing demand. Some projects may be in the engineering and construction stages, licensing stage, planning stage or feasibility stage. Each project has a scheduled online date that is used by each utility to determine dependable capacity to meet demand. 119. A review of the schedules of the projects in the expansion plans that are scheduled to come online in the next few years may reveal an opportunity to expedite the completion and thereby increase capacity using a project that is already planned. Utilities that are building power plants under the expansion plan can be provided with a bonus to pay the constructors if the power plants are commercial prior to the scheduled date and likewise can be penalized for failure to meet the scheduled date for commercial operation. The bonus and penalty can be related to the cost of providing replacement power. Incentives 120. Power Purchase Agreements (PPA) for power plants operated by private companies use two methods to expedite construction schedules and outage schedules. These are (i) liquidated damages for failure to meet construction schedules, and (ii) penalties for failure to achieve guaranteed availability under the PPA. 121. To expedite construction schedules, liquidated damages are included in the PPAs and are then reflected in the Engineering, Procurement, Construction (EPC) contracts to make sure that the power plants achieve commercial operation on time. EPC contracts may also have bonus provisions based on revenues that the project company earns by generating energy earlier than expected. The liquidated damages and bonus provisions help to focus the efforts of the constructor in sequencing the work, expediting equipment deliveries, and initiating startup and testing early in the commissioning process. Examples of liquidated damage provisions to meet a guaranteed schedule range from payments of US$45,000 to US$90,000 per day of delay. These examples of liquidated damage provisions are taken from projects in West Africa, the Middle East and South Asia. An example of the impact of bonus provisions on a constructor can be illustrated by a project built in northeastern Pennsylvania in the early 1990s, in which the constructor negotiated a contract to build a coal-fired power plant in 27 months and targeted the construction schedule for 22 months. The constructor completed the project in 24 months and earned a bonus of a percent of the revenues earned by the plant for completing the project three months early. 58 122. Penalties for failing to achieve guaranteed availability under a PPA will motivate the project company to minimize scheduled outage time because scheduled outages can be controlled, whereas unscheduled outages and forced outages cannot be controlled. Minimizing outage time can be accomplished by making spare parts available prior to the outage, using scheduling and management techniques to effectively schedule the outage activities and using quality control techniques to ensure that repairs are done properly. 3.3.3 Transmission System Upgrades and Reduction of Losses 123. A computer model of the electrical system in Central America was used to run illustrative cases of the impact of selected changes that could be made to the system. The model is based on information that was gathered in 2004. Although the information is not updated and may be incomplete, the results are still helpful to illustrate the impact of changes and to analyze several measures. 124. The measures selected to study the impact of changes to the transmission system were based on voltage profile and transmission line overloading. The corrective measures studied to improve the voltage profile included:  addition of capacitors;  effects of load tap changers; and  addition of new generation. 125. The measure studied to correct transmission line overloading was the addition of a transmission line. All measures contribute to eliminating an average of around three percent of losses. Table 27. Transmission system changes Addition Operation Connection Addition of Proposed transmission of of the of Base case transmission system change capacitor load tap generating lines banks changers plants Technical losses (MW) 244.96 241.93 242.49 244.59 244.23 Imported power (MW) 278.41 278.43 278.41 278.41 278.43 Generated power (MW) 8,007.34 8,004.29 8,004.88 8,006.97 8,006.59 Load (MW) 8,040.79 8,040.79 8,040.79 8,040.79 8,040.79 Percentage of losses (%) 3.05 3.01 3.02 3.04 3.04 Source: Authors. 126. The results achieved come from specific measures:  The addition of the capacitor bank reduces the need for reactive power from the generators, allowing the generators to increase capacity available for contingencies such as peak demand.  The importance of adding capacitors at one of the substations of the Nicaraguan system has been identified by low voltage at three buses (4401, 4404, and 4407) that register voltage levels below 90 percent. A capacitor bank of 109.6 mega volt ampere reactive (MVAR) is installed at one of the buses (4407) and the voltage levels at three buses increased to above 94 percent. The recent cost of a 90 MVAR capacitor bank installation at 59 230 kV was US$4.5 million. A typical schedule for a capacitor bank is six months for manufacture and two months for installation.  The location of the capacitor banks in Nicaragua‘s 230 kV transmission system improved voltages with the consequent improvement in quality of service, and reduced the power losses in the transmission system. When the capacitor bank reduces the exchange of reactive power, it frees up capacity in the lines and possibly in nearby transformers. For example, in one of the adjacent lines, the load was lowered from 35.3 percent to 33.1 percent of line capacity.  New transmission lines reduce system losses, avoid overloading and improve voltages. In the case of a new transmission line in Costa Rica, a load level of 101.8 percent was decreased to 56.7 percent with the addition of a parallel line. The voltages at the ends of the line before the new transmission line was simulated were 94.8 percent and 94.0 percent, respectively. After insertion of the new line, voltages improved to 95.2 percent and 94.7 percent, respectively.  In Costa Rica‘s transmission system, the transmission line connecting two buses (5195 and 5003) is overloaded to 101.8 percent of capacity. To overcome the overload situation, another line was modeled to be constructed in parallel with the existing one. With this action the loading is reduced to 56.7 percent. The estimated cost of a 230 kV transmission line is US$120,000 per kilometer for a single-circuit line and US$180,000 per kilometer for a double-circuit line. The schedule for design and construction of a typical 230 kV line, with right of way already procured, is approximately two years. 127. The additions of a transmission line and a generating plant reduced losses by less than 1 megawatt. Operating load tap changers reduced losses by 2.5 MW and the addition of capacitor banks reduced losses by 3 MW. The test conducted for the purpose of this study provides a very conservative estimate of losses since the modeled system did not include subtransmission and distribution systems. Nevertheless, each alternative provided a significant enhancement to transmission system operating characteristics by improving voltage conditions or reducing overloaded conditions. 128. One of the advantages of improved transmission system characteristics is a reduced requirement for the generators to generate reactive power. Reducing the requirement to generate reactive power can allow the generator to produce additional megawatts within the generator‘s rating, as specified on a generator capability curve. For example, a generator rated 125 MW at 0.85 lagging power factor can produce an additional 15 MW if the requirement to produce reactive power is reduced to 0.95 lagging power factor. 129. The value of this exercise is to show that making changes to the transmission system may not generate huge decreases in losses, but the improvement of transmission does produce significant increases in electricity supply available to consumers (through fewer needs for reactive power generation, for example). As a result, the contribution of measures linked to transmission improvements should be included in a broader emergency response design. 60 3.3.4 Integration of Backup Generation 130. Backup power generation is usually considered by large commercial or institutional facilities (hospitals, hotels, shopping centers, universities and industrial facilities) to provide a reliable source of power under blackout conditions in the grid. Some backup power generation is sized to provide electrical energy for the full load operation of the facility, while other backup power supplies are sized for emergency, personnel safety and safe shutdown of the facility. 131. Industrial facilities, such as refineries, paper mills, steel mills, sugar mills, ports, pharmaceutical companies and aluminum smelters, build ―inside-the-fence‖ power generation facilities to provide a source of reliable power for the process or to save on energy costs, producing electric energy at a lower cost than that delivered by the grid. 132. The advantage of such sources of distributed generation is that they can potentially supply electricity to the grid during a national emergency, above their traditional role as a backup, or stand-alone, capacity. The disadvantages of doing so include less centralized control of environmental emissions, costly operation of distributed generation and potential loss of native load for the utility. 133. As a short-term measure, to take advantage of any backup generators or ―inside-the-fence‖ generation, an offer can be made to the owners of those generators to pay for fuel and capacity if the backup generator is entered into the dispatch pool under a limited PPA. A PPA can be developed to compensate the owners for the additional maintenance, fuel and capacity in the short run in exchange for their being subjected to dispatch and operation. Interconnection equipment would have to be installed and would be covered by the agreement. 134. PPAs can be crafted for a minimum capacity and a sunset date at which time backup generation would revert to the original on-site emergency service. PPAs would be limited in duration up to the time that plants being built under the expansion plans are built to replace the capacity of the backup generation to prevent the loss of native load for the local utility. Benchmarks, bonuses and penalties can be applied to backup generation that is selected to be included in the dispatch pool. Costs 135. The costs to implement the integration of backup generation into the dispatch pool would be the capital cost of the synchronizing equipment and protective relays so that the backup generator can work with the system and the operating cost of more frequent maintenance and the cost of fuel. The existing backup generation most likely operates on diesel, so the cost of fuel as a pass-through would be approximately US$0.095 per kWh based on diesel fuel costing US$1.83 per gallon.17 136. A measure of the cost of maintenance and spare parts can be taken from the reported cost of renting high-speed diesel engines in Costa Rica where the rental units cost US$0.04 to US$0.05 per kWh. Integrating the backup generation is similar to renting 17 The price of diesel fuel is subject to high volatility. This study anticipates that diesel prices will remain at a relatively high level in the next two to five years. The price is assumed constant for the purpose of calculations comparing short-term temporary alternatives. 61 generating units except that they are already installed and after the rental period will not need to be relocated. The owners of these backup generators will gain the benefit of a more reliable supply in their immediate area by allowing their units to be integrated into the dispatch pool, so the cost could be less than the cost of the rental. 137. Prerequisites for deployment of the use of backup generation in the dispatch pool are a minimum size of the unit that would make it economical to add synchronizing equipment, protective relays and the terms of a temporary PPA acceptable to the owners of the backup generators to allow their generators to be operated by dispatch, which will increase maintenance and use of spare parts. 3.3.5 Sugarcane Bagasse-fueled Power Plants 138. One source of on-site generation is the bagasse-fueled power plants used by the sugar mills during the sugarcane harvest. The boiler specifications could be reviewed to determine an alternate fuel that could be used after the harvest is over and the power plant could be operated all year. Additional information required to determine the cost and effectiveness of including on-site generation in the dispatch pool includes: a) Size and location of on-site generation; b) Type of fuel used by the on-site generation; and c) Agreement of the owners to include on-site generation in the dispatch pool. 139. Analysis of the additional information will provide a measure of the effectiveness of such an approach. The same benchmark, bonus and penalty can be applied to bagasse plants that opt to be included in the dispatch pool after harvest, operating on alternate fuel. Cost 140. The costs to implement the inclusion of the bagasse plants into the dispatch pool would be the capital cost of the synchronizing equipment and protective relays, the cost of modifying the boilers to burn an alternate fuel, the operating cost of more frequent maintenance, and the cost of fuel. The alternate fuel will most likely be light distillate oil (diesel), so the cost of fuel as a pass-through would be approximately US$0.095 per kWh based on diesel fuel costing US$1.83 per gallon. 141. The operating and maintenance costs will be less than for diesel engines, so the O&M cost will be less than US$0.04 to US$0.05 per kWh charged for diesel rentals and will more likely be in the range of US$0.015 to US$0.025 per kWh. 3.3.6 Reduction of Nontechnical Losses with Advanced Metering Systems Nontechnical Losses 142. Nontechnical losses represent a significant difficulty for electric utilities. The primary causes of these losses include commercial loss and nonpayment loss. Commercial loss is frequently the result of electricity theft through illegal taps on power lines or tampering with power meters. Nonpayment loss is caused by an inability on the part of the consumer to pay full price for the electricity consumed. These nontechnical losses represent an unnecessary energy waste that burdens electricity rates for consumers, 62 results in lost revenue for utilities and causes increased carbon emissions in the environment. 143. One potential solution to these types of nontechnical losses is the implementation of new power metering systems. This includes the establishment of either a prepaid electricity metering system or an integrated power system of smart boxes on distribution lines. Prepaid Electricity Metering 144. A prepaid electricity metering system allows consumers to buy credit from the power utility in order to use a specified quantity of energy. These credits commonly come in the form of encoded tokens which, when inserted into the appropriate slot in the meter, allow the consumer to utilize his energy credit. The meter then dispenses electricity until the credit runs out. In addition, the meter alerts the consumer sufficiently in advance of the energy credit being exhausted so that he can pay to recharge his energy supply. However, if the consumer fails to buy additional energy credits, the meter automatically disconnects the supply as soon as the credit store is used up.18 145. Prepaid electricity metering offers several important benefits to utilities. Most significantly, the utility receives electricity payment about 45 days earlier than in the conventional billing system, effectively eliminating the risk of nonpayment. In addition, the utility can save considerably on operating costs associated with reading, billing and revenue collection. Both of these factors improve the electricity utilities‘ finances tremendously. 146. There are several barriers to the implementation of prepaid electricity meters. First, utilities may be discouraged by the large initial investment required, which includes the cost of equipment, marketing, establishing distribution channels, and other management costs. Moreover, consumer behavior may play a role because of the difficulty in convincing existing customers who are satisfied with the postpaid system to switch to a prepaid system. In many cases, the payment, especially for smaller users, is on a flat-rate basis and paying for actual energy used may be more expensive to the consumer. Finally, the uncertainty of success may act as a barrier since it may not be a viable option in all markets. The success of this system depends on the commitment by power utilities and for this they must be convinced of the real benefits of prepaid metering.19 147. Such prepaid electricity metering systems have become increasingly common and can be found in the United Kingdom, South Africa, Argentina and New Zealand, among others. The South African case, in particular, is an example of the successful implementation of the prepaid electricity metering system. Eskom, the utility that provides 95 percent of South Africa‘s electricity, has experienced success with the prepaid electricity metering system. Starting in 1994, Eskom has over 2.6 million meters in operation to date. It currently costs Eskom on average 2,500 South African Rand (approximately US$248) for each new electrification connection that it makes. However, the installation of new prepaid meters has reduced steadily because certain projects have 18 Pabla 2004. 19 Srivatsan 2004. 63 become prohibitively expensive to electrify. Many of Eskom‘s new customers live in new homes or shacks where there is no house wiring and thus require additional investment on the part of the utility. 148. With regard to the problem of nontechnical losses, Eskom has found that the prepaid metering system can be a useful tool in managing commercial loss and eliminating nonpayment loss. By carefully analyzing consumption and purchase patterns, Eskom has been able to manage electricity theft by detecting usage anomalies, performing site visits and prosecuting trespassers. In addition, Eskom has also found that consumers have accepted prepayment because of the absence of fixed monthly charges and reconnection fees and a clear display of available credit that allows consumers to budget more effectively. Finally, the reliability of Eskom‘s prepaid metering system has been very good, with current meters exhibiting a failure rate of less than two percent per year, including customer-induced failures.20 149. Although implementation and operation of improved metering and prepaid meters require a significant commitment from the power utility, both financial and over time, such systems contribute to almost eliminating nonpayment losses. In addition, the system allows utilities to be able to better manage electricity consumption and detect theft. As a result, the prepaid electricity metering system is recommended for utilities that face long outstanding periods for their billings and significant amounts of electricity theft. Integrated Power System 150. An integrated power system utilizes different electricity distribution system architecture when compared to many of the traditional fixed network (Automated Meter Reading and Advanced Metering Infrastructure; AMR/AMI) systems used in North America and Western Europe. Whereas the typical AMR/AMI system features an electric meter on the endpoint of the consumer‘s premises, the integrated power system involves the physical removal of the electric meter from the customer‘s premises and the use of a separate unit that serves many customers. An integrated power system has been installed in Cartagena, Colombia. 151. In this system, the traditional electric meter is replaced by a module that is placed on the electrical distribution structure alongside the premises. This module serves up to 12 premises and allows the utility to carefully monitor electricity consumption at the end-user level. The module is meant to be relatively inaccessible to the electricity end users and thus is typically mounted on a pole top inside a substation enclosure or secure cabinet. Finally, the module is manufactured according to outdoor and military-like specifications to make it climate resistant and tamper proof. 152. The integrated power system is specifically designed for deployments that involve harsh climates, challenging topographic conditions, or countries that have significant occurrence of nontechnical electrical losses resulting from electric meter tampering or theft. The integrated power system runs parallel to the current metering system but measures consumption at the line level, before it ever reaches the meter. This allows the system to bill in real time the actual energy being dispatched to the end user. The 20 ―Frequently Asked Questions Related to Prepayment.‖ 64 integrated power system then reports to the utility how much energy was dispatched to each end user, allowing the utility to compare against what it is billing in order to identify specific end-user lines where electricity is being lost. 153. This system helps the utility to reduce its commercial losses by identifying areas where nontechnical losses occur. The system is meant to act as a permanent solution by continuing to monitor electricity flows in real time and allowing remote suspension and reconnection of service if losses persist. This system is likely to be less expensive to install than a prepay system, but it will push cash flow out and still has the difficulty of bill collection, although it will have the remote disconnect-reconnect option. 154. The integrated power system has several features that compare favorably with the traditional AMR/AMI systems. The integrated power system is specifically designed to provide significant information and protection from tamper and theft. In addition, the system is designed to accommodate challenging climates, environments and geographies because its ability to utilize a variety of different communication technologies with its network also allows for easy disconnection and reconnection of nonpaying customers and also supports both pre- and postpayment revenue models. Finally, the system eliminates the need to upgrade residential electric meters. 155. However, the integrated power system does have some key disadvantages. The integrated power system measures on-premises consumption by means of a distribution transformer that is located some distance from the premises. When this transformer is installed further than 10 to 12 meters away from the premises, there is a possibility that line loss could create an inaccurate measurement. Another issue that exists is that, at this time, the module firmware, a key element of the system, cannot be upgraded remotely; it must be upgraded locally at each box, a labor-intensive and time-consuming process. Finally, at present the integrated power system is comparatively more expensive than other AMR/AMI systems. As such, it may only be practical to deploy this system selectively in areas that are most vulnerable to tampering and theft or have challenging topography. 156. The integrated power system is a potential solution to the problem of mitigating nontechnical electricity losses and promoting energy efficiency. This system is designed for the express purpose of eliminating commercial losses resulting from tampering and theft; thus, is most viable in geographical regions where these problems are prevalent. A private company that is developing this system conducted ten pilot trials with seven distribution companies. The results showed an average improvement of a 29.2 percent reduction in energy lost; the trial with the greatest improvement showed a reduction of 58 percent of energy lost. This data suggests that the integrated power system can significantly help utilities mitigate energy loss because of the additional information gathering and tampering prevention this system provides. 65 Cost 157. The cost of a basic prepaid electric meter tends to range between US$10 and US$50, although feature-rich meters may be much more expensive (around US$200 per meter). The cost of prepaid meters will vary depending upon:  Technical specifications of the meter (1 phase or 3 phase; display; rating);  Method of prepayment (cash, card or code);  Number of meters ordered (manufacturing and shipping costs);  Communication (meters read manually or through telecommunications); and  Expected meter life and warranty. 158. Other factors to consider include:  Ability to tamper with meters;  Payment by utility or customer for replacement or repair of damaged meters;  Payment by utility or customer for initial prepaid meters and installation;  Impact of prepaid meters on reduction of nontechnical losses;  Cultural acceptance of prepaid meters;  Dealing with theft or counterfeit if the prepaid meters are replenished by cash;  Process for selling credits if the prepaid meters are replenished by cards or codes (similar to phone cards, or by utility office);  Cost of installation and training of the workforce to install the meters. 3.3.7 Addition of Capacity Using Reciprocating Engines Diesel Fuel 159. Reciprocating engines (internal combustion engines) constitute a good backup power supply to the hydropower units that much of Central America uses for base load. Reciprocating engines have thermal efficiencies of 41 percent for the small high-speed units (e.g., 1 MW of capacity) to upwards of 46 percent for the larger medium-speed units (e.g., 100 MW of capacity). Boilers cannot meet this level of efficiency and gas turbines can be thermally competitive only in combined cycle and with natural gas or light diesel oil (LDO). Purchase and setup of the medium-speed units built into a nominal 100 MW plant will cost US$800 to US$$1,100 per kW and require about 30 months to purchase and install. They can burn the less-expensive HFO and crude oil at an efficiency of approximately 46 percent. 160. The smaller high-speed diesel units can be set up quickly, because they can be skid- or container-mounted with engine, generator and circuit breaker on the skid and require no foundation other than a site with stable soil. Large plants up to 90 MW can be established and operating in three or four months from receipt of order. Their downside is the price of electricity that they produce, due largely to their high fuel costs, since these units must operate on diesel or LFO (or a high level of subsidy in case the diesel fuel price is subsidized). The temporary high-speed units of 1 MW to 2 MW banked into a larger plant are being rented dry in Costa Rica for US$0.04 to US$0.05 per kWh. The 66 fuel cost should be approximately US$0.095 per kWh based on fuel costs of US$1.83 per gallon. These plants are about 41 percent efficient. Fuel Supply 161. Each 2 MW unit burns about 140 gallons per hour at full load. It is expected that the units would be operating as peaking units for possibly two or three hours in the morning and about five hours in the afternoon, although peak load requirements differ by country. An increase in diesel rental units would require the import and transportation of additional quantities of diesel fuel oil and the resulting increase in port unloading capacity, storage tank capacity and tank truck capacity to move the fuel from the port to the power plant locations. 162. For a few of these rental units, mobile tanker trucks connected by manifold for fuel supply may be adequate on a temporary basis, but with a plant much over about 20 MW, this proves to be impracticable because road tankers have a capacity of approximately 8,000 gallons (at least in North America, to stay within highway load capacities). 163. For larger plants, steel tanks built on the site would generally be required. These tanks are of unlimited size with respect to the practical capacity used and can be erected and tested quickly. A 100 MW plant will require about 50,000 gallons of diesel for seven hours of peak operation, as noted above, although peaks are generally bell shaped so the plant would not likely be operating at full load for the entire period. 164. With oil requirements of this magnitude, assistance is needed from various government entities to expedite the procurement and receipt of equipment and oil, as well as to expedite site locations and permitting of the plant, including the oil storage facility, transportation of the oil from the port or other interface to the plant, environmental permitting and other logistics required to get the plant up and running in the time expected. 3.3.8 Addition of Capacity Using Leased Power-generation Barges 165. The use of barge-mounted electric power generation dates back to the 1940s; it is a proven and reliable approach to providing electric supply but is typically expensive. Barge-mounted generation has been used as both a short-term (emergency) supply source of electricity and as a long-term permanently installed power plant. 166. Electric generation barges are available for short- to intermediate-term rental or may be purchased (or leased) for longer-term use. The barges also use a variety of equipment that yields a wide range of capacity outputs and can utilize several fuel sources. Due to the portability of power barges, there is an active market for the sale/lease/rental of barges that are operation ready, needing only an interconnection to the grid to supply power. There is also an active market for the custom construction of barges. 167. The advantages of using power barges may include the following:  Wide range of outputs using multiple machines allows for capacity supplied to be well matched to the needs (single or multiple barges). 67  Barges may be added or removed if the need changes over time.  Barges may serve base-load, intermediate or peaking power needs.  Time from the decision to obtain added capacity to operation may be significantly quicker, particularly when currently operating units are used.  Construction of a new barge may begin simultaneously with permitting activities, allowing for delivery of the power island in under a year.  Construction delays are less of a factor for the power island because the barges are built in an industrial setting using experienced construction personnel. 168. The disadvantages of using power barges may include:  Impact of storms on production.  Consumption of valuable waterfront/docking areas.  Space limitation adds operation and maintenance challenges.  Environmental issues (emissions and water pollution, wildlife) vary depending on barge equipment and fuel.  May require transmission line, dock improvements, fuel storage or other on-land costs that impact the cost per MWh generated. 169. The use of power-generation barges in Central America is not uncommon and typically is oriented to light distillate oil (LDO). The extensive coastline and the location of electric-demand load centers near the coast are supportive factors for the use of barges to meet short-term or emergency supply of power. Gas turbines in a simple-cycle configuration can also be considered for a fixed installation at a prepared land site. The equipment, if available, can be delivered and constructed in a similar time frame to be considered as a short-term solution. In addition, if the generation is filling a short to interim requirement, the residual value of the power-generation barge is higher than that of a conventional plant because it can be easily moved to another location for use. The cost to purchase power plant-equipped barges currently in operation is widely variable, with an indicative range of US$500 to US$900 per kW of capacity. 3.3.9 Addition of Capacity with Used Power Plant Equipment 170. Used power equipment may on some occasions provide good opportunities to lower investment costs while eliminating manufacturing time. This option is examined briefly here, but it merits utmost caution with regard to this type of equipment and does not indicate support for procurement of used equipment. Indeed, used equipment may generate higher unexpected operating costs and risks of failures that could impair the purpose of producing electricity in a reliable manner. 171. The investment cost of used plants and equipment is significantly lower than the cost of new equipment due to wear and tear and to warranty protection that is less than that of new equipment. Used power-generation equipment that is selected for purchase must be thoroughly inspected by reputable third parties and tested for critical functions. 68 The results of testing and any refurbishment or remanufacturing may provide some limited warranty protection. Inspection and testing are critical prior to the purchase of used equipment. There are specialized companies with the expertise to determine the equipment‘s condition. Most results are presented in a test report and often come with a verification certificate that details the functioning of each major piece of equipment. The cost of used power plants varies significantly; a sample of some used plants for sale showed a range of US$33/kW to US$1,000/kW. 172. Construction costs of used power-generation equipment, including the cost of disassembly and shipping, approach the construction costs of building a new plant. The construction of used power-generation equipment carries slightly less risk than the building of a new plant because it is known in advance that all of the parts will fit and that the plant will work. 173. Since the schedule for building a plant with used power plant equipment is dependent on the particular unit selected to be moved, it is not likely to be a short-term solution. 3.3.10 Environmental Considerations in Rehabilitating Existing Thermal Plants 174. Bringing additional capacity online quickly through rehabilitation of existing thermal plants can help, but it requires a case-by-case assessment of power plants being considered. In evaluating individual power plants, the baseline reference for environmental standards should be the World Bank‘s Pollution Prevention and Abatement Handbook, ―Thermal Power: Rehabilitation of Existing Plants.‖ Primary consideration should be given to local environmental regulations. 3.4 Ranking of Measures to Increase Electricity Supply Capacity 175. One of the underlying assumptions is that the most effective means to reduce short-term constraints on electricity availability, in terms of cost and schedule, is to improve the performance and make use of existing equipment. However, the actual cost and schedule will be made up of the summation of individual determinations necessary to identify which power plants can improve their performance or be added to the dispatch pool. It is also difficult to determine the magnitude of the capacity that can be added to each system until the characteristics of each existing power-generating unit have been identified and the feasibility of increasing capacity has been identified. 176. The other solutions that require the lease of temporary equipment for additions to capacity have also been reviewed and compared to some longer-term technologies such as hydro and geothermal plants. The results of those rankings are presented on table 28. 177. Only three of the technologies listed are appropriate for short-term installation to add capacity (listed below). Other technologies take a longer term to implement, except geothermal if the field is already prepared for equipment installation.  High-speed diesel;  Barge GT plant, SC;  Fixed GT plant, SC. 69 178. The decision on which technology to implement will need to be made on a case-by-case basis by evaluating the trade-off between being able to have new capacity brought online quickly to generate expensive electricity or to add capacity at a slower rate, but to have electricity produced at lower cost. 179. Peak electricity is always more expensive than electricity generated by base-load plants and this fact is reflected in the operating costs of short-term technologies. Each of the short-term technologies is ranked in terms of schedule, efficiency, operating cost and capital cost in the table below. Table 28. Characteristics of capacity technology Capacity Expected Construction time Availability factor Efficiency life (2) (3) (5) (1) (4) 20%– High-speed diesel 20 years 90 days (rental) 95% 30% 41% Medium-speed 40%– diesel 20 years 24–30 months 95% 50% 46% 20%– Barge GT plant, SC 20 years 12–18 months 94% 30% 40% 20%– Fixed GT plant, SC 20 years 12–18 months 94% 30% 40% 30%– Fixed GT plant, CC 20 years 24–30 months 90% 40% 55% 40%– Coal-fired boiler 40 years 30–36 months 89% 50% 35% Hydro power 50 years 36–84 months 89% 50%+ N/A Geothermal power 50 years 12–36 months 97% 80%+ N/A Notes: (1) North American Electric Reliability Corp. (NERC) 2002-2006 (2) Schedules have been toward the longer date for the past few years but should be retreating. (3) From contract signing to commercial operation. (4) Capacity factor based on plant efficiency, demand curves and general availability of renewables. (5) Geothermal construction time can be as low as 12 to 24 months with a proven source Source: Authors. 180. Capital cost was converted to a US$/kWh basis using assumptions of a five-year lease, 40 percent residual value, 15 percent interest rate and 60 percent capacity factor. The terms of each agreement may be different, such as lease or buy provisions, capacity of the unit which varies with technology, and the term of a lease. It is clear that high-speed diesel engines can have the lowest capital cost but also have the highest operating costs. Unit sizes will also be smaller for high-speed diesel engines than for the other short-term technologies. 70 Table 29. Technology sorted in order of installation time and thermal efficiency Technology Installation time Thermal efficiency Rank Time Rank Efficiency High-speed diesel 1 90 days (Rental) 1 41% Barge plant, GT 2 12–18 months 2 40% Fixed GT plant, SC 2 12–18 months 2 40% Source: Authors. Table 30. Technology sorted in increasing order of O&M and fuel cost Fuel cost O&M cost O&M and fuel Rank Technology $/kWh US$/kWh US$/kWh 1 Fixed GT plant, $0.112 $0.0057 $0.118 SC 1 Barge plant, GT $0.112 $0.0057 $0.118 3 High-speed diesel $0.109 $0.0255 $0.135 Source: Authors. Table 31. Technology sorted in increasing order of capital cost Capital Levelized Rank Technology Installation time cost cost US$/kW US$/kWh 1 High-speed 90 Days $500 $0.0163 diesel (Rental) 2 Fixed GT plant, 12–18 months $650 $0.0212 SC 3 Barge plant, GT 12–18 months $900 $0.0293 Source: Authors. 3.5 Ranking of Measures to Increase Electricity Supply and Characteristics Matrix 181. The rationale for the ranking of these solutions is based on anticipated cost, schedule, impact on capacity and ability to control the process. They are ranked in anticipated increasing cost and the schedule for implementation. The detailed rationale for the ranking is described as follows:  Increasing availability of existing operating plants that have been identified as having low availability is a low-cost effort completely within the control of the utility operating generation plants and can be implemented in a very short time frame.  Increasing the capacity of existing operating plants that have been identified as having low effective capacity is also completely within the control of the utility operating electricity generation plants and can be implemented in a very short time frame. There will be some cost, depending on the necessary parts or construction that may be required for corrective maintenance. Rehabilitation of units that have been retired or derated can also be considered. Impact on increased capacity is unknown until the plants with low 71 effective capacity, or candidates for rehabilitation, have been identified and potential improvements have been quantified.  Expediting the completion of plants and transmission lines that are currently being planned or under construction can be implemented immediately but the impact will be longer term, dependent on the construction schedules of each of the projects. This measure also depends on the cooperation of those outside the control of the utility and may include some cost if it is determined that financial incentives are necessary to accelerate schedules.  Integration of the backup generation into the dispatch pool for peaking by offering PPAs depends on the cooperation of those outside the utility and also requires the cost for synchronizing equipment and protective relaying for each generator to be connected. There will also be the added cost of fuel, which will most likely be high-cost diesel fuel. However, the generating equipment is in place and the schedule will be determined by the time it takes to install the required interconnection equipment and negotiate the agreements. Impact on increased capacity is unknown until the capacity of the backup generation evaluated as a candidate has been identified and the cost of interconnection has been quantified.  Increasing the availability of bagasse-fueled plants for operation after the sugarcane harvest depends on the cooperation of those outside the utility. The cost will be dependent on the identified modifications to the existing boilers and the cost of the alternate fuel. The schedule will be dependent on the time it takes to make the modifications and negotiate the agreements. This solution is limited to the regions where there are existing bagasse plants.  Upgrading the transmission system by the addition of capacitor banks to reduce transmission system losses and increase the operating megawatt capacity of existing generators is within the control of the utility. Schedule and cost are dependent on the size and number of capacitor banks being installed. The potential increase in capacity can be determined from the transmission studies to identify the location and size of the capacitor banks to be installed.  Installation of advanced metering systems to reduce nontechnical losses can be an ongoing program with small incremental costs. Implementation of this alternative depends on the cooperation of the utility‘s customers. Implementation will likely be gradual, and the benefits of improved metering will be longer term. However, in an emergency response design, steps to launch improvements in metering will help improve the overall resilience of the electricity system.  Installation of high-speed reciprocating engines to operate on diesel fuel on a temporary basis is a short-schedule but high-operating-cost solution. High-speed reciprocating engines are more efficient than combustion turbines, can be provided in relatively small unit sizes and can be installed in locations distributed around the system. 72  Installation of leased power-generation barges equipped with reciprocating engines or combustion turbines requires a longer schedule to deliver and install and uses high-cost diesel fuel. Combustion turbines usually have larger unit sizes than reciprocating engines. Installation of power barges is limited to water locations that have been prepared for the connection of the barges. One advantage of a power barge is the ease of relocation or removal when it is no longer needed, but high cost is a concern.  Installation of a fixed combustion turbine (GT) plant, simple cycle (SC) at a prepared land site is estimated to have a schedule similar to the power barges and will have the same operating costs. The installation of fixed combustion turbines can have more options for location than power barges but does not have the advantage of easy relocation or removal when they are no longer needed. However, the high cost is a concern. 182. Each solution will have a cost to implement. This may be incentive payments, expediting costs, spare parts cost or the capital cost for the project. With limited resources a threshold cost may be determined for the overall program and for each individual project. The threshold cost is represented parametrically in the table below by the blue boxes on a diagonal to portray the concept graphically. Table 32. Cost and time to implement different alternatives Cost High Rented high-speed Barge OCGT - Fixed Used equipment diesel OCGT power plant Medium Increased Accelerated availability - utilize construction bagasse Low Transmission Rehabilitation of capacitors - backup Improved metering existing facility generators $/kWh/time 0–12 months 12–18 months Up to 24 months Source: Authors. 183. These solutions require inclusion of environmental and social considerations, for which World Bank Guidelines and local regulations can provide useful standards. 73 Table 33. Characteristics matrix Actions Rank Short-term fix Benefits Consequence Cost and schedule Risk required Cost of improved Possible low cost and Obtain data on Improves reliability Increasing maintenance outages and short schedule 1 availability of existing Low availability parts for corrective depending on fixed limitations equipment maintenance maintenance Improves operation Possible low cost and Obtain data on of existing Cost of parts for Increasing short schedule 2 capacity equipment or corrective maintenance Low capacity depending on fixed limitations rehabilitates retired or rehabilitation maintenance or derated units Expedite completion of Determine the Advances the Cost of expediting plants in the effectiveness schedule of projects Cost of incentives, 3 efforts or incentives to Low expansion plan of expediting or keeps a project on reduced schedule contractors and owners under the schedule schedule construction Cost of connection Integration of Obtain data on Makes use of equipment, high-priced Possible low cost and 4 on-site existing on-site existing operating Low fuel and capacity charges short schedule generation generation equipment under PPA Increase Cost of fuel and capacity Obtain data on Makes use of availability of charges un PPA, cost of Possible low cost and 5 allowable existing operating Low bagasse-fueled equipment required to short schedule alternate fuels equipment plants convert to alternate fuel Reduces transmission Update system losses and US$4.5 million for 90 Addition of Cost of capacitor 6 transmission can increase MW MVAR at 230 kV, 8 Low capacitor banks installations system data capacity of existing months generators Obtain pricing, South Africa Install Reduces implementa- experience is US$248 advanced nontechnical losses Cost of implementation 7 tion schedule per installation. Cost Low metering and can be used to and public acceptance and technical can be stretched out systems control some loads data over time High cost, short High-speed Obtain pricing schedule High-cost fuel and rental 8 reciprocating and available Fast implementation Lease US$0.04 to Low fees engines data US$0.05 per kWh plus US$0.09/kWh fuel Medium cost and short schedule for used Leased power High-cost fuel and rental barges, US$500 to generation Obtain pricing fees or purchase costs, Large capacity US$700/kW; 9 barges, or fixed and available cost to prepare Low additions possible New fixed equipment gas turbine, data waterfront site or land US$650/kW to simple cycle site US$850/kW for simple cycle Large capacity Warranty less than for Medium cost and Used power Obtain pricing additions possible, High new equipment, schedule dependent schedule, not 10 plant and available reduction of (minimal to implement dependent likely a short-term equipment data construction and warranty) on plant remedy operating risk Depends Obtain Acceptable waivers Minimal cost and on Environmental information on may provide capacity Short-term deterioration schedule dependent on Low applica- restraints environmental addition with of environment application tion limitations existing plants Source: Authors. 74 CHAPTER FOUR PRACTICAL RECOMMENDATIONS 184. A government or utility must act quickly when an electricity shortfall becomes apparent. It must create an electricity conservation strategy in a very short time-anywhere from hours to months—and then implement it. Good information is key to creating an effective plan. 185. The three major information requirements for dealing with an electricity shortfall are illustrated through a series of questions below:  Identify the kind of electricity shortfall, e.g., energy or capacity (what kinds of savings are needed, capacity or energy?). Is the shortage limited to certain peak times? If yes, what activities cause it? Example: are the in-line water heaters causing a 6:00 pm electrical peak?  Estimate the probable duration of the shortfall (how long will the shortfall last?). Is the government or utility waiting for a new power plant? Transmission line?  Establish a breakdown of energy consumption by end-use during the shortfall period (which end users or appliances/machinery are using the electricity?). 186. The goal of the collected information is to allow the authorities to develop a list of measures and energy savings and select the most effective ones for further action. 4.1 Identify the Type of Electricity Shortfall 187. A successful conservation strategy must save electricity at the time that there is actually a shortfall. Every crisis will be unique, but most will be either a shortfall in peak capacity or in energy (i.e., kilowatts or kilowatt-hours). In practice, the crisis will evolve (or more information will become available). What first appears as a shortfall in peak capacity may quickly change into a broader energy shortage (or vice versa). A supply shortfall may also be caused by administrative, rather than technical, reasons such as when generators choose not to offer power or try to manipulate the market. 188. Many conservation programs have impacts on one or the other, but not both. For example, it is often possible to reduce peak power by deferring agricultural pumping until off-peak periods. This action will cut the peak but not save any electricity (and might even increase its use). Many programs to improve the efficiency of appliances, such as refrigerators and electric water heaters, will save electricity but have little impact on peak demand. Identifying the kind of shortfall will narrow the list of reasonable measures and simplify the development of a strategy. 189. Information needed:  Size of shortfall. By what percent does electricity demand exceed supply?  Identification of times when shortages occur: time of day, season, drought? Or when in the future is the shortfall expected to appear? 75  Load curves (electricity use by hour) for typical days in seasons with highest and lowest electricity demand (to assess the impact of lighting, water heating, industry, harvest, etc.).  Does the shortfall include the spinning reserves? 4.2 Estimate the Probable Duration of the Shortfall 190. Strategies to save electricity in a hurry work best when there is a reasonably clear ending to the shortfall. In Central America, this may be when a power plant is completed (or repaired) or a transmission line is finished. The likely duration of the shortfall will shape the strategy to reduce demand. A 20 percent shortfall persisting for months will require different interventions than one lasting just an afternoon. In general, it will be possible to rely more on financial incentives and technological improvements for crises with longer advance warning or duration. Information required includes:  Prediction of when the critical shortfall is likely to end (and the event that will signal the end).  Likelihood that the crisis will continue or evolve into something different. 4.3 Establish a Breakdown of Energy Consumption by End Use during the Shortfall Period 191. It is difficult to save electricity that was not used in the first place but this is exactly what could be attempted if there is poor information on how (and when) electricity is used. The most reliable approach is to perform detailed customer surveys, including end-use monitoring, load surveys, appliance saturation surveys and other data collection instruments. It is also important to know the largest customers. For example, about one percent of Tokyo‘s electricity is used by the water and sewage treatment system. In California, utilities (in cooperation with the State Energy Commission) conducted load surveys of hundreds of customers. These, combined with appliance saturation surveys, give California planners a clear picture of the most important end uses of electricity. 192. Most data collection takes years to perform, and even longer to compile and interpret. Ideally, data collection will be a regular activity. Reliable, up-to-date information in Central America will be scarce or nonexistent but insights from even limited or incomplete data can make a difference. 193. Information needed:  How much electricity is consumed by each sector? a) Residential b) Commercial c) Industrial d) Agriculture (irrigation? milling?) e) Government buildings and facilities? f) Certain regions with unusually high consumption? (e.g., hotels in tourist areas). 76  What appliances and equipment are responsible and how much? These data will be crude at best. If any end-use surveys have been conducted in one of the Central American countries, then it might be roughly applicable in the others. Major end uses are: a) Lighting (residential, commercial, street) b) Water heating c) Cooking d) Television e) Refrigeration f) Water pumping and sewage treatment g) Industry (including mining) h) Other. 194. Technical characteristics of end users are also vital. For example, are most showers in-line, resistance-heated, rated at 2 kW? Or is most residential and lighting done with compact fluorescent lights? It is also useful to compile data on customers with long-term, fixed-price contracts. These users—typically electricity-intensive industries—may find it worthwhile to shut down operations temporarily and resell electricity on the spot market if the price rises enough (and if their contract so permits). These contracts are difficult to compile and tabulate because each is unique and many are confidential. 4.4 Define Whether Specific Electricity Pricing Measures are Needed 195. The price signal is the most important means of informing consumers of an electricity shortage. The prices of electricity should rise to reflect its scarcity and most utilities already have interruptible power tariffs or demand response programs to exploit this price elasticity. These programs also provide clues about how other customer categories will respond to higher prices. 196. Unfortunately, for many groups of customers there exist barriers to quickly raise electricity prices. These barriers are caused by regulatory delays, technical barriers associated with meters and meter-reading procedures, and uncertainty about what the actual electricity price is during the shortage. For example, most utilities in North America and Japan read residential meters once a month. If the shortage is expected to persist for less than a month, feedback caused by high prices can play at best a weak role in encouraging conservation. It is therefore critical to determine the technical and institutional constraints to which higher prices can be used to discourage consumption. 4.5 Develop a Prioritized List of Measures 197. Hundreds of electricity conservation measures are possibly relying on behavioral changes and technical improvements in efficiency (or both). But resources are usually available to effectively promote only a small fraction of them. Factors to be considered when ranking the measures include:  Features of the shortfall: amount of conservation needed, duration and advance warning; 77  Target sectors, that is, residential, industrial, commercial or agricultural;  Appropriate mix of behavioral and technical changes; and  Staff and money available to implement programs. 198. This is the most difficult part of the process because it requires input from many different sources. Furthermore, the ranking requires subjective judgments, for example with respect to estimating the impact of campaigns to change consumer behavior. This, in turn, will depend on public opinion regarding the electricity shortfall, the public‘s willingness to participate, and the credibility of the group promoting conservation. In practice, policy makers may have as little as a few hours to develop the list, which will consist of only a few measures. Advance preparation is critical. Ranking measures according to their cost-benefits does help to apprehend orders of magnitude and to fine-tune expectations. As shown in the box below, among the six measures described in the preceding chapters the most cost-effective measure is by far CFL replacement with costs that are six times lower than the next alternative in the ranking. The other appliance replacement alternatives rank fourth and sixth with costs, which under the given assumptions are not very different from electricity generation expansion costs. These rankings do not include climate change aspects, which could affect their costs (e.g., externalities of carbon emissions are relevant) or potential access to concessional financing (e.g., for low carbon solutions such as appliance replacement programs). Institutional Measures to Consider 199. Having a long-term energy efficiency strategy in place can be of great help in devising and putting into practice an effective and efficient response to a crisis. 200. Specific institutional measures to be considered include:  Enforcing restrictions on imports of energy-inefficient products and developing regional collaboration on energy-consuming equipment information and customs standards.  Strengthening energy demand data collection: residential appliance surveys, monitoring.  Developing energy conservation programs focused on the largest electricity users. 201. The international experience reviewed in previous sections shows that countries with a strong energy efficiency tradition were best suited to cope with the crisis. 78 Box 4. Comparing the cost of adding electricity supply measures with savings from appliance replacement In order to have comparable data, we consider—as in the generation alternatives—a 15 percent discount rate in all cases. For refrigerator replacement, we assume a 15-year life, annual savings of 569 kWh (replacing a mid-1980s refrigerator with a new efficient one) and a cost of US$500. For CFL replacement, we consider savings of 32.8 kWh/year (30 watts per lamp used 3 hours a day 365 days a year), a 5-year lifetime and a cost of US$2.5. For the electric shower, we assume savings of 221 kWh/year at a cost of US$208 and a 10-year lifetime. Based on these data, we calculate the levelized costs of the replacement (Table 1). Table 1. Appliance replacement: Levelized cost Electric Refrigerator CFLs showers Savings (kWh/year) 569 32.85 221.4 Cost ($) 500 2.5 208 Life (years) 15 5 10 Levelized cost (kWh/$) 0.150 0.023 0.187 Source: Authors. We estimate the levelized cost of each alternative as the marginal cost of buying, installing and maintaining the efficient device, divided by its discounted stream of lifetime energy savings. The results for each appliance—in US$/kWh—are presented in the last row. These costs can now be compared with total costs of the different generation alternatives. A ranking based on increasing costs of generation and levelized costs of replacement is presented in Table 2. Table 2. Ranking of levelized costs Alternative $/kWh CFLs 0.023 Fixed GT plant, SC 0.139 Barge plant GT 0.147 Refrigerator replacement 0.150 High-speed diesel 0.151 Electric shower 0.187 Source: Authors. These results are very sensitive to the assumptions considered. Fuel prices, discount rate and prices of the individual alternatives will all have significant impacts on total costs and relative ranking. Fuel prices are a key element because they represent a very large share of generation alternatives while they do not enter at all in the costs of efficient appliances. For example, a 50 percent increase in fuel prices would make all generation technologies more expensive than appliance replacement. Environmental externalities were not factored in the calculation and would likely tend to further burden the costs of the electricity generation additions, as opposed to demand-side measures that do not imply additional emissions. 79 Annex 1. Case Study: Chile 1. Background In the 1990–2003 period, the 5.8 percent GDP annual average growth was accompanied by a 5.1 percent growth of the total secondary energy consumption and, within this field, electric power increased by 8.2 percent. Although a series of Energy Efficiency21 (EE) initiatives were implemented in the 1990s, it was not until December 2005 that the Ministry of Economy, Promotion and Reconstruction issued Order No. 336 whereby the Commission for the ―Energy Efficiency Country Program‖ was created. The main purpose of this commission is to provide guidance to each of the ministries in terms of specific actions, plans, policies and EE measures. 2. The 2007–2008 Energy Crisis Three major factors contributed to the crisis:  The 2007–2008 energy crisis in Chile stemmed from a drought and the interruption of gas imports from Argentina. In 2007, gas reception averaged only 9 percent of the contracted 25 million cubic meters per day. The lack of gas forced the use of diesel, thus increasing maintenance costs and the failure rate in dual thermal plants.  In 2007–2008, a drought brought reservoir capacity down to 38 percent of its maximum level. In 2006, 70 percent of energy was generated by hydro plants, dropping to 53 percent in 2007.  Failure of important power plants: Nehuenco (11 months); Unit U-16 (2 months); Gasatacama Combined Cycle 2 (12 months, partial). To deal with the price increases, the government implemented the following measures:  Stabilization of fuel prices through the injection of US$1.26 billion into the Fuel Price Stabilization Fund.  Temporary reduction of the specific tax on gasoline.  Electricity subsidy for the most vulnerable 40 percent of the population (direct reduction in the electricity bill).  2009 National Light Bulb Replacement Program.  Monetary subsidies for poor families. The measures for avoiding brownouts included: 21 Under the scope of the National Energy Commission, an ―Efficient Use of Energy‖ working unit was created for the purpose of implementing the ―National Program on the Efficient Use of Energy,‖ which was financed with international funds. In this context, various initiatives for the promotion of EE in different areas of energy consumption were carried out, especially pilot programs and demonstration projects. In addition, progress on regulatory and sectoral legislative tasks was given priority over the execution of individual projects. 80  Month of April included in peak hour measurement.  Rationing decree (reduction in voltage–hydro reserves).  Energy-saving campaigns (Sigue la Corriente, Ahorra Ahora, Gracias por Tu Energía).  Extension of daylight savings time.  Flexibility of water use for power generation.  Installation of backup turbines and engines.  Conversion of combined cycle gas turbines to allow operation with diesel.  Investment in diesel logistics.  Financial offers from generators for consumption reductions by regulated clients and agreements with nonregulated clients. Thanks to these measures there were no interruptions to the electric supply or to residential and commercial gas supply. Increases in domestic prices due to international fluctuations were mitigated and low-income families received support to help them cope with higher prices. In order to ensure the long-run stability and functioning of the electricity sector, the Government of Chile has taken measures aimed at strengthening the public sector‘s role in the electricity system. A new Ministry of Energy in charge of sector policy, planning and regulations was created. Personnel in the Ministry increased by 146 percent since 2007 (from 62 to 153 in 2009) and the institutional budget was increased fivefold (from US$9,097,433 to US$47,720,193). 3. Energy Efficiency Country Program (PPEE) 3.1 General Strategy Strategic Purpose: To build and consolidate a National Energy Efficiency System with the active participation of all related national stakeholders involved. This strategy is based on the following principles:  Long-term commitment.  Simultaneous implementation of initiatives and projects involving all sectors and stakeholders to create enough synergies to enable the necessary managerial, technological and cultural changes.  High-level political and technical coordination.  Integration of economic, energy, environmental and social objectives.  Flexible implementation.  Combination of regulatory, promotional and educational instruments. The program is based on three fundamental principles: 81 a) Public-private cooperation and participation: The Ministry of Economy, a supra-sectoral institution, leads the program. In addition, the Notifying Committee was created for the purpose of achieving the active participation of all relevant sectors and stakeholders, as well as the Advisory Board22 in charge of providing guidance in terms of the PPEE‘s overall strategy, budgetary issues and how to obtain support for the program from the private and international sectors. b) Mix of policy instruments: Promotional, educational (including educational, training and social awareness instruments) and regulatory instruments. None of these instruments prevails over the other. c) High-impact and highly profitable measures: The selection or combination of these measures should focus on making energy efficiency noticeable and an evident source of energy. During 2005, the PPEE, together with 100 stakeholders, designed the development of the National Energy Efficiency System, which was included in an action plan. This system comprises 13 basic and independent courses of action, such as:  EE national policy and institutional status.  Creation of an EE culture.  EE legal and regulatory framework.  National EE monitoring and supervision system.  EE certification system.  EE instruments for promotional and economic, tax and financial incentives.  Incorporation of international EE mechanisms.  EE sector policy and program on housing, buildings and construction.  EE sector policy and program on transport.  EE sector policy and program on industrial use (mining, agriculture and trade).  EE sector policy and program on energy transformation.  EE sector policy and program for the public sector.  Technological advances in terms of EE. 3.2 Courses of Action The PPEE is divided into five essential areas and two cross-cutting areas. Each of these areas promotes different projects, initiatives and promotion policies in connection with EE. The technical areas are: the Public Sector, which includes the following subsectors: Street Lighting, Home Appliances, Construction and Housing, Industry and Mining. The Education and Regions sectors are transversal and cross all other areas of the program. 22 The board is made up of at least eight but no more than twelve academic experts from the public and private sectors. 82 Each of these areas prepares intervention strategies based on the participation of the most relevant stakeholders, as well as strategies for the technical and economic assessment of the different sectors‘ energy consumption, the savings or EE improvement potentials and the technical, legal and institutional possibilities available. a) Public Sector According to a study published by the National Energy Commission in 2005, the Public Sector represents one percent of total energy consumption. Despite its low potential in terms of EE, it is a strategic sector within the PPEE due to its exemplary role in society. The five main principles of this sector are: EE criteria on government procurement; EE criteria on construction of public buildings, maintenance and retrofitting reconversion of premises built; management of and incentives for savings; and EE in the replacement and extension of street lighting. The following activities are performed:  Energy efficiency procurement: EE criteria are incorporated into government procurement through ―Chile Compra‖ at the time of performing the public tendering.23  An ongoing training program including relevant information24 was prepared for government purchasers.  Constructions based on sustainable criteria: Development of the preliminary project ―Sustainable construction design for the new Temuco Airport in the 9th Region.‖ A 42 percent saving was established if compared to the consumption of the Concepción Airport.  EE regulations applicable to public works and maintenance: Since 2006, the Ministry of Public Works has conducted a study of the incorporation of EE criteria in public works and maintenance thereof, in order to issue reference regulations for the public infrastructure sector and create a basis for the generation of energy-efficient public works projects.  EE in public hospitals: A public-private cooperation pilot project was prepared with the participation of the Ministry of Health and the Ministry of Economy, several public hospitals, the energy provider DALKIA, and GTZ, the German Technical Cooperation enterprise. The purpose of this project is to introduce into the public sector the energy contracting model or third-party procurement through professional service providers.  Optimization of energy resources: The Budget Department (DIPRES) is involved in the ―Design and Basic Proposal of an Energy Efficient System for the Management Improvement Program (PMG) in the Public Sector‖. Its purposes are the identification of economic incentives so that different 23 A PPEE study carried out in 2005 concluded that 39.2GWh/year may be saved by incorporating EE criteria in the procurement of electric items made through ―Chile Compra‖. 24 Publication of manuals designed by EE experts from the University of California at Berkeley and Fundación Chile. 83 services and state agencies can optimize their energy resources; and the design, justification and inclusion of such incentives in a management system for the efficient use of energy in public administration, in accordance with PMG guidelines and in compliance with the implementation of the ISO 9001:2000 standard.  Energy efficiency in the Teatinos 120 building: In 2006, based on an EE diagnostic of the Teatinos 120 government building, lighting fixtures were replaced and computer configurations were changed. As of March 31, 2007, the following progress was achieved: change of lighting fixtures (52 percent) and computer configurations (94 percent). 100 percent fulfillment of these two measures would translate into a 6 percent savings in total electric power consumption. In addition, persons responsible for EE were appointed for each service in the building. Training activities were made available to these individuals. Based on this experience, in 2008 the PPEE and the Public Building Program of the Budget Department implemented a comprehensive energy management program in government buildings.  Street lighting: By the end of 2005, the Inter-institutional Cooperation Agreement on EE in Street Lighting was executed. In order to fulfill the purposes of this agreement, a street lighting survey was conducted, a national regulation based on energy efficiency criteria was suggested and a street lighting manual was drafted. b) Home Appliances Within the home appliances technical area, the PPEE coordinates the initiatives for the creation of a National Energy Efficiency Labeling System for Home Appliances. One of the most relevant initiatives is the implementation of the National Program for Energy Efficiency Certification and Labeling (P3E) that was launched in 2005 for light bulbs and refrigerators. These appliances were selected on the basis of the 2002 census and a study conducted in 2005 by the CNE (National Energy Commission) which indicated that about 60 percent of electricity consumption in residential areas is generated by the two appliances mentioned above. c) Construction and Housing The energy consumption of residential areas, including households, stores and offices, represented 28 percent of the country‘s overall energy consumption. In this sector, energy is mainly used for heating, boiling water, and cooking. For the purpose of reducing energy consumption in this sector, the PPEE promotes a series of projects and initiatives to consolidate a 0.9 percent energy-use reduction in this area. More specifically, the Ministry of Housing and Urban Planning (MINVU) issued the Regulations on Thermal Conditioning of Households. d) Industry In the industrial sector, the PPEE‘s courses of action are focused on: reduction of production costs, compliance with environmental requirements, reduction of energy dependence, and improvement of overall competitiveness through EE. 84 The industrial sector has enormous potential. According to a study prepared for the CNE in 2004, the usable potentials for the Chilean industrial sector ranged from a 1.9 to 4.5 percent reduction in the annual energy intensity over a 10-year period. The PPEE‘s strategy for the industrial sector considers both transversal and specific components. The former refer to measures, activities and projects applicable to the whole industrial sector. Two core elements within the transversal strategy are the CORFO Program for Preliminary Investment in Energy Efficiency (PIEE) launched in late 2006, and the Energy Efficiency Award granted together with the CPC to each of its branches since 2005. Through the PIEE, up to 70 percent of the energy consulting services hired by companies can be jointly financed and, to ensure the qualifications of the consultants, an Energy Efficiency Consultants‘ Registry was created, which comprises 21 certified consultants. e) Mining In energy terms, the CNE‘s latest survey indicates that the mining sector represents 35 percent of electricity consumption. One of PPEE‘s objectives for this sector is the execution of agreements within the framework of the Mining Sector Initiative on Clean Energy. The following activities are conducted:  Mining Sector Initiative on Clean Energy (IMEL): Its purpose is to increase the use of nonconventional renewable energy sources (NCRE) and EE. IMEL operates through the execution of voluntary agreements.  Energy Efficiency Award.  A characterization study for small- and medium-size mining companies is underway, the findings of which promote the Clean Production Agreement signed by the sector at the end of 2006 and will translate into specific strategies for this segment of the sector. The following goals have been set for 2010: to have basic information available for the mining sector, to standardize the criteria about energy consumption metering in the area and to consolidate an EE increase in domestic mining production. f) Education For the PPEE, education is one of the key issues for meeting the established objectives and goals. In this regard, the PPEE, with the support of the Ministry of Education and the National Environmental Commission (CONAMA), conducts activities in universities, elementary schools and higher education institutions under the School Environmental Certification System to implement one of the relevant guidelines of the SNEE. 85 Annex 2. Case Study: Cuba 1. Background In 2004 and 2005, prior to the Energy Revolution, Cuba‘s electricity sector had the following features:  Large number of inefficient home appliances in Cuban households;  85 percent of the population used kerosene for cooking;  Residential electricity tariffs did not encourage savings;  There was a poor energy-saving culture in the residential and state sectors;  Base generation with large and inefficient thermo-electrical plants, with an average of 25 years of operation, 60 percent of availability, frequent failures and high self-consumption;  Frequent blackouts; in 2004, there were 188 days with blackouts greater than 100 MW; in 2005, there were 224 days; and  High percentage of losses in transmission and distribution networks. 2. The Energy Revolution and the Transformations of the Electricity Power System These difficulties led to a strategy for the development of a safer, more efficient electricity system. The strategy selected was to act not only from the supply side but also from the demand side. Two objectives were established: i) improvement of the electricity system through an increase in the installed generation capacity and a reduction in losses in transmission and distribution networks; and ii) development of an energy-saving culture in the population. The following courses of action were set for the purpose of achieving the objectives:  Acquisition and installation of safer, more efficient generation equipment;  Increase in the use of gas for power generation;  Restoration of transmission and distribution networks;  Promotion of an intensive research and development program on the use of renewable energy sources, mainly wind and solar; and  Implementation of a program for energy saving and efficient use. 86 3. Programs 3.1 Demand An advisory group was created in Cuba for the purpose of comprehensively coordinating and performing all the actions related to power efficiency for the identification of energy-saving projects in all sectors of the economy. This advisory group is divided into the following working subgroups:  Air conditioning and cooling  Heating  Buildings  Automation  Electricity losses  Driving force (electric engines)  Lighting  Residential, commercial and service sectors  Audits and technical inspections  Industrial sector  General The energy-saving strategy defined covers the following courses of action:  Implementation of a system of energy efficiency standards and labeling;  Design of a legal framework for the promotion of rational and efficient energy use in Cuba;  Change in the state-sector electricity tariff;  Strengthening of power service companies;  Automation projects in the industrial and commercial sectors;  Installation of capacitor banks in low-power-factor customers;  Replacement of inefficient engines in the industrial sector;  Efficient use of air conditioning, heating and cooling systems;  Increase in the use of power co-generation;  Improvement of thermal insulation in buildings and industries;  Compulsory application of NC 220 in all new buildings;  Certification of new projects‘ energy efficiency during the investment process;  Further promotion of the use of EE equipment in the residential sector; e.g., solar heaters;  Development of a communications strategy. In the power sector, these courses of action were implemented through the Energy-Saving Program in Cuba (PAEC). 87 3.2 Energy-Saving Program in Cuba (PAEC) PAEC‘s objectives are the following:  To reduce the system‘s maximum demand and the annual consumption growth rate according to established goals.  To develop better energy use habits in new generations to encourage the rational use of energy and environmental protection.  To develop standards and a pricing policy that would guarantee the energy efficiency of all new electrical appliances used in the country. a) The program is organized into different working groups: i. The Standardization and Labeling Group conducts the following activities:  Standardization and labeling program  Clean Development Mechanism (CDM)  PAEC‘s Web page  Procurement, import of energy-efficient equipment  Development of new products  Implementation (procurement, distribution)  Introduction of energy-efficient equipment. ii. The Guidance and Savings Motivation Group conducts the following activities:  Energy-saving Program of the Ministry of Education (PAEME)  Training  Promotion  Work with mass organizations  Assurance iii. Electricity Regulation and Efficient Use Group: The aim of this group is to ensure that the exceptional measures for energy saving and the modification of off-peak loads are met. Its main activities consist of regulating electricity demand and consumption in the country‘s leading companies and providing consulting services for power issues. Basically, it focuses on developing greater awareness of the efficient use of energy. b) As a result of PAEC‘s actions, the following programs are underway: i. National Program on Energy Efficient Standards and Labels: This program is carried out by PAEC together with the National Standardization Office (ONN), the Domestic Trade Ministry (MINCIN) and the Foreign Trade Ministry (MINCEX). The aim of the program is to introduce EE rules, limits, testing standards and labels. 88 The products selected during the program‘s first stage were refrigerators and residential freezers, phase induction electric motors, residential electric fans and fluorescent lamps. ii. Program for the Rational Use of Energy in the Residential Sector This is a nationwide program, conducted and financed by the national government. Through the Social Workers Program, inefficient home appliances are replaced with energy-efficient equipment. iii. Program for the Rational Use of Energy in the State Sector In the state sector, more than 100 inefficient water pumps were replaced with efficient water pipelines and sewerage and more than 500,000 40-watt fluorescent tube lamps and electromagnetic ballasts were replaced with 32-watt fluorescent tube lamps and electric ballasts. A special project was implemented in order to regulate demand and distribute the load among 1,720 selected services (large users). The following actions were conducted in relation to these services:  200 energy supervisions  Introduction of the Energy-efficient Management Program  Design and control of electricity consumption programs  Training of personnel in charge of energy control and subsequent inspections to test results. As a result of these actions, while electricity consumption in the overall economy grew 7.5 percent from 2006 to 2007, in the state sector the growth was 4 percent and in the selected services only 1.2 percent. These services account for 45.6 percent of state consumption. Electricity intensity in the state sector fell from 0.16 GWh/MMP in 2005 to 0.13 GWh/MMP in 2008. iv. Communications Program The strategy of the EE communications policy focuses on the general population and mass organizations. The media selected are the press, radio, television, billboards on avenues, neighborhood debates, conferences and festivals. v. Savings Program of the Ministry of Education (PAEME) The PAEME is the program executed by PAEC and the Ministry of Education. Its main objective is to contribute through the National Education System to the development of a more responsible civil attitude in present and future generations and to awareness of the need to rationally use and save electricity and protect the environment. The specific goals of the program are to: 89  Promote energy-saving and rational-use measures and to disclose the consumption ratios of home appliances;  Contribute to making teachers, students and families in general become interested in learning about, applying and increasing the use of renewable energy sources; and  Analyze regulatory documents in force and apply them to different energy-saving lessons included in school syllabuses. 90 Annex 3. Case Study: South Africa 1. Background Electricity usage by consumers in South Africa follows a particular pattern. People use more electricity during the early morning (from 7-10am); consumption then decreases, only to increase again in the evening (from 6-9pm). This places a strain on national electricity resources because Eskom needs to generate significantly more electricity to cater to consumer needs during relatively short periods. From its small beginnings in 1991, starting with research, pilot studies and time-of-use tariffs, Eskom‘s DSM program has grown into a concerted national electricity-saving effort officially initiated in the last quarter of 2002. The efficient use of electricity has become a national priority, a necessity for the future development of the South African economy and the effective provision of electricity. Working toward these objectives is Eskom‘s Accelerated Energy Efficiency Plan that focuses on reducing electricity demand by 3,000 MW by 2012, and a further 5,000 MW by 2025. 2. Institutional Framework Eskom is implementing DSM in South Africa through collaboration with the Department of Minerals and Energy (DME) and the National Electricity Regulator (NER). 3. Strategies a) The 12 overarching elements of the energy efficiency strategy are to: i. Set short-, medium- and long-term goals for energy efficiency that will support the country‘s economic growth. ii. Create national awareness that electricity is a valuable commodity that must be used widely. iii. Promote effective energy use through appropriate legislation aimed at:  preventing the importation and use of inefficient equipment;  setting energy efficiency requirements for buildings;  achieving energy efficiency across natural resources used for generating electricity;  establishing mechanisms for funding accelerated energy efficient projects; and  providing funding for appropriate energy efficiency projects. iv. Ensure effective collaboration between Eskom and all stakeholders in the sector, including the National Energy Efficiency Agency, the Department of Minerals and Energy and the National Energy Regulator of South Africa. v. Accelerate the evaluation, approval and implementation of energy-efficient projects. vi. Implement selected large-scale efficiency projects. 91 vii. Develop and implement ―energy efficiency‖ tariffs applicable to end users, including ―time-of-use‖ tariffs for households. This enables householders to take advantage of tariffs that are lower at certain times of the day when demand for electricity across the network is lower. The usage cost is linked to Eskom production costs at that particular time. The tariff therefore reflects the generation cost. viii.Develop contingency projects to supplement the program, such as the use of alternative energy sources for domestic heating and cooking. ix. Maintain savings achieved in the Western Cape during 2006, while implementing a focused rollout in KwaZulu Natal during 2007. x. Position Eskom and government as leaders in the energy efficiency process by:  Identifying, implementing and tracking projects that contribute toward an internal efficiency drive;  Implementing employee programs to ensure energy-efficient worksites and employee homes; and  Committing to energy-efficient improvements in government buildings. xi. Use the government‘s Accelerated and Shared Growth Initiative for South Africa (ASGIS-SA) objectives to achieve advances in the industrial arena that provide the best short-term benefits. xii. Ensure that the energy efficiency program within Eskom is efficiently managed. b) Courses of Action i. Residential Sector The focus will be on rolling out programs for efficient lighting, solar water heating, and installation of aerated shower heads and hot water heaters, thereby reducing residential consumption of electricity. ii. Industrial Sector Demand-market participation contracts, process optimization, and promotion of the use of energy-efficient electrical motors will be of primary concern. iii. Commercial Sector Efforts will be concentrated on street lighting projects and the conversion of lighting, heating, ventilation and air-conditioning systems. iv. Programs and projects  Residential, commercial and industrial programs. The main objective of this program is to transform the South African electricity market into an energy-efficient industry. Figures 2 to 4 below show the identified areas that represent significant savings potential in each market sector. 92  Public education. The primary objective of this program is to increase awareness about energy efficiency. The program includes a broad range of marketing and public relations activities, and feeds directly into programs in different income segments as well as residential, commercial, industrial and institutional program activities.  Schools program. The objective of this program is to highlight to school students the benefits and importance of using electricity efficiently. DSM seeks to increase the awareness of students and faculties about energy-efficient measures by providing participating institutions with resource packs, including teacher, student and electricity audit guides.  Stakeholder activities. Aimed at keeping DSM stakeholders abreast of DSM changes, objectives and programs and also at outlining how to assist in promoting the energy efficiency message. 4.1 Compact fluorescent lamp exchange Compact fluorescent lamps (CFLs) offer consumers lighting through lamps that have a longer life and consume considerably less energy than conventional incandescent bulbs. As part of its strategy to introduce these globes, Eskom embarked on a national program to exchange incandescent globes with CFLs in selected areas. Since the program began in 2004, more than 18 million CFLs have been exchanged for incandescent globes. The national program was recently implemented in the Western Cape, Northern Province, Gauteng and Free State where four million CFLs were exchanged for incandescent globes. The program has reached more than 315,000 households and continues to reduce the energy demand of the household sector. 4.2 Power Alert Power Alert is a residential load reduction DSM project. Visual inserts in the form of Power Alert meters are broadcast (flighted) on South African Broadcasting Corporation‘s channels SABC1, SABC2 and SABC3 on weekdays between 17:30 and 20:30 pm. These Power Alert meters give an indication of the strain on the electricity supply and will urge people to switch off their appliances if the need arises. This is not a permanent intervention. The Power Alert meter creates real-time awareness and voluntary reaction by the public when broadcast. The key indicators Four status levels occur, each calling for specific measures to be taken by consumers in all geographical areas. These are:  Green: indicates that there is only limited strain on the system. Consumers are requested to save power as part of their everyday activities to achieve energy efficiency. 93  Orange: the demand on the system is increasing. Consumers are prompted to switch off some nonessential power-consuming appliances. These include clothes dryers, dishwashers, pool pumps and unnecessary lights during peak periods.  Red: strain on the system is increasing and load shedding is imminent. Consumers are asked to take action by switching off water heaters, stoves, microwave ovens, kettles, heaters, air-conditioning units and unnecessary lights.  Brown: the most serious state indicates that there is significant strain on the national grid and that load shedding is being undertaken. Consumers are requested to switch off all appliances that are not absolutely necessary and rely only on essential lighting and their televisions (which, at this stage, indicate changed status as it occurs). Savings achieved Achieving the intended savings depends largely on the participation of the television audience. This participation is driven by, among other things, the frequency of the Power Alert broadcasts and the public‘s general levels of awareness. These levels of awareness are in turn influenced by ―awareness advertising‖ or ―awareness campaigns‖ as well as the frequency and severity of power interruptions. The following graph shows the impact assessment for the National Power Alert project from July 2007 to March 2008 in South Africa. 4.3 Solar Water Heating Program The Eskom Solar Water Heating Program is driven by the government, which has set a target for renewable energy to contribute 10,000 gigawatt hours (GWh) of final energy consumption by 2013. Solar water heating could contribute up to 23 percent of this target. Eskom is supporting this drive through the large-scale introduction of solar water heating because it is one of the most effective renewable energy sources available. 94 4.4 Residential Load Management Residential load management, a system that uses radio or ripple switches, allows municipalities to manage demand during peak periods without undue disruption. By using a wireless signal (radio), the geyser, the appliance that uses the most electricity in any home, is remotely switched off. After a short break in supply, the geyser is switched on again without the homeowner even realizing that it had been switched off at all. Switches will be installed in homes by contracted technical teams over a period of two years. The task, taking about 30 minutes, will be performed at no cost to householders. As the system simultaneously switches off thousands of geysers if this is required, the demand on the electricity network is significant. The network is used more efficiently and the possibility of major blackouts occurring is reduced. Peak demand for electricity is reduced, meaning that the existing capacity of the network is used more effectively. 4.5 Energy-efficient motors An estimated 100,000 motors keep South African industry running. In the process they consume up to 10 GW of electricity (60 percent of total industrial energy usage and about 57 percent of peak-demand generation). It is the use of this electricity which, if substantially reduced, could play a pivotal role in reducing national electricity constraints that led Eskom to introduce its Energy Efficient Motors (EEM) Programme, offering users ―instant subsidies‖ for trading in their old motors. The Energy Efficient Motors Programme is designed to create awareness about the vital contribution these motors can make to increasing national electricity savings. To encourage the purchase of new energy-efficient motors, Eskom is offering subsidies on motors ranging from 1.1 kW to 90 kW. The 1.1kW units will qualify for a subsidy of R400 and, at the top of the range, the 90 kW unit subsidy is R3,500. 95 Annex 4. Replacing Electric Showers in Costa Rica In Costa Rica, 41.3 percent of the population (52.4 percent of urban and 25.6 percent of rural households) has electric showers. By income level, 75.6 percent of middle-upper-income households and 19.2 percent of lower-income households own electric showers. The implementation of a program for heat recovery systems in electric showers, such as the one developed by Rewatt of Brazil, can have a very positive impact in terms of energy savings. Based on the penetration ratio and the number of households, the total number of electric showers in the country is estimated to be nearly half a million. Table 34. Electric showers in Costa Rica Penetration ratio (%) 41.3 Households (1,000) 1,198.0 Total electric showers (1,000) 494.7 Annual consumption (kWh/year) 492 Number of electric showers 494.8 Total annual consumption (MWh) 243.4 Source: Authors. According the Residential Energy Consumption survey, the average consumption of electric showers is 41 kWh/month, with little variation by region or income. Total annual energy consumption can be estimated based on this consumption and the number of electric showers. Using the costs and estimated energy savings of the Rewatt heat recovery system quoted by its manufacturer (450 Brazilian Reais) and residential tariffs in Costa Rica, the economic impact of the installation of this device can be evaluated (see table below). Table 35. Efficient electric shower: Economic impact estimation Cost ($) 208 Energy savings (%) 45 Tariff ($/kWh) 0.1087 0.1960 0.2691 Annual costs ($) 53.5 96.4 132.4 Annual saving ($) 24.1 43.4 59.6 IRR (5 years) -16% 1% 13% Source: Authors. Costa Rica has a three-block tariff for residential customers and the evaluation can be performed using each of the blocks. As the table shows, savings range from US$24 to nearly US$60 per year, depending on the tariff block. From a purely financial perspective the replacement seems to be efficient only for users consuming in the third block (over 300 kWh/month). 96 Table 36. Cost analysis of risk-mitigating measures: Sensitivity analysis Base Case R S C n Levelized Fuel Total Rank CoC kWh/year US$ years cost cost costs CFL 32.85 2.5 5 0.023 0.023 1 Fixed GT plant, 2 SC 5256 650 15 0.021 0.118 0.139 Barge plant, BG 15% 5256 900 15 0.029 0.118 0.147 3 Refrigerator 569 500 15 0.150 0.150 4 High-speed diesel 5256 500 15 0.016 0.135 0.151 5 Electric shower 221.4 208 10 0.187 0.187 6 Levelized cost of saving ($/kWh) = C*r/S(1-(1+r)^-n) Cost of Capital (r) 10% 12% 14% 16% 18% 20% $/kWh Rank $/kWh Rank $/kWh Rank $/kWh Rank $/kWh Rank $/kWh Rank CFL 0.012 1 0.013 1 0.015 1 0.016 1 0.017 1 0.018 1 Fixed GT plant, SC 0.134 3 0.136 3 0.138 2 0.140 2 0.142 2 0.144 2 Barge plant GT 0.141 4 0.143 4 0.146 4 0.149 3 0.152 3 0.155 3 Refrigerator 0.116 2 0.129 2 0.143 3 0.158 5 0.173 5 0.188 5 High-speed diesel 0.148 5 0.149 5 0.150 5 0.152 4 0.154 4 0.155 4 Electric showers 0.153 6 0.166 6 0.180 6 0.194 6 0.209 6 0.224 6 Investment Cost (C) -10% +10% $/kWh Rank $/kWh Rank CFL 0.017 1 0.014 1 Fixed GT plant, SC 0.141 2 0.137 3 Barge plant, GT 0.150 3 0.144 4 Refrigerator 0.165 5 0.135 2 High-speed diesel 0.153 4 0.150 5 Electric showers 0.206 6 0.168 6 Useful Life (n) -10% +10% $/kWh Rank $/kWh Rank CFL 0.015 1 0.016 1 Fixed GT plant, SC 0.139 2 0.140 2 Barge plant, GT 0.147 4 0.148 3 Refrigerator 0.146 3 0.155 5 High-speed diesel 0.151 5 0.152 4 Electric showers 0.180 6 0.197 6 Source: Authors. 97 References Almas. 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