Privatesector P U B L I C P O L I C Y F O R T H E Note No. 143 May 1998 Developing International Power Markets in East Asia Enrique The Greater Mekong subregion has good potential for international power trade. Initial interest Crousillat in this market is being spearheaded by private developers negotiating bilateral cross-border trade agreements. But experience in power trade zones in Europe and North America shows that to achieve the benefits of fully fledged trade, the countries in the subregion need to closely coordinate electricity sector policy, operating protocols, and network development. This Note sets out the market development options, reviews sector reforms so far, assesses the obstacles to full power trade, and briefly outlines multilateral efforts to promote an infrastructure that will support international power trade in the subregion. Potential benefits FIGURE 1 THE POTENTIAL EAST ASIAN POWER MARKET The Greater Mekong subregion—Cambodia, Lao People’s Democratic Republic, Myanmar, Thailand, Vietnam, and the Yunnan Province of southern China—has significant potential for Yunnan Province, cross-border power trade. The subregion is well China endowed with low-cost hydro resources—the Mekong River Basin is the world’s twelfth larg- MYANMAR est river system—and China, Lao PDR, Thai- LAO PDR land, and Vietnam have large coal and natural Mekong River gas reserves. The potential for trade stems from imbalances in costs and in supply and demand THAILAND between countries in close proximity: the low- Bangkok cost hydro potential is in Lao PDR, Myanmar, VIETNAM and Yunnan Province, but the main markets are Thailand and the more distant Malaysia- Singapore grid about 1,000 kilometers away CAMBODIA (table 1). Recent studies comparing scenarios of electric- ity self-sufficiency in each country with a full Kuala Lumpur MALAYSIA trade scenario show that full trade could yield cost savings of at least US$10.4 billion in 2001– SINGAPORE 20 and a reduction of airborne pollutants valued at US$160 million a year. (These estimates assume a significant slowing in power demand The World Bank Group ▪ Finance, Private Sector, and Infrastructure Network 2 Developing International Power Markets in East Asia TABLE 1 SELECTED ECONOMIC AND POWER INDICATORS IN EAST ASIA (1996) Cambodia Lao PDR Myanmar Thailand Vietnam Malaysia Singapore Population (millions) 10 5 43 61 76 20 3 GDP per capita (U.S. dollars) 1,266 2,071 677 13,235 1,263 8,763 21,493 Annual electricity use ␣ ␣ (kilowatt-hours per capita) 55 55 60 900 198 1,777 6,451 Electrification (percent) 10 18 15 98 30 95 100 Note: Estimates of GDP are based on purchasing power parities rather than exchange rates as conversion factors. Source: World Bank estimates. over the next few years in Thailand as a result the export potential of Yunnan’s planned Jing of the current financial crisis.) The savings Hong hydropower plant and associated trans- would arise from: mission lines to Thailand, through Lao PDR, ▪ Lower operating costs due to economic with the support of the Lao and Thai govern- power exchange, postponed and lower in- ments. The Vietnam and Lao governments vestments in generation due to least-cost de- have signed a memorandum of understand- velopment of regional energy resources, and ing on purchases of about 2,000 megawatts reduced spinning reserve costs. of power by 2010. ▪ Lower coincident peak load (compared with the sum of individual peak loads), mutual ac- Developing international markets cess to generation reserves for interconnected systems, a more robust power supply to meet Experience in power pool development in Eu- such unexpected events as load growth above rope and the United States suggests that to get forecast or delayed commissioning of genera- the full benefits of that trade, countries in the tion and transmission projects, and increased Greater Mekong subregion will have to go be- system reliability. yond the proposed bilateral power purchases. ▪ Lower greenhouse gas emissions and other An international market requires coordinated pollutants, largely due to a shift from thermal development and operation. The countries in- to hydro generation in the long term. volved will have to ensure compatibility in their power sector structures, conditions for private There is growing interest in cross-border entry, and market competitiveness. bilateral power trade in the subregion, spear- headed by private developers in Lao PDR sell- The three main models for international power ing power to Thailand. The government of markets can be regarded as three phases of a Thailand has agreed to buy 3,000 megawatts continuum: from these private power developers by 2006, ▪ The single-buyer model. and several independent power producer (IPP) ▪ The third-party or open access model. projects are moving ahead. China’s Ministry ▪ The spot market or wholesale market (power of Electric Power is encouraging studies of pool) model. The World Bank Group 3 BOX 1 SECTOR OPERATORS The power sectors in the Greater Mekong subregion are structured differently. Single buyer Cambodia. Electricité du Cambodge is a state-owned utility respon- In a single-buyer market a single entity, such as the Electricity Generating Authority of Thailand sible for the supply of electricity nationwide. Electricity supply is (EGAT; see box 1), purchases power from all largely restricted to the capital, Phnom Penh, and a few provincial producers on a contractual basis. This approach towns; there are no transmission facilities in Cambodia. does not require a radical separation of inte- grated utilities or significant power sector re- China. In Yunnan Province, the Yunnan Provincial Electric Power form. But the long-term contracts should be Corporation operates as a fully integrated power company, wholly structured like IPP contracts, providing for sepa- owned by the government. The South-East China Electric Power rate payments for capacity and energy to com- Corporation (SCEP) was set up as a joint venture company in pensate producers that maintain high levels of plant availability. This model would provide lim- Guangzhou by China’s central government, the State Energy Invest- ited benefits for competition because sales would ment Corporation, and Guangdong, Guangxi, Guizhou, and Yunnan tend to be based on long-term contracts. It might province in 1991. The SCEP constructs and manages jointly funded also lead to inefficiencies in investment, such generation and transmission projects. It is exploring the feasibility of as duplication in transmission. a regional power pool. More competitive single-buyer models require Lao PDR. The national utility Electricité du Lao, established in 1961, is some vertical and horizontal separation of gen- eration, transmission, and distribution. Vertical responsible for all supply in the country. But electricity supply is separation facilitates competition among power largely restricted to the capital, Vientiane, and a few provincial generators and makes it possible to identify the towns, since transmission facilities are limited. costs of transmission and to set prices for grid use. These prices normally need to be regulated Malaysia. Tenaga Nasional Berhad operates as a fully integrated through a transparent and predictable price review power company; it purchases all power produced by independent mechanism. To get the benefits of competition, power producers. though, governments should ensure that no large generators command excessive market power. Myanmar. Myanmar Electric Power Enterprise was constituted in Open access 1989 as a government-owned, fully integrated utility. It is responsible for planning, designing, constructing, maintaining, and operating The open access, or third-party, model opens electricity supply facilities throughout the country. the transmission system to generators so that they can wheel power directly to distributors or large Thailand. The country has three government-owned utilities: bulk customers. Access to transmission must Electricity Generating Authority of Thailand (EGAT), Metropolitan therefore be regulated, and pricing policies com- Electricity Administration (MEA), and Provincial Electricity Authority patible, transparent, and efficient. Vertical sepa- (PEA). EGAT is responsible for bulk supply, MEA for distribution in ration of transmission avoids the conflicts of interest that can arise if a transmission entity favors Bangkok, and PEA for supply in the rest of the country. These utilities its own generation source. Under the open ac- are well established, profitable, and well managed. The government cess model most exchanges would still be based plans to privatize them through public stock offerings. on long-term contracts, but short-term trade could occur if countries have spare capacity or energy. Vietnam. Electricity of Vietnam was established in 1995 as a wholly government-owned holding company for the power sector. It Power pool coordinates the three formerly fully integrated power companies, The final stage in developing an international which had been based in Hanoi, Danang, and Ho Chi Minh City. power market is to form a regional power pool 4 Developing International Power Markets in East Asia TABLE 2 STATUS OF POWER REFORM IN EAST ASIA Fully Single- integrated Independent IPPs buyer Transmission Wholesale sector regulation Degree of unbundling permitted model access competition Thailand Under Unbundling of distribution √ √ Limited access No study and generation in progress planned Malaysia √ Set up in Unbundling of generation √ √ No No 1991 and transmission under consideration China Under Partial unbundling √ √ No No study of generation and transmission Vietnam √ Law being Generation and transmission √ √ No No drafted to be operated as profit centers Lao PDR √ Not Creation of separate √ √ Under study No planned transmission company being considered Cambodia √ Law being Not planned √ √ No No drafted Myanmar √ Not Not planned √ No No planned or wholesale market allowing regional power generation market to IPPs, though their suc- producers to sell directly to any distributor or cess in attracting private investment has var- bulk customer. This model requires a regulatory ied. IPPs have been active in Lao PDR, Malaysia, framework to guarantee a fair and efficient mar- and Thailand, but they have shown less inter- ket, including mechanisms to facilitate and co- est in other countries. Nearly all governments ordinate trade. Again, governments must ensure are moving toward a single-buyer model (table that a few large generators do not dominate the 2). In Thailand, for example, EGAT’s transmis- market and inhibit competitive power pooling. sion entity is responsible for power purchases— though IPPs (with 10 percent of generating Market reforms so far capacity) will have some access to the grid for direct sales to large consumers. In Malaysia All governments in the subregion have fostered Tenaga Nasional Berhad (TNB), the govern- the beginnings of power trade by opening the ment-owned, fully integrated utility, purchases The World Bank Group 5 all power produced by IPPs (which have about ▪ Laws, regulations, and contracts. In every 30 percent of generating capacity). country laws, regulations, and power pur- chase contracts include long-term provisions Thailand has made the most progress in un- that hamper the move to more competitive bundling transmission, distribution, and gen- markets. For example, the lack of flexibility eration. In China the central government is to reassign parts of the generation purchased moving slowly to encourage competitive gen- under a long-term power purchase agreement eration. The Yunnan provincial power corpo- will limit the scope for introducing more com- ration is developing the single-buyer model and petition in the near term. has signed long-term power purchase agree- ▪ Transmission ownership. Some governments ments with projects sponsored by other govern- have not yet decided which agency or entity ment entities. The Lao government plans to will be responsible for building and operat- establish a separate transmission company to ing transmission. provide wheeling services to the region. It also ▪ Open access rules. Governments have not es- is considering separating export power plants tablished open access rules for transmission from local supply. The government of Vietnam facilities. Thus where private developers are plans to operate generation and transmission building a transmission line to connect their as profit centers, but whether it will permit full plant to load-serving points, it is unclear unbundling is unclear. The governments of whether a second generator could connect Cambodia, Lao PDR, and Vietnam seem reluc- to this line. A need to construct additional tant to relinquish control over the sector. transmission facilities could put a proposed project at a competitive disadvantage, par- No government has yet contemplated intro- ticularly if the first plant added a unit at the ducing open access to transmission, though existing site. There also is no policy allow- Malaysia is well placed to do so, with IPPs ac- ing through-flows—required, for example, if counting for such a large share of its generat- Lao PDR were to permit sales from Vietnam ing capacity. Nor has any country made much to Thailand (though the Lao government has progress in setting up independent regulation agreed in principle to allow output from and designing coherent pricing policies. China to be transported through its system into Thailand). Transmission facilities should Market barriers be open to all generating plants on a non- discriminatory basis. There are many barriers to achieving the full ▪ Independent regulation. The absence of in- potential of power trade in the Greater Mekong dependent regulatory agencies increases the subregion. The following are the most crucial. risk for developers of arbitrary changes in tariffs. Institutional and public policy Technical barriers ▪ Leadership and priorities. Only Lao PDR and Thailand rate cross-border trade highly. There ▪ Network development. Transmission con- is no authoritative regional group or agency struction needs to be coordinated to mini- to provide leadership in network develop- mize the cost of long-term investment. There ment. Environmental issues, too, must be ad- are plans to develop project-specific facili- dressed at a regional level to resolve conflicts ties to transmit output from one country to and ensure that no country bears an environ- another. But developing a robust market will mental burden so that others can have clean require a network of facilities rather than power. Failure to mitigate the environmental point-to-point links. A network would pro- impact of dams will become a barrier to hy- vide parallel facilities to ensure delivery of dro development and thus a barrier to trade. electricity in the event of outages. 6 Developing International Power Markets in East Asia ▪ Transmission protocol. There is no protocol ▪ Generation tariffs. Generation dispatch de- to govern the operation of a regional trans- cisions appear to be based on one-part en- mission network. If as a result one system ergy tariffs. Yet dispatch decisions should be constructs facilities to a standard lower than made by comparing generators’ variable costs that of another, it could impose a reliability of production—information not provided by risk on the system with higher standards. Lack a one-part tariff. Only Thailand is moving of a protocol also puts the reliability and toward a two-part tariff, however. An ap- quality of service at risk if operators in dif- proach to pricing bulk electricity based on a ferent countries are unsure about what pro- one-part tariff acts as a barrier to economic cedures govern routine and emergency trading both within a country and across operations. borders. ▪ Transmission tariffs. The transmission tariff Commercial and financial barriers plays a key part in financing the creation and expansion of a transmission network. But no ▪ Transparency of costs. Whether trade devel- country has a separate transmission tariff. In- ops will depend on the relative cost of power stead, where cross-border transmission is in neighboring countries. But comparing elec- being developed, costs are bundled into a de- tricity rates in the region is extremely difficult livered capacity and energy price at a remote because most currencies are nonconvertible, point from the plant. Transmission tariffs have power suppliers do not separate generation been defined only on a case-by-case basis. and transmission costs, and accounting pro- ▪ Construction uncertainty. Many plants for de- cedures vary. livery of power to EGAT are in the planning stage, but there is much uncertainty about which will be built. This uncertainty has in- creased because the East Asian financial cri- BOX 2 PROPOSED MARKET DEVELOPMENT STRATEGY sis may make it harder to raise finance for projects. Moreover, recent low bids for plants in Thailand threaten the viability of the least ▪ Reach agreement to make power trade a high priority. competitive hydro plants in Lao PDR. Uncer- ▪ Set up a regional coordinating body to establish a protocol for the tainty about which generation projects will new interconnected system and handle environmental issues. be developed impedes sound decisions about transmission investments. And where govern- ▪ In each country decide who will own and operate transmission ments have agreed to build and operate trans- and adopt regulations requiring nondiscriminatory open access. mission facilities, there are doubts among generation developers about whether some ▪ Ensure that domestic laws and regulations and long-term power of the facilities will be completed on time purchase agreements are compatible with power trade. for the scheduled completion of generation projects. ▪ Develop a master plan for plant and transmission locations and get ▪ Country and cross-border risk. Funding for governments to commit to the transmission facilities. power generation for export may be ham- pered by financiers’ perception of risk re- ▪ Develop an operating protocol to ensure safe, reliable, and lated to country-specific issues or to the efficient operation of the transmission system. multinational character of projects. The na- ▪ Design a two-part tariff and a transmission tariff that will ture and degree of risks vary by country, but the most common are the financial weak- encourage investment in transmission facilities. ness of buying utilities, currency non- ▪ Set stable tax and royalty policies for export. convertibility, government interference, breach of contracts or concession agreements, and the seller’s possible lack of access to The World Bank Group 7 transmission lines. All these can undermine a project’s financial viability and thus make financial closure more difficult. For many projects, official credits, loans, or guarantees may be needed to give comfort to commer- cial banks. Future development of the power market Developing an international power market in the Greater Mekong subregion will be a long- term process. Because of the long construc- tion periods, most benefits will accrue after 2010. Thus while the current financial crisis may slow the process initially, it should not have a major impact on the overall benefits of devel- oping international trade. Market development is under way. Potential Viewpoint is an open channels for regional cooperation have been forum intended to established. The regional Electricity Power Fo- encourage dissemina- rum (sponsored by the Asian Development tion of and debate on ideas, innovations, and Bank) provides governments an opportunity best practices for ex- to discuss how to develop this cooperation. panding the private The Mekong River Commission has been con- sector. The views pub- lished are those of the ducting regional studies on the interconnec- authors and should not tion of the subregion’s power systems. Under be attributed to the the umbrella of the Association of Southeast World Bank or any of its affiliated organiza- Asian Nations (ASEAN) governments have es- tions. Nor do any of the tablished a technical working group to coordi- conclusions represent nate interconnection efforts. And the World official policy of the World Bank or of its Bank has just completed a study to help pro- Executive Directors mote power trade, assessing the potential ben- or the countries they efits and proposing a strategy for developing a represent. regional market (box 2). This strategy system- To order additional atically addresses the barriers outlined in this copies please call text and will be discussed at a regional semi- 202-458-1111 or contact Suzanne Smith, editor, nar scheduled for June 1998. Room F6P-188, The World Bank, 1818 H Street, NW, This Note is based on a World Bank–sponsored study, “Power Trade Washington, D.C. 20433, Strategy for the Greater Mekong Sub-region” (Report 17033-EAP, World or Internet address Bank, East Asia and Pacific Region, January 1998). ssmith7@worldbank.org. The series is also Enrique Crousillat (ecrousillat@ available on-line (www.worldbank.org/ worldbank.org), Senior Energy html/fpd/notes/ Economist, East Asia Energy Sector notelist.html). Unit (Energy Markets and Reform Printed on recycled Thematic Group) paper.