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Power

Access to affordable, reliable and sustainable energy is vital to ending extreme poverty and promoting shared prosperity. While there have been substantial strides in improving access in recent years, today more than 1.1 billion people live without access to electricity worldwide, almost all of them in developing countries.  

Bringing people their first power connections and making existing connections more reliable will require a huge level of investment. The International Energy Agency (IEA) estimates that for the period through 2035, non-OECD countries will account for the most incremental electricity demand, set to increase from 11,300 terawatt hours (TWh) to just over 26,000 TWh—more than the current generation capacity of the entire world. According to the IEA, meeting the world’s growing need for energy will require an investment of $48 trillion over the next two decades.

The public sector alone cannot respond to the enormous investment needed to meet the growing demand for electricity. Bringing in the private sector through the use of public-private partnerships (PPPs) allows governments to share the burden of financing and management. During the past two decades, many developing countries have been liberalizing and introducing private sector participation in their electricity markets, in an attempt to ensure sustainable supply of energy and improve the quality of electricity services. As a result, the power sector has been one of the greatest beneficiaries of private investment through PPP projects and project financing structures.

Of course, private sector involvement does not alone solve the growing energy demand, nor is it the best option in every country or scenario. As electricity sectors are restructured, governments must ensure the system is properly regulated, with strong oversight in the transmission and distribution areas in particular. The government must set clear limits in market power of distribution utilities while allowing competition in the generation segment with the establishment of a market for energy.

Environmental and safety compliance and employment impacts are other key aspects that require public sector oversight. The development of the national electricity sectors requires, in most cases, a thoughtful restructuring exercise with clear definition of rules allowing for a cooperative process in which the government and the private sector can work together in order to bring about a positive outcome for the country and the user.

 

Sub-sectors

  • Generation

    To meet the growing demand for electricity, additional capacity needs to be built and/or existing generation facilities must be updated. Public-private partnerships (PPPs) can be used to overhaul old facilities and construct new ones. The most frequently used forms of PPP transactions for power generation are Build-Operate-Transfer (BOT) agreements or on concession agreements. BOT agreements are often employed where the nature of the project causes the government to have a very long-term...

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  • Transmission

    As more electricity is generated to meet growing demand, transmission networks must upgraded and expanded to handle the increased volume and larger coverage areas. The increased investment and commitment to renewable energy generation capacity also requires extension of transmission networks to often remote areas where many renewable sources are found. Improving and extending transmission systems to keep pace with the expected growth in generation capacity and consumers’...

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  • Distribution

    The last step in power delivery, distributing electricity from the transmission system into consumers’ homes, schools and businesses, is often cited as the weakest link in the power sector given its high susceptibility to disruptions and technical and commercial losses. As generation capacity and demand rise, electricity distribution will be further challenged, putting at risk the financially sustainability of the electricity utility and hampering economic development.

    Distribution...

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  • Renewables

    The growing need for energy worldwide and a deeper environmental awareness has led to a new level of commitment by governments to develop renewable energy sources. Renewable energy technologies, such as hydro, wind, waste-to-energy, biomass, geothermal, and solar power offer the potential of increased energy security, reduced exposure to fuel price volatility, and with the exception of large hydro power projects, a more limited environmental impact than traditional sources of energy.

    The...

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Issues

  • Project preparation and coordination

    While PPPs can be applied at a specific point within the power production and delivery system, whether it be a generation facility, transmission segment or a distribution network, they do not operate in a vacuum. Power PPPs exist within a very...

    While PPPs can be applied at a specific point within the power production and delivery system, whether it be a generation facility, transmission segment or a distribution network, they do not operate in a vacuum. Power PPPs exist within a very complex supply chain. A PPP in generation must take into consideration the delivery points and therefore the condition of transmission capacity as well as the creditworthiness of the off-taker. Similarly, transmission and distribution PPPs need to respond to the availability of energy, the regulatory framework (including tariff levels) and the required investments.

    Given this interconnected landscape, poor preparation of PPPs can seriously undermine the viability of a project, while thorough preparation can spell its success. Preparation is essential in the allocation of risks between the contracting parties and to assure the potential private partners the commercial and financial viability of the project. Sound preparation can also help strengthen the enabling environment, by assisting governments to carry out limited reforms as part of the “upstream” preparation process, and/or ensure contracts are structured in such a way as to allow them to succeed despite of legal and regulatory weaknesses.

     

  • Political leadership

    Political leadership is recognized as critical to the success of PPP projects, especially in developing countries. Developing country governments, often under the guidance of donors and development agencies, take initial steps to create...

    Political leadership is recognized as critical to the success of PPP projects, especially in developing countries. Developing country governments, often under the guidance of donors and development agencies, take initial steps to create policies conducive to private participation. If key political leaders are reluctant to overcome opposition to involvement of the private sector in public service delivery, the reform steps will be piece-meal and do not send a clear message of support for potential partnership with the private sector.

    To facilitate successful PPPs in the power sector, politicians must be willing to tolerate reductions in sector control by large, state-owned power companies, and make the case of the PPP to their constituents, whom in many cases are frustrated with the public power system that suffers from frequent brownouts and blackouts, but are reluctant to begin paying for a resource that had previously been provided for free.

    To strengthen their case to their constituents, government decision makers should become familiar with successful cases in which private sector participation has helped turn around the electricity service and brought investment and improved operation to all parts of the electricity supply chain: generation, transmission and distribution.

     
  • Regulation

    For PPP projects that operate within government regulation to be successful in the power sector, regulation must be transparent, fair, accountable, and credible. Countries should have an independent and professional regulator that can enforce...

    For PPP projects that operate within government regulation to be successful in the power sector, regulation must be transparent, fair, accountable, and credible. Countries should have an independent and professional regulator that can enforce regulations with a view to promoting investments in the sector and securing quality service at reasonable tariffs.

  • Planning and strategy

    A strong policy framework for guiding and supporting PPPs in power, whether they be Independent Power Producers (IPPs) or distribution concessions, has two essential elements: a clear policy, based on a comprehensive sector master plan, which is...

    A strong policy framework for guiding and supporting PPPs in power, whether they be Independent Power Producers (IPPs) or distribution concessions, has two essential elements: a clear policy, based on a comprehensive sector master plan, which is consistently implemented by government; and legislation that formalizes the policy. The plan needs to include reasonably accurate supply/demand forecasts, an assessment of least-cost options, and contingencies.

    The policy needs to elaborate how various subsectors fit into overall sector policy, how state-owned utilities are to be governed, how private participation relates to government provision of services, how projects are to be developed, procured, and negotiated (and who is responsible for doing this), and the powers and functions of regulators (including how licensing of private service providers is to be handled).

  • Climate change and renewable energy

    Energy and the power sector are at the heart of the growing climate change crisis. As it stands today, only 12 percent of the energy consumed globally comes from renewable sources. The transition to a low-carbon energy sector could benefit...

    Energy and the power sector are at the heart of the growing climate change crisis. As it stands today, only 12 percent of the energy consumed globally comes from renewable sources. The transition to a low-carbon energy sector could benefit nearly one in five people worldwide that currently do not have access to modern energy services. Greater reliance on hydropower, wind, solar, waste-to-energy, biomass, and geothermal sources, as well as more efficient energy use, can help foster economic growth sustainably.

    The strong growth in energy demand expected in developing countries means that they stand to gain the most from investing early in low-carbon and efficient infrastructure, as it reduces the risk of premature retirements or retrofits of carbon-intensive assets. Many renewable technologies are also experiencing rapid cost reductions as technologies improve and the industries grow to scale. However, except in regions with natural resource abundance or in countries that are otherwise dependent on expensive imported diesel, renewable energy is yet to be cost competitive with traditional sources of power such as coal and gas.

    Thus, to promote clean energy generation, governments may choose to introduce policy incentives and targets. In some cases, these targets may be mandatory, with penalties on local government, electricity utilities or power generators for failing to reach such targets. Such mechanisms are particularly relevant as governments face high fossil fuel prices, energy security, and the impact of changing weather patterns.

     

Resources

    • 2013
    • Maria Vagliasindi
    • World Bank Group (WBG)

    Revisiting Public-Private Partnerships in the Power Sector

    This report reviews the evidence to date with sectoral reforms and considers different approaches in varying circumstances to help outline the potential role of the private and public sector in strengthening the corporate governance of private and public utilities; helping governments to establish legal, regulatory, contractual, and fiscal frameworks; and improved market governance to attract private investment.   

    • 2008
    • John Besant Jones, Bernard Tenenbaum, Prasad Tallapragada
    • World Bank Group (WBG)

    Regulatory Review of Power Purchase Agreements

    A Proposed Benchmarking Methodology

    The overall purpose of a regulatory review of power purchase agreements (PPAs) is to ensure that the terms of the PPAs are "fair and balanced" to all parties who will be directly and indirectly affected by these transactions. In particular, the prices paid by purchasers of power under the PPAs should be compatible with fair pricing to consumers supplied with power procured under the PPAs. In addition, the prices received by sellers of power (typically an independent power producer (IPP)) under the PPAs should be sufficient to allow the sellers to finance the development and construction of their generation facilities and to earn reasonable returns on capital invested under efficient operation of these facilities.

    • 2001
    • John Besant-Jones and Bernard Tenenbaum
    • World Bank Group (WBG)

    The California Power Crisis

    Lessons for Developing Countries

    Over the past 15 years, more than 30 countries or regions within countries have initiated major reforms of their power sectors. Typically, the reforms involve some combination of restructuring, privatization, and competition. While the reforms are almost always intensely debated by power sector officials, they rarely receive much attention outside the power sector. But this has changed with the skyrocketing prices, blackouts, utility bankruptcies, and potential ‘deprivatization’ that have accompanied the collapse of California’s reform program. Clearly, what happened in California was not what was planned. Governance of the transmission system and market operators should be kept independent of market participants, and it should not...

    • 2001
    • Asian Development Bank (ADB)

    Developing Best Practices for Promoting Private Sector Investment in Infrastructure: Power

    This five-volume set presents the findings of an ADB regional technical assistance study which developed sector-specific best practices for promoting private sector participation in key infrastructure sectors in ADB's developing member countries. The best practices cover the role of government, institutional reform, strategic planning, legal and regulatory frameworks, unbundling and competition, contractual arrangements, sources of financing, and the allocation of risk. This volume examines the optimum approaches for achieving benefits for consumers of electricity through power sector restructuring, unbundling, the introduction of competition, and privatization.  

    • 2014
    • International Finance Corporation (IFC)

    Handshake Issue #13: Power & PPPs

    Handshake Issue #13, Power PPPs focuses on public-private partnerships in the power sector and brings diverse expert voices together to discuss how to increase access to energy in emerging markets. Features on hydropower and renewables, alongside in-depth looks at Africa and Latin America, provide a fresh analysis of one of today's most important and rapidly evolving sectors.

For legal and regulatory resources go toPPPIRC

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