Financing Networks in Electricity Sector and Market Liberalisation in South-East Asia

Overview – Sector liberalization, and the development of renewable energy, have been two of the major policy themes informing development bank policies in the energy sector.  A recent report by the World Bank (Vagliasindi  et al 2013) examined the extent of unbundling across countries, its links with a variety of outcomes including price, access, and emissions, and possible factors affecting these outcomes, including GDP per capita.

This study concerns the development of liberalization in the electricity sector in Indonesia, Thailand, Vietnam and Lao PDR, and seeks to extend the work of Vagliasindi et al in two ways: by analysing the impact of World Bank loans in the policy-making process, and by examining the extent to which investments in restructuring have leveraged private investments in renewable energy generation.

Research design/methodology – The study examines investments, loans and costs in the electricity sectors of Indonesia, Thailand, Vietnam and Laos using qualitative and quantitative research approaches (namely factor analysis and regression analysis) based on longitudinal secondary data sets mainly from the World Bank and IEA.

Findings –  Economic growth in Indonesia, Thailand, Vietnam and Laos has driven growth in  the demand for energy of 10% p.a. on average since the 1990s. The WB has lent more than $18 billion to the electricity sectors of these countries through over 140 loans. Similar patterns of periods, purposes and values of loans are witnessed in all  countries despite differences in politics, economics and time., Overlapping loans  ensure a continuous  impact on sector policies. These loans also show a common pattern of moving from financing rural electrification, to increased generating capacity, to electricity sector restructuring. The largest loans, and the largest proportion by value, have been for restructuring rather than infrastructure. Only 4% of the loans have been for renewable energy projects, all involving public sector partners.

There is no correlation between market liberalization stages and green-field private investment. As in other countries, the investment in network extension has been financed almost entirely by governments and donors.  Private investment has taken place to varying degrees through IPPs in thermal generation, underpinned by PPAs. Renewable energy potential is high, but there is very little actual generation using renewables, and nearly all of this comes from the public sector.  There is thus little evidence that WB restructuring loans leverage investment in renewables by the private sector.

These findings are supported by experience in other countries including Chile, with the deepest market liberalisation in the south, where private investment in generation has been largely in coal, oil and gas; and Germany, where the difficulty of pursuing renewable objectives under the internal market has led to a major restructuring (known as the ‘energiewende’) including widespread municipalisation.

Policy Implications – The paper concludes that the policy framework of development banks and national governments should be reviewed. This should include challenging the assumptions that restructuring ‘leverages’ private investment in renewables, and that the costs of restructuring are offset by benefits in terms of capacity.

References:

Vagliasindi M. et al (2013), ‘Revisiting policy options on the market structure in the power sector’, The World Bank

Keywords: Electricity sector, liberalisation, World Bank, energy policy, private investment, marketization, renewable energy, electricity generation, demand growth, capacity