International_Trends Turbo K

8/3/2019 International_Trends Turbo K

1/28

International Trends inElectricity Industry

Rahul Pandey

IIM Lucknow

[email protected]


2/28

Why should you be aware ofinternational trends in power ?

Economies are fast becoming more liberalized &globalized

Technology/equipment suppliers are often international

Technological progress & investments in advanced countries andmarkets influence international equipment costs

Opportunities for deploying latest management tools

Opportunities for deploying latest IT tools

Power industry reforms is a global phenomenon

International backdrop to Indian power reforms

Some of the ongoing international reform experiences to rub onIndian reforms in near future

Removal of trade and tariff barriers will bring equipment and fuelprices in India closer to international prices


3/28

Outline

Trends in restructuring

Trends in environmental regime

Trends in technologies


4/28

Trends in Restructuring


5/28

Trends in Restructuring

Vertical disintegration and deregulation:

Unbundling into generation, transmission and

distribution entities

Open access to transmission grid

(Privatization of generation and/or distribution)


6/28

Pro De-regulation Case

Unbundling, privatization and deregulationare likely to result in greater competition in

power markets, in turn leading to higherefficiency, higher reliability (service) andlower costs (lower tariffs)


7/28

The Case Against

In the long-run, imperfect competition inpower markets stems from economies ofscale, oligopolistic ownership, etc.

In intermediate term, competition isimperfect because of capital intensiveproduction and long construction delays.

In short-run, prices are volatile, supply sideis technically rigid and demand inelastic,leading to imperfect competition.


8/28

Peculiarities of Electricity Industry

No finished goods inventory (uneconomicalstorage) & demand fluctuations Not a commodity

Not a fuel but an instantaneous phenomenon occurring throughout

an interconnected system Real time system synchronization/ coordination/

integration

Reliability requires reserve margins

Relatively inelastic demand Capital intensive technologies, long life

Long gestation periods

Public good


9/28

Developed Countries Experiences

USA: Public Utilities Regulatory Policies Act in 1978 Supply of wholesale

power to utilities

Energy Policy Act, 1992 Competition in wholesale elec trading

Investor owned, Municipal, Federal govt. managed utilities, and IPPsincluding Merchant Plants

Most states remain regulated (a few de-regulated)

Independent state-level public utility commissions

Real time dispatch, pricing / tariff setting

Public participation thru civil society orgns. Mixed outcomes

High costs due to stranded investments

High efficiency due to integrated resource planning and DSM (thanks tostrict but effective regulation)

No significant difference between costs of public and pvt. ownership


10/28


California: 50 GW market size

Restructuring intended to protect retail consumers

Retail tariffs controlled; Wholesale market freed-up

California measured very low on HHI (Herfindal-Hirschman Index) Low concentration of firms

Totally de-regulated Unbridled market power

Uniform price model (as against pay-as-bid)

Collusion among big players Strategic maintenance scheduling gaming the market

Hike in peak prices (reduced peak efficiency)

Market collapse (predicted in 1996); Blackouts; Supplyutilities banckruptcies


11/28

Developed Countries ExperiencesUK:

Restructuring began in late 1980s

Unbundling; Privatization of generation and distribution; Independentregulator; Competition commission

Electricity Pool spot market Compulsory marginal daily bid system(uniform price); Incentive for adding capacity

Increased market concentration (60% of capacity was by 2 firms, in 1996) Market power (monopolize price-setting)

Forced divestments by 2000

Regulators concerns remained for 2 generators (8%, 18%)

Rejection of Market Abuse Licence Condition in 2001due to difficulty in

benchmarking competitive price (bid prices can change over time)

Recognition of limits to competition

Powergens strategy: From centralized planning to devolved structure (functional to divisional to cluster of

BUs); profit or cost centers; Reduced planning cycle

From coal-dominant to coal-gas mix (JVs with gas suppliers)

Internationalization (Germany, Hungary, Indonesia, etc)

Technical to Strategic focus


12/28


Australia, UK, New Zealand: Problems of market power (poor competition)

Increased prices in peak periods

Vertical re-integration (UK)

Norway, Denmark, Finland: State-controlled generation (hence domestic ownership)

Independent and effective regulation

No evidence of market power


13/28

Developing Countries ExperiencesLatin America: Few big MNCs (huge foreign investments) Serious problems in most countries except Chile (Chile witnessed re-integration;

Endesa owns 55% of Chile, 22% Columbia, 19% Argentina, 24% Peru, 5% Brazil) Brazil: Reform since 1995; Successful in privatization & revenue improvement from

distribution; Failed in privatizing generation; Capacity constraints continue; Tariffsincreased; Unbalanced retail and wholesale tariff settings

Restriction on cross-ownership of firms in Argentina, Bolivia, Peru

Africa: Reforms in 20 countries (justification same as in India) Unbundling Corporatization Commercialization of state-owned utilities with no

change in ownership; Contract management New generation by IPPs (T&D still state owned)

Independence of ERBs questioned (except in SA and Ghana) Labour union resistance inWest African countries Protests due to tariff hikes; Corruption in Kenya, Tanzania, Uganda, Zimbabwe Zimbabwe: Initial improvement in public utilitys management and efficiency; Later

problems due to implementing privatization without tariff and regulatory reform Increase in capacity; Financial improvement in some cases


14/28

Developing Countries ExperiencesChile: Began in early 1980s in the backdrop of economic globalization (2-way

investment flows; X-country infrastructure of elec lines and gaspipelines)

Unbundling and privatization of 2 state owned firms (Pvt pension funds,unlike foreign investment in rest of LA); Competition in generation (directselling to large buyers); Open access to transmission; Licensing

requirement for distribution projects Unregulated prices for large buyers; Regulated for others (at marginal

costs, but anchored to competitive price) Economic Load Dispatch Center market Spot prices and Spot

transfers High concentration 94% of market by 3 generators

Endesa (like other sector Chilean firms) grabbed opportunities andresponded on multiple fronts: Integrated state-owned firm in Chile until 1975 (Hyd+Thr) Shed off

distribution & construction in early 1980s Forced to hike efficiency and paydividends to State Doubled employee productivity Privatization in 1988 Independent & decentralized profit centers Orgn.-wide incentives +Improved availability+ Improved finances + New project development +

Engineering

Internationalization (via JVs with Local & US partners)

Gen+Trans in LA by mid-1990s


15/28

Developing Countries ExperiencesAsia and Others:China: Province-owned integrated utilities compete in each province many

controlled by State Power Co. of China; Provincial Cos. profit centers Coal + Hydro ratio similar to Indias; Distances a concern; Deficient T&D

grids Least-cost centralized planning by Govt; Govt controlled regulator;

Excess capacity; Time-of-day tariffs Recent trend towards mine-mouth power plants and clean coal

technologies Govts inclination for competitive bidding by generators announcedIPP scandals in Asia: India, Indonesia, Pakistan, Philippines Tendency of rent-seeking by IPPs

30-50% higher cost of gas power projects in Asia and Africa High Risk Premiums incompatible with High (RoR+Capital

Costs+Protections)

Other concerns: Reduced access of electricity to the poor Argentina, Georgia, Kazakhstan, Bolivia, Moldova, Most African

countries


16/28

Lessons from International Experiences

Competition and System integrity in electricitymarkets requires:

Creating large no. of players

Real time pricing

Incentives for system reserve margins (capacityinvestments)

Preventing vertical re-integration tendencies to hedgeagainst price risks

Independent ERCs Effective public participation and oversight in regulation

Effective Re-regulation !


17/28

Trends in Environmental Regimes


18/28

Tightening environmental norms

Global environmental concerns Climate change caused by GHG emissions, of which CO2

is a key element

Kyoto Protocol requires immediate mandatory mitigation ofby developed nations, and envisages commitments by

developing nations by 2010 Economic advantage of Gas w.r.t. Coal in US &Western Europe

already visible (at least 40% less C) due to removal of subsidies(20-40% decline in coal markets)

Coal to Gas substitution also visible in ex-USSR & Eastern Europe

(35% decline in coal markets) Gas power generation share on a rapid rise, replacing Coal in US &

EU and Hydro in LA; Rapid investments in gas pipelines

Domestic environmental concerns Increasing restrictions on SO2, NOx, Ash particulates, etc


19/28

Clean technologies under exploration

CCGT with efficiency of 60-65% Advanced coal power technologies (target to achieve 45-

55% efficiency at $1000/kW) E.g. IGCC (Coal gasification preferably combined with combustion +

Fluidized bed of limestones to capture S and crack tars + Gas

cleaning system to remove S & filter ash + Gas turbine) US,Germany, Japan, Spain, Netherlands

Possibility of integration with Fuel Cell technology

Carbon sequestration technologies under development

Biomass (mostly for cogeneration), MSW, andWind based

generation Co-firing of Biomass/MSW (upto 15% of heat input) with

Coal in utility boilers without significant loss of efficiency

Fuel Cells Complementarity with transport sector


20/28

Trends in Technologies


21/28

Dominant trend since 1890s until 1980s

Centralized large generating stationslocated far away from end users

Economy of scale effect Lower per-unit-cost with increasing scale

Traditional thermal, large hydro (laternuclear too) matched the requirementswell, with part of hydro meeting peak loads


22/28

Dominant trend since 1890s until 1980s

Mtoe

Year1800 1850 1900 1950 2000

0.01

1

100

10000

Coal

Hydro

Nuclear

Gas

Primary energy supply in the US


23/28

Trend since 1980/90s

Towards smaller generators closer to users Economy of series manufacture effect

Lower per unit cost with increasing volumes ofmanufacturing/assembling subsystems

First breakthrough:G

asT

urbines Efficient & economic at smaller sizes Very low gestation periods

No fuel storage

No solid waste; Much less emissions

Can be used as Cogeneration of elec & heat (eff 80%) Reduced T&D losses

No need for system coordination & policing

Higher reliability & control of supply

Amenable to commercial free market businesses

Amenable to end-use optimization


24/28

Trend since 1980/90s

Other future prospects: Fuel cells

Modular renewable energy technologies

Microturbines Clean coal technologies

As few major customers shift to on-sitegeneration, it will render centralized utilitygeneration further uneconomical as systemload factor will fall


25/28stsin1995

(inUS$

1990/kW

)

Combustion gas turbine

Gas combined cycle power plant

Conventional coal power plant

Biomass power plant

Coal combined cycle power plant

Nuclear power plant

Wind

Geothermal power

Solar thermal

Solar PV

Mat

ure

In

cremental

Radical


26/28

Learning Curves for some Technologies

20000

10000

5000

1000

100

500

US$(1990)/ kW

Cumulative MW installed

10 100 1,000 10,000 100,000

Solar PV

Windmills

Gas turbines

1982

1992

1982

19871958

19631980


27/28

Factors that drive technology costs down

Cumulative investments

Investments in support infrastructure (e.g.

transmission networks, road networks, gaspipelines)

Increasing markets, leading to increasingscale/volumes, leading to maturity, leadingto standardization

Improvements in production andmanagement systems with experience


28/28

Implications for Indian Firms

In short to medium run..

Modernize management and technologicalsystems; Learn new tools of operations, IT

and financial strategy Build innovative capabilities

In long-run..

Keep your horizontal, vertical and regionaloptions open

Documents

International_Trends Turbo K