Competition and private participation can improve operating efficiency in power sector


By Satyen Mohapatra :


Nov 30, 2018NEW DELHI- Although urgently needed in some segments of the power sector, a World Bank Report says, investment alone is unlikely to solve the power crisis in South Asia.

A big contributor to power shortages is inefficiency. Competition and private participation can improve operating efficiency, the report added.

According to a World Bank Regional Report launched here, the economic cost of power sector distortions like misallocation of fuel supply, inefficiencies in generation, high losses in distribution, and inadequate pricing of emissions from fossil fuel–based electricity generation is to the tune of 4–7 percent of GDP in countries like Bangladesh, India, and Pakistan.

The Report “In the Dark: How Much Do Power Sector Distortions Cost South Asia?”is authored by a team led by Senior Economist at the World Bank Fan Zhang, South Asia Development Forum.
The report points out that of the nearly 1000 million people globally without access to electricity, more than 250 million people live in the region.

The average, per capita electricity consumption in the region is less than a quarter of the world average, and several of the countries in South Asia also face electricity shortages, leading to frequent power shedding.

As demand for electricity grows and more people are connected to the grid in the coming years India itself is going to account for 30 per cent of the total global electricity demand, the Report points out.
The World Bank lending commitment to the region for energy projects reached US$8.6 billion at the end of fiscal 2018, it said.

The Report making a strong plea for reforms that address policy distortions in the energy sector said “it could play a big part in making the best use of existing facilities, avoiding waste, attracting private investment, and promoting the shift toward a cleaner energy mix.”

The analysis goes beyond looking at just fiscal costs, evaluating the impact of distortions from a welfare perspective. Rather than the cost of subsidies, the report assesses the loss of consumer welfare and producer surpluses, as well as the environmental and social costs.

The report adopts a broad definition of the power sector. Instead of focusing exclusively on generation, transmission and distribution, the analysis covers the entire supply chain of power supply, from upstream fuel supply to downstream access and reliability.

The report finds that the full cost of distortions in the power sector is far greater than previously estimations based on fiscal costs alone. Some of the largest costs are upstream and downstream.

The report also shows that countries in South Asia can reap huge economic gains from energy sector reforms, and along the way offers important insights on the implementation of these reforms.

It said a narrow focus on liberalizing the price of electricity should be avoided because, in the absence of other reforms, the market equilibrium is highly inefficient. It also appears that, without fundamental changes in incentives, corporatizing power utilities does not guarantee substantial improvements in their operation.

The Report said that many studies have examined the cost of power sector distortions in South Asia. They typically consider a narrow definition of the power sector—one that includes generation, transmission, and distribution and often omits upstream fuel supply and downstream access to electricity and reliability of supply.

Most studies also focus on fiscal costs, ignoring the fact that, although there is no fiscal cost to a rural household lacking access to electricity or the atmosphere being polluted by coal-fueled generating plants, the economic costs are huge.
This report introduces two innovations. First, it goes beyond fiscal costs, evaluating the impact of distortions from a welfare perspective by measuring the economic cost of distortions through their impact on consumer wellbeing, producer surplus, and environmental costs.

Second, it adopts a broader definition of the sector, one that covers the entire supply chain of power supply, including upstream fuel supply and downstream access and reliability

Achieving universal access to electricity brings a broad range of social and economic benefits and should remain high on governments’ agenda. But merely ensuring connectivity is not enough. Unreliable supply of electricity discourages households and businesses from adopting electricity and limits the potential gains from electrification
Where electricity prices are too low to recover costs, adding new electricity connections inevitably puts greater strain on the grid because the system is forced to absorb more loss-making customers.

Electoral incentives may create a bias favoring short-term, more visible investment in grid extension over long-term, hidden efforts in grid maintenance.

In a budget-constrained environment, the drive toward quantity can come at the expense of quality for both existing and new customers. To ensure the quality of electricity supply, it is important to remove electricity subsidies, so that utilities have the resources to invest in the long-term reliability of the grid, it said.
Many countries have used energy-efficiency programs to ensure affordable energy for low-income households. Putting a price on emissions would also prompt countries to move toward renewables and away from fossil fuel–powered electricity, it added.