GETTING IT RIGHT: GOVERNANCE, REGULATORY STRUCTURE, AND PRIVATE POWER IN A DEVELOPING UNIVERSE

Transcription

1 GETTING IT RIGHT: GOVERNANCE, REGULATORY STRUCTURE, AND PRIVATE POWER IN A DEVELOPING UNIVERSE STEVEN FERREY Professor of Law, Suffolk University Law School Professor of Law, Boston Univ. Law School (Adj( Adj)

2 Beginning Observations The light bulb burned like an evening star, and we had the exact beginning of a new era for civilization: October 21, Energy is the only universal currency Recognition of this universality was one of the great achievements of 19 th century science, but surprisingly, this recognition has not led to comprehensive, systematic studies that view our world through the powerful prism of energy. -- Vaclav Smil, Energies,, 1999

3 Axis of Analysis Electricity is critical to all any stage of development ent Particularly essential for developing countries ~ Centralization vs. Decentralization ~ Conventional vs. Renewable fuels ~ Private vs. state-owned power supply or delivery ~ Role of Self-generation Electricity trades and systems operate as a function of contracts and regulation ~ ~ We consciously create the system It is essential that we get it right ~ Long lives of hard infrastructure investments ~ Society builds around infrastructure choices

4 SPEAKER S FULL DISCLOSURE AB INITIO Involved in several developing nations Worked on WB and UNDP projects The Good, the Bad, and the Ugly Full Disclosure: Looked at (SPP) Life from Both Sides Now Joni Mitchell Represented government agencies Represented developers Represented lenders Represented buyers of electric system Put up hydro, LFG, wind, and fossil 500 kw 520 MW greenfield Multi-billion dollar generating asset purchases

5 From Recent Assessment in Electricity Daily, by Rosenzweig, Voll & Pabon-Agudelo (NERA) Complexity of Necessary Sector Reforms Government should set policy, not tariff or PPA Government cede management control Commitment to independent roles (regulator, developers) PPA and tariffs set on widely accepted, objective principles Other policies furthered by direct, separate subsidy Realistic time frames and institutional maturity period Achieve buy-in by all stakeholders Political parties (Andhra Pradesh) campaign for free power for sectorss Non-commercial local mentality Historic corruption of various stakeholders Political rather than market mindset International Agencies should Rely on Experts to Direct Programs

6 Why Structure is Important for this Intangible What is electricity? It is a premium carrier form of energy Intangible Measured but not possessed Can not be easily stored in its carrier form A public good (reliability) in the context of a developing nation Legal Fictions Govern Power Kirchoff s Law is never reflected in power transactions Buy, sell, loss, transmission path are all legal fictions Engineers matter for the physical system operation Legal arrangements (attorneys, economists) matter for the power markets Legally A good or a service? We do not sell electrons We sell movement, motion, buzz Legally, this distinction matters very very much

7 The Structural Dilemma of Power Investment in a Developing Nation Significant capital cost with long depreciation Intangible product subject to changeable legal rules, but means (capital) of production bolted to ground What does this mean to developers, lender, investors? Stranger in a strange land Look to local and international legal controls and guarantees ~ ~ Key role for the World Bank and other international organizations ~ ~ Create structure; enforce loan covenants and structure Need a legal and regulatory structure to: Create and enforce a fair, neutral trading environment Create an enforceable legal relationship Adjudicate or resolve disputes Allocate risk ~ ~ Key role for the World Bank and other organizations

8 Legal Form and Substance FORM Private power entry and wholesale sale Independence of legal buy-sell deal from utility and government Mature legal system with demonstrable precedent Respect for contract U.S. (or U.K.) risk mitigation provisions are now international SUBSTANCE Guaranteed revenue stream to SPP or IPP Fair and neutral PPA Interconnection; wheeling; energy banking enhancements? Long-term SPP tariff At neutral, fair price = avoided cost

9 Role of the PPA PPA is the legal skin of the living power arrangement and bulwark of the structure Provides certainty ~ necessary for markets to work Allocates risk among buyer, seller, investor, lender Incorporates the terms of the tariff Makes project financable Need for a regulator To set basic terms for a standardized PPA To set and revise a standardized tariff To establish fair rules for interconnection and stand-by power To provide initial dispute resolution forum

10 Renewable SPP Program Structures in Developing Countries WB commissioned an analysis of what worked and what did not work with SPP programs in developing Asia Thailand ~ early leader ~ gas-fired cogen Indonesia ~ Island system not interconnected ~ individualize Sri Lanka ~ Hydro system, power shortage, civil conflict India ~ Federalist system: Andhra Pradesh and Tamil Nadu Vietnam ~ Socialist utility structure with immature private sector Different: demand, growth, indigenous resources, dominant fuel, T& D interconnection, government With SPP program, success is possible (scale is ideal)

11 What does a Decade of SPP Programs Tell Us about Governance and Structure? Both tremendous successes and failures Careful structuring creates additional power resources Renewable options are not being fully developed Smaller economic projects are being overlooked SPP programs can be grafted onto regulated or competitive systems successfully U.S. PURPA experience (never repealed ~ with restructuring) Leads to competitive bidding and wholesale/retail deregulation Introduces market, competitive forces Builds lender experience in power sector Diversifies generation base Can be off-grid or grid-connected

12 Will I Now Proceed to Bore you Today by Droning on Endlessly with Detailed Minutia about each program and the impact of proper structure? No

13 Lessons from these 5 Asian SPP Programs There are Spectacular Successes and Failures 4% SPP contribution in India, Thailand; 2% Sri Lanka; 60% goal in Indonesia (stalled) Renewable set-aside in Indonesia and Thailand Key 1: All successful ones use a standardized PPA Must be fairly and neutrally developed Even a small change in PPA language will kill the program Tension between utility, government, and developers re PPA Complaints about provision and tariff enforcement Key 2: All have developed standardized tariffs Need to value and pay for capacity when provided Need an adjustment mechanism for avoided cost adjustment Must determine whether to index capacity component

14 Should one Subsidize Renewables? Developed countries with Established Markets do PURPA benefits and EPA 92 wheeling rights RPS and System Benefit Charges Net Metering and Energy Banking Production Tax Credits, Accelerated depreciation Keys Innovation Successes from Asian Experience Thailand: Competitive Bidding for Renewable Subsidy (0.9 cents/kwh Kwh) Indonesia: 4-Tiered 4 hierarchy of SPP Program Entitlements 4:1 On-peak Incentives in Tariff rather than PPA penalties Andhra Pradesh: Tariff Premium for baseload renewables (7 ct/kwh Kwh) India: Federal grants, loans with repayment moratoria Consideration of direct retail sales Must pay for energy and capacity Sri Lanka & India: energy only Thailand: Only takes <65% of off-peak power Tamil Nadu: : Can cause SPP to back down; but SPP can wheel power Various Tax holidays and import tax exemptions

15 SPP Program Design Lessons Either controlled solicitation or open offer can work Term ~~ provide SPP option 5 years non-firm ~ energy only years for firm commitment Enhancements Self-service wheeling: Andhra Pradesh (-28%),( Tamil Nadu (-2%) Energy banking: Thailand (<1 Mw); Andhra Pradesh (-2%),( Tamil N. Tariff Avoided Cost basis: all Some seasonally differentiate [Indonesia: for each island grid] India states and Sri Lanka cap the tariff at % of subsidized retail tariff Emphasizes importance of tariff reform Indexation FX: Indonesia & Thailand (avoided capacity) Adjustment: All provide it; basis & frequency of adjustment vary Indonesia: Steep On-peak incentives in tariff Tamil Nadu: : Higher tariff for biomass than (intermittent) wind

16 Lessons and Best Practices SPP programs are a lead model for wholesale privatization [all SPP <0.5% of system capacity] International actors/agencies are justified in setting absolute requirements for Form and Requiring to be implemented Neutral Consultants Recommendation re: Substance on Neutral Principles Prevent gaming of system Implementation ~ Transparent Integrate Private Sector Early lending community Entitlement milestones Rations the energies of private developers

17 PPA (by Contract) and System Reform (by regulation) Are the Key Structural Pieces to Integrate the Parties & Must: Create transparent principles for the integration of new power producers ~ ~ standardize the PPA and lock it in Establish market and cost-based principles Apply neutral L-T L T avoided cost tariffs to contract pricing Tariff floors for renewable energy (Indonesia, Sri Lanka) Price incentives can be used vs. typical contractual penalties Allocate risks among stakeholders nonperformance risk (Thai program adjust capacity down) Capacity credits for intermittent resources or dispatchability Consider SPP security (bank, direct sales, cap credits) Provide agreed neutral dispute resolution process Ration limited subsidies to renewable SPPs (bids, tiers) Enforce milestones to realize supply plan bid security deposit in Thailand, Sri Lanka

18 Final Thoughts on Structure and Governance Program design is key Proper Incentives Open process Eliminate corruption and favoritism International organizations can support the correct form Contract gets less attention that tariff Tariffs change; contract lasts the duration Several examples where PPA changes subvert program Follow-up: There can be an audit team for each program as a condition of support If we get the structure wrong, we compromise both renewables and sector restructuring We now have a model of what works and what mistakes are fatal: We need to disseminate this and replicate successful element