How can utilities leapfrog to a low carbon future in developing economies?

By Maxine Chikumbo, Fall 2016 Fellow

As the race to develop sustainable energy pathways to a low carbon future continues, opportunities have arisen for developing and emerging nations to move towards and even outpace developed countries. Commonly referred to as ‘leapfrogging’, the underlying concept is that less industrialized countries can skip over decades of progress and fossil-fuel driven dependence, as a shortcut to a clean energy economy. For this to occur at a large-scale, a fundamental two-step process is required involving the re-evaluation of utility models and restructuring of electricity markets. To ensure greater renewable penetration and more distributed generation to meet demand, many of these countries will have to simultaneously deregulate and introduce competition. This was recognized at COP 22 as a big picture strategy necessary for LDCs to achieve their climate goals.

What has worked with energy competition in developed economies?

 Case 1 - United States

Competition through privatization in the electricity sector has boasted multiple benefits for the United States, which the 1978 Public Utility Regulatory Policies Act set the tone for:

• Lower costs. Competition within the electricity market means different entities are competing with one another to sell electricity to consumers, who will be looking for the best price. Although it has been argued that deregulated markets do not always equate to lower rates, this is still a viable incentive.

• Increased efficiency and reliability. If IPPs and distributors are competing, efficiency and advanced technology become critical in the pursuit of market share. This drives production costs down, which can translate to lower rates and reliability. With more entities generating power and pooling resources to back up the grid (think RTOs and ISOs), the likelihood of rolling blackouts drops.

• More choices and environmental responsibility. The diversification of fuels offers customers multiple sources of energy. Ideally, their demands and greener choices could help crowd out dirty fuels and contribute to a decline in emissions - which can be encouraged through policy and incentives like rebates.

Map of deregulated states in North America as of 2016. Source: Electric Choice

What hasn’t worked with deregulation and privatization, and what could be ‘leapfrogged’?

Despite the outlined benefits, there have been several drawbacks identified. One of the most prominent examples pointed to in the US is the California Energy Crisis. Along with many other factors, it was the result of a statewide deregulation:

• Increased costs for ratepayers. Competition can actually introduce high electricity rates and reduced reliability if demand is unusually high. To try prevent such price surges, deregulation should be supported by policies and initiatives that promote demand side management.

• Market manipulation. Once electricity is a free market commodity, it is potentially subject to manipulation, which can lead to very high prices. These incidents were said to have played a significant role in the consequent blackouts during Crisis, and resulted in FERC tightening up its regulation.

• Public awareness and buy-in. Winning over public support is often overlooked. Companies tend to be accused of putting profit before people (who should be aware that private sector and foreign dollars are essential). In the 1990’s, various groups in the US launched public awareness campaigns as deregulation was taking off to educate and move people against it.

Challenges and lessons learned from introducing competition in developing economies

Case 2 - Zimbabwe

Zimbabwe’s electricity sector is an example of what happens when a utility goes bust. The state-owned utility ZESA is only producing 1,000 MW, underserving a load of 1,400 MW. Most of the power plants are either underperforming in capacity or are not operational at all. The hydroelectric powerhouse Kariba Dam is failing, and pooling agreements with neighbouring countries are strained. Allowing IPPs to competitively supply would be a win-win – including foreign-owned IPPs. Private sector involvement would increase reliability, with surplus capacity to support the grid. The diversification of fuel sources through private funds investment in renewables would help the country move away from reliance on thermal plants to more solar in particular - an unbelievably untapped market. Although solar still is expensive if not subsidized, private investment would allow for IPPs to identify and execute good, large-scale, investments.

Case 3 - Uganda and Kenya

Uganda has been at the forefront of utility restructuring. Through the 1993 Public Enterprises Restructuring & Divestiture Statute, they have sought to privatize the electricity sector with one of the main utilities to effectively regulate companies. Paired with the 1999 Electricity Act, policy adjustments were made. From this, the Privatization and Utility Sector Reform Project was borne. Once dominated by the state-run utility, Uganda was plagued by the similar challenges to Zimbabwe. However, due to policy reform, along with India, Uganda is now pointed to as an exemplary model on how utilities can privatize and open the gates to a clean energy economy.

Kenya too is on the rise as the nation works to rebuild its economy. The long-term development program Vision 2030 includes an infrastructure framework that aims to ramp up energy production to 23,000 MW by 2030, generating most of it from renewables. By 2017, the target has been set to adding 5000 MW to national grid. The policy reform and strategy encourages foreign investment; and has the government assume more of a regulatory role in the market. The aim is for the private sector to contribute to the power prediction goal, and this was propped up by the 2013 Public Private Partnership Act. If proven successful, Vision 2030 could prove to be a useful resource for energy leapfrogging.

So, what needs to be done exactly?

Utilities and governments in developing and emerging economies can borrow from effective policy reform, and customize their approach around larger global goals to achieve their energy goals. Deregulating, focusing on the consumer, and moving away from fossil fuels will allow for them to combat climate change, create jobs, improve health, and lower costs - taking them to the low carbon future they need to be.

Maxine Chikumbo is a Fellow with the Clean Energy Leadership Institute and a Communications Assistant at the American Council for an Energy-Efficient Economy.