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E N E R G Y A N D M I N I N G S E C T O R B O A R D D I S C U S S I O N P A P E R
P A P E R N O . 1 9
S E P T E M B E R 2 0 0 6
Reforming Power Markets
in Developing Countries:
What Have We Learned?
John E. Besant-Jones
Energy and Mining
Sector Board
THE WORLD BANK
GROUP
Copyright © 2006 The International Bank for Reconstruction
and Development/The World Bank Group. All rights reserved. 2 i
CONTENTS
ACKNOWLEDGMENTS ............................i v
ACRONYMS AND ABBREVIATIONS ..........i v
FOREWORD............................................v
1 . OVERVIEW ........................................1
1.1 Context of the Paper ......................................1
1.2 Strategic Elements of Power Market Reform ....1
Element 1: Power Market Reform Has Many ........
Dimensions ......................................................2
Element 2: Power Market Reform Must
Be Adapted to Starting Conditions ....................3
Element 3: Power Market Reform Is a
ProcessNot an Event......................................4
Element 4: Power Market Reform Is an
Opportunity to Help the Poor ............................6
2 . CONTEXT OF POWER MARKET REFORM
IN DEVELOPING COUNTRIES..............9
2.1 The Techno-Economic Basis for
Power Market Reform in Developing Countries ....10
The General Case for Reform..........................10
The Case of Developing Countries ..................12
2.2 The Importance of Political Factors for
Power Market Reform..........................................14
The Political Nature of Power
Market Reform................................................14
The Political Incentives to Reform ....................16
Political Issues for Reforming Power Markets....18
3 . CURRENT EXTENT AND OUTCOMES OF
POWER MARKET REFORM IN
DEVELOPING COUNTRIES ................2 1
3.1 The Extent of Power Market Reform ..............21
3.2 Classification of Developing Countries by
Power Market Reform..........................................27
3.3 The Rise and Fall of Private Investment ..........29
3.4 Outcomes of Power Market Reform................31
Better Service Quality for
Electricity Consumers ......................................33
Improvement in Governments
Fiscal Position ................................................33
Affordable Access to Electricity for the Poor ....35
4 . ENTERPRISE RESTRUCTURING AND
CORPORATE GOVERNANCE ..............3 7
4.1 Corporate Governance and
Commercialization ..............................................38
4.2 Conditions for Justifiable Public
Investment ..........................................................42
4.3 Private Sector Participation ............................43
Private Sector Roles ........................................44
Conditions for Sustainable Private Investment ..46
4.4 Improving the Feasibility of Privatizing ..............
Distribution ........................................................48
What Is Being Privatized ................................49
The Prospective Private Participants ................50
When Privatization Should Take Place..............51
How Privatization Should Be Conducted ..........52
Risk Mitigation Options ..................................52
5 . MARKET STRUCTURE AND
GOVERNANCE ................................5 9
5.1 Importance of the Market Structure
for Market Governance ......................................59
5.2 Restructuring Power Supply ............................60
Purchasing AgencySingle Buyer ....................62
Restructuring Small Power Systems ..................64
5.3 Experience with Independent
Power Producers ................................................66
Impact of Independent Power Producers..........67
Sustainable Conditions for Independent
Power Producers ............................................69
5.4 The Role of Competition in Power Markets ....71
Characteristics of Competition in the
Power Market ................................................71
Wholesale Power Trade ..................................73
Competition in the Power Markets of
Developing Countries......................................76
6 . REGULATION OF POWER MARKETS . .7 9
6.1 The Need for Public Regulation
of Power Markets................................................79
6.2 Institutional Approaches to Power
Market Regulation ..............................................80
6.3 Regulatory Credibility for Private Investment ..83
6.4 Regulation by Contract to Support a
New Regulatory Regime ......................................86
6.5 Incentive Regulation to Promote Efficiency......88
7 . ACCESS AND AFFORDABILITY TO
ELECTRICITY SERVICES ....................9 1
7.1 Context and Background ..............................91
7.2 Reform Policies for Improving Access and
Affordability ......................................................93
7.3 Removing Regulatory and Institutional
Constraints on Electricity Services ........................94
Regulation of Electricity Markets Serving
Low-Income Users ..........................................95 ii
Institutional Reforms for Supporting Access
and Affordability ............................................96
7.3 Financial Viability and Affordability ..............98
Reducing Service Costs ..................................98
Designing Appropriate Tariffs..........................99
Subsidizing Electricity Services to
Low-Income Households ..............................101
8 . IMPLEMENTING POWER MARKET
REFORM ......................................1 0 7
8.1 Challenges for Implementing Power
Market Reform..................................................107
8.2 Government Roles and Responsibilities ........109
8.3 Sequencing of Power Market Reform............111
8.4 The Transition Stage for Power Market
Reform ............................................................115
The Importance of Starting Conditions ..........115
Quick versus Gradual Approaches to
Reforming Power Markets ............................115
Reform Road Map ........................................119
APPENDIX: REFORM OF POWER
MARKETS IN OECD COUNTRIES............1 2 1
GLOSSARY ........................................1 2 7
REFERENCES ......................................1 3 7
FURTHER READING ............................1 6 1
TABLES
TABLE 1. Types of Power Market Reforms
with Different Starting Conditions ..........................5
TABLE 2. Distributions of Power Supply
Structures in Developing Countries ......................23
TABLE 3.
Differences in Power System
Characteristics by Threshold Group ....................28
TABLE 4. Improvement of Privatized South
American Distribution Companies........................34
TABLE 5. Main Features of Public-Private
Partnerships........................................................45
TABLE 6. Power Market Risk Matrix and
Coverage ..........................................................54
TABLE 7. Types of Vertical Unbundling ................66
TABLE 8. Risk Exposure to the Impact of
IPP Costs in Four Southeast Asian Countries ........68
TABLE 9. Market Concentration in Selected
Latin American Power Markets, 1998 ..................75
TABLE 10. Impacts on Access and Affordability of
Different Types of Utility Reform ..........................94
TABLE 11.
Policy Instruments for Promoting
Access to Electricity Services..............................100
TABLE 12. Policy Instruments for Promoting
Affordability of Electricity Services ....................101
TABLE 13.
Subsidy Instruments for Helping
Low-Income Electricity Consumers ....................103
TABLE 14. Sequence of Power Market Reform
Measures in 20 Developing Countries................111
TABLE 15. Private Power Investments in
Latin America and Asia 19902002 ..................113
TABLE 16. Types of Power Market Reforms with
Different Starting Conditions ............................116
FIGURES
FIGURE 1. System Size and National Income of
Unbundled Power Systems ..................................26
FIGURE 2. Private Investments in Electricity in
Developing Countries, 19902002 .