Power sector: Big challenges for developing economies

Extraction, generation and distribution of electricity are fundamental aspects of an industrial sector having strategic implications for the performance of any economy – large, medium or small. Besides, a massive employment is vital to a country’s power sector. According to its 12th Five Years Plan, India would need a gigantic workforce of more than 650,000 people as the country had embarked on an ambitious programme in 2012 to generate more than 180,000 MW of surplus electricity by 2017 – confirmed by India’s Institute of Energy and Research (IER).
By 2022, Jawaharlal Nehru National Solar Mission aims at adding 20,000 MW of solar energy to India’s national grid. If grid-connected solar electricity were to be promoted, its production cost would be compatible with grid parity levels. Natural gas is likely to play another key role in India’s energy mix by 2025 while increasing up to 20 per cent.

Cumulatively, India’s petroleum industry had attracted foreign direct investment (FDI) worth $3,338.75 million in between April 2000 to March 2012. In fact, India is an attractive destination for Clean Development Mechanism (CDM) projects owing to the country’s vast market potential and the recent development of its industrial, financing and business infrastructures. Likewise, India has been ranked as the third-best investment destination in renewable energy sector after China and the United States. According to Ernst & Young, renewable energy now contributes to almost 70 per cent of India’s total power output in terms of project numbers and USD value.

Along with India, comparable experiences of various developing economies should be seen on this score. Particularly, Bhutan’s experience deserves an appreciation. Since 2009, Bhutan has been the only South Asian country to achieve a surplus capacity in electricity generation and a hydropower sector that contributes to 40 per cent of its governmental revenues, 45 per cent of its export earnings, and 25 per cent of its gross domestic product (GDP). At present, more than 75 per cent of the hydroelectricity produced in Bhutan is exported to India and the country’s GDP per capita is higher than those of India and Nepal. Previously, Bhutan used to import electricity from India during the winters to meet peak demand.

Currently, Bhutan’s total installed capacity of hydroelectricity is 1488.66 MW – with a domestic consumption of nearly 250 MW while India imports the rest due to a bilateral agreement. In addition, Bhutan comprises 27 hydropower stations, including 4 mega-plants, 12 mini-plants and 10 micro-plants. The total generation had increased from 2,060 GWh in 2002 up to 6,925 GWh in 2009. Hydropower – the source for 99 per cent of the country’s current electricity – is usually abundant in terms of potential, estimated at 30,000 MW.

Strategically, accelerating development of hydropower sector for export is vital to the Bhutanese economy. Given the Bhutanese government’s limited capacity to construct mega-infrastructures, a feasible strategy stipulates leverage public and private investments to accelerate hydropower and generate income for further developments in socio-economic terms.

Since 2007, hydropower generation has quadrupled to 1,489 MW and is expected to increase up to 1,602 MW by the end of the 10th Plan and the trend is maintained such that it would reach 10,000 MW by 2020. Endowed with vast hydropower potential from the perennial and north-south-flowing rivers, the Bhutanese economy is well aware of the facts and it has undertaken in-depth institutional reforms to improve an investment climate for the export-oriented hydropower projects and expand power distribution to its largely-rural consumers in an efficient manner.

However, other developing economies should go a long way before a satisfactory level is reached. Tanzania is the second largest economy in the region of East Africa. The country was experiencing power shortages that were restraining its potential for economic growth – leading the International Monetary Fund (IMF) to adjust Tanzania’s economic growth forecasts! In the last 7 years, the country’s electricity sector has achieved a limited success in diversifying its energy feedstock mixture. The prevailing power crisis provides an irrefutable evidence of planning, implementation and operational incompetence in Tanzania.

Furthermore, innovative practices must be sought after. A noticeable trend within the resource-rich African countries has been that of allowing mining firms to develop electricity for their own use and sell the excess power to the national grid. Thus, developing the mining sector could be the key to averting future electricity crises.

Obviously, electricity pricing is one of the most sensitive factors in the developing economies. The intention of policymakers is to minimise the effect of increased tariffs on the operation and growth of certain industries. Generally, tariffs continue to go northward – to cover losses, to pay for emergency power generation and to fund capacity expansion, either directly or indirectly. Further attempts at cross-subsidisation had minimal effects on balance sheet.

Vietnam’s energy sector is dominated by public ownership although market forces have been brought to bear in recent years and private sector participation is expanding. Apparently, Vietnam has formulated a National Energy Policy for the period between 2006 and 2015. The policy emphasises the need to diversify the country’s energy mix while maximising the use of local energy reserves – 1) development of energy infrastructure and enhancement of durable energy supply; 2) development of energy in consideration of environment; 3) improvement of energy efficiency; 4) restructuring the energy sector’s structure and opening up the market for energy; and 5) enhancement of international energy cooperation after ensuring the national energy security.

Regarding the economies of India, Vietnam or Bangladesh – why not speed up the renewable sources of energy? Apart from hydropower, biomass that includes wood, wood-waste, pear, wood liquors, rail-road ties, pitch, wood sludge, municipal solid-waste, agricultural waste, straw, tires, landfill gases, fish oils, and energy extracted from other waste materials – is an organic fuel. Solar energy should become an important part of rural electrification. Despite the grid extension being assessed unfeasible in economic terms, off-grid electrification can be pursued through stand-alone and home-based systems for extracting solar energy.

Nevertheless, the use of solar energy for space-heating and domestic hot-water production has received little attention from both public and private sectors in developing economies due to the high cost of solar-based PV systems. Equally, both wind and geothermal energy systems remain unexplored. Fresh studies should be conducted to accelerate such extractions.

Renewable energy is central to the climate-change mitigation efforts. Broad estimates have shown that mitigation from existing renewable energy portfolio is equivalent to around 4 to 5 per cent of total energy related emissions.

The governmental strategy to meet the energy needs of developing economies may focus on vital areas – diversification of investment sources to meet the growth in energy demand, establishment of a competitive energy market, development of renewable energies, promotion of trading of energy with neighbouring countries, improvement of energy efficiency and conservation and promotion of environmental sustainability of the energy sector.

After all, the investment requirements of the energy sector happen to be  large. These challenges are better addressed by both public and private investors plus the multilateral and bilateral development banks that are already providing loans in this sector, as experienced in such economies.

In India, the national transmission system which shifts power around the country needs modernisation and more investments – around $110 billion according to a McKinsey study. Indian power sector requires INR 3.72 trillion in funding for the 12th Five Year Plan (2012-17) as per the Working Group on Power for formulating estimations of the plan.

The World Bank extends such support to any energy sector with loans for power generation, transmission, distribution, and rural electrification. In addition, it provides technical assistance in certain areas – power sector policy and strategy; institutional strengthening, private sector participation in infrastructure, gas master plan, petroleum product pricing, development of the Electricity Law, promotion of renewable and rural electrification.  Developing economies are sure to benefit out of such strategy, if the political strings are not attached.

Dr. B. K. Mukhopadhyay, a management economist, is attached to the West Bengal State University.

Source : The Financial Express