Catalog

	Table of Contents
p. 6 of 21 BACK | NEXT Introduction: Looking ahead Past policies and operations Changing context of the policy review Poverty reduction Private sector participation and sector restructuring Regional and global environmental impacts Regional cooperation Impact of the financial crisis Future assistance in the changing context Conclusions

Energy 2000: Review of the Energy Policy of the Asian Development Bank

---

Changing context of the policy review

16. The following recent important developments warrant certain reorientation in ADB operations to the energy sector.

1. (i) Access to modern forms of energy is a key determinant of the quality of life and the level of social development. ADB has adopted poverty reduction as its overarching goal. Other strategic objectives, such as economic growth, environmental protection, gender equity, and human resource development have to be pursued in ways that contribute effectively to poverty reduction. The framework for poverty reduction comprises three pillars, namely, pro-poor, sustainable economic growth; social development; and good governance. Within this framework, ADB is mainly concerned with medium-term interventions (such as those that help address structural issues affecting the delivery of basic services and other targeted poverty interventions) and long-term impacts (such as those that stimulate pro-poor growth and encourage expansion of the private sector). The energy sector operations will be designed to support ADB’s approaches to poverty reduction⁷. Energy does play an important role in meeting basic needs. Even though modern energy is not a substitute for other development interventions, it contributes to them, and the lack of access to modern energy has been shown to correlate closely with many poverty indicators. Access to modern forms of energy makes possible greater gains in productivity, education, agriculture, and private investments. Such access is necessary (though not sufficient) for income generation among the poor people in the DMCs.

2. ADB has formulated a comprehensive private sector development strategy⁸ aimed at strengthening the role of the private sector as the motor of growth in Asia. The strategy consists of a systematic and coherent framework with the following key elements: (a) creating an enabling environment through public sector operations to spur entrepreneurial development and stimulate domestic and foreign private investment; (b) availing of all possible opportunities to “crowd in” private sector participation; and (c) continued leveraging of large amounts of funds from commercial sources through participation in private sector projects that have clear development impacts, mainly in infrastructure and financial sectors. Within this framework, ADB’s operations will focus on four areas: (a) assistance to foster effective governance in the public sector and help DMCs promote good corporate governance; (b) support for policy reforms and capacity building to strengthen financial systems; (c) development of workable publicprivate partnerships to involve the private sector in infrastructure; and (d) assistance in preparation, financing, and risk management of regional projects that involve private sector participation.

3. With the significant use of fossil fuels, particularly for power generation, there is a great risk of acid rain, which could inflict long-term damage in the immediate vicinity and the region and be very difficult to reverse. Improved modeling techniques have made it possible to better understand the impacts of emitting oxides of sulfur and nitrogen; DMCs need to use them for early warning. Further, there is increasing evidence of global warming because of human activities that alter the chemical composition of the atmosphere through the buildup of greenhouse gases (GHGs)⁹. The levels of GHGs rise mostly during the production, transport, and use of fossil fuels. As the largest share of historical and current global emissions of GHGs has originated from the industrialized countries, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) specifies targets for GHG emission reduction in developed countries from their 1990 levels by an average of 5.2 percent in 2008–2012. Once the Kyoto Protocol is ratified, it will create a market for GHG credits that can benefit DMCs where the marginal costs of GHG abatement will be lower. Further, with technological improvements, clean energy options that do not pollute are becoming commercially available, some of which are infinitely renewable, such as solar and wind energy. The energy sector operations need to recognize these developments and support the move toward cleaner energy at the global level.

4. During its close association with the development of the energy sector in its DMCs, ADB has gained significant comparative advantage in pursuing regional cooperation, which has the potential of becoming an important development strategy in Asia. Regional cooperation involves encouraging complementary activities across borders to accelerate economic growth. By enlarging markets beyond national boundaries, energy sector development in the region can be accelerated and the region can become more attractive for private investors. Viable opportunities in this regard exist in the Greater Mekong, Central Asia, South Asia, Southeast Asia, and Pacific regions.

5. The large devaluation of domestic currencies experienced during the Asian crisis bared the high exchange risk associated with power purchase agreements (PPAs) for power plants funded primarily with foreign resources. The slowdown of economy also caused stagnation or reduction in energy demand. The crisis led to steep rises in prices of fuel and electricity tariffs to protect the financial health of state-owned energy sector companies. In DMCs where this was not possible due to social considerations and consumer resistance—and where PPAs insulated the power generators from demand and exchange risks— the burden of devaluation and excess overcapacities had to be borne by large budgetary support. Structural weaknesses that prevented further efficiency improvements in the sector were accentuated during the financial crisis, but the slowdown in demand growth and accordingly lower investment requirements have provided a window of opportunity to restructure the sector by unbundling various activities, establishing independent regulation, and enlarging private sector participation in a more competitive framework. The evolution of competitive electricity markets in developed countries has provided examples that can be suitably emulated in DMCs to increase economic efficiency and help realign risks associated with long-term investments in energy projects. The BOT model, which has been extensively used for making power projects in DMCs bankable, has demonstrated advantages when used judiciously. However, when competition among large number of buyers and sellers is possible, merchant power plants are a preferred modality for private sector participation in the power subsector.

Back Energy sector policies of other multilateral development banks	Next Poverty reduction