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p. 30 of 30 BACK | NEXT Introduction Regional Energy Context Energy Policy Issues Conclusions and Recommendations

Bank Policy Initiatives for the Energy Sector

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Conclusions and Recommendations

84. The Paper has attempted to identify the major energy sector issues likely to be faced by the DMCs in the 1990s and the policy initiatives that may be appropriate for the Bank to adopt in dealing with these issues. The recommended policy initiatives focus on enhancing (i) private sector participation to fund the large scale energy investments of the 1990s; (ii) energy efficiency both on supply and demand sides; and (iii) closer integration of environmental considerations in energy development. The overall thrust of the suggested policy initiatives is to encourage the DMCs to develop appropriate market structures and to encourage greater competition in the energy sector. Such an approach encompasses a broader field than concerns with cost recovery and public sector reforms. It calls for special attention to the essential issues of freeing entry, removing restrictions on ownership and management, enabling technological choice and permitting market forces to determine costs and prices. It is recognized, however, that the extent and speed of success in achieving this ideal framework will vary from country to country and from subsector to subsector. It may be relatively less difficult to achieve this in respect of traded energy forms such as oil and coal, and in countries with a greater degree of market orientation such as the Philippines, Malaysia, and Thailand than in respect of nontraded forms of energy like electricity and in countries with a tradition of administered prices. The Paper takes the approach that the suggested framework should be the one which the Bank should encourage DMCs to seek, and that all other sectoral concerns discussed should be regarded as steps leading to its realization.

85. Thus, in respect of the power subsector, the Paper advocates sector restructuring in the medium-term involving unbundling of the mix of generation, transmission and distribution to enable greater private sector participation, introduce elements of competition and to minimize monopolistic segments of the subsector. In the short term, it advocates corporatization and commercialization of government-owned utilities as a prelude to their privatization and the entry of private sector through BOO/BOOT options. It also advocates in the short-term tariff setting through independent and transparent regulation and focusing sharply on demand side management. The major recommendations made for Board approval are the following:

1. A major portion of the Bank's lending and technical assistance should be directed to those DMCs which are willing to restructure their power sector to increase efficiency and to mobilize the incremental investment funds from the private sector, both domestic and foreign.

2. The Bank should finance new capacity additions only if the utility pays adequate attention to both supply side efficiency options such as economically sound rehabilitation and retrofitting of existing plants, system loss reduction and optimization of system operations, as well as demand-side management options.

3. The Bank should encourage power utilities to prepare and implement master plans for DSM measures.

4. The Bank should encourage power utilities to incorporate into their planning models IRP with its key elements of DSM and environmental cost internalization, and provide assistance for related training.

5. The Bank should support BOO/BOT projects if (a) they are part of the least-cost power development plan; (b) they provide additionality in terms of financial resources, implementation capability and experienced O&M manpower; and (c) their sponsors have been selected through competitive bidding. Unsolicited proposals may be considered under special circumstances such as severe time constraints, exploitation of unique natural or institutional features, or in the initial stage of private participation in the power subsector of a DMC.

6. The Bank should support joint-venture projects between governments/utilities and private entrepreneurs by providing loans to the former, which could be used as equity in the project.

7. The Bank should actively pursue environmental protection by giving high priority to power projects with minimum environmental impacts and insisting on adequate mitigation measures and monitoring for projects with significant environmental impacts. The use of clean coal technologies (when economically viable) and energy conversion processes yielding high overall efficiency (such as cogeneration) will be encouraged. Full compliance will be required in project planning, design and implementation with the Bank’s policies on beneficiary participation and involuntary resettlement.

8. The Bank should support regional trade in electricity between neighboring countries from projects where this meets environmental standards and is cost-effective for all parties.

9. The Bank should encourage DMCs to phase out gradually subsidies to the power subsector, minimize cross-subsidies, adjust tariffs at regular intervals to fully cover the costs of supply and meet an adequate proportion of system expansion costs; such tariff setting and adjustment should be carried out by independent regulatory bodies on the basis of transparent principles.

86. In respect of the hydrocarbon subsector, the Paper advocates a more rapid movement towards the normative market framework and market-based pricing and recommends that in the medium-term governments should divest themselves of all commercial functions and retain only those coming under the classification of merit or public good. Meanwhile, this will require the establishment of a supportive regulatory regime which is transparent and equitable to both producers and consumers so as to accelerate private sector participation. The Paper recognizes that because of the environmental friendliness of natural gas and the high efficiency with which it can be used, the development and utilization of natural gas should receive a high priority for investment and Bank assistance. It advocates the use of sector lending and program lending modalities to focus on policy reforms involving divestment, substantially greater role for private investment, and market-based pricing. The main recommendations made for Board approval are the following:

1. The Bank should encourage private sector participation through the development of a supportive policy and regulatory environment within DMCs and through the Bank's joint participation in projects where the additional comfort of a multilateral institution catalyzes private sector participation.

2. As oil is an internationally traded commodity with established private sector interest for its development, the Bank should not, in general, fund oil development projects but would provide policy assistance to create a policy environment which attracts private investors, provides greater competition and independent and transparent regulation. If necessary, the Bank should consider assistance to develop marginal and already proven oil fields, if such a development is economically sound.

3. The Bank should assist in promoting good practices in hydrocarbon field operations to enhance their efficiency and environmental management.

4. The Bank should play a major role in funding natural gas field development, processing, transportation and distribution networks. Cofinancing and private sector participation should be encouraged to the maximum extent possible in all Bank-financed natural gas projects. The Bank should not finance exploration activity as it has a high risk profile and should be equity financed by entrepreneurs.

5. The DMCs need a significant expansion in refining capacity to meet growth in petroleum product consumption. The Bank should consider providing catalytic financing to the private sector for greenfield or expansion projects. The Bank should also finance projects for desulphurization and elimination of lead content to help comply with stricter environmental standards.

6. The Bank should encourage DSM in hydrocarbon use particularly in industrial and domestic applications.

7. The Bank should support regional trade in natural gas through financing the necessary infrastructure to enable DMCs to have greater access to this resource.

8. The Bank should support regional trade in electricity between neighboring countries from projects where this meets environmental standards and is cost-effective for all parties.

9. Coal is the primary energy source in the Bank's largest DMCs and its use is a major cause of environmental degradation. The Bank should actively promote environmentally sound mining practices and clean coal technologies. As coal is an increasingly internationally traded commodity, the Bank should not directly finance coal mine developments except where it is for captive use by a thermal power plant, and economically superior to other coal supply options. The Bank should offer policy assistance where necessary to enable restructuring and privatization of the subsector. The Bank should become more active in promoting environmental and safety programs in coal production and in projects to minimize the environmental costs of coal burning through approaches such as coal benefication and centralized coal gasification systems.

87. In respect of the rural energy systems, the main recommendations made for Board approval are the following:

1. The Bank should assist in the provision of commercial energy sources to rural areas whenever it is economically and financially viable and private sector investment for the purpose is not forthcoming. Where only the economic viability is confirmed after factoring in all costs in an unbiased manner, such provision should be assisted to the extent that the utility responsible can accommodate it without adversely affecting its own financial viability.

2. The Bank should ensure that subsidies, if any, on commercial energy are provided to targetted groups which cannot afford to pay its economic price on the clear understanding that such subsidies will be gradually phased out in a time bound manner. Cross-subsidization of rural electricity consumers by urban consumers needs to be discouraged and, instead, the utility needs to be provided with direct cash injections from tax revenues to meet the costs of financially non-viable electricity supply extensions. Such cash injection is a must in the case of economically non-viable supply extensions pursued purely for social reasons.

3. To stem deforestation and promote equity and health in rural areas, the Bank should help DMCs to develop efficient fuelwood stoves and give high priority to fuelwood plantations in formulating rural energy development plans; such fuelwood plantations should, whenever possible, include native tree species and should be established in already degraded lands preferably in locations accessible by the poor.

4. The Bank should provide technical assistance to DMCs to assess, in an unbiasedd manner, the economic viability of solar, minihydropower and wind energy options, or hybrids in conjunction with diesel plants, to meet demand for electrical and mechanical energy, particularly in isolated locations. Decentralized energy systems that may be recommended by such assistance are, however, best owned and operated by the private sector.

5. The Bank should allocate adequate resources for regional studies and seminars that promote renewable energy use and address renewable energy supply issues.

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