Energy Service Provision

Introduction

The Internet discussion on energy provision in developing countries brought together planners, organizers, consultants and academics from government, development agencies, private companies, NGOs and universities in twenty countries.

Three topics, distilled from a priority list of issues contributed by each discussant, became the focus of the exchange of thoughts and experience over the 12-week period:

1. Technological Leapfrogging: What are the opportunities and obstacles with regard to technological leapfrogging in developing countries?
2. Energy Efficiency: What are the possibilities and pitfalls facing increased energy efficiency in developing countries?
3. Renewables: Can we assess and develop the optimal means to create public private partnerships that promote renewable energy dissemination and commercialisation?

The objective of the conference was not only to stimulate debate, but also to offer some guidelines and constructive examples of how developing countries can utilise improved energy provision options through collaboration between the public and private sectors.

Topic 1: Leapfrogging

What are Public Private Partnerships (PPPs)? PPPs are agreements between the public and private sectors to assume co-responsibility, and often co-ownership, for infrastructure and urban services provision. This is not the same as a privatisation agreement, wherein a corporation takes full responsibility for specific services. Rather, a partnership combines the advantages of the corporate sector's dynamism, access to finances, knowledge of emerging technologies, managerial efficiency and entrepreneurial spirit - with the job generation and service delivery concerns of the public sector and local residents.

Definition of Technological Leapfrogging: To achieve significant changes on increased environmental, social and economic sustainability of energy systems from a national and global point of view, the key entry point for change is the nature of new investments in energy, especially in developing countries. This is relevant because due to rapid economic growth, increases in demand and the size of population needing energy services, most new investments in energy infrastructure in the future will take place in non-OECD countries. While not denying the importance of efficiency and performance of existing energy infrastructure, the issue of technology leapfrogging is directly relevant to the direction of the future energy path. This session will look at some of these issues as they relate to PPPs.

Being in the initial stage of industrial development, many countries have inadequate or outdated existing energy capital stock in place.

The technology leapfrogging idea argues that most developing countries not only have the opportunity to employ the most technologically advanced energy systems available on the world market to meet their energy demands, but also they can consider deploying new, emerging technologies and systems that are not yet widely in use. The adoption of such advanced technologies is often referred to as "technological leapfrogging" (as in the children's game), whereby developing countries leap over the industrialised countries. Rather than assume that countries graduate incrementally along a fixed energy technology path, from the least complicated and least efficient to the more complicated and more efficient, it can be argued that a country, municipality or firm can choose to jump over several steps in the progression to the front of the technology curve and pick the most modern and most efficient. Many new energy technologies will not be commissioned on a commercial scale in OECD countries where energy demand is rather flat and basic needs have been met. Unique conditions exist in developing countries that can be conducive to technology leapfrogging to address sustainable energy concerns.

Generally required prerequisites for technology leapfrogging:

1. The establishment of an appropriate legal, regulatory, and policy framework
2. The rational pricing of energy
3. The creation of a strong domestic capital market.

General Questions for this session:

Why doesn't leapfrogging always happen?
When does leapfrogging occur?
Are you aware of successful examples from your own work?

Complexities and bottlenecks:

Conventional issues dealing with higher first costs, the perception and actual risk of something new, intellectual property rights, lack of access to financing for "undemonstrated" technologies and lack of absorptive capacity in the country may all be barriers to technology leapfrogging. These are typically the issues that are addressed through new modalities being developed under the public private partnership approach.

Rationale:

1. Many of the industrial technologies now being commercialised in the industrial countries are capital-intensive and labour-saving - characteristics that are not well suited to industrial activity in most developing countries, where labour is cheap and capital scarce.
2. Comparative advantages in natural resources are often quite different for many developing countries, presenting new opportunities that do not exist in OECD countries.
3. Human needs are quite different in developing and industrialised countries because of climatological differences, and because the satisfaction of basic needs and infrastructure-building must be given prominent focus in the economic planning of developing countries.
4. Technology leapfrogging will avoid costly restructuring later in order to improve the sustainability of the energy sector later.

Arguments sometimes used against technological leapfrogging:

1. Developing countries cannot afford the risk-taking of innovation when there are so many pressing development needs to attend to.
2. Some developing countries have had bad experiences with efforts to transfer advanced energy technology to industrialised countries
3. The development assistance community has not been very supportive of innovations in the energy sector.

Examples:

1. The world's first plants for producing iron by direct reduction (without smelting) were built in Mexico. This technology, used in conjunction with electric arc furnaces (EAFs) for steel making, is especially well-suited to many developing countries because favourable economics can be realised at scales of 100,000 tonnes of annual capacity or less. This is compared to capacities of 2.5 to 3.5 million tonnes per year needed for conventional blast furnaces plus oxygen converters.
2. An important example of a development assistance organisation supporting a technological leapfrogging energy project and related capacity building is the Brazilian project that will demonstrate electricity generation from biomass using thermochemical gasification of woody biomass (wood chips from an existing eucalyptus plantation) in combination with a gas turbine/steam turbine combined cycle power plant. This project is the world's largest in its class (30MWe) and is supported by the Global Environment Facility.

Discussion Questions:

1. What kind of combined government and private sector actions are required promoting "technological leapfrogging"?
2. Which of these barriers and others that you might identify could be dealt with through new means of public private partnerships?
3. Do you have any experience with specific barrier removal?
4. What are the enabling conditions that business enterprises need to bring the most modern, clean and efficient energy technologies to market and installation, especially in developing countries?
5. What is the role of local NGO's and international development organisations in this process?
6. Which RE/EE technologies do participants consider to be suitable for "technological leapfrogging"?

Topic 2: Energy Efficiency

Introduction:

Energy efficiency and the possibility to get more out of the resources available in terms of energy emerged as a major issue in the 1970's due to the oil price shocks. With sudden price rises for petroleum there was a fiscal incentive for consumers and countries to find more efficient ways to use energy. Later driven by emissions concerns, public policy and the removal of price subsidies, many industrialised countries continued to pay attention to energy efficiency. As technology improved on the industrial production front, energy efficiency gains were often a positive by-product of process improvements and modernisation gains. It has been demonstrated that with the market pricing of energy it is possible to increase efficiency while increasing productivity as well.

In developing countries energy efficiency has often been low related to technology, price conditions and the overall level of development in a given economy. A huge potential for energy efficiency measures exists, however, and this potential is arguably larger than that of industrialised countries.

There are a number of reasons why there is huge potential for energy efficiency measures in developing countries:

1. Energy-intensive activities are growing rapidly in developing countries, so that a larger fraction of the opportunities for making improvements in energy efficiency are associated with new installations compared to the already industrialised countries. (e.g. industrialised country steel production is rather stagnant while the rapidly growing economies of Asia are increasing their overall production of steel (and many other energy intensive products). Therefore the opportunity to install high efficiency equipment as part of the expansion in productive capacity exists. A similar argument can be made concerning the impact of growth in fixed infrastructure, buildings and the overall capital stock. This means that the choices concerning energy efficiency in these investments today will have a longer term effect on overall energy consumption greater than that of the currently (relative) low capital stock today.
2. Energy prices are typically subsidised and low in many developing countries. With the ongoing process of price reform, sector restructuring and (in some cases) utility deregulation, markets that had not encouraged the use of efficient technologies due to artificially low prices, may now face new price incentives. While it is clear that artificially low prices will retard the incentives for energy efficiency, higher energy prices will not automatically lead to high efficiency. Energy price subsidies are also widespread in many industrialised countries.
3. Many commercial technologies for improving energy efficiency have not been readily available in developing countries. With globalization and international investments in energy increasing there are new opportunities (in some countries) for acquiring energy efficient technology as part of trade and investment patterns.
4. While capital markets generally tend to discriminate against investments in energy efficiency, this is even worse in developing countries, where domestic capital markets are often poorly developed. While the investment costs to expand production or consumption of energy are often seen as "bankable" and producing a revenue stream, the investment costs to conserve something not yet consumed (in this case energy) is harder to get capital financing for in both industrialised and less industrialised countries.

There are three issues related to energy efficiency, which we consider important as background reference for the discussion.

1. Energy efficiency plays an important role in sustainable human development. The challenge for sustainable future energy provision is how to achieve sustained economic growth without having energy consumption increasing at the same rate. Directing investments to the adoption of more energy-efficient measures instead of merely increasing the total energy supply will be crucial to meet this challenge. China is an interesting example in this regard. By committing around 7-8% of total energy investment to efficiency improvements in the 1980's, GDP has grown at 9.5%/year since 1980 while energy consumption has risen only half as fast, at an average rate of 4.8%/year. This has served to positively prove that you can "de-couple" economic growth and energy consumption (a relation often seen to be positive and linear) through attention to energy efficiency improvements.
2. Subsidies to conventional energy constitute a significant impediment to sustainable energy futures. They make it more difficult for new, energy efficient technologies to enter the market. Subsidies on carbon based energy (coal, oil, etc.) also serve to create barriers for renewable energy, but we will take that up next session). Consumer subsidies remove the incentive for consumers to adopt more energy-efficient technologies. Subsidies on the consumer side entail both electricity and fossil fuel price reduction. An estimate is that the financial burden of under-pricing electricity in developing countries is on the order of US$ 90 billion per year, which is more than the yearly Official Development Assistance in the world. These subsidies are rationalised by the argument that they have large social benefits, by increasing the access to energy, thereby meeting the basic needs of the poor people. However, energy price subsidies are often an ineffective and inefficient way of helping those living in poverty, who typically receive only small benefits from the total subsidy given due to their overall low level of consumption. People living in poverty in rural and urban areas have limited access to electricity, and they cannot benefit from household tariff subsidies meant to guarantee basic needs. Similarly, in the case of kerosene use in Tanzania, subsidies were found to benefit only wealthier (primarily middle-income) households who were able to purchase and use the fuel, while the lowest-income households benefited little, if at all.
3. Many energy-efficient technologies are cost-effective from the perspective of the life-cycle costs of technologies (i.e., all costs over the lifetime of technologies evaluated at a discount rate equal to the market interest rate. Or, in simpler terms, the cost of the machine plus the cost of the fuel or electricity to run it.) but are more capital-intensive than conventional energy technologies. However, since consumers evaluate alternatives primarily on the basis of first costs rather than life cycle costs, they tend to choose the less efficient devices because it involves a lower initial investment. This is particularly true for poorer consumers. The costs of batteries and a flashlight over a two year period may be more that the cost of the same illumination from a kerosene lamp over the same period. The difference is a flashlight costs less that a kerosene lamp. Similar arguments can be made concerning motors, stoves, houses, vehicles, industrial lighting systems etc.
   
   Innovative mechanisms, such as micro-credit to end-users and Energy Service Companies (ESCOs*), often initiated by the private sector if the right incentives are in place, may help to overcome such financial barriers at the side of end-users. ESCOs can be set up by utilities, banks or industrial credit organisation or by entrepreneurs in a deregulated environment. Many argue that ESCO's present excellent new opportunities for public private partnerships to promote energy efficiency. ESCO's are businesses that invest in retrofitting and other efficiency measures for commercial and residential building. The ESCO enters into contact with the owner of a building to undertake steps to reduce energy use. Customers typically continue to pay their old utility rates until the investment costs of the improvements are paid for. Thereafter, the ESCO passes the savings on to customers in the form of lower energy bills.

Discussion Questions:

1. What has been the role of government and the regulatory environment in promoting energy efficiency in your country?
2. What is the potential role of Public Private Partnerships to promote energy efficiency? Do you have any direct experience or knowledge of examples?
3. What are enabling conditions to stimulate energy-efficiency? Are prices enough?
4. Recently in many countries electricity and power utilities have been privatised and/or deregulated.What are the effects of energy subsidy removals/reductions in your country?
5. Does privatisation lead to improved efficiency?
6. What new opportunities for businesses ESCO's etc. exist in your countries? What is taking place?
7. Only the private sector with its "bottom line" orientation can truly promote energy efficiency. What do you think?

Topic 3: Renewables

Introduction

Renewables is the third topic for the Internet Energy Conference. For this topic, I would like to try to increase the amount of discussion as compared to the previous two topics. Feedback has indicated that one potential reason for the lack of discussion has been the wide number of discussion points within each topic. So as an effort to focus the conversation, I will attempt a different type of topic introduction for renewables. I encourage your active response to this "strawman" or target that we have constructed.

The purpose of the discussion on renewables is to assess and develop the optimal means to create public private partnerships that promote renewable energy dissemination and commercialisation. Using the input of the group, we hope to develop a set of recommendations, which will be used to guide future discussions on our topics.

So as a first step down this path, and as a means to begin our discussion on renewables, I will propose a model public private partnership in the renewables sector. My hope is that people will use this suggested model as a starting point for our discussions.

Model of renewable energy public-private partnership:

A successful public private partnership should fulfill three conditions at a minimum:

1. Benefits for private sector: generate a profitable revenue stream or expand market access. There must be a measurable financial value added to the producer.
2. Benefits for the consumer: delivery of a service(s) that people want and would not have access to at the same price, in a business as usual situation. There must be a perceived added value for the consumer.
3. Benefits for the government: fulfillment of a political need, social obligation, development imperative. There must be a social value added for the government.

In this spirit, I propose the following project: It would be the perfect, model project. It would meet all these criteria. It would open markets for renewables, meet the needs of people and prove to governments that the alternatives are viable.

Hypothetical Project: SolarCo PV Project in the Waloo Province

The company: SolarCo is a large manufacturer of PV cells based in the United States. The PV cells they manufacture are for household use and provide enough electricity for a light bulb, television, and a fan. SolarCo also sells other household electrical appliances. SolarCo had been interested in expanding operations into developing countries, but the heavily regulated energy sector has proven too risky and costly to enter. Also, the pay back period of a renewable energy project had proven too lengthy to justify the initial investments and expenditures. There is a lack of access to accurate market, legal and business information.

The Province: Waloo is a remote province in a developing country with excellent solar potential and no access to the electricity grid. The Government is unwilling to connect Waloo to the grid because of this high cost. Every year political promises are made that the villages will be electrified but to date this has not happened. The present government is truly committed to the delivery of rural energy services to meet local economic, and development needs.

The Project: After extensive negotiations, the government of Waloo and SolarCo have agreed to the following project.

• SolarCo will provide the PV cells on a lease-basis with consumers making monthly payments for the use of the cells. At no time will the residents of Waloo own the PV cells.
• SolarCo will be responsible for the maintenance of the cells, battery connections and electricity connection. It will be the responsibility of the customer to notify SolarCo of any problems with the cells.
• SolarCo will be responsible for generating all the capital for the project including the money involved in creating the installation and distribution system.
• SolarCo would be granted exclusive rights to the Waloo power market for a period of 5 years. No other company would be able to compete with them in the PV market in that period.
• The Government will be responsible for eliminating any regulatory hurdles that SolarCo may encounter that block the implementation and financial success of the project. They will create a tax-free environment for SolarCo as well as eliminate any import tariffs for the component parts that are sources internationally.

Benefits:

SolarCo: They are granted a monopoly market for 5 years as well as the ability to import tax-free. In this protected environment, SolarCo is expecting a pay back period of about 16 months, still a long time for energy projects. Also, they have the potential to sell their other electricity consuming appliances. There are potential secondary market benefits and their television, and video marketing division is very excited.

Government: They can now enable services to reach a previously unserviced population at a cheaper price than extending the current grid. Also, the investment burden is shifted to the private sector. The cost of this deal has been the personnel time needed to negotiate with the company and the domestic, legislative and administrative hurdles. The opposition has made an argument about lost or forgone tax revenues but to date this has not been substantiated.

Public: They now have electricity services and, as they are leasing the PV cells, they aren't bearing the sunk costs of buying the cells. Their monthly costs for light, radio etc are the same as when they relied on dry cell batteries and kerosene but the new service is more stable and they like the "modern" nature of it.

Discussion Questions:

1. How realistic is this scenario?
2. Is this scenario a description of a good public private partnership or a bad one?
3. Is it close to any existing services or real approaches that you have been involved with or know about?
4. Are components of the project unrealistic? What needs to change?
5. What regulatory or economic conditions need to occur so that public private partnerships in the energy efficiency sector can take place?

Home  |  About PPPUE  | Innovative Partnership Grant  |  Global Learning Network