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INTRODUCTION: Trends in Energy Policy, Deregulation, Energy Markets and Technology

During the last quarter of the twentieth century, two developments have served as catalysts for change in the national energy policies of countries throughout the globe:

· steadily increasing demand for electric energy created requirements for new capital investments which exceeded the ability of governments to provide; and

· concern about local and global environmental degradation resulting from the burning of fossil fuels and their effect on global warming, acid rain and other air pollution problems created pressures to spend funds to address these issues.

These two catalysts have affected the institutions and energy framework of virtually every country. In the majority of countries, the predominant electric institution is the electric utility monopoly - characterized by some degree of government ownership and control. In many of these countries, self-generation supplements the electric supply. To the extent that existing institutions have been unable to create new sources of funding for new electric-sector capacity and new sources of funding to cope with environmental imperatives, governments are turning to the private sector.

Power from renewable resources is especially well suited to the rapidly changing electric industry

Power from renewable resources is especially well suited to the rapidly changing electric industry. Renewables tend to be modular. Solar and wind technologies in particular have a short lead-time from installation to operation, they provide a flexible option for adding generating capacity in distributed (decentralized) and community-scale applications. Biomass, geothermal and hydro (that does not require building a dam) can also be constructed fairly rapidly. The primary long-term benefit of grid-connected renewables such as biomass, hydro and geothermal is that once a renewable project has been constructed, and fully depredated, it becomes a permanent, environmentally clean, and low cost component of a country’s energy system. Renewable fuels, once developed, are essentially free, and their use reduces dependence upon imported fuels. In effect, the construction of a renewable energy project provides future generations a low cost, energy facility that produces power with minimal environmental degradation. In the wholesale-supply market, renewable resources provide not only basic electricity but the added benefits of fuel diversity, environmental benefits, and long-term price stability.

Renewable technologies provide a means for using sustainable domestic resources, promoting increased electrification, and minimizing the impact on the global environment.

Renewable generating facilities are commonly built and operated by the private sector contributing its expertise and additional sources of investment capital. However, in order for a government to generate private-sector money, the economic and political environments and the legal system of the country must allow private-sector investors to invest in, and make a profit from the building of new generation, transmission and distribution facilities. This course of action implies some degree of private-sector ownership and control and the relinquishment of existing government ownership of the utility monopolies.

Fundamental and sweeping legal, regulatory and institutional reforms have been required in order to enable a partial or total shift from public-sector to private-sector ownership and control of the electricity sector. Among the more significant reforms have been the creation of legal regimes enabling the sale of government ownership in electricity facilities and the restructuring of the electricity business.

A number of countries have instituted a new electricity structure designed to rely on the open market: known as an “unbundled, competitive electricity market.”

In an unbundled electricity market, the electric power industry is divided into three distinct functions: generation, transmission and distribution. This division allows “arms-length” (“competitive”) sales of electricity or services among companies in the three sectors. The continuation of government ownership in any of these three sectors varies from one legal regime to another as does the authorization for cross-sector ownership. Independent power producers (“IPPs”) are allowed to enter the market freely in order to provide competition for the previously government-owned companies. Although details vary from one country to another, this model system typically relies on competitive forces to establish electricity market prices and on private-sector owners to conduct long-term planning. Since no one in this market structure has any obligation to supply, in the usual utility sense of being required to plan and acquire adequate generating capacity to meet future demand, new capacity will be built only when somebody thinks that new capacity will provide a favorable return on investment relative to projected prices.

Among the 193 nation states and 57 overseas territories and dependencies, there are countless combinations and permutations of electricity systems.

Such sweeping reforms have not been universal. Indeed, this is not a monolithic world, and among the 193 nation states and 57 overseas territories and dependencies there are countless combinations and permutations of electricity systems. Although the electric utility monopoly is still the predominate electric power industry model, this situation is changing rapidly. The level of government participation in different countries falls along a shifting spectrum defined (i) on the one extreme by total government ownership and control of the utility; (ii) in the middle by government regulation of privately-owned companies; and (iii) at the other extreme, by less regulated privately-owned generation and regulated transmission facilities which may be off-grid or allowed to supplement the grid supply. In many countries the electrical energy sector is characterized by a mix of government-owned, government-regulated, and privately owned systems.

The wide variety of electricity systems operating and organizational structures existing worldwide makes it challenging to formulate issues and strategic recommendations of universal applicability. What is an obstacle to attracting private investment in a system of vertically integrated state-owned utilities is not necessarily relevant in a privatized system organized along one of the variations of the totally unbundled, competitive model.

In the competitive market for private-sector capital, keep in balance the country’s need to develop its own indigenous resources and to assure its energy sector is developed in an environmentally friendly manner.

This Manual seeks to identify those issues that are the most relevant to countries that are seeking to attract private capital to their electricity sector - and in particular to the renewable energy sub-sector. In some cases, the relevancy of an issue will depend upon the structure of a country’s national electric system. In other cases, the issues and recommendations may have more universal application. Where the issues are specifically related to system structure, an attempt has been made to identify the structure that is being discussed and to indicate the applicability of the discussion to countries that incorporate that particular structure.

The international financial community has significant capital available for investment in energy projects. But an increasing number of countries are vying for this capital - and capital is not infinite. Countries seeking investment dollars are entering into a competitive market in which countries will compete for international debt and equity investments. To be competitive in this milieu, a country will be required to demonstrate a legal, political and commercial host environment that reduces risk and provides investors with good reason to believe they will receive a fair and reasonable rate of return on their debt or equity investment.

The policy makers whose task it is to create an environment in which the private sector shoulders the task of moving a country’s electric power system into the twenty-first century are challenged to identify and bridge the local barriers which impede the development of electricity from renewable resources. This Manual is designed to assist these policy makers.

· Chapter I (Renewable Energy Overview) is a primer on the essentials of renewable energy resources - their costs and benefits.

· Chapter II (Identifying Goals and Objectives in the Electricity Sector) presents a top-down analytic approach. Electric sector objectives flow from national goals and by understanding both, the policy maker is situated to determine how to employ renewable energy resources to achieve goals and objectives.

· Chapter III (Encouraging Private-Sector Investment) discusses the hurdles to private-sector investment in renewable resources in urban and rural environments and explores mechanisms available that the energy policy strategist may use to overcome those hurdles.

· Chapter IV (Government’s Role in the Electricity Sector) recognizes that in virtually every jurisdiction, legislation and regulation are the two primary tools for achieving public interest goals. This chapter explores how legislation may remove legal, economic and social barriers to the development of renewable technologies as well as provide a framework for the ownership and financing of renewable resource infrastructure projects. The chapter further offers insight into how regulatory guidelines contribute to a stable and predictable market for both international and domestic investment in renewable energy.

· Chapter V (Universal Electrification Policy) deals with how the policy maker may use renewable energy to provide a sustainable, long-term level of electrification to isolated areas.

· Chapter VI (Program Implementation) analyzes the institutional issues that are at the heart of sustainability, and provides guidelines for the policy maker designing a renewable energy program country-wide.

The policy makers whose task it is to create an environment in which the private sector shoulders the task of moving a country’s electric power system into the twenty-first century are challenged to identify and bridge local barriers.

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