Energy deregulation: Transforming Asia’s energy sector

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Energy sectors across the Asian continent are turning to deregulation to improve operational efficiency and sustainability.

Energy demand is predicted to almost double in the Asia and Pacific region by 2030. It is therefore imperative that innovative ways to generate power in a socially, economically, and environmentally sustainable manner are uncovered.

Since Asia is the world’s largest continent with the highest population rate, each country will need to find what works best for its power sector and economy as a whole.

Countries across the region such as Japan, South Korea, Taiwan, Malaysia, Thailand, Philippines and Singapore  have opted for market deregulation in a bid to create sustainability.

Malaysia has introduced deregulation to its gas and power sector and has paved the way for the introduction of Independent Power Producers (IPPs) to the supply function of the sector, helping the government to reduce the costs and administration involved in the exploration of new natural gas fields.

Thailand, as a part of International Monetary Fund and World Bank recommendations, unbundled the Electricity Generating Authority (EGAT) assets and introduced laws for market deregulation. Since 2010, it offers new financial products that target huge market capitalisation.

The Philippines’s Energy Regulatory Commission facilitated the privatisation of the National Power Corporation which worked very well in the urban centres, with fully liberated markets benefitting urban consumers. However, providing services to rural markets competitively remains a challenge.

The national electricity market of Singapore, under the supervision of the Electricity Market Authority (EMA), facilitates the competitive sale of electricity to wholesale and retail markets. It introduced large consumers to the retail electricity industry with contestability reaching 45% by 2010 with a view of to eventually achieving 100% by 2020.

Deregulation creating much needed competition in Asia

Anbumozhi Venkatachalam, Senior Energy Economist of Economic Research Institute for ASEAN and East Asia (ERIA), told Engerati that deregulation will create the competitiveness that power sectors need.

He added that while it is difficult to pinpoint where any single country in Asia has achieved their drivers of deregulation in comparison with the early adopters of deregulation in Europe and US/Australia, the drivers are mostly the same. Drivers include the need for power producers to use their resources more efficiently, thereby enhancing productive efficiency; the creation of tariffs that reflect the true cost of electricity for consumers and lastly a competitive market that will open doors to foreign direct investments in new energy infrastructure development.

Two countries that command a deeper analysis are China and Japan. Both are targeting high electricity costs and pollution and they believe that deregulation will deliver the results they are looking for.

While the challenges to achieving an open market are deeply entrenched in each country, whether it is monopolies, state policies or outdated legislation, Japan and China seem to have made some headway.

What's driving Japan’s deregulation?

Japan is aiming for a complete deregulation of its retail market by 2017 with reforms in electricity and gas markets. The Fukushima event was the main driver of the energy policy being revisited.

Japan initiated its electricity market deregulation process last year April and it is steadily becoming one of the world’s largest deregulated electricity markets. If successful, the change could result in a vastly modernised energy sector resulting in lower rates and a more prosperous economy overall.  The deregulation could see Japan advance innovation and even become a model for the Asian region.

Ever since the US deregulated its electricity market in the 1990s, Japan has attempted to do the same with the goal of reducing prices, improving efficiency and boosting innovation and business opportunities locally and overseas. But, politics always got in the way of their attempts. Monopoly power companies like Tokyo Electric Power Company (TEPCO) wielded strong political influence.

Prior to the Fukushima accident, government officials didn’t think that a full deregulation of the sector was viable. But, the after effects of the accident led to electricity prices that skyrocketed out of control leaving consumers and the sector in dire straits. This was mostly due to an increase in fossil fuel imports. This left the sector with no choice but to look for more sustainable solutions.

Deregulation of the sector made its way on to the list for consideration as it could bring much-needed competition to the market, enabling the stagnant sector to become more efficient as a result of competition.  

New entrants from a wide variety of industries have queued up, bringing with them new business models that bundle costs like mobile, internet and electricity.

The bumpy road to Japan’s deregulation

The road to deregulation hasn’t been easy for Japan. Reform of the nation’s electricity business is far from complete.

According to the Mitsubishi Research Institute, only a small percentage of consumers have switched service providers because the majority say  that switching procedures are cumbersome. They were also unable to see the benefits offered by the new firms and they didn’t believe that prices would go down significantly after all.

The new power suppliers can address some of this scepticism by simplifying the switching procedures and improving the way they communicate their pricing plans. On the other hand, there will be limits to the discounts they can offer against the services of the major power firms. A household is generally said to save up to about US$144 ( ¥1,0000 a month in electricity charges by switching the power supply contract to one of the new suppliers. That relatively modest amount may not be as attractive for consumers as, for example, discount smartphone services.

To support the development of the power retail market in Japan, the government should continue to work towards establishing a market environment that facilitates competition between the major power firms and new entrants to the business. A good way to do this is to expand an electricity wholesale market where small suppliers that do not have power generation facilities can procure electricity for retail.

Separation of the former regional monopolies’ power generation facilities and power transmission and distribution segments is planned for 2020. It will be critical to ensure fair access to the electricity transmission and distribution networks to all power retailers so that they compete on an equal footing.

China’s market deregulation

Pollution and overcapacity is China’s reason for market deregulation. Pollution is a major driving force behind China’s reform as cheap coal and overcapacity encourage wasteful consumption patterns. This stands in the way of the government’s efforts to improve energy efficiency and cut pollution.

China’s large scale investments in wind and solar energy are being under-utilised under the current system, which is too static to effectively incorporate fluctuating green energy generation rates, resulting in waste and the threat of power cuts.

The country is a big energy consumer, representing 25% of the world’s energy consumption. Electricity distribution and transmission are critical to China’s growing economy.

The electricity reforms began with a pilot project in Shenzhen in 2014, and was expanded to five more regions in 2015, with enterprises seeing savings of $854.6 million as result. Similarly, direct energy sales were expanded to seven more cities in 2015. The government is set to expand the programme to ten more provincial, and one to two regional power grids in 2016 (including Beijing, Tianjin, Chongqing, and Guangdong), and the whole country by 2017. The government will be monitoring the progress of the pilot project until 2018. 

The regulator aims to complete the revamp of transmission and distribution tariffs by the end of this year, and will start trial spot market power trading by the end of 2018 and fully operate it in 2020. It also aims to complete work related to the opening of the retail market to new players after state-run monopolies are fragmented.

By shifting to a deregulated market, the government wants to use market forces to phase out inefficient and less environmentally friendly producers out of the market.

With the market setting prices at various bidding increments, efficient producers will now be given the chance to properly utilise their assets, under-bidding less competitive producers. As a result, China’s ageing and “dirty” generators will be forced to operate at peak consumption hours, thereby reducing pollution levels.

China’s grid operators anxious

Local grid operators in China have voiced opposition on network security concerns around the time it takes to set up the information technology and network communication systems to enable trading.

In the past, the grid operator only needed to send power dispatch instructions to the generator once a day but with market liberalisation, this will have to be conducted hourly. Added to that is that fact that monitoring is required to ensure compliance.

Similar to train traffic control at a subway station, manpower and sophisticated information systems are required at power grid dispatch control centres to meet the needs of more complicated power trading and dispatch after price liberalisation.

Innovation and deregulation in Asia

As new players enter a deregulated market and companies are compelled to push for operational and financial efficiency, technological improvements in devices like smart meters, home and building energy management systems and efficient power generators are encouraged.

Innovation in the renewables sector is also possible as more renewable companies enter the market. These improved technologies can then be exported around the world, improving local skills and economy, as well as boosting the global energy sector’s transition.

In addition to making a mark on the technological landscape, countries like Japan and China have the opportunity to be a leader in the creation of innovative policies to ensure lower prices for consumers in a system that charges a higher price during peak times.

Deregulation: overcoming barriers

There are still social, political and geographical barriers that the Asian region is faced with when it comes to deregulation in the power sector. The sector, many dominated in the region by the presence of state owned enterprises (SOE), is often protected by rigid state policies on service institutions and market structures, explains Venkatachalam. The monopoly of SOEs in energy production and distribution and outdated legislation make deregulation impossible in many countries. The presence of pervasive fuel subsidies and other cross subsidies to power generation stand in the way of competitive market development.

“The price of electricity is often subsidised directly and the prices are, as a result, regulated. Some countries like Cambodia, Lao PDR, Myanmar and Vietnam also have less understanding on the benefits of  deregulation and less political will to implement the reforms needed to liberalise the markets.”

Despite these challenges, Venkatachalam explains that Asian countries have taken various approaches to deregulate and have different levels of success. He suggests that deregulation should be promoted in harmony with other policy pillars such as energy security, climate change and economic efficiency.

Negative implications of deregulation such as reduced uptake of renewable energy and energy conservation should be alleviated through appropriate policy interventions.

He adds: “Keeping up to date with developments within the region and sharing the early experience through forums are necessary. While deregulation may not be implemented as quickly as some industry players might like, the knowledge sharing and experiences learned should increase."

He concludes: “Generation is where the biggest gains from deregulation can be found. IPPs can operate very effectively on feed-in-tariffs, which are pre-set by the regulator. With distributed energy now entering the sector in a big way, self-generation by industry and consumers will become the norm. It is likely that more consumers will want to stay connected to the grid since it is hard to produce just enough energy at all times, reliably, for a consumer. Deregulation must ensure that consumer generators have an effective and fair two-way relationship with the grid, and the current momentum.”

 

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