Expanding Access to Electricity
What Asia Can Learn from a Success Story in Latin America
NBR asked Carlos Colom Bickford, President of the National Energy Commission (CNEE), Guatemala, to outline the key opportunities to expand access to electricity in Asia based on successful models from Latin America.
Over the course of the next two decades, three billion people will join the middle class, many of them from emerging economies in Asia. The concurrent growth in energy demand will be felt most acutely in the power-generation sector. The twin challenges of meeting rapidly expanding energy demand to ensure economic growth while mitigating the associated environmental impacts are at the core of the 2012 Pacific Energy Summit, to be held in Hanoi on March 20–22, 2012. In advance of the meeting, NBR asked Carlos Colom Bickford, President of the National Energy Commission (CNEE), Guatemala, to outline the key opportunities to expand access to electricity in Asia based on successful models from Latin America.
The 2012 Pacific Energy Summit brings power generation to the fore among a number of competing energy issues. You have experience and expertise from the perspective of an energy regulator. From your perspective, why is power generation an issue of critical importance now? What is the key role that the regulator must play?
It starts with the basic economic concepts of demand and supply. In the electricity market of any nation wanting to grow in economic and social terms, sufficient and efficient power generation must be readily available for consumers, as electricity is a basic and neccessary public service. Electricity consumption is directly related to the GDP of any nation, so electricity demand follows economic growth. Anticipating this growth, and sending proper regulatory signals that result in the construction of new power generation projects, is critical.
Because power generation investments are usually long-term and capital-intensive, the role of the regulator is of utmost importance. Regulators, acting with the public interest as a top priority, have to send proper signals to investors so they can develop efficient power generation projects with the best possible benefit-to-cost ratio. In Guatemala, even though the electricity market has been liberalized since 1996, indicative long-term planning of power generation growth and the subsequent long-term auctions to buy power has proved to be an efficient mechanism to meet electricity demand growth.
Give us a little background on Guatemala’s Rural Electrification Program. From your point of view, what are the key elements that led to its success, with the country’s level of electrification coverage rising from 50% to more than 80% in just a few years?
During the mid-1990s, Guatemala had a level of electrification coverage of less than 50%. Millions of people were in need of this basic service, and the government didn’t have the resources or a sustainable mechanism to expand it, especially in rural areas. In response, authorities in Guatemala’s electricity sector implemented a successful rural electrification plan, based on General Electricity Law, Decree 93-96 of the Congress of the Republic of Guatemala, published in 1996. This process included the privatization of state-owned electricity distribution assets and enabled more than 600,000 new homes to be connected to the distribution grid in a little more than ten years. Guatemala’s electricity access jumped from a total of 700,000 homes in rural areas in 1999 to close to 1.4 million homes in 2011.
The rural electrification plan’s main objective was to improve the quality of life of Guatemalans in rural areas by introducing electricity access to 2,633 new communities. It was an aggressive plan that required the construction of 1,283 kilometers of 69 kV and 374 kilometers of 230 kV new transmission lines and 28 new power substations to support this aggressive electrification plan.
The two key elements that were crucial for this success were the reform of the regulatory framework, through the approval of the 1996 General Electricity Law—based on a regulated, efficient competitive market—and seed funding from the privatization of the distribution assets. This allowed the new owners of the distribution grid to work hand-in-hand with the government through a rural electrification trust fund and thereby to expand electricity access.
Do you think this scheme is sustainable in the future?
Yes. This is mainly due to the foundation for the continuous expansion of rural electrification, which is embedded in the 1996 General Electricity Law. However, in practice, we have learned that, despite the law, regulators must monitor both the distribution companies and the connection for new services, as power consumption from rural consumers is often low and therefore not very economically attractive for the companies.
Another important aspect is sufficient seed funding, which must be available for an aggressive electricity expansion plan such as the one in Guatemala. Creating trust funds for electrification expansion, funded through innovative financing mechanisms, such as depositing the resources obtained from the privatization of state-owned assets in a trust fund exclusively destined for rural electrification, is important to meet this objective.
Based on your experience, do you think this scheme could be applied in other countries similar to Guatemala?
Yes, I think that if countries have the will and determination to expand electricity access, schemes similar to the one implemented in Guatemala can be used, as long as we ensure that they are designed to meet the characteristics and realities of each country. In the mid- 1990s, it seemed it would be impossible to double the amount of homes with access to electricity in Guatemala. However, through the implementation of structural changes in the electricity market, such as the approval or modification of more efficient regulatory frameworks, the results proved that it is possible. In countries similar to Guatemala, with high poverty levels and many socioeconomic challenges ahead, structural changes are required to allow for these aggressive plans to be successful.
What provisions in the regulatory framework are necessary in order to incentivize distribution companies to continue expanding rural electrification?
In general terms, the regulatory framework has to send proper economic signals to induce the efficient performance of the distribution company, ensuring reliable service for the consumer and just and reasonable returns for the investors. Because electricity distribution is a natural monopoly, the 1996 General Electricity Law established a price-cap mechanism that incentivizes the distribution companies to be efficient and invest in new infrastructure. In this mechanism, the regulators recognize the annual, efficient investments to expand the distribution grid in the distribution company’s tariffs. Also, the law requires distribution companies to connect every new home located within a distance of 200 meters of the existing distribution infrastructure, without any cost to the interested person. An additional provision in the law includes a maximum number of days for the distribution companies to connect new services, to name a specific provision.
In retrospect, do you think that the privatization of the electricity distribution assets helped expand access to electricity in Guatemala?
Privatization is never an easy decision—politically, socially, etc.—and privatizing state-owned assets is always difficult. Yet from my point of view, it was a correct and very important decision for Guatemala for several reasons. First, the status of the state-owned distribution companies in rural areas at the time was critical: The technical and non-technical losses were high, the rural electrification coverage was low, and the levels of quality of service, both technical and commercial, were also low. Second, the monetary resources obtained from the privatization were funneled exclusively to a trust fund that was established to fund rural electrification expansion.
The government was also tasked with selling two distribution companies that served a small market and had high technical and nontechnical losses, low per capita consumption, and low quality levels. Normally, this would not have been attractive to potential investors. Yet they were offered grid expansion through the rural electrification plan.
Another correct decision was for the state to maintain ownership of the power generation and transmission, although now, due to competition and other politically derived situations, the state company only has a 30% and 80% participation in these markets, respectively.
In regard to the transmission of electricity, can you summarize how Guatemala is planning to build more transmission lines in order to keep up with the demand growth?
First, we are approaching our transmission expansion development plans with a long-term vision, which is of utmost importance for the efficient development of the electricity sectors.
But we also know that there are thousands of plans in many countries that remain only that: as plans on paper. The key driver in Guatemala to realize our vision for the transmission system expansion, which will support rural electrification plans, was an open auction mechanism, where private investors participated in a transparent process. The lowest-cost bid was awarded a “build-own-operate” contract for the infrastructure construction. In order to back up the expansion of the distribution grid (13.8 and 34.5kV), the transmission system (69 and 230 kV) required important investments.
How can this model be applied to the Asia-Pacific region?
I think we must remain mindful that each country has specific characteristics and realities. However, the general principles applied in the Guatemalan case can also be applied in any country, as they are processes based on common sense, efficiency, competition, and transparency.
You also have had considerable experience developing the hydroelectric sector. Guatemala—a country with an abundance of natural resources, especially those conducive to developing hydropower—has been successful in the last several years in developing the hydro sector. What provisions in the regulatory framework of the electricity sector do you think have helped achieve this success?
For a starting point, the General Electricity Law of 1996 provides a foundation that establishes that power generation activities can be performed by any entity, and that access to transmission infrastructure, which is monopolistic by nature, is guaranteed by law. This has been crucial in allowing new investors to come to the country and develop these resources. Now, more than 70% of Guatemala’s electricity is produced by private producers.
There’s another important provision in the law: 100% of a distribution company’s electricity capacity demand must be contracted with power generators through an open and competitive auction process, as mentioned previously. In recent years, this auction process has been set five years in advance of the initial supply date. Moreover, the power purchase contracts have a 15-year life span, making this an attractive mechanism for both the distribution consumers and the investors. Competition and transparency are guaranteed because contracts are assigned on a least-cost basis, which is ideal for consumers, and contracts awarded to the investors offer certain income on a long-term basis.
Another important element is the Incentive Law for the Development of Renewable Energy Projects, Decree 52-2003 of the Republic of Guatemala Congress. This exempts the owners of hydro and other renewable energy generation projects from paying income tax for ten years, as well as value-added tax on the equipment for the hydro and renewable power project.
Do you think that countries should prioritize hydroelectric energy over any other renewable energy?
Yes. I think that micro, small, medium, and large hydro development should be a priority in countries where the potential remains for hydro development. From my experience, this is a reliable and efficient way to produce electricity, with many benefits related to cost and to the electricity grid. Based on statistical data, most of the developed countries in the world have been using their hydro resources at maximum capacity for decades. So for the countries that have this resource, I’d recommend that policymakers focus on developing it and balancing it with the electricity-generation matrix, depending on the other renewable and non-renewable energy resources they have.
How have you assessed and addressed the obstacles and concerns of hydroelectric power in regard to the environment and ecosystems, livelihoods, and community engagement?
This has been one of the biggest challenges in Guatemala in recent years, if not the biggest challenge to the development of renewable energy projects more broadly. Environmental and social concerns need to be properly addressed if a project is to be successful. But we have always emphasized the importance of investors to observe and obey the applicable laws. As long as they do this, the state must guarantee that they can perform their job and carry out their investments.
From my experience, when the environmental and social issues under discussion are legitimate, often the stakeholders—investors, communities, and the Ministry of Environment and Natural Resources—reach agreements. The main problem in Guatemala is that there are certain groups that act outside the boundaries of the law, and they have made a profitable industry derived from the opposition to most renewable energy projects. My point of view is that this can only be solved through proper communication and by the rule of law.
Policymakers in the Asia-Pacific face a wide array of energy choices at various price points, each with varying environmental impacts and infrastructure requirements, and regulators have a key role. How can the Pacific Energy Summit facilitate the development of coherent energy policies that is also tailored to the specific needs of individual countries?
From my experience, it is important for a strategic sector, such as the electricity sector, to have an independent and technical regulator. The reform of the electricity sector in 1996 created a strong foundation for the electricity sector to grow over the years. One key element in Guatemala is that the regulator has independent funding from the general state budget, and this has allowed us to hire qualified professionals to perform our job. The regulator has to have the public interest in mind, but at the same time, send the correct signals to investors so they can contribute to the development of the sector through efficient investments.
Regulators, from my point of view, can make a big difference if they perform their work ethically and efficiently. For example, in addition to the typical regulatory activities that we perform as regulators, we have responsibility for the long-term planning of the expansion of the electricity generation and transmission capacity in Guatemala. Events like the Pacific Energy Summit are important because sharing experiences between policymakers, industry leaders, and other stakeholders can help identify sustainable solutions to the common challenges related to the growing need for energy in the world. Many challenges that countries face are similar to challenges that other countries or persons have faced before, so listening to how they have solved these issues and learning from successful case studies can reduce the time it takes to solve problems, as well as reduce the costs.
Carlos Colom Bickford is President of the National Energy Commission (CNEE), Guatemala.
This interview was conducted by Jacqueline Koch, Senior Media Relations Coordinator at NBR.