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Many governments around the world have deregulated and privatised their electricity systems since the mid-1980s. The principal beneficiaries of privatisation have been the consultants and the banks, building societies, insurance companies, pension funds and other industrial and commercial companies that were able to invest in the newly privatised services and/or provide loans to those who do. The banks and consultants have advised on privatisation schemes and helped draw up deregulation legislation around the world. They have collected fees from brokering the purchase of independent power producers (IPPs) worldwide and have been involved in energy trading themselves.
Black outs, price spikes, price manipulation, bankruptcies and electricity shortages have resulted from this worldwide wave of electricity privatisation and deregulation. Despite the many failures of electricity privatisation and deregulation around the world there is still pressure on governments to privatise remaining government-owned systems. To support their claims advocates need models of successful privatisation and deregulation that they can use to persuade governments that the IMF and the World Bank can’t coerce. It is for this reason that Australia has been misrepresented as a case study of successful electricity deregulation and privatisation.
This is surprising given that price manipulation by electricity companies is rampant in Australia’s National Electricity Market (NEM). This exacerbates price volatility causing the wholesale price of electricity to vary from $30 per unit to $10,000 per unit, $10,000 being a price cap that market ideologues regard as a distortion of the market. In 2000, Radio National’s Background Briefing program revealed that in South Australia where electricity has been privatised, power companies were making millions of dollars in a single day selling power to Victoria when it was most needed in SA. This occurred even as SA households suffered shortages and blackouts causing thousands to go without power.
The transmission system in Australia, in particular, is under-funded. As the 2002 Council of Australian Government’s report ‘Towards a Truly National and Efficient Energy Market’ reported, ‘the current state of transmission is one of the most significant problems facing the NEM’. This is a consequence of the absence of effective planning for future transmission requirements and a market system that does not encourage investment in transmission maintenance, upgrade or expansion.
Despite these problems, Australia is portrayed as a model of success by international policy organisations such as the International Energy Agency (IEA). The IEA is an international energy policy advisor, originally established in the early 1970s to, in the words of its website, ‘ensure reliable, affordable and clean energy’ for the citizens of its members: 26 developed nations, including Australia. It now focuses on market reform of electricity systems.
For Ulrik Stridbaek, Senior Policy Advisor with the IEA, the Australian electricity market has ‘passed the test’ with flying colours because price signals have worked to encourage new investment in electricity generation in the states where electricity has been privatised, Victoria and South Australia. According to Stridbaek, the high prices experienced in the electricity market, particularly in South Australia, were necessary to provide a financial incentive for new investment and the state and federal governments were right to ignore the public outcry and let the prices soar.
Stridbaek argues that for electricity ‘liberalisation’ to be a success there needs to be ‘sufficient political commitment to face the pressures from groups that are the likely short-term losers from liberalisation’. He admits ‘the overall costs and benefits of retail competition for the smallest consumers’ are debateable, however these consumers gain from ‘the increased welfare from the freedom of choice’ of who to buy their electricity from and this choice is what provides pressure on retailers to perform better than their competitors. For Stridbaek the ‘price of electricity to the final consumer is rarely a good measure’ of how well an electricity market is performing. High prices are necessary to encourage investment.
In this free market logic, promoted by almost all the international financial institutions and policy bodies, competition is the cornerstone of a performing market because it delivers efficiency. Yet the idea that efficiency is supposed to be a means to lower the price of electricity to consumers seems to have been lost. In the distorted logic of market adherents, efficiency can lead to more expensive electricity and this is excused because consumers can choose where to buy the more expensive electricity.
The picture of privatisation and deregulations doesn’t look any better around the globe. In countries where electricity has been privatised or deregulated, residential electricity rates have increased, often dramatically. Thousands of electricity workers have lost their jobs. And governments have not only lost the dividends from profitable electricity enterprises but had to bail out unprofitable private electricity firms.
Brazil is a typical case. During the 1990s Brazil’s electricity system was purchased by a complicated web of foreign private investors. The retail and distribution sections of the system were privatised first. Light Servicos de Electricidade (Light) was auctioned in 1996 and purchased by a consortium comprised of EdF of France, AES of the US and CSN of Brazil. The terms of the contract meant that Light would buy hydroelectric electricity from the state at $23 per MWh and sell it to consumers for $120 (compared with $75 that EdF charged the more affluent French electricity consumers). Consumers experienced massive price rises while the foreign owners repatriated profits and avoided investing in new generating capacity.
The main argument for privatisation was to provide foreign capital for Brazil to reduce its debts. But Brazil’s debt has continued to climb along with its dependence on foreign capital. Foreign investors, who were happy enough to buy existing plants that had no remaining debt so that they could make quick returns on their money, were less interested in investing in new generation capacity. This was despite price incentives provided by the high electricity rates. They demanded that 70 per cent of any new project be financed by the Brazilian Development Bank. Furthermore, they insisted that the price for gas, which they favoured as a source of electricity, be guaranteed far into the future with long-term contracts. Moreover, the Brazilian government was to take any losses resulting from a fall in the value of the Brazilian currency against the US dollar.
Once admired and envied for its plenitude of cheap hydro-electricity in a system that had worked reliably for decades before privatisation, Brazil’s electricity system broke down with shortages so severe that rationing had to be implemented, causing economic and social disruption.
Whereas investment in Latin America has tended to be a result of full privatisation and mostly involved foreign acquisitions of government enterprises, the World Bank reports that investment in East and South Asia has ‘focused on introducing independent power producers in markets dominated by vertically integrated, state-owned enterprises’. Independent power producers are now a large market in Asia, particularly in China, Indonesia, the Philippines, India, Pakistan, Malaysia and Thailand.
In Asia, independent power producers generally sell their electricity to a single state-owned utility according to a contract called a Power Purchase Agreement (PPA). The rationale for this is that private investment will provide the capital and expertise needed to increase generating capacity quickly.
However, the amount of money invested is often small compared with the amount of money paid back by state-owned local utilities, often in foreign currency, money that then leaves the country. For many independent power producer projects, foreign investors only put up, on average, 24 per cent of their own money. The rest is obtained through loans, mostly from foreign banks and agencies. Independent power producers expand capacity at a very high cost that in fact increases government spending and foreign debt, inhibits competition, blunts technological innovation and increases consumer costs.
When India was being pressured to privatise its electricity by the IMF and the World Bank in the early 1990s, for example, Enron used its political influence with US embassies and the CIA to win a $3 billion contract to build the Dhabol Power Plant south of Bombay. This was the largest foreign investment in India. Even the World Bank argued that the agreement with Enron was ‘one sided’ in Enron’s favour. Specifically, the agreement committed the electricity board to pay for electricity at a set rate without requiring Enron to provide that electricity. Additionally ninety per cent of the plant’s generating capacity was to be paid for, night and day, whether or not it was needed or cheaper supplies were available.
Despite the high prices, the risks—political, currency, demand, default—were all borne by the national and state governments rather than the investors. The agreement required the power to be paid in US dollars (highly unusual in India) so that the risk of a currency devaluation was borne totally by the state. In 1993 a US dollar was worth 32 rupees. By 1999 it was worth 40 rupees, increasing the cost of electricity by more than 20 per cent. Also the price of electricity was tied to the world price of oil which escalated after 1999. The unit price was higher the less electricity that the state bought.
So although the foreign investment brought less than $2 billion in capital to the state, it spent over $26 billion over 20 years for the plant, a good proportion of which was to become profits for the American companies and repatriated — and this doesn’t take into account increases in fuel costs.
Although the power supplied by the plant was supposed to help regional economic growth, the cost of the power was likely to be a severe burden on the very industries it was supposed to help. It would be even more of a burden on poor consumers and farmers who had become accustomed to cheap, subsidised electricity.
Locals protested the environmental and social impacts of the project whose electricity was both unreliable and heavily polluting. By the end of 2000, the electricity board was buying power from Dabhol at 8 rupees per unit and selling it to consumers at 2 rupees. In January 2001 the state government decided it could no longer afford to pay Dabhol the agreed amount under the PPA and the electricity board stopped paying its bills. Even before Enron had filed for bankruptcy the plant was forced to shut down, not without threat of legal action by Enron to recover contracted payments.
Independent power producers ‘rely overwhelmingly’ on imported fossil-fuels as the source of their electricity and this fuel tends to account for 50-70 per cent of total operating costs. Despite India’s cheap coal reserves, the Dhabol plant was to be fuelled by imported diesel oil and liquefied natural gas (LNG). The gas was estimated to cost about 4 times the cost of coal and would also represent a loss of foreign exchange of some $1.45 billion.
In the Philippines, the independent power producers favoured imported fossil fuels as a fuel over locally available hydro-power and geothermal power and used oil and coal for 56 per cent of their generation. In Pakistan, which has its own source of gas as well as hydro resources, the independent power producers used imported petroleum-based fuels for 74 per cent of generation.
To insulate themselves from price fluctuations in the price of fuel, independent power producers generally incorporate conditions in the PPA that compensate the investor if fuel prices rise. They may include the price of fuel in the final tariff or index the tariff to the price of oil. In the Philippines and Thailand, where the independent power producers mainly use imported fuel, the price of that fuel increased by 50 per cent between 1997 and 1998. In the Philippines the National Power Corporation, Napacor, is responsible for supplying fuel to the independent power producers.
Even World Bank analysts admit ‘that IPPs have often inflated supply prices for utilities’. In the Philippines, for example, the price of power from the IPPs, in 1996 — before the Asian crisis, was US$76 per MWh compared with US$57 for state-owned Napocor’s power. Electricity prices for consumers in the Philippines are now the highest in the ASEAN Region.
Privatisation is good for the banks because the money raised by the asset sales helps governments to pay the interest on their debts, at least in the short term. It is also good for transnational corporations because they are able to buy profitable government assets and have more opportunities to sell their products and services into new markets, often with heavy tax-payer funded subsidies. However, privatisation of services such as electricity have led to more unemployment and increasingly unaffordable prices, often without improving the quality, capacity or reliability of the electricity system.
This result has not been confined to developing countries. The same has been true in many parts of the developed world. The supposed disciplines of the market have been eclipsed by price manipulation by private electricity companies seeking to boost the price of electricity and maximize profits. In places where government-imposed price caps remain in place, retail suppliers have not been able to pass these high wholesale prices on to consumers causing them to experience financial difficulties that have led to black outs and government bail outs, as in California.
The increased rates have left the poorest unable to pay and without access to these essential services, even in the wealthiest countries. In England prepayment meters were installed in homes for electricity. The problem of ‘fuel poverty’ affected about 16 per cent of households in the UK at the beginning of 2002. It’s estimated that over 30,000 extra deaths during winter each year in Britain because people cannot afford to heat themselves properly. Dealing with fuel poverty is considered to be an objective outside the private company goals of economic efficiency and profit.
The supposed efficiency gains to be made by private, competitive companies, have too often been made through short term cost savings, including cuts to safety, maintenance, training and research budgets. Old equipment is not regularly serviced nor replaced in advance of likely failure. Accidents and equipment breakdowns become more likely meaning an increase in equipment-related blackouts as well as blackouts related to network congestion because planning and responsibility for network maintenance and development is not a market priority.
The widespread electricity blackouts in the north-eastern states of the US and Canada in 2003 was one of the more spectacular consequences of a deregulatory process that removed government controls and let the market decide.
The current focus of market advocates like the IEA on competition and efficiency has helped to blind many politicians and advisers around the world to the real goals of electricity supply, which should be an affordable, accessible, clean, and reliable supply.