Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the July 17, 2007 issue of the Bangkok Post.
By Verasa Attanun
Strong economic growth in much of the region is resulting in huge challenges for power utilities in markets where supply is already stretched.
PricewaterhouseCoopers recently interviewed 119 senior power utility executives from 114 utility companies in 44 countries. In Asia, executives in Australia, China, India, Japan, Malaysia, New Zealand and the Philippines participated in the survey. The results indicate that market liberalisation, increased regulation, and energy efficiency are the key issues going forward.
Are the utilities markets in Asia liberalised? Freeing up markets to improve competitiveness, financing and efficiency is important to boost modernisation. However, the pace and progress of liberalisation varies enormously across the continent. Only a quarter of Asian respondents to our survey described their market as fully liberalised: 38% are monopolies and 38% are partially privatised companies.
Japan and the Philippines, for example, have relatively open markets with several power pools. In contrast, India's market is majority government-controlled, and private investment incentives are few.
China, meanwhile, is undergoing power industry reform. After segregating generation and transmission, the government is evaluating the most appropriate type of power market by testing tariff-bidding mechanisms in different regions of China. Although the long-term plan is to have a fully implemented tariff-bidding system, we think it's unlikely that any major changes will take place in the near future.
In Thailand, the electricity supply structure follows the Enhanced Single Buyer (ESB) model, and is primarily operated by three state-owned enterprises: the Electricity Generation Authority of Thailand (Egat), the Metropolitan Electrical Authority (MEA) and the Provincial Electricity Authority (PEA). Egat is responsible for generation and transmits electricity to the MEA and PEA. The MEA is responsible for distributing power to customers in the Bangkok Metropolitan area, including Nonthaburi and Samut Prakan provinces. The PEA is tasked with distributing power to customers in the rest of the country.
In recent years, the Thai government has encouraged the private sector to participate in electricity generation by launching independent power producer (IPP), small power producer (SPP) and very small power producer (VSPP) schemes to sell electricity to Egat.
Thus, the outlook for liberalisation greatly depends on the country. Looking at the overall responses to our survey, three-quarters of respondents anticipate progress on liberalisation in their country within the next five years.
Is market regulation rising in Asia? About a third of survey respondents operate in countries where regulation is government-run, with independent regulators governing the rest. Half of those surveyed expected regulation to increase in the next three years and half expected it to remain about the same. No companies are expecting regulation to decrease.
In Thailand, the current administration is focused on ensuring efficiency in the energy sector in terms of competitive pricing, reliability of the system and the sustainability of energy supplies. The Energy Ministry has recently proposed an Energy Industry Act, which will regulate both the electricity and natural gas pipeline industries.
Although many executives don't expect the regulatory burden to decrease, a significant majority of Asian companies believe that regulation facilitates business development. This acceptance of the need for regulation bodes well for the prospect of developing more sophisticated power markets in the future.
Where are Asian utilities companies focusing investment, and what challenges do they face? The investment focus of Asian utility companies is strongly geared towards meeting growth demands and delivering more efficiency from existing assets and management. Nearly two-thirds (63%) of utility company executives said they recently invested in new technology in generation and transmission, as well as IT business technology. The same proportion report investing in new acquisitions or non-domestic businesses. They are focused on local power projects instead of foreign investments.
Part of this generating and transmitting nuclear and renewable energy to address demands for cleaner power generation. In China, for example, more wind, gas and nuclear-fired plants have commenced operations or are planned for the near future.
In Thailand, the Energy Ministry launched the Power Development Plan (PDP) 2007, which offers a plan to develop electricity for 2007-21 using a combination of gas, coal, alternative energy and nuclear energy.
Across Asia, companies are concerned about environmental compliance costs. Although utilities will boost the use of hydropower and other renewable energy sources in the coming years, coal-fired plants continue to play a dominant role in Asia. Environmental compliance is increasingly important for power utilities as more countries have tightened regulatory regimes.
Looking forward, what are the key issues? It is clear that more and more people are thinking these days about cleaner power, renewable energy sources and energy efficiency. This includes improved supply and distribution efficiency; switching from coal to gas; nuclear power; renewable heat and power (hydropower, solar, wind, geothermal and bioenergy); combined heat and power; and early applications of carbon capture and storage. All can be found in some form in power utility sector strategies.
However, the big question is the extent and pace of the actual shift that will take place in the energy mix. Economic signals and incentives will be critical for utility companies to be able to make this shift. An effective carbon price signal will need to exist across all regions, crucially covering high-emitting and high-growth countries like the US, India and China.
Energy efficiency will also play a key role. It is clear, for example, that companies in energy-intensive industries are already highly active, making moves such as integrating upstream into conventional or new energy technology, and reducing the energy intensity of industrial processes.
The emphasis on energy saving and efficiency is equally evident in the responses from utility company executives in our survey. Such an emphasis is likely to be a strong theme in the sector in the years ahead.The full report, "Energy and efficiency: The changing power climate" is available at www.pwc.com/th
Verasa Attanun is a director at PricewaterhouseCoopers Thailand. We welcome your comments at leadingtheway@th.pwc.com.
