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close this bookSustainable Energy Strategies - Materials for Decision-makers (SEED - UNDP, 2000, 208 p.)
close this folderChapter 6. Promoting Institutional Change for Sustainable Energy
View the document(introduction...)
View the document6.1. Introduction
View the document6.2. Liberalising the energy sector
View the document6.3. Making it happen
View the document6.4. Conclusions

6.2. Liberalising the energy sector

6.2.1. Introduction

In the past, governments played a direct and prevailing role in the energy field in most countries (and certainly not only the so-called Centrally Planned Economies). Energy was seen as a strategic sector crucial to international competitiveness, economic and social development, and national security, in which the most important decisions were to be taken by the government. State utilities for electricity, gas, and, sometimes, also coal and oil products were instruments for implementing energy policies in many Western countries, such as the United Kingdom, France, and Italy. Similar solutions were adopted in most developing countries.

This concept has been gradually abandoned in many countries, as they have recognised that market mechanisms could perform the same tasks with better efficiency. In the last decade or so, the entire world has been moving toward increased reliance on private sector, competition, and free initiative. The introduction of elements of competition even in those sectors which were previously considered as natural monopolies, such as electricity and gas, already present in the United States and in the United Kingdom, is now required by the directives of the European Union, and is being gradually implemented in the EU countries. Prices of oil products have been deregulated in most industrialised countries. Exploration and exploitation of oil and gas deposits are open to competition. The process of liberalisation in this field also has made great progress in the economies in transition, as well as in China.

The process is slower in many of the developing countries. Reservations about foreign interference through investments, preoccupation about the fragility of their economic systems, reluctance to abandon instruments of control, and lack of local capital to start energy enterprises have all contributed to delay of the transition to free market mechanisms in most developing countries.

Financing institutions consider that the development of sustainable energy can greatly benefit from market and competition. For instance, the World Bank states that "one of the most powerful ways to improve energy supply is to ensure that the energy market is determined by consumers’ choices. This means both that the price of energy should reflect its cost and that regulation of energy industries should encourage competition and choice".1

1 World Bank, 1996, Rural Energy and Development: Improving Energy Supplies for Two Billion People

The European Union also encourages the introduction of market elements in all fields in its programme of aid to African, Caribbean and Pacific (ACP) countries. This includes support to structural adjustment (including structural reforms and sectoral policies), and the creation of an environment more favourable to the success of projects.2

2 European Commission, 1996, Green Paper on relations between the European Union and the ACP countries on the eve of the 21st century—Challenges and options for a new partner

· ship, Chapter VI, Brussels, European Commission (also on Internet at http://www.oneworld.org/euforic/greenpap/chap6.htm)

However, free market is not everything. Effective as market forces are in optimising the allocation of resources for short and medium-term objectives, the market is known to be short-sighted, not to respond spontaneously to long-term signals. As the World Bank puts it, "liberalising energy markets, however important, may not be the complete answer... private companies have shown little interest in extending electricity supplies to rural areas (industrial and urban customers are more lucrative)". Long-term and social signals can be introduced by governments (e.g., through introduction in the prices of the cost of externalities), thus promoting sustainability in the energy field, while using market mechanisms to the best of their potential.

In other words, while "deregulation" is needed to allow space for private initiative and competition, "re-regulation" is needed to establish a set of rules that allow the market to function properly by correcting its imperfections and by accounting for the social costs of the energy system.

6.2.2. The Organisation of Government in the Energy Field and Energy Planning

Within central and local governments, many solutions are possible to deal with energy matters. There can be a dedicated ministry, or the task can be assigned to a ministry with wider competencies (e.g., industry, or environment, or finance, etc.). The best solution depends on local circumstances.

In some cases, an inter-ministry, or inter-department committee at minister level, has the final responsibility. This reflects the fact that energy problems are not confined to the "energy sector", but permeate all sectors of economic, environmental, and social development. Some form of cooperation and coordination of energy aspects in the various ministries is certainly useful. For instance, regular workshops to bring together all these departments and allow for the exchange of information, experiences, and ideas have been suggested (in the case of Barbados).

Apart from the political responsibility, such a policy is implemented by the operative structure of the government departments. Unfortunately, ministries of energy in the South are generally known to be chronically understaffed and under-resourced. Governments may also consider establishing independent high-profile agencies to promote, support, or overview sustainable energy development. Such an agency may have fewer staff requirements than a ministry and, potentially, can address the limitations and rigidity of government bureaucracy. Setting up such agencies has, sometimes, been possible in the frame of development cooperation projects.

BOX 1. SUSTAINABLE ENERGY GOVERNANCE IN INDIA

One particular case worth mentioning is that of India, where a Ministry of Non-Conventional Energy Sources (MNES) exists since 1992, having replaced the former Department of Non-Conventional Energy.3 MNES is responsible for the overall planning and programme formulation, as well as overseeing implementation. MNES works at the state level, through "nodal agencies" which have been set up to promote renewable energy programmes in their respective states; it also involves the state-level utilities (State Electricity Boards) for grid-interactive power generation projects, while NGOs are generally cooperating to ensure connections with the local (village) level. While the creation of a Ministry to renewable is seen by some as a positive sign, others underline that its lack of links with the much more powerful Ministry of Power relegates renewable energy to a marginal position that is not given enough attention in the overall country’s energy plans.

3 Svaran Singh Boparai, 1998, “India and Renewable Energy: a Future Challenge”, Renewable Energy, 15, pp. 16-21, Pergamon

Another important element to be considered is the level at which energy policies should be formulated, specified and implemented. In the past, just one level was considered in most countries-the national level. Energy policies were the responsibility of the central government, and other levels of government (e.g., regional, provincial, or local) were called in occasionally, only at the executive stage.

Recent trends, in both industrialised and developing countries, point toward a much more decentralised approach. This is exemplified by the so-called "subsidiarity principle" adopted by the European Union, which states that all decisions need to be taken and implemented at the lowest (most decentralised) level that is possible or practical. Central governments often retain only the powers of setting the guidelines, orientating and coordinating energy policies, as well as looking after the part of the legislation that must be common to all the country, while progressively more decisions are taken at the local level. This sharing of responsibilities has the double advantage of better adaptation to the local conditions and of involving stakeholders more directly in the process. Of course, the degree of decentralisation depends on the size of the country and on its general organisation, but there is hardly a small country today that does not find it effective to delegate some of the powers in the energy field (and obviously in others) to smaller units, down to individual villages.

Generally, the main reference to the energy policy of a country in the past was a national energy plan, setting objectives and targets, specifying the actions that would be implemented to reach them, and (at least ideally) assigning the resources necessary for these actions. Such prescriptive national energy plans of the command/control type are seldom considered nowadays, both because of the realisation that, in the past, they have often remained on paper, and because of the aforementioned trend towards market mechanisms.

This obviously does not mean that governments do not have an energy policy, but rather that the instruments of this policy have changed. Since the main instruments are those that influence the market and, hopefully, direct it towards the desired results, the outcome of policy decisions is less deterministic. For instance, a tax on a polluting fuel is expected to help decrease the consumption of that fuel; but the degree to which this happens (specifically, the elasticity of demand with respect to price) is often not known, especially in countries that have relied less on market mechanisms in the past.

Therefore, such instruments have to be calibrated on experience. The approach must include a degree of flexibility, and it is necessary to set up a system to monitor, frequently and accurately, the results of policy measures, in order to correct them in a timely fashion.

Often, energy plans of the past assumed energy demand as an external condition, determined by economic growth, population size, industrialisation, etc., thus concentrating their attention on the supply side (i.e., how best to satisfy this demand). There is now a general realisation that it is possible to influence demand by improving the efficiency of energy utilisation, and that the action on demand may be just as important as the action on supply, and often economically more rewarding.

A first useful step for a government in the energy field is to set clear goals for its action and to identify realistic quantitative targets. If all concerned parties are convinced that the government is serious and determined to reach its objectives, they stand to act accordingly and this is to be reflected by the market. Such target settings are useful in order to select the best range of policy instruments and to discuss them with stakeholders.

Regulatory boards and commissions (discussed again in Section 6.2.4) are important actors in the governance of the energy structure of many countries. Although in many cases such boards and comissions are independent from government, their role increases with the degree of liberalisation of the energy market. They have become major players in many countries, including the United States, United Kingdom and, among the developing countries, e.g., Argentina.

6.2.3. Levelling the Playing Field

6.2.3.1. Eliminating Subsidies

Energy prices have been (and in many cases still are) imposed by governments on the basis of general policy objectives, such as promoting development or social equity, protecting national industry etc.. Having recognised the significance of energy for development, many governments subsidise electricity or various fuels, so that their price to the final consumer is lower than the cost of production and delivery. In many developing countries, energy prices and tariffs are much lower than in industrialised countries, although the cost of producing and delivering energy is by no means lower. For instance, it has been evaluated that the average OECD tariff for electricity is about 50 percent higher than the corresponding tariff averaged over all developing countries.

For the developing countries (DCs), this has the double effect of discouraging energy conservation (by making interventions to increase efficiency artificially more expensive than the energy which is saved) and of creating a barrier to the introduction of new forms of energy, renewable in particular, which are not equally subsidised. Moreover, it has been observed that generalised subsidies (i.e., not limited to the poorer strata of the population), although originally meant to alleviate poverty, actually favour the richer layers of the population. Only the rich can afford consuming substantial quantities of energy; thus, they have little incentive to spare energy or to use it more effectively, and the resulting general costs are spread among the entire population. Poor people often have no access to commercial energy anyway, and political prices of energy as a whole discourage private business entrepreneurs from extending energy services.

In substance, there are two main problems with imposed energy prices. The first is that they do not allow the market to function. They make no place for competition and, therefore, either the final user pays a higher price than necessary, or public finance spends more money, or both. The second problem is that imposed energy prices are generally not instruments of an energy policy, but rather of other policies (social, industrial. or others). As a result, they distort the energy market and orient it towards undesired solutions. Specifically, subsidised energy prices will diminish or cancel the advantage of increasing the efficiency of energy utilisation and encourage waste. Since such subsidies are generally applied to traditional fuels or energy forms, they are going to act as disincentives for new energy sources, renewable in particular, and for new ways of producing energy, such as decentralised power production or cogeneration of heat and power. As a result, with very few exceptions, imposed energy prices are an obstacle to the introduction of sustainable energy systems.

Prices of conventional fuels and electricity need to achieve marginal-cost pricing, i.e., the cost of producing the last kWh added to the grid, or of acquiring the last tonne of coal or oil. In this way, the consumer is faced directly with the least-cost alternative between consuming more energy or using it more efficiently. Prices also need to allow for the eroding effects of inflation. If economic support has to be given to industry, farmers, the poorer strata of the population, other instruments need to be used rather than "political" energy prices. (For the special cases of temporary support to sustainable energy, see Section 6.3.1.1.)

Although the necessity of eliminating energy subsidies has been recognised in principle in many countries, its application often meets with severe difficulties. Increasing prices of largely used commodities is always unpopular and often politically sensitive. People used to paying little for the fuel they use are likely to consider a sharp rise of its price unacceptable. Political crises have been triggered in the recent past by increases in the prices of energy. Recent increases of the tariffs of electricity in Ghana generated a wave of protests, resulting in their prompt suspension by the government. Previous attempts to raise the tariffs had been rapidly absorbed by inflation.

A technical difficulty connected with correct pricing of energy should be mentioned here. Individual energy consumption is not always measured. In most countries, the heat provided for space heating from central building boilers or from district heating is not metered, and is charged according to some prefixed criteria, such as floor area. In some cases, there are no meters for electricity, gas, and, frequently, water. This has been a major problem for introducing pricing reforms and energy saving measures in the economies in transition in Eastern Europe, but it is also applicable to a number of developing countries and (for space heating) in some industrialised countries as well.

However, even when the market operates fully, the price paid by the final consumer also includes taxes, that, in some cases (e.g., petrol in European countries), constitute a large fraction of the final price. It is quite common that different mechanisms are present for different energy sources (e.g., free market prices plus taxes for petroleum products and coal; regulated maximum prices plus some market elements for electricity and gas, see Sections 6.2.4.1 and 6.2.4.2).

BOX 2. CROSS-SUBSIDIES

Sometimes, subsidies allocated to one form or one utilisation of energy extend to others. For instance, diesel is used both as a fuel for diesel engines and for heating purposes. In some European countries, for instance, taxes on gasoil are less heavy than on petrol, in order not to burden truck drivers excessively; however, the same lower tax is inevitable for diesel-powered private cars and for heating. In India, subsidies have been given until recently to kerosene, considered as a need for poor people that use it for lighting; however, since kerosene can easily be added to diesel fuel, gasoil price has been levelled with that of kerosene. In some countries, fuel for farmers (especially diesel fuel) is subject to a lower tax, but it is difficult to assess where and for what purpose it is eventually used.

6.2.3.2. Internalising Externalities

While energy taxes have been used in the past mostly as instruments to ensure revenues for the national budget, there is the possibility of using the fiscal system coherently, in order to charge to the user the costs which are borne by the society as a consequence of the use of energy. environmental costs, health costs, and, more recently, costs connected with climate change, or the so-called "externalities".

Externalities are defined as "the costs and benefits originating when the economic or social activities of a group of people have consequences on another group of people, and when the first group does not take adequately into account these consequences". For instance, the production of electricity from coal affects, through acid rain, farmers or fishermen who do not use electricity, or use little of it.

Among others, externalities include damage to health and the environment, effect on employment and on energy security, depletion of finite resources, etc. Ordinarily, these are not reflected in the price of energy and have to be borne by society as a whole, or by some groups of the population, such as the less privileged ones.

The economic evaluation of externalities is a prerequisite, if a government decides to introduce external costs in the price of energy, in order to have users pay for the full cost of what they consume. However, this is not the only possible use for such an evaluation. Many other kinds of policy decisions can be taken in a more informed and effective way, if one has a guidance to the "hidden" costs which are avoided by improving environmental conditions. For instance, respective externalities for various fuels may orient policy decisions which stand to favour one against another. The same applies to different energy systems. Evaluating the costs and benefits of more (or less) stringent environmental standards also requires a comprehensive approach as the one we outline above. In general, the evaluation of externalities is valuable for anyone who wants to pay greater attention to economic instruments for environmental policies, develop comprehensive indicators of environmental performance of different technologies, and compare different approaches to encourage competition and market mechanisms.

Not adding externalities to the price of energy corresponds to giving a subsidy to that form of energy, equal to the "hidden costs" which are not charged and, eventually, are paid by society as a whole, or by some particular group not coinciding with the users. These "virtual" subsidies are even more difficult to remove than actual direct subsidies. The price of petrol in the United States, which is much lower than in most industrialised countries because it takes no account of externalities, is an extremely sensitive political issue and constitutional barriers are claimed to exist against the introduction of the hidden costs in the price.

Economic theory shows that there are no relevant externalities, if the emissions (or other causes of impact) are reduced to an optimal level, which is the level where the marginal cost of further reducing them is equal to, or greater than, the marginal cost of this pollution or impact. In other words, once this level is reached, the cost of reducing it further is greater than the benefit gained by society or by the affected groups, and, therefore, it is not justified.

The full inclusion of externalities in the energy prices can greatly facilitate the diffusion of sustainable energy schemes, since for renewable energy sources and efficiency interventions, externalities are much less negative than for conventional energy sources, and, in some cases, are even positive.

BOX 3. EVALUATING EXTERNALITIES

Although its principles are quite clear, the evaluation of externalities is far from simple. Aggregate, top-down methods, starting from national statistics on emissions and damages, although useful for a first orientation, do not yield marginal costs, nor can take into account local and time variations. More useful, but correspondingly more difficult, are bottom-up methods, using an approach based on the damage functions and the impact pathway. They are based on the specific emission data for a given technology and for specific sites. The main problems concern the uncertainties on the causes and nature of impacts, as well as the lack of adequate studies on the economic evaluation of damage.

The most complete way to calculate externalities for a given energy technology takes into account the whole life cycle. For instance, the production of electricity from coal starts from coal mining, coal beneficiacion, its transportation to the power plant, its burning and the relative exhausts at the stack, the generation of power, the final disposal or utilisation of the ashes, and the cost of recovering the site of the mine once this is exhausted. Some evaluations also include indirect impacts, such as those associated to the manufacture of the equipment used to extract, transport, or burn coal, and the construction of the power plant. Not surprisingly, on the example just mentioned, the largest impacts are those on the health of the coal miners, those associated with coal transportation, and those deriving from the acid emissions of the plant. Of course, positive externalities, such as the creation of jobs along the whole cycle, are also taken into account.

Long-term effects are difficult to express in monetary terms, since this involves the choice of a discount rate extending over several generations-a very sensitive choice, which is not so much an economic, but a political or ethical dilemma.

Various attempts to calculate externalities, both in general terms and for specific situations, have been carried out in the last decade. Almost all of them originate in OECD countries.4 One of the most exhaustive is the recent (1995 and on-going) ExternE programme promoted by the European Commission.5 Developing countries have so far put little effort into this kind of exercise, but this can probably be useful for them to evaluate long-term strategies and to assess market mechanisms to control emissions. Evaluations made elsewhere have little applicability to developing countries, because of the large variations in the value of parameters; however, the methodology can be very much the same.

4 See, for instance, L.A. Cifuentes and L.B. Lave, 1993, “Economic Evaluation of Air Pollution Abatement: Benefits from Health Effects”, Ann. Rev. Energy Environ., 18, pp. 319-342; and N. Rajah and S. Smith, “Using Taxes to Price Externalities: Experiences in Western Europe”, Ann. Rev. Energy Environ., 19, pp. 475-504

5 European Commission, 1995, DG-XII, ExternE, Externalities of Energy , EUR 16520 EN, Brussels-Luxembourg

The evaluation of externalities is a first step toward adopting market measures in place of command/control mechanisms. The traditional route for governments in the past has been to impose, through norms and regulations maximum values for emissions and other performance criteria. Often, this also included mandating certain technological solutions rather than others. This approach is simple, but not always effective; the costs of reducing negative impacts on the environment have been estimated to be generally much greater than what can be achieved by market forces. Moreover, by imposing particular technologies to be adopted, technological development and innovation have been discouraged or impeded. By substituting economic measures for regulations, the market is stimulated to work out the best solutions in economic terms, and R&D is encouraged to progress in the desired direction. However, the type of market instrument employed to take externalities into account may differ. In Europe, the prevailing trend is to introduce externalities into prices by means of taxes. In the United States, the preferred system is to fix a maximum value for cumulated emissions (generally decreasing with time), distribute this value among potential polluters by assigning emission credits, and allow these credits to be traded in exchanges, as if they were bonds. This results in assigning (negative) market values for the emissions, and, therefore, leads to choosing the most economical solutions to reach the targeted result.

In industrialised countries, attempts to address externalities through taxes and tradable emission rights have had a very large impact when applied to the most common pollutants emitted by large-scale plants, particularly sulphur oxides and nitrogen oxides. In these instances, the penalty is typically greater than the cost of reducing the emissions, or of purchasing emission share at a reasonably low-value, so that any reasonable entrepreneur is able to intervene. The result has been a very steep alleviation of the phenomenon of acid precipitation in Europe and North America, as well as a general improvement of air quality. Emission taxes for these pollutants have also been introduced in developing countries (for instance, in China), but for the time being they are generally too low to reach the desired result.

The same applies to the "carbon tax" (meant to include the externalities deriving from the effect of carbon dioxide emission on the stability of global climate) in the few countries where this has already been applied (mostly Northern European countries). Uncertainty in the evaluation of externalities, doubts about the magnitude of the phenomenon, the very long time horizon involved, and the worldwide effects expected from global warming have prompted, for the moment, relatively low values of the carbon tax. The tax itself, or more probably the expectation of substantial increases in the future, has already contributed to an acceleration of the shift toward less carbon-intensive fuels (from coal to natural gas), even if it has had only marginal effects on the overall level of energy consumption.

In some countries, there is another mechanism that makes taxation based on externalities more effective. The institution of the tax foresees that its revenues (or a part thereof) are devoted to specific actions aimed at reducing pollution, for instance, promotion of demonstration projects, support to the diffusion of renewable energy technologies, or increased energy efficiency. Although many economists frown at this concept of "targeted taxes" on sound theoretical grounds (If there is good reason for a public expenditure, why not charge it to the general budget?), the mechanism has proven effective on the ground, implying, perhaps, additional psychological and information motivations.

Examples of taxes on externalities used to finance sustainable energy schemes are fairly common in industrialised countries, but some examples can also be found in developing countries. For instance, since the middle 1980s the Government of Ghana is imposing a small levy (originally equal to 0.3 percent of the pump price) on petroleum products, the revenue from which is used to finance sustainable energy projects.

6.2.4. Restructuring the Energy Sector

6.2.4.1. The Electric Power Sector

The introduction of market mechanisms and competition in the power sector has been-and still is-one of the most important factors of transformation of the energy sector in many countries, both industrialised and, more recently, also developing countries.

A distinction should be made between privatisation and liberalisation of public services, which do not necessarily go together and which belong to different decision levels. The choice to change the ownership aspects of a public enterprise is a decision of economic policy which has different motivations in different contexts, including improvement of management, efficiency of financial markets, reduction of public deficit, etc. Liberalisation is a choice dictated by technical-economic considerations and drawn by the evolution of technology; its main purpose is decreasing the cost of energy and improving the quality of the service by introducing competition and by optimising the allocation of resources. Various countries have adopted privatisation and liberalisation measures in different proportions. Since privatisation does not directly influence technological choices and sustainability, here we focus on liberalisation.

In 1996, following the experience of the United Kingdom and elsewhere, the European Union issued a directive requiring all member states to introduce market mechanisms in the electricity market (and, sometime later, in the gas market), also giving guidelines and minimum quotas for market opening. The solutions adopted for introducing liberalisation into the electric power sector vary widely, although most models incorporate a formal separation production, transmission, and distribution into district entities. Different companies are responsible for each of the three functions, or, in some cases, at least temporarily, the three sectors are distinguished within the same company, with separate budgets and management. There is generally only one company in charge of transporting electricity (more than one long-distance electric network in a country is hardly justified); there are many distribution companies over the country, but generally only one in each geographical location (although a few exceptions do exist); and there is generally a multiplicity of power producers. The aim of the liberalisation procedure is to allow the maximum share of the users (at the limit, all users) to choose among different producers, based on price and quality of service, and to have the electricity convoyed from the production site to the consumption side through the transport system. The price to be paid for transport is regulated, generally on a cost-plus-fee basis. At the beginning, only large-scale consumers (typically large and medium industries) are going to be able to choose among producers, but most countries aim at a progressive enlargement of the basis of these "eligible customers", eventually arriving at the totality of electricity users. Since it is impractical for isolated customers to contact many prospective producers (or vice versa), the figure of the "provider" is emerging, establishing links between the producer and the client and actually introducing the element of competition at all scales (this figure is already common in the field of telecommunications). In the various countries, the degree of choice given to the final consumer, the actual level of competition, the uniformity of prices, and the balance between public and private enterprises are very variable and are rapidly changing with time.

In order to function properly, the electricity market has to be regulated. Rules have to be set, in order to guarantee that the market functions properly, the interests of the consumers are protected, and some social objectives of public interest find their fulfilment. Examples are the extension of the grid to locations not yet served, an upper limit to tariffs, the assurance of service for essential or strategic usage, and the promotion of environmental protection and renewable sources of energy. While some of the basic guidelines need to be set by the government and established by law, setting the actual rules and monitoring of the functioning of the system is increasingly committed to a specific authority, which is generally a high-level body independent of the government.

Such authorities have been pioneered by the United States since 1987 by the creation of the Public Utility Commissions at the state level (with a corresponding electricity regulatory commission at the federal level). Anglo-Saxon, North European and South American countries have followed: the UK since 1989, Argentina and Norway since 1990, and so on, until the system has been adopted by most-not all-OECD countries. Independent regulatory Authorities are still rare among developing countries. In the latter, in most cases, deregulation of the electricity sector has been introduced and regulatory powers remain within the government, as in the case of Jamaica, where an Office of Utility Regulation has been established.

Developing countries, however, have particular problems to take into account. In many developing countries, the size of each grid (many not interconnected) is still too small to justify more than one large-scale electricity producer. The problem concerns the access to the grid of very small independent power producers, often based on renewable energy or operating diesel generators. Moreover, the quality of the service is often very poor, with frequent interruptions, and improving this aspect is a major concern. The importance of rural electrification is also much greater than in the case of industrialised countries, and solutions have to be weighted against these problems. It would probably be unwise for most developing countries to adopt the regulation of the electricity market schemes from industrialised countries, without introducing major changes to account for their own particular conditions. However, there is a general consensus that introduction of elements of liberalisation of the market at an early stage, if tailored to their actual conditions, would generally be beneficial. In particular, it is recommended to liberalise the sale of energy from renewable energy sources (RES), independently of eligibility rules in general.

In other words, developing countries must make the most of exploiting the potential of the market in reducing costs, allocating resources, and finding innovative solutions, but at the same time they must orient the market decidedly towards their outstanding priorities, such as poverty alleviation, rebalancing of rural and urban areas, and promotion of social, as well as economic development. There is no fixed formula to do this, and each country must consider its own specific situation. Some examples can be found in the next sections.

It may be worth mentioning that, among the provisions regulating the electricity market in some of the industrialised countries, a levee is applied, generally on the tariffs for the transportation of electricity, in order to support some goals of public utility, such as the financing of research and development in the field of electricity, or the promotion of RES.

6.2.4.2. Other Energy Sectors: Gas And Petroleum

The gas sector has problems similar to those of the electric sector, due to the need of infrastructures for transport and distribution. The deregulation of the gas sector in industrialised countries is proceeding more or less in parallel with that of the electric sector-in some cases preceding it, in others lagging behind. In some countries (e.g., Italy and UK since 1999), the same regulating authority oversees both sectors. Liberalisation of the gas market has little significance in most developing countries, since there is typically no infrastructures for natural gas.

Petroleum products and, to a large extent, coal are more easily amenable to market mechanisms (apart, of course, from the regulation of their environmental performance, which is open to a number of options, as exemplified by the various approaches to the reduction of SOx emissions).

The prices of petroleum products have been deregulated in most industrialised countries. State-owned oil companies often have been privatised, and where they have not, they have no longer monopoly positions, and are required to operate as private ones in a competitive environment. Exploration and exploitation of oil (and gas) fields is also generally open to national and international competition, through a system of concessions subject to competitive bidding.

In developing, oil-producing countries, state-owned national companies are still the rule. They have responsibilities for the exploitation of national reserves, which is generally carried out by means of joint ventures with foreign (or multinational) petroleum companies. This is understandable, in view of the prevalent weight of oil on their economies, and, in particular, on the balance of payments. This situation is not expected to change in the foreseeable future.

This system can be-and is being-used, in some cases, to the advantage of sustainability. Some farsighted governments actually bind the concession of oil exploration and exploitation to some forms of introduction and diffusion of sustainable energy systems, so that they are better prepared for the time when petroleum reserves run off. Some of the major oil companies have responded positively to this challenge, putting substantial investments in the development of advanced energy systems, such as renewables (particularly biomass and solar photovoltaics) and distributed generation and cogeneration.

6.2.5. Barriers and Opportunities

6.2.5.1. Legislative Issues

The trend towards deregulation and market mechanisms indicates that it may often be more important to eliminate legislation that constitutes an obstacle to the diffusion of sustainable energy systems, rather than to create new laws. However, new laws and norms are still necessary to regulate the market, impose certain minimum standards, and set up incentives (see Section 6.3.1.).

A clear indication that has emerged from past experience is that technical norms should not be included in legislation. Examples abound of technical norms that represented the best choice expressed by the scientific and industrial communities at the time they were included in the legislation, but which have become rapidly obsolete because of technological progress or change in the external conditions. The fact that they have been included in laws has made the process of amending and updating them extremely cumbersome and lengthy, with norms made with the best possible intentioned finally representing obstacles to the progress of technology and diffusion of improved solutions. If technical specifications are necessary, they must be subject to periodic revisions, with the possibility of having them issued and updated rapidly. However, in most cases, it is better to specify the targets one wants to reach rather than the technology to reach them. At most, a technical annex can show that at least one technology exists capable of obtaining the desired results, but if other (and perhaps better) options are available, people should be allowed to use them.

Looking for laws and norms that impede the development of sustainable energy systems is not an easy task, since such legislation may not be addressed specifically to energy and may be equally or more relevant to other fields. For instance, taxation on energy technology and equipment discourages some efficient energy technologies. Similarly, renewable energy technology products (such as solar photovoltaic and heat panels) or materials to manufacture them locally are often subject to high import duties that increase their market price, relative to conventional energy.

The process of generating electricity in a dispersed or decentralised way (often by RES) is often discouraged by the difficulties of obtaining the required permits, which may have to follow the same procedures as permits for plants that are a thousand times larger. Sometimes, this also applies to energy generated to be consumed on-site, while selling electricity to other customers is often illegal, and provisions to sell it to the grid are technically difficult, bureaucratically cumbersome, and economically unrewarding. Legislation allowing equipment owners to connect and sell power to neighbours is under discussion in Uganda. If implemented, the resulting microgrids could bring about dramatic improvements.

Setting up solar panels on the roof or facade may be in contrast with local building codes. Passive solar architecture includes a number of features (such as orientable sunshades, green-houses providing and storing solar heat, or wind towers for cooling) that, even if not prohibited, are discouraged by local legislation (for instance, by calculating and taxing greenhouse space as part of the residence).

Labelling and minimum standards are well-known and proven instruments to improve the efficiency of energy consumption (for instance, in appliances). Setting the right values is a difficult problem of compromise between contrasting needs. Overly low standards risk the failure of projects, because of poor quality of the equipment, with consequent loss of confidence by the business and financial worlds, as well as by consumers. Overly high standards risk involving excessive (and unnecessary) costs, limiting consumers’ choices and endangering projects for another reason. Efforts to reach reasonable standards are underway in a number of initiatives, such as the PV Global Accreditation Programme (PV-GAP) for photovoltaics.

Positive examples of standard-setting at the level of a single country are beginning to emerge. Policies and programmes for appliance labelling and standards, as well as for improving thermal efficiency of new housing projects have started (e.g., South Africa), but have yet to be implemented on a large scale. Energy standards for commercial buildings have been adopted in Cd’Ivoire. However, better results may be obtained by setting up common standards agreed upon, at least at the regional level, thus facilitating commercial exchanges, joint initiatives, and exchange of experience.

6.2.5.2. Technology-Specific Issues

Energy is interlaced with every facet of productive and social life; this is particularly true for the more sustainable energy systems, which are mostly distributed, local, and integrated into everyday life. Therefore, it is not only institutions, legislation, and norms explicitly concerning the energy sector that are relevant in terms of barriers, as well as of opportunities, for the development of new energy structures. We briefly discuss two examples here.

The first concerns energy from biomass, be it residues, forestry products, or dedicated plantations. In most developing countries (and not only in those), the largest fraction of agricultural residues today are burnt in the fields. Although this practice does return to the earth a part of the minerals and of the nitrogen content, it is by no means the most effective, it wastes large quantities of stored heat and it creates potentially severe environmental problems. Repeated shut-downs of airports because of the smoke, for instance, have induced the Chinese government to ban the practice of burning, at least in certain areas. Although the residues can be tilled back into the ground, only about one-third of the residues is estimated necessary with this technique to supply the required fertilisation. Large quantities of biomass are thus made available for energy use.

Agricultural, land use, and forestry policies often present institutional difficulties for the energy exploitation of biomass. The state ownership of forests in many countries (as opposed to village ownership or private concessions) does not encourage sustainable forestry practices and rational exploitation. Forest departments typically lack the resources to manage forests and woodlands, or even to guard them against public exploitation as a free good. Returning this land to ownership and management by local communities (a form of privatisation) can be a sound way of turning depredation into good management. Tenure laws, forestry codes, management plans, rural wood markets, and price regulations must be developed and implemented. The World Bank, together with UNDP, ESMAP, and the Regional Programme for the Traditional Energy Sector (RPTES), are conducting pioneering efforts along these lines in 12 countries of Sub-Saharan Africa.

Another example of a sustainable energy system that often meets with institutional difficulties is the combined production of heat and power (CHP), which is an energy-saving technology meeting increased favour in both industrialised and developing countries. Here, the difficulties are more internal to the energy sector, but derive from the fact that CHP puts together two sub-sectors which are regulated with different rules and logics: two markets, two types of technology.

The techniques used until recently for CHP put emphasis on heat production. The CHP plant generally operated following the demand for heat; the ratio of electricity to heat produced was rather rigidly fixed and relatively low, so that the electricity produced was all consumed on the site and complemented with inputs from the grid. The result was relatively easy to manage from the institutional point of view, but the overall efficiency was low and hardly justified the recourse to this technique. The fact that the plant followed the heat load implied its partial utilisation and, therefore, increased financial loads.

New techniques, in particular gas turbines and combined cycles, have completely changed the situation. The overall efficiency has become much higher, and the electricity to heat ratio has become much more flexible, but also much higher. In these conditions, it becomes convenient to operate the plant at full power all the time, extracting at each moment only the quantity of heat that is required. The power produced is generally much more than what is needed locally, and, therefore, it has to be fed into the grid. In these conditions, rules have to be set to distribute the cost of the overall production between heat and electricity. If (as it is often the case with district heating) the plant belongs to the electrical utility, then taking up electricity is an internal problem, but setting the price for heat is more complicated. In the case of industrial CHP, where the plant is owned and operated by the industry or (in some cases) by a third party, either the sale of electricity or of both electricity and heat involves specific regulations. Incentives for CHP plants, originally set for older technology, often require a maximum electricity over heat ratio (to make sure that it really is CHP), which is absolutely in contrast with maximum efficiency and modern technology trends.