Cover Image
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

(introduction...)

ENABLING FRAMEWORKS FOR SUSTAINABLE ENERGY

6.1. Introduction

Energy is an essential component of development. Society needs not energy per se, but rather the services that energy can provide, such as heating, cooling, manufacturing goods, pumping or purifying water, etc. The widespread availability of energy services is needed for sustainable development.

The main features of a sustainable energy system are well known: high efficiency in energy transformation and final uses; much greater utilisation of renewable energy sources; and clean and effective utilisation of fossil fuels.

The introduction of these changes faces both barriers and opportunities. Some of these are of a technical nature: for instance, some of the technologies for renewable sources of energy or for improved energy efficiency are less mature than conventional technologies, have not been adapted to the specific conditions of the place, or their cost may still compare unfavourably with those of more traditional solutions.

However, the widespread adoption of more sustainable energy systems is also influenced by non-technical factors, particularly the institutional environment, such as norms, regulations, incentives, taxation, etc. In many countries, these factors have evolved and become consolidated over a long period during which the role of energy has not been sufficiently understood and the concept of sustainability has been unknown. As a consequence, these factors often represent powerful barriers against the introduction and diffusion of the energy systems required for sustainable development. The energy policies of many developing countries-when such policies are explicitly stated-often do not take into due account the possibilities offered by new technology, and, sometimes, with the best of intentions, actually discourage their adoption.

In the following sections, we consider all the non-technical factors that depend on the action of governments (both central and local), including legislation.

It should be noted from the start that technical and non-technical factors are only formally independent, since they actually interact with each other. Legislation may orient technology one way or the other. Many examples are known, for instance, of well-meant laws or norms which have slowed down the development of technologies or turned them towards less effective solutions. Positive examples can also be found. Conversely, new technical solutions open opportunities that can be taken up by the legislator. Therefore, discussion of institutional problems cannot be entirely separated from technological considerations.

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.

6.3. Making it happen

6.3.1. Creating enabling conditions

6.3.1.1. Encouraging Renewable Energy Technologies

Renewable energy technologies (and, to a lesser extent, some energy efficiency measures) necessitate some degree of public support to take off. There are good reasons to provide temporary financial support to these technologies, despite the general principle that subsidies to energy need to be avoided. The first reason is that this support is meant to overcome the inadequate functioning of the market, which discriminates against renewable energy in many ways: because externalities are not yet reflected in the price of energy; financing systems favour conventional solutions and large-scale supply-side interventions; and there are still barriers of knowledge and capacity. The second reason is that, in the past, conventional sources have received subsidies and support that have enabled them to buy down costs by rapidly following the learning curve.

It is, however, clear that if some of these technologies need to be subsidised to gain a footing, then such subsidies must be open, universal, and time-bound. Decisions need to be regulated and made in common with the private sector. Subsidies should never be given to technologies that do not have the capability of eventually (and predictably) becoming competitive and surviving by themselves in the marketplace.

In the past, many governments in both industrialised and developing countries have planned, financed, and, often, directly implemented projects using renewable energy. Alternatively, they have supplied capital incentives for any such projects with little discrimination. These approaches have proven to be inadequate in scale, and, often, conducive to supporting uneconomical technologies, because they have not adequately considered market conditions.

Fiscal incentives for sustainable energy systems should, therefore, be carefully designed and targeted to buy down initial cost, risks, and other implementation barriers; subsidies for running costs are much harder to justify and often have been the principal cause of project failure.

Many countries have set up ambitious targets for the penetration of RES in their economy, as well as set up incentives and regulations in order to reach these goals. The Commission of the European Union, for instance, has approved a "white paper", indicating the objective of doubling the share of renewable energy sources in the energy budget of the Union. Member countries are requested to adopt consistent policies to reach this collective objective, and several countries have already complied with appropriate legislation.

Examples from industrialised countries include the Non-Fossil Fuel Obligation (NFFO) in the UK, the Renewable Portfolio Standard in the US, a number of methods of dispatching and price incentives for electricity generated by renewable sources in various European countries, and several types of intervention for energy-saving measures. Experience has shown that these interventions are most effective when they make use of market mechanisms (such as through competitive bidding), and when they actually promote technology improvement (through planned decrease of subsidies with time).

NFFO derives from the 1989 Electricity Act, empowering the UK Secretary of State to order the Regional Electric Companies (RECs) to contract for specified amounts of electricity sourced from non-fossil fuels. The RECs are compensated for the extra cost of electricity by means of a levee on electricity consumers (the Fossil Fuel Levee). NFFO is operating since 1993, by means of competitive bidding (five until the last in 1998). The competitive mechanism has allowed the highest prices paid for the kWh from each of the technologies considered (wind, hydro, landfill gas, waste, and biomass) to decrease substantially from each call for tenders to the next. The total capacity expected to be commissioned by the year 2000 amounts to 1500 MW. Similar bidding systems have been introduced in France and Ireland.

On the other hand, other countries offer fixed prices for the acquisition of energy from RES to the grid, namely Germany, Denmark, Spain, and Italy. These prices are calculated on some prescribed bases (such as avoided marginal costs plus decreasing incentives) and, therefore, do not depend on competition; however, the results obtained so far do not seem to be worse than with the bidding system.

Additional incentives are often offered to the developer, such as accelerated depreciation allowances, tax exemptions, lower import duties, government-guaranteed special lines of credit, or even direct subsidies.

India, in its Ninth Five-Year Plan, has set a number of ambitious detailed targets for renewable energy, sub-divided by technology and application.

In India, there is a host of benefits available to both manufacturers and users of renewable energy systems.6 These include: (i) 100 percent depreciation for tax purposes in the first year of the installation of the systems (recently reduced to 50 percent); (ii) no excise duty on manufacture of most of the finished products; (iii) low import tariffs for capital equipment and most materials and components; (iv) soft loans (2.5-10.3 percent) to manufacturers and users; (v) 5-year tax holiday for power generation projects; (vi) remunerative price for the power generated through renewable energy systems fed to the grid; and (vii) third-party sale of renewable power.

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

Innovative approaches are possible. One receiving attention at the moment is the "concession approach" to renewable energy resources (starting from wind), which applies, with the necessary changes, the same criteria used for oil and gas field concession, through the exploration phases, setting up of joint ventures, and exploitation phase. The main advantage of this approach resides in contracting the concessions in fairly large blocks that justify launching of joint ventures and the effective transfer of technologies, as well as allow the process of buying down costs to effectively take place. At the moment, this approach is being considered, in particular, for wind projects in China.

Successful approaches include bundling consumer demand (to capture economies of scale) and financial capacities through community association, and delegation of public sector responsibility to private sector concessionaires.

New renewable energy technologies are already contributing to improving the quality of life, especially in rural communities of developing countries. Their social contribution is, in a way, much greater than their share in national energy budgets. Examples vary from the biogas family plants in China to those at village scale in India, the small wind generators or PV systems feeding TV and communication systems in Mongolia, and the PV-fed refrigerators for vaccines in Africa. However, we are just now experiencing the first results of policies designed to encourage the diffusion of renewable energy technologies (RETs), not by direct subsidies (or not only by them), but by creating a favourable institutional environment for their diffusion through market forces and private initiative. Effects can already be observed, for instance, in Zimbabwe, India, or in some provinces of China.

6.3.1.2. Supporting Appropriate Financial Mechanisms

One of the main difficulties to be overcome for the diffusion of sustainable energy systems is the dispersion of financing into a myriad of small projects. Lending institutions are used to large-scale loans, such as generally required by supply-side conventional plants. The cost of assessing each single proposal of renewable energy or improvement of energy efficiency is often far too high to be justified by the amount requested. This applies to project financing (where the loan is assessed on the basis of the techno-economical soundness of the proposal) but it also applies to the more conventional loans based on the solvability of the requester. Now, credit is an essential need for the diffusion of sustainable energy schemes at the individual level, where there is often the possibility of paying for the energy services, but not of anticipating the money for downpayments.

The solution to this problem relies on aggregating together many similar projects, so that the technical analysis is done once for all and transaction costs are sensibly reduced. Bundling these projects is also convenient from the technical point of view, as it allows to supply adequate answers to the problems of installation, operation, maintenance, availability of spare parts, etc. However, from the financial point of view, it is an absolute necessity.

Governments are not expected to provide financial services directly, but they can greatly facilitate the development of appropriate financial mechanisms by creating the right legislative environment, supplying guarantees, making the initial investment available for rotating funds, etc.

In India, the central government has set up a financing company, Indian Renewable Energy Development Agency (IREDA), which is exclusively devoted to development and financing of RE projects. IREDA has developed state-level institutional linkages with technical consultancy organisations in various states. IREDA provides soft loans and technical assistance to manufacturers, suppliers, financial intermediaries, and the actual users of RE systems. A programme on wind energy, small hydropower, and photo-voltaic market development in India has been taken up by IREDA, with assistance from the World Bank and other international agencies. IREDA has financed projects of about 625 MW capacity and sanctioned loans of about Rs14,000 million (US$400 million).

FINESSE (Financing Energy Services for Small-Scale Energy users) is a programme set up by the World Bank and UNDP with the help of some bilateral donors. It draws on the concepts of:

· bundling small projects into appropriate financing packages;
· incorporating them into national energy planning;
· selecting appropriate intermediary solutions; and
· providing technical assistance and training as needed.

Since 1991, these concepts have been applied to Indonesia, the Philippines, Malaysia, Thailand, and Sri Lanka.

SADC (Southern Africa Development Community) has applied, since 1996, the same concepts in Angola, Lesotho, Malawi, Namibia, South Africa, and Zimbabwe.

Where these methods have been applied, results have, in most cases, been encouraging. It is probably too early to draw any conclusion, but the impression shared by the majority of operators in this field is that the potential is greater than is generally assumed. The key factor is to involve and stimulate local business initiatives, so that the community can express its needs more easily. Aggregation of demand then becomes a powerful factor of cost reduction, both in terms of financing and in technical terms. When these terms can be addressed together (as, for instance, for the ESCO case), the results are probably easier to come home.

6.3.1.3. The Instrument of Voluntary Agreements

In the transition from top-down command and control mechanisms to economic participatory market mechanisms, the instrument of voluntary agreements (VAs) is meeting increasing favour and finding more frequent application in the fields of environment and energy policy. VAs in this sense are a relatively new instrument, which complements-rather than replaces-other instruments. Is is also especially potentially effective under two points of view: the implementation of objectives incorporated in existing policies (as concerns the definition of the ways to reach such objectives) and the definition of innovative policies (as an instrument for identifying and implementing new types of objectives).

The definition we adopt of VA is "an agreement between at least one public subject and one economic subject aimed at reaching objectives of public policies".7 Formally, VAs are contracts, which may have a variety of forms, but which have some common characters:

· they are finalised to public interests, with objectives of improving the quality of environment, use of natural resources, quality of energy services, and other social objectives;

· there is at least one non-economic public entity and one economic, generally private, entity among the signatories; and

· for the public subject, the agreements constitute an instrument of environmental and energy policy.

7 P. Amadei, E. Croci and G. Pesaro, 1998, New Instruments of Environmental Policy: Voluntary Agreements, Franco Angeli, Milano

VAs are the result of negotiations; the parties agree on the objectives and on the way to reach them; however, the most distinctive element of VAs, with respect to other voluntary instruments, is the voluntary exchange of engagements.

The economic subject(s) engage themselves to reach certain targets or implement certain standards which are not required by the present legislation; the public subject(s) take some corresponding engagement, which can range from a simple public recognition of the engagement of the enterprise to the destination of resources, implementation of normative and administrative measures that facilitate or expedite the action of the private parties, and realisation of particular infrastructures of interest to the economic parties.

In the case of VAs, enterprises can introduce new schemes for the management of environmental and energy variables in the process of industrial production, assuming a direct and primary role in the direction of the innovation, which is to be based on its own technological, organisational, and market strategies.

In order to be effective, a VA needs to be controlled and monitored, so instruments to do that have to be clearly defined in the text of the agreement and implemented at an early stage. It has to be binding-it is voluntary in the sense that the parties have negotiated it and entered into it by their choice, but once it is signed, it is mandatory for the signatories. For this reason, sanctions have to be foreseen, if one of the parties does not fulfil its engagements. In the simplest case, the sanction may be that the other party does not comply with its own obligations, but other types of sanctions are possible. In some cases of large-scale VAs, the government may clear that, if the stated objectives is not reached by the implementation of the agreement, it has to fall back on some forms of command and control.

Voluntary agreements with environmental objectives, some regarding the energy sector, have been operating in many OECD countries. The Netherlands has been at the forefront of the adoption of such instruments in Europe. Chemical industries, the energy sector, and, later, the transport sector have had a major role. Among the specific topic considered are the reduction of waste production, its reuse and recycling, elimination of chlorofluorocarbons (CFCs), reduction of packaging, etc.

Evidence of VAs in the environment and energy sector is scarce for developing countries. There is no special reason why this instrument can not be as effective in developing countries as it appears to be in industrialised countries.

BOX 4. EXAMPLES OF VOLUNTARY AGREEMENTS

A scheme of voluntary agreement adopted or considered in several European countries involves Government on one side and manufacturers of appliances on the other, in order to promote the increase in energy efficiency of refrigerators and the elimination of CFCs from discarded refrigerators without release to the atmosphere. Manufacturers engage in improving the average efficiency of their product, according to an agreed schedule, and to take responsibility for the disposal of the old refrigerators, and the government facilitates this process by modulating value-added taxes, according to class of efficiency, and by supplying contributions for the controlled recycle or disposal of each old machine replaced by a high-efficiency model. Another well-studied VA in a province of France concerns the engagement of a large segment of industrial companies in the region to reduce the production and maximise recycling of wastes, while the government provides technical and financial support. In the United States, the "Green Light" initiative, started several years ago, now sees more than two thousand companies introducing high-efficiency lighting in all their areas, again with technical support from the government (the Environmental Protection Agency) in evaluating different alternatives. Another important initiative has been the agreement between the government and the three major auto producers for the development of zero or very low emission vehicles, by which the manufacturers have engaged in producing and commercialising such vehicles in a given time frame, and the government participates with very substantial funding to the R&D effort necessary to reach this goal.

The European Union has put out a recommendation to the member states that the instrument of VAs be used for environmental purposes whenever possible, and it has issued a number of guidelines for such agreements.

A voluntary agreement involving the government and the representative organisations of all economic and social parties has been the backbone of the new Italian sustainable energy policy formulated at the end of 1998. The basic agreement is a covenant, signed by the central and local governments, the associations representing industry commerce and other business, the workers’ unions, associations of cooperatives and farmers, the banking system, environmental associationsm and consumers’ representatives. The parties agree on a certain number of guidelines in the energy field (including international cooperation, opening of the energy markets, social cohesion, competitiveness, quality of the services, etc.), a certain number of specific environmental targets, and on the type of actions to be carried out to reach these targets. The agreement is actually a general framework, which is presently being articulated in sectoral and local agreements, which are much more specific and include verifiable objectves, monitoring mechanisms, and penalties.

Evidence of VAs in the environment and energy sector is scarce for developing countries. There is no special reason why this instrument can not be as effective in developing countires as it appears to be in industrialised countries.

6.3.2. Facilitating Sustainable Energy Initiatives in Rural Areas

As we have mentioned at the beginning, the recourse to market forces and private entrepreneurship must be adequately steered, so as to avoid the danger that socially important but economically less rewarding tasks are left behind. Particularly, this is the case for rural electrification and provision of energy for the poor. The main guideline to do this is by promoting and inducing independent and autonomous agencies at the local level, to pursue rural electrification and decentralised energy systems.

For a limited period, development assistance is generally needed to underwrite (by credit guarantees, etc.) obligations in the public interest (such as rural electrification) that are imposed on new (or newly-privatised) companies where these lose money. Governments must thus nurture a capable, motivated, and vigorous local sustainable energy sector, until it becomes self-sustaining. Actors include manufacturers of renewable energy and energy-efficiency equipment, assemblers, importers, distributors, retailers, equipment installers and operators, such as renewable-based independent power producers (IPP) and Energy Service Companies (ESCOs), energy managers, consultants for the industrial and commercial sectors, technical support service providers for small users of renewable energy technologies and energy efficient devices, and NGOs that help to implement these policies. Maintenance is important (including the procurement of spare parts) and needs up-front financing and aggregation of microprojects.

Several different approaches are possible, most relatively new and untested:

· Public/private sector joint ventures: Public utilities supply know-how and share financing, risk, and management functions with private sector enterprises. For instance, in Tanzania, the public utility Tanesco has worked with the town of Urambo to establish and operate a diesel-based electricity cooperative.8 In India’s West Bengal state, a local NGO, the Ramakrishna Mission, and the state Nodal Agency have come together to form the West Bengal Renewable Energy Development Association (WBREDA).

8 UNDP/CE DG-VIII, 1999, Energy as a Tool for Sustainable Development for ACP countries, Brussels

· Energy Service Companies: ESCO-based PV deliveries have been implemented in the Dominican Republic, Morocco, Indonesia, and Bolivia, and are currently being tested in Zambia. ESCOs own the equipment and are paid a monthly fee for the energy services provided. ESCOs are also active in the field of energy efficiency: a small grant GEF/World Bank project is now attempting to nurture the ESCO market in the Ivory Coast. Few, if any, ESCOs in the rural areas recover their cost; they depend on some form of grants. A grass-roots energy service company has been set up in Karnataka, India. Called the Solar Electric Light Company (SELCO), it has been successfully marketing and installing solar home systems and water pumps in several districts of the states of Karnataka and Andhra Pradesh, through innovative rural credit support schemes.9

9 See ref. S.S. Boparai, above

· Project-led capacity building: Good project design can force private sector developers to build up comprehensive energy delivery services. A good example is supplied by the Regional Solar Pumping Programme of the European Commission in Sahel.

· Community Associations and Cooperatives: Cooperatives have played a major role in the rural electrification of the United States and in several European countries. This route is presently being actively pursued in Bangladesh. Community associations and cooperatives can greatly contribute to aggregate political voice, technical and managerial know-how, and financial credit-worthiness. They may also open the door to larger-scale solutions, such as minigrids and medium to large scale bio

· mass production. Examples can be found in Morocco (where the management is supplied by an NGO), the Philippines (sponsored by the Asian Development Bank), and the state of Minas Gerais in Brazil (started by a concession funding by the government to a local company for the installation of photovoltaic systems in schools, etc.). In India, a group of farmers in Tamil Nadu have purchased and installed solar pumps with government support. In Cape Verde, a World Bank solar electrification and wind power loan is helping to lead the reform process by introducing the private provision of energy services in rural areas.

We have clearly indicated that the ability to provide modern energy services in rural areas and to the poorer strata of the population is, perhaps, the most critical test of the energy policy of developing countries. Liberalisation without the appropriate regulating instruments risks concentrating the attention of entrepreneurs where the task is easier and more rewarding- in cities and on the more affluent people. However, experience in facilitating market mechanisms to deal with the more difficult tasks has been positive so far. The examples are numerous, and many of them are cited in the preceding paragraphs on the types of instruments which have been tested. The ability of the rural population to spend money to utilise modern energy systems is higher than generally believed, if nothing else, because they are already spending excessive amounts of money for very inefficient systems like candles, kerosene lamps, or carrying batteries for recharging to the nearest city. The economic value of the productive activities that can be based on the availability of even small quantities of energy is also fairly high, and local people can readily appreciate that when they are given the correct information and the possibility of taking the initiative upon themselves.

6.3.3. Introducing Integrated Resource Planning and Demand-Side Management

Often, the more sustainable energy solutions are also the most convenient economically. These opportunities often are not captured, because of lack of information, institutional barriers, or lack of organisational structures needed to implement them.

One relevant example is the way in which utilities plan their investments. In the traditional utility of the industrialised countries, this planning proceeds in separate steps from power generation to transport and distribution. Assuming a certain growth of demand, the planning of the generation capacity to respond to it is carried out in steps of at least 100 MW each. The choice of the plants and of their siting is mostly determined by minimising the cost of this step. The following step is to design the enlargement of the transport system required to carry the electricity from the production to the consumption site, and this is optimised separately. The final step concerns distribution in a similar way.

Such a procedure does not allow taking into account the interactions among the different steps. For instance, small generators located close to the site of utilisation generally have a higher specific cost for generating electricity, but incur savings in the transport and distribution (e.g., transformers). The resulting distributed generation may well lead to lower overall costs than the planned centralised production. The way to evaluate this is readily available through the methods of Integrated Resource Planning (IRP)10, which have already been adopted by a number of utilities in the last decade, and which are also being diffused in developing countries. For instance, a number of workshops on the subject have been organised in China, with a considerable measure of success, by the Working Group on Energy Strategies and Technologies of the China Council for International Cooperation on Environment and Development. IRP is actually a much broader concept, and it applies to all types of energy systems, not only electricity. IRP takes into considerations the complete energy chain, including the extraction and collection of primary energy, its conversion into carriers suitable for transportation, distribution, and end use, as well as the provision of desired energy services. IRP also includes life cycle considerations, while traditional planning is generally limited to a relatively shorter time horizon.

10 D. Berry, Least Cost Planning and Utility Regulation, Public Utilities Fortnightly, March 17, 1988; Electric Power Research Institute, Moving Toward Integrated Resource Planning: Understanding the Theory and Practice of Least Cost Planning and Demand-Side Management, EPRI, Palo Alto, CA, EM-5065, February 1987; D. Bauer and J.H. Eto, Future Directions: Integrated Resource Planning, Proceedings of the ACEEE 1992 Summer Study on Energy Efficiency in Buildings, American Council for an Energy Efficient Economy, 1992

IRP has proven to be an effective, powerful analytical method, providing useful answers whenever resources are limited. IRP analysis is based on the chain as a whole, and it must include the potential for efficiency improvement of all realistic supply and demand side alternatives. These alternatives are then ranked according to cost (including social and environmental costs), in order to find the true least-cost option. A prerequisite is a transparent and rational energy pricing system.

In some cases, utilities are required by regulations to employ IRP methods. IRP methods, however, can be applied to set priorities for investment to be cost-effective and establish performance standards for all energy-intensive investments, for instance, commercial buildings.

The next step derives from the consideration that it is often less expensive to use energy more efficiently, than to produce more energy to obtain the same service. From a societal point of view, it is convenient to put on the same footing the options of production and consumption, by comparing the marginal costs of increased generation and those of increased efficiency. The main barrier found in the past to the implementation of this principle was that the utility, which had the strictest relationship with the users, based its revenues on selling electricity and would not look favourably to schemes reducing such revenues. In some particular cases, utilities whose generating capacity was completely saturated had some benefits from reducing or delaying demand growth, because installing additional capacity would involve marginal costs higher than the tariff they could apply. In California, many utilities provided, free of cost, high-efficiency lights to their customers to obtain this goal.

The application of economically convenient measures to increase the efficiency of energy use is called Demand-Side Management (DSM).11

11 E. Hirst and J. Reed (ed.s), Handbook of Evaluation of Utility DSM Programs, Oak Ridge National Laboratory, December 1991; C.W. Gellings and W.M. Smith, Integrating Demand-Side Management into Utility Planning, Proceedings of the IEEE, June 1989; Reddy, A.K.N., A. d’Sa, G. Sumithra, and P. Balachandra (1995). Integrated Energy Planning, Part I and II, Energy for Sustainable Development Volume II(3 and 4).

While, until the recent past, the main trend was to devise methods to require, or at least encourage utilities to offer DSM services to their clients, the present market approach to this sector indicates that a better solution may be to promote or stimulate the setting-up of specialised companies called Energy Service Companies (ESCOs). Although DSM originates with electricity, it is by no means limited to it. ESCOs offering services to reduce fuel consumption for space heating, for example, are relatively common in European countries.

Some cases of successful application of DSM come from developing countries. In Jamaica, for instance, the public electric utility has started a DSM project, sharing the costs and benefits of energy efficiency measures with the customer. SADC (Southern Africa Development Cooperation) Energy Management Programme targets low-cost and housekeeping industrial measures, through audit and training programmes for industry managers and technicians.

It is important to keep these considerations of IRP and DSM present, while designing the rules of the liberalised market, so that these rules encourage rather than discourage, energy efficiency and energy service companies. In some cases in the past, the emphasis on cost reduction and competition among generators has monopolised the attention of the regulators and created some negative bias, which is presently being removed.

National agencies with responsibilities for energy saving (and often also for renewable energy) may have an important role in the diffusion and application of demand side management and energy efficiency. Such agencies, set up by governments, exist in most industrialised countries and in many developing countries. There are also regional associations of these national agencies, such as EnR in Europe and more recently (1997), MEDENER for the Mediterranean countries (including, on the South shore, Morocco, Algeria, Tunisia, Egypt, the Palestinian authority, and Lebanon). These associations are supporting joint programmes and technology transfer.

6.3.4. Additional Policy Considerations

6.3.4.1. Removing the Information Barrier

The "information barrier" works in two directions: toward the people and toward the government. Most people do not know what possibilities are offered by alternative energy sources and more efficient devices, not necessarily only those made possible by advanced technology, but also the equipment that has been on the market for some time somewhere else. People do not know they have different options in the energy field; they do not have adequate information on their performance, limitations, and costs. Therefore, they tend to maintain their traditional systems even when new, more convenient ones, are available.

In order to overcome this barrier, government can support promotional campaigns, based on good and objective information, so as to make people aware of sustainable energy alternatives, which also have economic and other advantages. The targets of these campaigns should be business, finance, and small-scale service sectors, as well as ordinary households. Examples of similar campaigns exist. For instance, in Morocco, the government, through the Centre for Renewable Energy Development (CDER), together with an NGO and with German technical cooperation, has launched an educational project on the options offered by renewable energy technology and their environmental aspects. Targeted in a first phase to about 550 students of secondary schools in a rural environment, the project is a means of reaching a larger strata of the population.

Demonstration is also needed; people are going to want to be shown the alternatives in actual operation, in the reality of the local environment, and are likely to imitate a neighbour who has acquired a more advanced energy system when this proves to be successful and profitable. Therefore, governments need to promote demonstration projects as a means to disseminate information, as part of a scheme to create the appropriate conditions for diffusion of sustainable energy systems carried on by market forces, and not as a repetitive intervention that replaces the spontaneous diffusion process.

The other type of information barrier is the insufficient base of knowledge available to governments and other decision-makers in the field of energy. Often, they have to make decisions in the absence of enough hard data. Much of what is missing is physical data, for instance, data relating to the availability of energy sources. While exploration for fossil fuels, although far from being complete and satisfactory, enjoys a well-recognised status and is actively being pursued and promoted in many countries, the evaluation of the reserves of renewable energy sources is mostly lacking. Solar (direct and indirect) radiation maps, time and space distribution of wind regimes, quantities of biomass residues available for energy production, potential for energy from forestry and for energy crops, geothermal anomalies that can lead to exploitation, and, where applicable, evaluation of opportunities for the utilisation of currents, tides, waves, and ocean thermal gradients are rare, occasional, and, when they exist, generally inadequate.

The lack of this information is likely to discourage programmes for the exploitation of renewable energy resources, which are generally under-estimated. For instance, it is now common lore that wind charts are initially based, most of the time, on measurements taken at airports, but the sites for airports are generally chosen just where there is little wind. A recent detailed survey of the energy potential of biomass residues in China (carried out in the frame of a US-supported project) has shown possibilities much beyond what was commonly estimated before, and has indicated both the areas and types of residues on which attention should be concentrated.

Many other types of information are needed and very often do not exist. Even rather basic data is often not available, such as how much energy is consumed in a village or in a certain area, what type of energy, for what purposes, and at what prices (if commercial). Even less is known about what is necessary to assess a market’s potential: how ready people are to pay for energy services, what their priorities are, who takes the decisions at the various levels (including the household) on the implementation of new energy schemes, and what the availability is of certain items on the market, etc.

For instance, a survey, conducted in Uganda on the priorities assigned by families to different energy services, showed a reality which was quite different from what was previously expected.

Market assessment for particular items of equipment is also useful before launching certain diffusion projects, and the private sector involved (often small-scale or informal business) does not always have the means and capability to carry it out.

A logical step beyond information is involvement. Rural energy projects have shown to have more possibilities of success, when participatory appraisal methods are included as integral parts of energy programmes and women are directly involved in the decision-making process. Community ownership and management, as well as partnerships with local and regional organisations and NGOs are essential.

6.3.4.2. Promoting Research and Development

A typical role of governments in the energy field, at least in industrialised countries, is to promote, support, and carry out research and development (R&D) activities. In these countries, the private sector contributes substantially (generally more than 50 percent) to financing and carrying out these activities. However, support is still needed from governments for a number of reasons. First of all, proprietary as the results of R&D may be, they are always, at least partially, shared by those who have not paid for the activity, and, therefore, constitute a common good. Secondly, and partly for the same reason, the private sector tends to concentrate on applied R&D close to production problems. Fundamental and basic R&D (which is often the motor of deep innovation and breakthroughs) is mostly left to government initiative, often through the universities, and long-term programmes are generally led by government institutions, as well as some of the larger-scale projects.

There is a fair amount of discussion, and possibly of disagreement, on how much and what type of R&D of developing countries need to support or carry out directly. In this context, consideration has to be given to the fact that the private sector is unlikely to contribute, at least financially, to R&D, in a measure comparable to that of industrialised countries.

Some think that R&D on advanced energy technologies is better left to industrialised countries. Others argue that concentrated high-level R&D, even of a rather basic type, is possible with limited financial effort in the field of sustainable energy, and this "centre of excellence" can give a developing country (or region) a much better understanding of the field and constitute a point of strength for cooperation in the application of the advanced technologies. One example which is frequently quoted is the very high quality of the results obtained in the field of agriculture by the Consultative Group on International Agricultural Research (CGIAR) centres, most of which are located in developing countries.

Without entering into this debate, it must be noted that the situation varies greatly from one country to another. Developing countries with a tradition in basic sciences have already greatly contributed to the worldwide development of sustainable energy technologies. For instance, results obtained in China, India, and Brazil, among others, have been part of the foundation for important developments in photovoltaics and biomass utilisation.

However, there is also a huge scope and need for less basic R&D activities. Technology adaptation to meet local conditions is one example, i.e., how to make equipment more reliable, resistant to local environment, of lower cost, amenable to fabrication with local skills, instruments, and materials, adapted to the specific requirements and habits of the users, etc. All of these requirements are specific to a region, a country, or even a particular area, and the corresponding R&D has to be carried out locally. One example is the success in the development of two innovative types of cookstoves in Ethiopia, carried out by a team of local professionals (with the support of a British NGO). This has been carried out through a repeated assessment of needs, design, product trials, redesign, and performance monitoring. Cooperation with manufacturers, installers, merchants, and individual households has been the key to success.

R&D institutions strictly connected with local realities are also precious instruments of education, training, follow-up of projects, etc.

In India, the Ministry of Non-conventional Energy Sources (MNES) has set up the Solar Energy Centre (SEC) responsible for testing solar energy systems; it intends to become an autonomous body. MNES is also setting up new centres of excellence in renewable energy. The National Institute for Renewable Energy (NIRE) is being set up as an autonomous institution to deal with development, testing, and promotion of various renewable energy rechnologies. A separate Centre for Wind Energy Technologies is being set up.

Promoting Regional Cooperation

Every country can benefit from regional co-operation in the energy field. This is particularly true for small countries, or for the less developed ones.

The regional trade of energy is often a necessary condition to carry out large-scale projects, such as a hydroelectric plant. Interconnection among small electricity grids of neighbouring countries can allow new larger plants, but it can also allow a more rational and cost-effective utilisation of the plants which are already available and provide increased grid stability. Connecting the grid of Burkina Faso to that of Ghana or the Ivory Coast can avoid most of the use of low-efficiency diesel generators or oil-fired plants. Using untapped hydro resources in Nepal to supply electricity to India can be of mutual advantage. In general, large-scale hydro potential sites are located far away from consumption centres, and can often not be exploited without transnational interconnections and regional trade.

Exploitation of natural gas resources is another example. Transporting gas from deposits in one developing country, not only overseas to industrialised countries, but also to the neighbouring countries, may constitute a common ground for development, and allow further expansion in the use of a flexible, efficient, and clean fuel. The gas fields of Nigeria and of the Ivory Coast supply an example.

Countries of the same region often share the same climatic, geographic, environmental conditions, and cultural background. They may profit by putting together their efforts in R&D, adaptation of technologies, and experience in diffusion of sustainable energy system. Several regional research centres already exist, one example being the Regional Solar Energy Centre in Bamako, Mali. Standards and norms often differ from one country to another in the same region, thus making exchanges difficult and reducing the single markets to uneconomical dimensions. Trivial examples, such as the bottles for LPG, show the importance of the relatively simple exercise in unification. By creating a greater market for energy products, however, one can stimulate the development of specific products of regional interest and create new opportunities for local business.

The case of the small developing island states is paradigmatic; their dimension is generally so small that, if left separate, they are unlikely to attract marketing effort, and the penalty on the scale-factor of many goods is severe. Only by putting together their efforts on a regional basis can they reach economic dimensions.

Similar considerations apply to the financial markets; here, too, the aggregation of the demand of several small countries can be the necessary condition for accessing investment capital at reasonable conditions.

Although regional and international cooperation can be started by private enterprises and NGOs, the initiative of governments is essential in this domain.

6.3.4.3. Capacity Building

Another barrier to the diffusion of sustainable energy systems, which governments can help to remove, is the lack of adequate skills. This weakness is well known and understood, and the efforts to overcome it by "capacity building" are already at the top of priorities for both governments of developing countries and for cooperation programmes in the energy and other fields.

However, the majority of the efforts of capacity building have concentrated on the technical aspects connected with the construction, assembling, and installation of the devices; less attention has perhaps been devoted to operation and, especially, to maintenance. Well-known are many cases of projects financed by donor agencies which, while technically and economically sound, have been unsuccessful or even counter-productive because they have been soon left abandoned for lack of appropriate maintenance, unavailability of spare parts, or even ignorance about operational procedures.

But what requires an even much greater effort in the future concerns the replication and diffusion of these projects. This necessitates not only technical, but other skills as well: market analysis (in order to identify and qualify the demand for energy services and energy devices), marketing capabilities, organisational and managerial capacities, and business training for would-be entrepreneurs.

Another area requiring capacity building is within the government itself. Energy policy analysis, energy economics, in addition to the necessary technical background, are required in order to evaluate, choose, and implement programmes both centrally and locally. Still more sophisticated training would be required for technology forecast (i.e. trying to identify which new technologies are going to be important in the future in a given context) and for technology assessment (i.e. evaluating all the consequences and implications of the introduction and diffusion of a new technology from the economic, social, environmental point of view, and, again, for the particular situation of a given country).

The aforementioned FINESSE programme has addressed the issues related to providing education and training in business management, project identification, and preparation of "bankable" project proposals.

Finally, it is important to train teachers, and especially those who are going to build capacities at the local level, such as training communities to operate and maintain equipment themselves.

Workshops for the private sector, aimed at providing training and basic technical assistance, have been organised, for instance, through the Pacific Regional Energy Programme (PREP).

6.4. Conclusions

As it may have become clear from all the preceding considerations, there is no unique or best way, applicable to every country and situation, to proceed in regulating the energy sector. Each country or group of countries in a region needs to find what instruments are more likely to have success in their particular conditions.

A few general conclusions can, however, be attempted.

Market instruments and stimulation of private initiative are too effective to be ignored in any circumstance. The important role of the government is to use these instruments so as to reach its goals of economic and social development, with special emphasis on providing modern energy services to the rural areas and to the poorer strata of the population, as well as to protect the environment.

One of the first steps towards the use of market-based instruments is to reduce or eliminate the subsidies which are given to various forms of energy (except in a transitional phase to compensate for market failures and accelerate the introduction of environmentally-friendly technologies), to let the market determine the prices through competition when this is feasible, and to introduce taxation that reflects at least a part of the externalities.

Liberalisation of the power sector (and, when applicable of the natural gas sector) needs to aim at allowing a number of independent producers to enter the market and compete. In particular, it should favour distributed generation, renewable sources of energy, high efficiency, combined heat, and power production. Privatisation may be under certain circumstances, an instrument for increasing managerial efficiency and competitiveness, but it ought not to be considered a goal in itself. High-level regulating authorities, essentially those independent from government and political powers, have proven to be a good solution, but the main guidelines of their ruling and the priorities of their objectives have to be set by governments.

Market rules in the energy sector should, in any case, put on an equal footing supply and demand of energy, and aim at increasing the efficiency of energy use through integrated resource planning and demand-side management.

Identifying barriers in legislation, norms of implementation, and diffusion of more sustainable energy systems is by no means simple, and needs to be done at various levels of governments. Private business, NGOs, and various types of associations can help in this analysis.

Special measures are advisable to facilitate the initial diffusion on the market of renewable energy technologies and advanced methods for energy efficiency; however, such measures have to be transparent, limited in time and possibly decreasing in a programmed way, and in no case should promote technologies that have no prospects of eventually competing in a free market.

Aggregating demand for financing is essential for the promotion of small interventions, which are prevalent for renewable energies and for efficiency improvement. The same aggregation is going to have positive results on technical issues, like installation, operation, maintenance, availability of spare parts, etc.

Several different options are available for facilitating sustainable energy initiatives at the local level and in rural environments. The ones which are most adapted to the particular conditions of a country need to be identified and selected. The involvement of local communities, as well as encouragement to small business, cooperatives and the like, is an essential condition for success. Collecting and providing correct and adequate information is of the greatest importance, while training and capacity building is required in both technical and non-technical domains.

Research and development should be encouraged, with emphasis on testing and adaptation of technologies, determination of standards, and contribution to training.

Regional cooperation is a positive asset, and, in some cases, it becomes an absolute necessity. It concerns free energy trading, exchange of experience, pooling of R&D, setting up of common standards and norms, etc.

In conclusion, institutional conditions, as derive from the actions of governments at all levels, are of great importance in determining the evolution of energy systems. An active, targeted initiative is necessary in order to direct this evolution in a more sustainable way.

It is important to devote more attention to projects aimed at creating an environment favourable to the diffusion of sustainable energy solutions by market forces and private initiative. Such projects may concern the identification and removal of institutional barriers, creation of local structures to supply energy services or market improved equipment both in urban and in rural areas, capacity building at all levels, etc.

Experimentation of innovative organisational, institutional, financial, or normative solutions is at least just as important as the testing of new technologies, and possibly more useful. More projects in this direction need to be encouraged.