Markets for utility electricity

David B. Brooks

 

Overview

This paper explores the markets for electricity in developing countries and focuses on the major grid-fed markets of residential, commercial, and industrial users in urban areas. Concepts of thermodynamic efficiency and supply-demand matching are shown to be important to the development of utility markets. The paper calls for a better understanding of demand in terms of the quantities of electricity and the qualitative factors that influence use. Policy directions that emphasize demand efficiency are recommended.

Analysis

Markets for electricity in developing countries have experienced an extremely high rate of growth-in the early 1980s as much as 9% or more a year. A combination of factors, general to developing countries and specific to rapidly industrializing nations, might explain this growth. The release of suppressed demand, rapid urbanization, industrialization, and the growth of real income are all factors. Several problems constrain the servicing of these markets or put pressure on national capabilities:

· Too many consumers pay less than the "book cost" for electricity.

· Generation projects are subsidized by national or international funding agencies, and the book costs understate actual costs.

· Full costs often overlook unplanned environmental and social costs.

It is important when characterizing markets to identify those aspects that will help focus debate on the physically and economically efficient use of electricity.

Data on use of electricity are good relative to those on other fuels because billing data for the utility are generally segregated by customer class. The main market sectors are urban residential (20-40%) and industrial (at least 40%), wherever that sector is located. The commercial sector is also rapidly expanding, but lack of consistency in defining what customer base is "commercial" and high income elasticity in the customer class have led to confusion in reporting and great variation in data.

Market concentration is clear in urban areas where there is a high demand for this clean and flexible fuel to complement the other infrastructure found in cities. Resource-based industry may create demand nodes in rural areas. Otherwise, rural electricity, although historically a sizable component of a utility's development budget, does not constitute a large demand. The nature of rural demand may, in fact, place strains on the system by increasing the load factor.

Identification of Efficient Markets

Certain principles can be used to identify appropriate markets for electricity in developing countries. The first principle is that energy services can generally be increased more quickly and more efficiently by improving the efficiency of conversion and generation than by providing more supply.

The second principle is that, of all common forms of energy, electricity is of the highest quality. In other words, to deliver one unit of electric energy requires three units of fuel (for thermal generation). Electricity is therefore a highly refined source of energy that involves high thermodynamic costs in its manufacture. Appropriate markets for this high-quality form of energy are those for which there are no other efficient or convenient substitutes. There are three reasons for the higher rates of growth in demand experienced in developing countries compared with the developed world:

· Demand for electricity is suppressed by lack of income, lack of electricity-intensive industry, and lack of dependable supply (to the extent that these are reversed, as they are in particular in the newly industrialized countries, rapid growth occurs).

· Governments in developing countries have generally supported development of infrastructure in the power sector that is out of proportion to the actual energy demand that is met by electricity compared with other fuels (this is done for nationalistic and economic development reasons).

· Electricity is used inefficiently, particularly in industry.

Identification of Markets

Residential Use-Growth in the use of household electricity is correlated closely with family income. Even the poorest families will use power for lighting if it is available. As incomes increase, so do uses. Major end uses are lighting, communications and electronic devices, air conditioning, small and large appliances (generally motors), cooking, and water heating. Major efficiency improvements are possible in each of these uses based largely on technological improvements that have occurred in industrialized nations.

Future growth of demand in this sector will result from grid expansion and growth of incomes. This latter factor will be dampened somewhat by the large efficiency improvements that are possible in residential technology.

Commercial Use-Major uses in this category are lighting, space conditioning, ventilation, and in some cases hot water. Efficiency improvements are available not only in new technologies (for example, lighting) but in patterns of use and in building design. For example, the use of daylight and appropriate shading of windows can reduce the air conditioning load by reducing the heat produced by lights.

Industrial Use-Electricity conservation in industry has the potential for large savings. Examples from developed countries show that reductions of two-thirds of the demand for motor drives, about one-sixth for process functions, and one-sixth for other demands (for example, lighting) can be achieved.

Countering the trend of reduced demand because of efficiency is a higher overall demand from industry. This can be explained by shifts to electricity-intensive processes and the concentration of energy-intensive industries in developing countries. These opposing tendencies create uncertainty about the direction of growth in industrial electricity.

Matching Supply and Demand

To help focus the discussion of appropriate electricity markets, it is useful to recall that electricity is a form of energy of the highest quality. Three categories of electricity use can be defined:

· Uses for which electricity is entirely or almost always essential (for example, electronics, telecommunications, stationary motors, residential and commercial lighting, and electrometallurgy),

· Uses for which substitutes are adequate but lack the convenience, control, or cleanliness of electricity (for example, pumping, heating, cooling, and remelting), and

· Uses for which other fuels easily, and perhaps more efficiently, perform the same function (for example, water heating, steam raising, and space heating).

· These categories can be useful when priority markets for a utility are determined. However, it is almost impossible to develop hard rules. Much depends on the circumstances within the country (in particular, economic circumstances such as short- and long-run marginal costs of power and political choices).

However, it seems clear that the development of efficiency in markets is constrained largely by institutional barriers arising from lifestyles and habits, those protecting vested interests, and outmoded or misdirected policies.

Of a range of institutional barriers, the ones most specific to developing countries are the lending practices of international agencies. It is apparent that these institutions prefer loans for supply projects rather than loans for conservation projects, although this situation may be changing.

Suggestions for Further Research

Research is needed to

· Better understand patterns of demand for electricity in key sectors (disaggregated by end use),

· Reevaluate load forecasts (based on expectations of savings resulting from improvements in technology) as a basis for showing potential efficiencies,

· Understand patterns of demand for electricity based on the qualitative service it provides,

· Implement efficiency programs based on cost-effective measures and the capabilities of local staff, and

· Consider several factors related to efficiency and conservation (for example, efficient pricing, government policies and programs, education and training, and the development of a focal group, likely the utility, for a conservation program).