Executive Summary

Electricity markets in fast-growing economies face different challenges than those in more mature markets. Mature markets with stable demand for electricity are transitioning to a more sustainable mix of power generation technologies while continuing to support economic growth with affordable and secure power. Fast-growing markets are trying to serve voracious new demand for electricity as their economies grow, as more customers are connected to the grid and as per capita consumption grows.

This report recognizes the need for policy to balance the objectives in the Forum’s energy architecture triangle: security and accessibility, short- and medium-term affordability, and environmental sustainability. The fact that 1.2 billion people lacked access to electricity in 2012, combined with the scale of poverty, will inevitably focus attention on accessibility and affordability. But even as they make progress on achieving reliable universal access, fast-growing markets will need to develop roadmaps that take advantage of new technologies to make their power affordable while increasing environmental sustainability.

Meeting the electricity demands of residential, commercial and industrial consumers in these fast-growing economies will require an unprecedented level of investment in fuel supply, centralized and distributed generation, and networks across the whole value chain. Much of the new capacity in fast-growing countries will come from renewables, which requires large capital investments upfront and correspondingly lower operational costs.

The combined effects of growing demand for electricity and rising capital intensity will mean that non-OECD countries will have to double their investments in electricity from about $240 billion annually to $495 billion annually between 2015 and 2040 – $13 trillion in total – to satisfy growing demand and meet energy policy objectives, outspending OECD countries by 2 to 1.

Where debates in these growing markets used to focus on importing commodities to fuel conventional power stations, today’s discussions focus on importing capital to build renewable power alongside conventional power, as captured in the Intended Nationally Determined Contributions (INDCs) submitted for the Conference of the Parties hosted in Paris in December 2015. This is also fully in line with UN’s Sustainable Development Goals.

Unfortunately, fast-growing economies have a very mixed record of attracting private capital, with volatile returns in many of the largest markets and significant concerns among long-term investors about the transparency and reliability of policies and regulations, particularly where policy-makers have shorter-term political priorities.

Although 60% to 70% of the investment in electricity infrastructure in non-OECD markets has derived historically from governments or state-owned utilities, the scale of the investment necessary in the future will force policy-makers to look to private investors to fund most of the investment.

To attract the necessary capital, fast-growing economies will need to improve the viability of investment in their power sectors. Eight recommendations have been identified for policy-makers, regulators and businesses to do this, just as the 2015 The Future of Electricity report focused on improving the investment climate in OECD countries.

Policy-makers

Pursue the most efficient pathway to policy objectives

Policy-makers have an important role to play in encouraging the electricity sector to pursue the most efficient paths to achieve energy goals. They should develop roadmaps that balance generation sources among conventional and renewable, and also across centralized and distributed models. They should catalyse “no regrets” investments in infrastructure that move fast-growing economies closer to universal access. By encouraging the adoption of energy-efficiency technologies, both on the demand side (for example, more efficient equipment and buildings) and on the supply side (by upgrading inefficient power plants), they help reduce the need for investments in new generation capacity. Through all these measures, policy-makers support economic competitiveness while reducing the risk of policy instability due to adverse fiscal or stakeholder pressure.

Develop integrated policies that ensure parallel development of the power value chain

Policies need to be integrated across the power value chain to ensure that development of the upstream fuel supply, generation assets, transmission and distribution develop in harmony and investors are not left with fully operational but stranded assets that cannot earn a return due to lack of fuel supply or lack of customer access. Integrated policies need to consider not only the operational aspects such as planning regulations, but also the economic ones such as import duties and regulated tariffs that impact the viability of various participants in the value chain.

Take advantage of declining technology cost curves

As costs decline, non-OECD countries will add 34% more non-hydro renewables capacity than the OECD countries between 2015 and 2040. Moreover, the increasing digitization of energy assets offers the potential to improve operational efficiency and reliability, thus reducing both the delivered cost of electricity and emissions. Policy-makers should take advantage of declining technology cost curves driven by the rapid rates of global deployment and avoid the urge to promote unique technologies that will likely remain at high cost due to a lack of scale. On the demand side, policy-makers should also take advantage of new technologies to improve energy efficiency.

Regulators

Provide a level playing field for technologies, reflecting carbon abatement and security of supply appropriately

Regulators should structure power markets in ways that recognize the full value and costs of technologies, including carbon pricing. Regulations should be technology agnostic, taking into account issues including flexibility, reliability, carbon-abatement properties, land use and the cost of securing fuel supply. This may also mean removing fuel subsidies that support specific conventional generation technologies. In special circumstances, regulators might support new technologies that show promise in their particular market but only if there is a credible plan for the technology to become competitive in the medium term, and subsidies phased out.

Ensure technically and financially viable operations across value chain

Regulators can ensure the viability of the value chain by keeping it clear of financial obstacles. They should work with suppliers to reduce losses from non-metered supply and ensure that tariff subsidies or progressive tariff structures are fully funded. They should ensure that the viability of generators is not threatened by fuel tariffs that can distort margins or raise demand for electricity beyond their capability to provide it.

Business and investors

Create effective public-private partnerships to attract private sector capital

Private sector – businesses and investors – should engage with policy-makers and regulators to make the governance and regulations around public-private partnerships clear, transparent and independent in order to ensure that investors can be confident in committing long-term capital.

Nurture favourable investment environment

The private sector together with the public sector should put measures in place to reduce risk and decrease the cost of capital, allocating risks to the most appropriate market participants. The private sector should proactively engage with the public sector to align expectations for power sector profitability. Innovative financing schemes and a balanced approach to local content requirements will also help encourage investment.

Invest in education and R&D to close knowledge and human capital gaps

The private and public sector should work together to foster the development of universities and research institutes that produce the talent which will innovate, develop and manage the power sector in the decades ahead.

Each country will prioritize these recommendations differently based on its energy policy objectives across energy access and security, economic development and environmental sustainability. Prioritization depends on its economic and natural resources, the maturity of energy markets, and its policy objectives. In particular, this report looks closely at two fast-growing economies, India and Mexico, both at critical points in the development of their power markets:

• India’s rapidly growing economy has fuelled an intensifying demand for electricity with which supply has struggled to keep pace. Where investment in the past has come from government sources, in the future India’s policy-makers want to attract the majority of funding from private investors, which means addressing some of the structural issues such as unprofitable distribution companies, along with fuel issues and regulatory obstacles. Recognizing these challenges, India’s government has embarked on a series of progressive reforms, including integrated policies to ensure even development through the value chain, addressing losses that hinder the viability of the transmission and distribution businesses, nurturing a more favourable investment environment by decreasing finance costs, and recognizing the important role of renewables.
• Mexico’s economic growth over the last decade has been held back in some cases by the regulatory structure of some key sectors, including telecommunications, financial services and energy. To address these barriers and encourage the country’s economic development, Mexico has launched a series of reforms. In electricity, the reforms are guiding a transition from a state-owned electricity system to a new model that opens the door for private investment and multiple players in power generation selling into an efficient wholesale market. To ensure the viability of investment, Mexico is pursuing an integrated approach that supports development across the entire value chain and improves the flow of funds through the power value chain. Mexico will also need to ensure that the new market functions smoothly, enables appropriately attractive returns to investors and attracts the required scale of investment in conventional and renewable power.