Policy and regulatory issues in the power sector

19 April 2017 (Last Updated April 19th, 2017 07:15)

Power systems across the world are witnessing significant changes on account of various external factors. Climate change is leading to increased power demand, which is putting pressure on generators as well as grid operators.

Policy and regulatory issues in the power sector

Power systems across the world are witnessing significant changes on account of various external factors. Climate change is leading to increased power demand, which is putting pressure on generators as well as grid operators. It is also increasing the demand for storage technology, demand response programs, and alternate pricing schemes. There has been a shift in the generation mix in most countries, from fossil fuel-based generation to renewable energy generation. Renewable energy, being intermittent in nature, puts significant demands on grid operators to balance it. The generation profiles of renewable energy sources do not necessarily match the peak demand periods. Distributed generation is witnessing an increased role in meeting the power needs of the unelectrified population. Utilities are increasingly engaging with consumers to smoothen the demand curves through peak shaving. Against this backdrop, the role of regulators is changing to accommodate all these changes and safeguard the interests of consumers.

In the US, the change in the regulatory environment is particularly apparent, with the Trump administration taking charge. President Donald Trump has made abundantly clear his intent to deregulate the sector, especially with respect to climate regulations. Some of the key regulations that were passed during President Barack Obama’s administration, such as the Clean Power Plan (CPP) and Mercury and Air Toxics Standards (MATS), forced the power industry to look at power generating sources other than coal. A number of coal-based power plants either shut down, or had to make significant investments. However, experts point out that it was not only these regulations that led to the closure of coal-based power plants, but also the economics tilting in favor of gas-based plants. And this may continue given that the new government will also make it easier to extract gas from federal lands. Furthermore, the power project owners and developers have a long-term investment horizon, so the easing of regulations may not lead to a knee-jerk reaction in terms of where the investments are channelized.

According to recent news, the Trump administration is considering cutting the Environmental Protection Agency (EPA) budget by more than 30% in its new budget proposal. It has also proposed to eliminate the Advanced Research Projects Agency-Energy (ARPA-E), the program that seeks to fund early-stage energy technologies. A more recent executive order issued by President Trump, “Promoting Energy Independence and Economic Growth”, seeks to repeal the climate and key energy initiatives put in place by the previous regime. Apart from ordering a review of the CPP, the executive order also reverses the moratorium on coal mining leases on federal lands; removes the consideration of greenhouse gases (GHGs) from permit reviews under the National Environmental Policy Act; and abandons President Obama’s roadmap on emission reductions in the US. It also eliminates a tool for cost-benefit analysis in regulatory review called the social cost of carbon.

On the one hand, where overregulation is being seen as an issue in the US, the situation is just the opposite in African countries. While investors are looking with great interest at the opportunities in the African power sector, actual investments are not materializing due to transparency and regulatory environment issues. According to a recent report by the World Bank, sub-Saharan Africa, which is the least electrified continent, has one of the least developed policy environments for energy access. Specifically, Ethiopia, Nigeria, and Sudan, which are among the most populous energy deficit countries, are of key concern. Realizing this, the African Development Bank (AfDB) and the African Forum for Utility Regulators (AFUR) recently had a meeting with around 50 power regulators from across Africa. It has also launched a program named New Deal on Energy for Africa, targeted at improving access to energy for the African population. One of the key elements of this program is setting up of an enabling policy environment with the necessary regulations to foster adequate private sector interest and sustainability.  

Another country which has been tightening regulations related to emissions is China. It has reaffirmed its commitment to green energy and is taking steps toward meeting its commitments under the Paris Agreement. The country has already announced the suspension of 104 planned coal-based power plants with a total capacity of 120GW, of which around 54GW are from projects under construction. Apart from tackling environmental issues, these regulations are also aimed at reining in the overcapacity in the country. 

In the UK, the biggest factor expected to impact energy markets is Brexit. This would allow the country to repeal a number of rules and regulations set by the EU, which may seem inappropriate. Among these would be the renewables directive, which sets a target of achieving a 20% share of energy from renewable sources by 2020. This, in turn, will have an impact on the deployment of renewable energy in the country, though its extent remains to be seen. Another area which is expected to see the impact is electricity tariffs. As the UK government will be able to remove the VAT on electricity bills, the electricity tariff for consumers will go down. Though this move will be supported by the general public, environmentalists may protest reasoning that lower tariffs will lead to higher consumption of electricity and hence higher carbon emissions.

Certain developing countries such as Mexico have brought about reforms in the power sector, which have made the sector more competitive. The constitutional reform in the country in 2013 completely opened up the power sector to competition. This has brought in significant investment into the country, especially in renewable energy. The country held its first electricity generation auction in March 2016, in which 18 contracts were awarded. The auction mechanism resulted in record low prices of power. Another auction, held in September 2016 in the country, saw a further decline in power prices bid. Recently, the country’s regulator, the National Center for Energy Control (CENEC), launched the power market for energy balance, which will be a part of its wholesale electricity market. This market will help in dealing with conditions of surplus or scarcity through appropriate pricing signals. This in turn, will help in attracting players that are more efficient and can offer lower cost power. The regulator has been playing an important role in opening up the country’s power sector, and paving the way for development of a functional power market.

Similar reforms have also taken place in India, which has a flourishing power market. The generation sector in the country has seen significant private sector investment, with the focus turning toward renewable energy in the past few years. Government policies and programs have played an important role in making India prominent on the global renewable energy map. However, the distribution sector in the country continues to languish, primarily due to weak state regulators (known as state electricity regulatory commissions). With tariffs not being cost-reflective, and the regulators not having teeth to raise the tariffs, the distribution companies have been suffering heavy losses and have had to be bailed out by the government several times. This situation seems to be changing, with the central government setting specific targets for the distribution companies to ensure that the gap between the tariff and cost of supply is covered.

In another recent development, Bulgaria has requested limiting the new EU coal emission law. The country believes that the new norms are unachievable for Bulgarian coal-fired power plants. The investments required in order to meet the new targets are estimated at BGN1bn. The country reportedly also believes that the EU regulations have been increasing very rapidly, leading to difficulties for the investment programs of investors. The reference document on best available technologies for large combustion plants is coming up for approval at the end of April 2017. It remains to be seen what the approach of the EU will be regarding Bulgaria’s request.

So, interestingly, there is a dichotomy being witnessed as far as regulations in the power sector are concerned. The developed countries, the US in particular, are trying to move toward lower regulations in the sector. The UK is expected to follow a similar trajectory post–Brexit, and countries like Bulgaria are lobbying for lower regulations by the EU. On the other hand are countries with populations having low access to electricity, such as those in sub-Saharan Africa, in which the weak regulatory environment has been identified as a key factor in the slow development of the power sector attempts are being made to put in place the necessary regulatory frameworks in order to ensure access to electricity to their populations. Countries like China and India are also moving toward stricter regulatory regimes, especially with respect to the environment. Being the fastest growing economies in the world, the GHG emissions in these countries are a cause of concern and need to be controlled.