The Hindu Business Line : Power challenges for the developed world

A key message of the OECD report "Tackling Investment Challenges in Power Generation in IEA Countries," is that the growing demand for energy, coupled with the need to replace ageing infrastructure, creates significant investment requirements in power generation. G. SRINIVASAN says its findings should prompt some introspection among policy-makers in India.

India is today struggling to add capacity in power generation with the Tenth Plan (2002-07) target on this score falling short by a staggering 50 per cent and the power sector is turning out to be the Achilles heel of the economy, in general, and infrastructure, in particular. The entry of private players has not altered the picture significantly; indeed, their teething troubles have only compounded the crisis.

Set against this dim picture in India, a new investment cycle in power generation is starting in most countries belonging to the International Energy Agency (IEA), a club of rich countries of the Organisation for Economic Cooperation and Development (OECD). No doubt, electricity has propelled the rich world's industrialised and technology-driven economies, with energy demand for electricity and heat generation constituting 40 per cent of the OECD's total primary energy supply.

In a new publication titled "Tackling Investment Challenges in Power Generation in IEA Countries," the Paris-based IEA's Executive Director, Mr Claude Mandil, has said in the foreword that four questions form the kernel of the monograph.

How large are the investment requirements in the short and medium term, and is there reason to doubt that the requirements will be met?

What are the critical elements of a framework that offers incentives for efficient investment response?

What are the main action points for governments and regulators in creating an environment that facilitates proper investment? At the outset, the IEA study contends that the recent liberalisation of markets will deliver considerable benefits if implemented thoroughly and if backed by sustained government commitment. "Competitive markets with cost-reflective prices are a strong, and most likely necessary, instrument to effectively balance energy systems in terms of economic efficiency, reliability and environmental responsibility."

The study says the investments in power generation (measured by increase in installed capacity) continued to expand in most OECD countries over the last 15 years. IEA statistics show that for the OECD as a whole, the total installed generating capacity increased from 1715 GW in 1990 to 2400 GW in 2004: A total increase of 685 GW, or approximately 49 GW annually, representing an average rate of growth of 2.4 per cent. Over the same span, total OECD electricity consumption increased at an average annual growth rate of 2.3 per cent. Thus, at the aggregate level, capacity kept pace with demand.

Coal-fired generation

In the last decade, most countries concentrated their power generation investments in gas-fired power plants, especially combined-cycle gas turbines (CCGT). For 1990-2004, gas-fired capacity in the OECD countries increased five-fold, from 76 GW in 1990 to 380 GW in 2004, increasing at an average 12 per cent a year. But in recent years, growth has slowed markedly for several reasons, including higher and more volatile gas prices and surplus gas-fired capacity in some regions.

A shift towards more coal-fired generation is also on the horizon. Alongside, concerns about rising carbon dioxide emissions have accelerated investments in renewables and revived interest in nuclear energy, where it is acceptable. From 1990 to 2004, nuclear capacity in the OECD increased at an average rate of 1.2 per cent per year (upgrades of extant units played a key role), while hydro-electric generation capacity increased by one per cent and coal-fired capacity by 0.8 per cent.

Renewables such as wind power, biomass, and small hydro and solar logged varying rates of growth. Wind power capacity in the OECD bloc almost tripled over 2000-04, reaching 43 GW in 2004. During 1990-2004, wind power capacity increased at an average annual growth rate of 23 per cent, the fastest among all generating technologies, largely driven by "government incentives, generally in the form of tax credits, production incentives or, more commonly, obligatory purchases supported by consumers through feed-in tariffs".

Huge Investments

A key message of the report is that the growing demand for energy, coupled with the need to replace or refurbish ageing infrastructure, creates significant investment requirements in power generation. Net capacity additions are not keeping pace with growth in demand and reserve margins are declining in some regional markets. If current market trends persist, there are risks of under-investment, resulting in reserve margins falling to dangerously low levels.

Stating that several factors will put more pressure on margins in the coming decade, it says demand is increasing, particularly peak demand in several temperate counties. However, this appears to be moderated as most IEA countries have policy objectives to curb electricity demand through increased energy efficiency, which is often the most economical way to address climate change and energy security.

By cutting demand, the benefit is that less power needs to be generated. If currently planned OECD policies in energy efficiency are implemented successfully, installed capacity is projected to increase by only 15 per cent by 2015, even as the World Energy Outlook 2006 projected that installed capacity in the OECD would need to increase by 466 GW by 2015 — 20 per cent of existing capacity. Even as improved energy efficiency will ease the pressure on reserve margins, uncertainty about the effectiveness of energy efficiency measures is also a risk for today's investors.

The IEA report said making better use of extant power assets is one way to effectively delay the need for new generation capacity. Some IEA countries have liberalised their markets, comprehensively replacing regulated systems with frameworks in which competition creates spurs for efficient operation and investment.

Effective competition puts pressure on companies to use resources more efficiently and to practise just-in-time investment. This has allowed reserve margins to decrease without undermining quality in some pioneering markets including the United Kingdom, Australia, the US and the Nordic countries.

Cost-effective options

With the current high natural gas prices, coal-fired generation is the cheapest option in many ways. A number of investors are building coal-fired stations in several IEA countries, and more are planned. Nuclear power is also often a competitive option when gas prices are high and it is becoming even more attractive as carbon dioxide emission constraints tighten further.

Nuclear power is again under serious consideration by investors in several IEA countries and the first decisions to make large capital investments have already been made. If this technology could break away from a history of delays and cost overruns and overcome some notable regulatory hurdles, it is poised to halt and potentially even reverse the current trend of decreasing share of nuclear power in the OECD generation matrix, says the IEA report.

As the debate on pollution and its containment is raging, the IEA has asked the governments of the developed world to reduce investment risks by giving firmer and more long-term direction on climate change abatement policies. Putting a price on greenhouse gas emission is an effective way to internalise the costs of climate change. Direct financial support for specific technologies, such as renewables and nuclear, should be done at the lowest cost and with market-compatible instruments.

Market-based instruments, such as the tradable obligations system, have multiple advantages, it says, adding that direct subsidies, such as tax credits could also be implemented in ways that are compatible with competitive markets. It rightly points out that nuclear power can play a more crucial role in climate change abatement if governments in countries where nuclear power is accepted play a stronger role in facilitating private investment. It said fast and efficient licensing is particularly important for new nuclear power plants that face very high risks, including a long planning and approval process.

The IEA report on renewed power generation investments in the developed world should prompt some introspection among policy-makers in India about why the reform measures undertaken by the Government sporadically have failed to effect systems improvements and tangible impact in terms of delivery of power at affordable cost and in an assured manner to industry and households to sustain the nine per cent economic growth India is aspiring to in the coming years.