Integrating Independent Power Producers into Emerging Wholesale Power Markets
Many developing and industrial countries have sought to open their electricity industries to competition. In both contexts, policymakers and investors have to deal with the consequences of earlier, more partial sector liberalization measures. Forem...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/11/1631745/integrating-independent-power-producers-emerging-wholesale-power-markets http://hdl.handle.net/10986/19499 |
| Summary: | Many developing and industrial countries
have sought to open their electricity industries to
competition. In both contexts, policymakers and investors
have to deal with the consequences of earlier, more partial
sector liberalization measures. Foremost among these is the
existence of long-term contracts with independent power
producers (IPPs). The long-term nature of these contracts
has complicated the introduction of more far-reaching
sectoral reform designed to harness competitive market
forces for the benefit of consumers. In developing
countries, introducing competition is often coupled with
breaking up and privatizing state-owned electricity
monopolies. In this context, discussion of renegotiation of
power purchase agreements has tended toward the polemical.
At one end are those who resist any change, arguing that the
"sanctity of contracts" precludes modification of
contract terms. At the other end are those who favor
governments taking coercive measures to modify existing
contracts in the name of maximizing economic welfare and
minimizing the burden of sector reform on consumers and on
the state. Drawing on recent country experiences, the
authors analyze alternative approaches to restructuring
contracts and designing power markets to reduce rigidities
and incentivize IPPs to participate more fully in wholesale
power markets and to take on greater market risk. The
authors conclude that forced market integration or forced
contract negotiation have failed and are counterproductive.
Conversely, in countries where IPPs provide a sizable
proportion of generation capacity, ignoring market
integration may result in insufficient market liquidity and
discourage new entry, attenuating the scope for market
forces to act for the benefit of consumers. Failure to adapt
power purchase contracts and market rules imposes huge
resource costs on the economy beyond the financial
obligations consumers and taxpayers must bear. Based on
recent experience, a combination of measures, including
adaptation of specific market rules, contractual
alternatives for enhancing market liquidity, contract buyout
provisions, transitional financing mechanisms, and
characteristics of the successor entity to the power
purchaser, offer promising approaches for reconciling
preexisting IPP contracts with new market structures and
reducing the magnitude of above-market costs associated with
such contracts. |
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