Utilities Regulation and Energy Efficiency

Utilities Regulation and Energy Efficiency China, India, and Thailand have all set ambitious national targets for energy efficiency. Efficiency programs ma...
Author: Janis Mitchell
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Utilities Regulation and Energy Efficiency

China, India, and Thailand have all set ambitious national targets for energy efficiency. Efficiency programs managed through electric utilities will likely be an important part of efforts to meet these targets. Thailand was the first to set up a comprehensive utility energy efficiency program, and its experience highlights the importance of having a strong regulatory framework that integrates energy efficiency into utility investment planning. cross developing Asia, rapid energy demand growth since the early 1990s—with annual growth often in the double digits—has been a major source of economic and environmental stress. By reducing demand growth and the need for new infrastructure (e.g., power plants, pipelines) and its environmental impacts, energy efficiency has emerged as an increasingly practical energy supply option. New approaches to energy efficiency policy are taking shape throughout Asia, including in the electric utility sector. Internationally, utility-based energy efficiency programs have ranged from simple appliance rebate programs to more comprehensive integrated resource planning, where utility regulation is designed to put demandand supply-side investments on equal footing. In most Asian countries, utility-based energy efficiency programs are still in the development stage. This paper examines and compares the experiences, plans, and challenges of existing and nascent utility-based energy efficiency programs in China, India, and Thailand.

energy efficiency policies reflected the Chinese government’s continued tendency toward central planning. Policies and programs were administered top-down from the central government through the state-owned and operated industrial system. The approach ranged from hands-on, such as the imposition of company energy quotas and the closure of factories, to hands-off, such as the provision of grants and information services, but the scale was unprecedented. By the early 1980s, energy efficiency investment reached an estimated 10 percent of total investment in energy supply (Lin 2007). Over time, this level of political attention and investment proved unsustainable. As China moved from energy shortage to surplus at the end of the 1990s, interest in energy efficiency waned. Rapid growth in energy demand after 2002—at more than 15 percent per year between 2002 and 2004—led to renewed interest in energy efficiency as a means to rein in energy consumption, and government agencies announced an extensive array of energy efficiency targets, key projects, and enterprise programs in 2006. However, by this time China’s energy consumption was much larger, end uses of energy were more diverse, and the central government’s control over local governments and the industrial system was much weaker than during the 1980s and early 1990s. The difficulties encountered during this more recent round of energy efficiency policies has led to calls for new approaches, among which is an energy efficiency requirement (EE/DSM Rule) imposed on electric utilities.


Integration of Energy Efficiency into Utility Planning

The energy crises of the 1970s spurred more than a decade of aggressive investment in energy efficiency in China. During that time, design and implementation of

For more than forty years beginning in the 1950s, China’s electricity sector was a state-owned and state-operated, vertically integrated monopoly. In the late 1990s, the


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sector was corporatized, separating government and business functions, and later was “unbundled,” separating the generation and transmission and distribution businesses and creating two national grid companies to oversee provincial grid companies. In 2003 a national, independent regulator, the State Electricity Regulatory Commission (SERC), was established for the sector. China’s utility EE/DSM Rule, adopted in November 2010, is targeted at the country’s two national grid companies, the State Grid Corporation of China and the China Southern Power Company. The rule stipulates that the grid companies must obtain at least 0.3 percent of their annual kilowatt and kilowatt-hour sales from energy efficiency. Although a few grid companies in high growth provinces have run their own peak load management programs in the past, the EE/DSM Rule marks the fi rst time that utilities are being required to incorporate energy efficiency as a supply option. The rule, though not particularly ambitious, will allow grid companies and regulators to work through the challenges of integrating energy efficiency into utility planning, providing an essential foundation for scaling up the target.

Challenges of Energy Efficiency Integration How the EE/DSM Rule will be implemented, and who will be allowed to profit from it, are still open questions. Two widely discussed options are fostering a market for third-party energy service companies and allowing the national grid companies to implement the rule themselves. The grid companies are reportedly establishing regional energy efficiency offices, which seems to indicate that they plan to take charge of implementation. The most important challenges to China’s EE/DSM Rule are electricity pricing and regulation. As yet, there is no dedicated mechanism for raising investment capital for projects that contribute to the 0.3 percent target. The grid companies are reportedly expecting to be able to recoup their investment costs through a small increase in their average wholesale price. Although this might be a viable option for a small target, scaling up the rule to a more meaningful level would require rethinking how prices are set for the grid companies. Because their wholesale prices are not set on a cost basis, it is, in fact, difficult to sort out what incentives China’s grid companies face. Rationalizing their prices, and later decoupling revenues from sales, are important steps to providing the grid companies with incentives for energy efficiency. Both steps are currently under discussion. Another issue to be considered is how to determine the appropriate future target for the EE/DSM Rule. The 0.3 percent target did not have an analytical basis, and scaling up the rule will require some analysis of its


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avoided cost, or how much the rule saves or costs the electricity system and its ratepayers. All these considerations imply the need for strong and effective regulatory oversight of the grid companies, which China does not yet have. In addition to restructuring incentives for the grid companies and determining appropriate targets for the EE/DSM Rule, a regulator would need to set rules about the kinds of energy efficiency that would qualify to meet the target, and would have to oversee monitoring and verification of energy efficiency programs and savings. SERC is capable of fulfi lling this role, but currently lacks sufficient pricing authority and the capacity to design and oversee energy efficiency programs.

India The potential for cost-effective energy efficiency in India and its accompanying environmental benefits are well documented, yet utility energy efficiency programs across India have been limited historically. Against a backdrop of unprecedented growth in GDP and demand, increasing energy and capacity shortages, and concerns over climate change, significant efforts have been made since 2000 to promote energy efficiency, especially at the national level. The Energy Conservation Act (2001) established the Bureau of Energy Efficiency (BEE), a national-level bureau that is responsible for establishing energy efficiency labeling and standards for appliances and for establishing energy conservation standards in building codes. The Electricity Act (2003) promotes power sector reform legislation, and, while not explicitly addressing it, has been interpreted by some state regulators as justifying utility energy efficiency. In 2009, the National Mission on Enhanced Energy Efficiency (NMEEE) established a goal to reduce energy use by 10,000 megawatts by the year 2020. The NMEEE includes four initiatives: tradable energy savings certificates, market transformation, creation of a financing platform to facilitate energy service company (ESCO) activity, and development of a broader economic framework to support energy efficiency (e.g., tax incentives). India’s effort to accelerate energy efficiency through national programs recognizes the inherent challenges and supports utility energy efficiency.

Integration of Energy Efficiency into Utility Planning There is no formal utility-level integrated resource planning (IRP) in India. National-level IRP is conducted primarily by the central government. The state electricity regulatory commissions (SERCs) regulate distribution utilities and, in Maharashtra, Delhi, Karnataka,

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384 • THE BERKSHIRE ENCYCLOPEDIA OF SUSTAINABILITY: CHINA, INDIA, AND EAST AND SOUTHEAST ASIA: ASSESSING SUSTAINABILITY Haryana, Punjab and Gujarat, have begun to support utility energy efficiency. Maharashtra is the fi rst state with regulations that support state-level energy efficiency implementation using an avoided cost framework—one that explicitly takes into consideration the cost the utility avoids by not having to generate or purchase electricity. Currently, pilot programs are underway in the city of Mumbai that target lighting and cooling end uses by providing incentives to reduce the high fi rst costs of the most efficient products (as rated by the BEE). During 2004–2006, Karnataka, with technical assistance from the United States Agency for International Development, initiated a compact fluorescent lamp promotion program that uses on-bill financing. On-bill financing allows customers to finance the upfront costs of the lamps and pay for them over time through their utility bills. The national government is complementing utility energy effi ciency by initiating the Super-Effi cient Equipment Program that will provide incentives to manufacturers to develop and sell products that are substantially more efficient than the highest BEE-rated products (e.g., brushless direct current technology for ceiling fans). BEE has also implemented the National Bachat Lamp Yojana compact fluorescent light (CFL) promotion program that uses funds from the clean development mechanism (CDM) to reduce the relatively higher first costs of CFLs as compared with incandescent lamps. BEE is assisting state government agencies to support local municipalities in the promotion of energy efficient building codes. Unlike in China and Thailand, in India the agriculture sector is an important target for energy efficiency programs because of its heavily subsidized nature. Several different energy efficiency delivery models are currently being tested.

Challenges of Energy Efficiency Integration To date, there has been little coordination between the states and the BEE in their pursuit of energy efficiency. Moving forward, however, discussions are occurring to expand utility energy efficiency to all Indian states with the creation, by the Forum of Regulators, of the DSM Working Group, a statutory body consisting of chairpersons of all SERCs and the Central Electricity Regulatory Commission. BEE is an invited member of the Working Group. Deep penetration of energy efficiency in India is hampered by typical market barriers, such as lack of awareness, split incentives, lack of leadership among the private sector players who promote energy efficiency, and high up-front costs. Some barriers are accentuated in India, such as lack of access to technology (particularly in rural areas), and inability to assess efficient technology. Furthermore, the lack of a formal legal mandate and the


necessary regulatory/institutional framework present primary barriers for scaling up utility energy efficiency to all states. Given that most utilities are state-owned, and that there are political differences between the central government and the states, the central government’s ability to encourage utilities to support energy efficiency is further limited. In practice, the SERCs’ authority is still evolving, as they were reorganized only a decade ago. Most utilities are operating at a massive deficit and are unable to raise tariffs that cover existing costs, let alone new costs of energy efficiency programs, primarily because of political considerations. Indian utilities are not held to strict reliability requirements through an obligation-to-serve, as utilities in many other countries are, which in turn limits the possibility of full exploitation of energy efficiency potential in a formal IRP framework.

Thailand In the late 1980s and early 1990s, Thailand’s economy was one of the fastest growing in Asia, with GDP increasing over 10 percent per year. To fuel such growth, Thailand’s power usage went through a phase of rapid expansion, growing 14 percent per year and leading to a substantial investment requirement for the power sector. In response, the Th ai government set up the Energy Conservation Promotion Fund in 1992 to support energy conservation programs. In 1993, the government established the Demand Side Management Office (DSMO) within the state-owned Electricity Generating Authority of Thailand (EGAT), the utility in charge of the national grid and sourcing generation, to implement energy efficiency programs for  the power sector. The DSMO focused on market transformation, awareness campaigns, and facilitation of energy efficiency and load management technologies. The office grew rapidly and enjoyed a high-profi le success in delivering savings that exceeded targets. In 1997, Thailand’s financial crisis not only reduced economic growth to a standstill, but also led to an abrupt change from growth to decline in demand for electricity for the first time in Thailand’s history. The Thai power sector was suddenly in a capacity surplus situation, with many more committed projects in the pipeline. Feeling the pinch from having to cut down projects and renegotiate contracts, EGAT singled out the success of DSMO’s program as being responsible for the demand shortfalls. While DSMO survived the storm, its growth was stunted. Even long after the crisis, the power sector repeatedly found itself in a cycle of over-optimistic demand forecasts and excess capacity from over-investments. Energy efficiency and demand-side management had to take a back seat and

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took on more of a green image role so as not to undermine EGAT’s financial standing, or the government’s other high-priority policy objectives, such as stimulating investment from independent power producers.

Integration of Energy Efficiency into Utility Planning Despite being a part of EGAT, the DSMO’s programs have not been integrated into the utility planning process, known in Thailand as the Power Development Plan (PDP). The need to integrate energy efficiency in the PDP was only recognized and mentioned in the 1995 PDP. The idea did not develop further and was dropped altogether after the 1997 financial crisis and subsequent capacity surpluses. Despite the government’s vow and civil society’s demand to promote energy conservation, and despite its low cost, energy efficiency only received token treatment in the PDP process. The 2010 PDP is the latest example. The only energy efficiency measure included in the twenty-year plan was a thin tube light replacement program, which would deliver a saving of only 0.3 percent of total load by 2030.

Challenges of Energy Efficiency Integration The main challenge to the integration of energy efficiency in the PDP process is that it is severely misaligned with the incentive structure faced by EGAT. DSMO’s budget is funded by power tariffs but is treated internally (within EGAT) as an expense, not as capital investment on which EGAT can earn a return. Furthermore, EGAT is subject to a fi xed, guaranteed rate-of-return, which provides a handsome return on capital investment. As a result, EGAT faces several simultaneous disincentives to investing in energy efficiency. First, energy efficiency leads to a reduction in the amount of electricity sold, which reduces EGAT’s revenues. Second, investment in energy efficiency is not considered an “investment” and is therefore not eligible to earn the fi xed return on invested capital that determines EGAT’s profits and the incentives of its employees. It is not surprising, therefore, that only large-expenditure projects such as coal-fired, gas-fired, and nuclear and large hydroelectric power plants are considered in the PDP, and that energy efficiency is conspicuously absent. Since the latest PDP was adopted in 2010, the government announced a twenty-year energy efficiency plan in 2011 that calls for a 25 percent reduction in energy intensity (energy use per unit GDP). Th is goal, which was driven by concerns over Thailand’s high energy intensity, was reaffirmed by the newly elected government in August 2011. To achieve this goal, consumption of electricity and other forms of energy must be reduced by 20 percent from the “business as usual,” or PDP 2010, baseline


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consumption. It remains to be seen how this energy intensity target will be integrated into the next PDP. The key to achieving this goal is to restructure the utilities’ incentives. First, energy efficiency measures need to be treated as investments, not expenses. Second, in order to break the over-investment cycles, it is necessary to move away from guaranteed rate-of-returnregulation, which rewards over-investment rather than operational and investment efficiency. And last, the planning process needs to consider energy efficiency as a supply option to meet growing power demand.

Comparison of Experiences and Key Challenges In response to rapid growth in energy demand and environmental concerns, energy efficiency is enjoying a resurgence across Asia. National governments in China, India, and Th ailand have set ambitious, longer-term targets for energy efficiency. To meet those targets, planning and regulatory agencies are now designing and experimenting with new energy efficiency policies and programs, including those managed through electric utilities. Despite differences in national contexts, several themes emerge from a comparison of energy efficiency policy and practice across China, India, and Thailand, offering insights to guide future efforts. In both China and Thailand, the Asian financial crisis of the late 1990s had a severe impact on commitment to, and funding for, energy efficiency, as surplus production capacity led governments to scale back energy efficiency programs. Cyclical support is perhaps intrinsic to energy efficiency programs that are motivated by high energy demand growth, which makes them politically difficult to sustain when demand growth slows. Integrating energy efficiency into longer-term investment planning processes, such as through electric utility resource planning, could make energy efficiency policies more sustainable through economic growth cycles, but requires political commitment, and an institutional infrastructure to support it. Thailand was the first country in Asia to set up utilitybased energy efficiency programs, whereas this approach is just beginning to take shape in China and India. Difficulties in sustaining commitment to utility-based energy efficiency in Thailand provide a useful point of reference for China and India. The critical weakness of Thailand’s Demand Side Management Office continues to be the lack of an institutionalized mechanism that links energy efficiency with utility investment, an avoided cost framework, electricity prices, a system to monitor and verify efficiency savings, and utility profits. Without this more integrated approach to resource planning, high levels of investment in energy efficiency have proven difficult to sustain.

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386 • THE BERKSHIRE ENCYCLOPEDIA OF SUSTAINABILITY: CHINA, INDIA, AND EAST AND SOUTHEAST ASIA: ASSESSING SUSTAINABILITY For China, Thailand’s experience suggests that, without the support of a strong regulatory framework, its EE/DSM Rule is unlikely to be effective. A strong regulatory framework would require empowering China’s electricity regulator, which has historically had little real authority. China has a nationally regulated electricity sector, and providing enough flexibility in the design of national regulation across diverse provinces, several of which are comparable in size to Thailand, will be a challenge. For India, the challenge instead is how to harness the power of local initiatives, by strengthening state-level electricity regulatory commissions, clarifying and improving state-level incentives for energy efficiency, and scaling up local regulatory innovation. Over the coming decades, utility-based energy efficiency could be an important complement to other sector-based policies and incentives as a means to meet national energy efficiency targets. China, India, and Thailand will all need to develop the institutions and capacity to support more sustained inclusion of energy efficiency in utility planning, which will provide ample opportunities for exchange and shared learning. Fredrich KAHRL Energy and Environmental Economics, Inc. Ranjit BHARVIRKAR Itron Inc. Chris GREACEN Palang Thai Chuenchom Sangarasri GREACEN Palang Thai Mahesh PATANKAR Customized Energy Solutions Priya SREEDHARAN Energy and Environmental Economics, Inc. James H. WILLIAMS Monterey Institute of International Studies


See also Cities—Overview; Energy Industries—Nuclear; Energy Industries—Renewables (China); Energy Industries—Renewables (India); Energy Security (East Asia); Five-Year Plans; Green Collar Jobs; Information and Communication Technologies (ICT); Microfinance; Public Transportation; Public-Private Partnerships; Rule of Law; Steel Industry

FURTHER READING Andrews-Speed, Philip. (2009). China’s ongoing energy efficiency drive: Origins, progress and prospects. Energy Policy, 37(4), 1331–1344. Hu Zhaoguang; Moskovitz, David; & Zhao Jianping. (2005). Demand-side management in China’s restructured power industry: How regulation and policy can deliver demand-side management benefits to a growing economy and a changing power system. Washington, DC: World Bank. Lin Jiang. (2007). Energy conservation investments: A comparison between China and the US. Energy Policy, 35(2), 916–924. Sathaye, Jayant, & Gupta, Arjun, P. (2010). Eliminating electricity deficit through energy efficiency in India: An evaluation of aggregate economic and carbon benefits. Lawrence Berkeley National Laboratory Report LBNL-3381E. Singh, Daljit; Bharvirkar, Ranjit; Kumar, Saurabh; Sant, Girish; & Phadke, Amol. (2011). Using national energy effi ciency programs with upstream incentives to accelerate market transformation for super-efficient appliances in India. European Council for an Energy Effi cient Economy 2011 Summer Study. Retrieved April 4, 2012, from http://proceedings.eceee.org/docs/eceee_ 2011_toc.pdf Singh, Jas, & Mulholland, Carol. (2000). DSM in Thailand: A case study. UNDP/World Bank Energy Sector Management Programme Report. Retrieved September 13, 2011, from http://www.egat. co.th/en/images/stories/pdf/dsm_in_thailand_2.pdf Sulyma, Iris M., et al. (2000). Taking the pulse of Th ailand’s DSM market transformation programs. American Council for an Energy-Efficient Economy Summer Study Proceedings Paper. Retrieved September 13, 2011, from http://www.aceee.org/ proceedings-paper/ss00/panel08/paper31 Zhou, Nan; Levine, Mark; & Price, Lynn. (2010). Overview of current energy efficiency policies in China. Energy Policy, 38 (11), 6439–6452.

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