As feed-in tariffs gain traction as a policy mechanism of choice, we must keep in mind the bigger picture of the financial health of developing country electricity sectors.
It was not too long ago that the World Bank and other international financial institutions were drawing attention to the soaring debt levels of developing country utilities. In order for feed-in tariffs or other electricity policies to be effective, a comprehensive approach must address the financial and governance challenges that continue to trouble utilities. Most importantly, there must be transparent tariff setting processes that provide space for public scrutiny and input.
Tariff setting is a central issue that links both the financial and governance aspects of utility performance. In the past 10-15 years, reform efforts have pressed for tariffs to be raised in order to cover the full costs of providing electricity. The transition to cost-recovery principles has been a rocky policy path, which has alternated between social unrest directed at rate increases, and populist solutions which reinstated subsidies and incurred further debt. Missing in all of this has been a formal process in which consumers can engage in rate setting and decision-making about how to structure subsidies and price impacts.
In developing countries there are few institutions structured to allow for stakeholder engagement in a way that can accommodate a range of analyses and approaches. Unlike in the United States, where independent regulatory institutions came into being as a result of consumer protest against market manipulation by monopolies, developing country regulators were established to create an enabling environment for private investors. As a result, institutional processes for disclosing information and incorporating public input tend to be underdeveloped.
If independent agencies exist at all, they often lack sufficient mandate, authority and capacity to implement these tasks. When a lack of open, transparent processes combine with an absence of visible regulatory actions to curb inefficiencies, consumer confidence is lost. The lack of formal channels for integrating consumer perspectives has had adverse effects. With the lack of institutional space in which to explore a range of solutions, consumers have typically taken to the streets or threatened political stability in response to tariff increases that have been viewed as inequitable.
In Indonesia, for example, the government was unable to sustain significant tariff increases even in spite of World Bank and Asian Development Bank loan conditionalities. Yet a closer look at the positions of consumer and public interest organizations show that they do not necessarily reject price increases per se.
A forthcoming Asian Development Bank (ADB) study notes that leading public interest organizations support Indonesia’s April 2010 decision to remove the electricity subsidy for consumers who use more than 6600W per month. This position is not new. What consumer groups have been protesting since the beginning of the sector reform program is the lack of transparency around tariff setting and subsidy processes. They argue that the lack of an independent regulatory process has meant that short term political interests have dominated subsidy determinations, resulting in poorly targeted subsidies and other inefficiencies. In all that time, prices have barely risen. One cannot help but wonder whether earlier openness to alternative perspectives – and formal process for considering them – may have hastened the path to financial recovery. Even now, public interest groups in Indonesia are calling attention to the lack of a clear tariff methodology and involvement of a body that could represent the public.
Civil society perspectives are particularly valuable in the context of the impending impacts of renewable energy. In the Indian state of Tamil Nadu, for example, the utility’s massive debt must be attributed to multiple types of subsidy payments that the state government has not transferred. As in Indonesia, tariffs have not been raised even as the costs of providing electricity have risen. As a state with one of the highest deployments of renewable energy in India, exceeding the national target of 10%, part of the deficit is linked to renewable energy subsidies. When tariffs are inevitably revised, the voices of consumers will be ever more important in the dialogue about how the costs are covered.
In Thailand, consumer groups advocate that renewable energy policy should be bundled with energy efficiency and demand-side management, rather than deployed in isolation. Attention to energy efficiency would not only bring the costs renewable energy down, but would curb the tendency of Thai utilities to overinvest, an inefficiency which has had an even bigger impact on tariffs.
In Indonesia, civil society organizations argue that subsidies for renewable energy, as for any other policy, should not come as a “blank check”, but should be linked to public interest objectives and regulatory oversight. Already, several corruption investigations are underway in connection with alleged price mark ups and manipulated tender processes. At one solar PV project, the cost of installation was increased by nearly 20% as a result.
In the Philippines, analysts note that there is a serious tendency to keep marginalized sectors, especially those who are non-industry players, out of energy decisionmaking processes. For example, the voices of indigenous peoples and local communities are ignored in the development of power and fuel projects. This lack of transparency and public participation in energy planning and development has led to compromised environmental principles and standards as well as social conflict resulting in escalating costs for the country. This should be avoided as the Philippines implements its recently enacted Renewable Energy Act; otherwise support for renewable energy would diminish.
Consumers have an important role to play in the rate setting process, providing analytic expertise, helping to reduce information asymmetry, and demanding better corporate governance and performance standards from utilities. They can also provide important input into the setting of investment priorities and the distributional impacts of tariff design.
Yet the potential of civil society to participate in decision-making processes about the price and impact of renewable energy is far from realized. Prayas’ recent study “Clean Energy Regulation and Civil Society in India” documents the poor public response to the renewable energy tariff orders issued by Indian state regulatory commissions. The study, which reviewed regulatory proceedings and conducted stakeholder interviews in five Indian states, concluded that the lack of reliable data about renewable energy, including resource availability, costs, and performance means that only a handful of technically sophisticated CSOs are able to properly analyze regulatory decisions and the data that underpin them, and this work depends on the availability of adequate resources.
It also corroborates a global survey by the U.S. National Association of Regulatory Utility Commissioners (NARUC) which concluded that regulatory bodies tend to focus on investor issues and do not recognize the role of civil society participation, creating the perception of regulatory capture. For most CSO’s, the focus on investor issues has meant that the regulatory process is of little value to them.
Thus begins a cycle of non-engagement, for when CSOs stay away from regulatory proceedings, the perception that the process has been captured by project developers is reinforced, and has the potential to build popular suspicion of renewable energy generation rather than a constituency that demands more ambition.
To break this cycle, countries must build stronger regulatory institutions and transparent and accountable decision-making processes. There must also be investments in capacity building for the effective participation of civil society organizations. The political and economic sustainability of feed-in tariffs cannot be separated from the larger governance context of tariff-making processes and utility struggles with financial liquidity.
The authors are partners in the Electricity Governance Initiative, a global network of civil society organizations dedicated to promoting transparent, inclusive, and accountable decision making in the electricity sector. WRI and Prayas serve as the Secretariat for the initiative.