Mekong Utility Watch

Thailand’s flawed electricity privatization

Grainne Ryder
Probe International Power Sector Reform Series Paper #4, part 1
February 20, 1999

Thailand needs a new electricity system that makes the rights of consumers and citizens preeminent.


This report examines trends in the global electricity supply industry, the problems with partial privatization of Thailand’s electricity sector, and ensuring that further electricity privatization works for all citizens, the environment, and the economy.

The Case for Citizen-Oriented Reform

CONTENTS

1. Introduction: Thailand Needs A New Electricity System

2. Electricity Generating Monopolies Are Obsolete

3. Flawed Electricity Privatization

3.1 Small Power Producers Restricted
3.2 EGAT – A Public Liability
3.3 EGAT’s Perverse Monopoly

4. The Case for Citizen-Oriented Reform

4.1 What Needs to Be Done
4.2 Define Rights and Responsibilities
4.3 Setup An Independent Regulatory Body
4.4 Setup a Public Licensing System for Private Power Producer
4.5 Strengthen Citizens’ Rights
4.6 Strengthen Citizens’ Property Rights

5. Appendix A: EGAT’s Large Power Producers

6. Appendix B: EGAT’s Small Power Producers

7. Sources

Gráinne Ryder
Power Sector Reform Series Paper #4
Probe International
225 Brunswick Avenue
Toronto, Ontario
M5S 2M6 CANADA
GrainneRyder@nextcity.com

An earlier draft of this report was presented to the JACSES
International Seminar “Road to Sustainable Energy Path in Japan and
Asia – Challenges and Opportunities for the Future,” February 20-21,
1999, hosted by Japan Center for a Sustainable Environment and Society,
Tokyo, Japan.


1. INTRODUCTION: THAILAND NEEDS A NEW ELECTRICITY SYSTEM

Thailand needs a new electricity system that makes the rights of
consumers and citizens preeminent. In the last year, thousands upon
thousands of Thai citizens have appealed to the authorities, signed
mass petitions, organized rallies, and even blocked major highways to
protest plans for a string of massive-scale coal and nuclear power
plants and to demand compensation for environmental damages caused by
existing hydro dams and thermal power plants. Protestors are often
ignored and, in some cases, beaten or intimidated by state police. But
their message to the Thai government and its international financiers
is clear: the people of Thailand are no longer able or willing to
tolerate the costs imposed on them by power producers. Every citizens’
protest against a power plant is a plea for change — for cleaner air,
less environmental damage, an end to the victimization of communities,
and the right to participate in decisions that affect people’s
livelihoods, health, and resources.

Thai citizens have no say in how electricity is generated, by whom,
where, and at what price. In the last five years, citizens have had no
say in how the government has handled privatization of the state-owned
electricity sector. The Electricity Generating Authority of Thailand
(EGAT) continues to use its monopoly powers to impose power plants on
communities and to use and degrade water, land, and other resources as
it deems acceptable. Such extraordinary powers, combined with the
government’s unsound policy of selling electricity for less than it’s
worth, have promoted environmental degradation, forced resettlement,
wasteful electricity consumption, overexpansion, and the accumulation
of massive debt.

This report examines 1) trends in the global electricity supply
industry that has rendered electricity generating monopolies obsolete,
2) the problems with partial privatization of Thailand’s electricity
sector, and 3) what needs to be done to ensure that further electricity
privatization works for all citizens, the environment, and the economy.

CONTENTS

2. ELECTRICITY GENERATING MONOPOLIES ARE OBSOLETE

Restructuring Thailand’s electricity sector can lead to cleaner,
cheaper power if it is based on an understanding of the technological
advances that will drive the future electricity industry. Recent
technological advances are demonstrating two things. First, there is no
longer any economic or technical justification for building
massive-scale power plants. Second, there is no longer any economic or
technical advantage in having monopolies in electricity generation.

Today it is possible to generate electricity on a small scale at the
same, or lower, cost than that produced from the very large, centrally
managed power stations built over the last 50 years. Of particular
interest are the advances in cogeneration – the process of
simultaneously producing useful heat and electricity from the same fuel
source – which increases the efficiency of fuel burning, from 30
percent up to 90 percent, thereby reducing damage to the environment
while increasing economic output through more efficient use of
resources. Remarkably, the fuel conversion efficiency of conventional
coal or nuclear plants, which use steam-fired turbines, is only about
33 percent, which means that two-thirds of the fuel used to create
electricity in conventional power plants is wasted. In other words,
two-thirds of the greenhouse gases and other pollutants coming out of
the stack of a conventional power plant comes from burning fuel for no
useful purpose. As a result, the actual cost of electricity from
conventional power plants includes fuel costs at least twice as high as
they should be.

Combined cycle gas-turbine plants, on the other hand, cost about
one-half to one-third the capital cost of a conventional coal plant and
can be installed in as little as six months to a year, compared with
five to seven years for a large coal plant. Because of their economic
advantages and high fuel efficiency, some of North America’s top energy
analysts believe that combined cycle plants and cogeneration
technologies could render the model of large centralized generating
stations run by a single monopoly entity obsolete in this decade.

In contrast to the old bigger-is-better approach to electricity
supply expansion, most of the exciting new developments in the
electricity supply industry are at the small end of the scale.
Gas-turbine manufacturers, for example, are now demonstrating mini- and
microturbines in sizes down to tens of kilowatts, small enough to power
small factories, schools, hotels, hospitals, rural cooperatives, and
office buildings. New information technology is also helping to make
small-scale systems affordable and easy to operate locally. Energy
analysts, such as Walt Patterson of the London-based Royal Institute
for International Affairs, predict that as electricity systems adapt to
decentralized gas-turbine technology, systems will become increasingly
congenial to more smaller scale technologies suited to local needs. A
biomass-fuelled cogeneration system, for example, is never more than
100 MW, and wind turbines are usually a few megawatts.

Now that almost all of Thailand’s population has access to
electricity from the national grid and the demand for new electricity
supplies is slowing down, the needs of system users – from single
households in rural communities to large manufacturers – are changing.
Instead of one central supplier, many consumers will be looking for
different services to reduce their electricity bills and lower their
operating costs (by boosting efficiency). Consumers still want access
to inexpensive electricity, of course, but on more flexible and
reliable terms than the old-style power plants can provide. As
companies turn to higher value-added equipment (i.e., electronics
manufacturers), they need a higher quality electricity supply that
provides uninterrupted power at constant voltage. They also need fast
service response when problems occur because any service interruption
can cause considerable cost and damage. As consumer needs change, the
demand for new energy products and services in Thailand is expected to
increase – for innovations that range from time-of-day metering that
allow customers to change their consumption habits to save money, to
biomass technologies that allow farmers to supplement their income, and
to new energy-efficient technologies that allow large consumers, such
as companies, hospitals, or apartment buildings, to lower their
operating costs.

With the advent of decentralized technologies, electricity
generating monopolies in Thailand no longer make economic sense. It was
once thought that the entire electricity system was best controlled by
a single monopoly entity because generators that were connected to the
transmission network had to be under some form of central control or
dispatch to maintain stability of the network. But with today’s
decentralized generating technologies, only the transmission network
requires a central coordinator to maintain grid stability to allow lots
of power producers to safely and reliably deliver electricity to
consumers. Transmission lines can be operated much like a public
highway that is open to anyone, provided users pay an access fee, and
conform to basic rules of the road. In this way, lots of different
electricity producers can use the grid to sell power directly to their
customers.

At one time, only large utilities were thought to be capable of
building generating plants because of their enormous capital cost and
technical complexity. Conventional wisdom had it that electricity
generation was a natural monopoly, best controlled by one company in
order to keep prices lower than a privately run electricity sector and
to sell electricity without including a price markup for profit or
subjecting consumers to rapid price fluctuations.

Utilities, such as Thailand’s Electricity Generating Authority
(EGAT), could always count on the majority of consumers to support its
monopoly in the belief that it provided the least-cost electricity and
highest standard of service. EGAT kept electricity rates at or below
cost by deferring costs into the future, externalizing environmental
costs, and relying on foreign aid. The availability of cheap and
risk-free capital from institutions such as the World Bank created an
environment of investment without responsibility. EGAT began operating
as a type of one-company industrial strategy, promoting industrial
expansion in certain regions by offering discount electricity or
investing in large-scale power projects in order to stimulate economic
growth and create jobs in others. EGAT enjoyed virtually unlimited
access to cheap capital and its debts were guaranteed by the
government. For a time, EGAT’s special powers concealed its real cost
to society, and protected it from competition, but inevitably,
inefficiency pervaded the utility.

CONTENTS

3. FLAWED ELECTRICITY PRIVATIZATION

Initially, electricity privatization was promoted by the World Bank
as a way of financing rapid expansion in anticipation of rapid
electricity demand growth. By the late 1980s, electricity demand had
been growing by 10 to 12 percent annually and EGAT was spending more
than US$ 1 billion dollars annually on new generation and transmission
facilities. Instead of draining the government’s coffers, EGAT’s chief
financier, the World Bank, advised the utility to pursue a gradual
course of privatization as a way of attracting private capital for new
investments.

In 1992, the government, led by Prime Minister Anand Panyarachun,
passed a privatization law, breaking the 30-year monopoly in power
generation held by EGAT. Anand is chairman of Saha Union, the parent
company of Union Energy, a private power company that was subsequently
awarded one of Thailand’s first private power licences. Since 1992,
EGAT has partially privatized two of its newer, more profitable plants,
the 1232 MW Rayong and the 824 MW Khanom gas-fired stations, by
transferring ownership to its new private subsidiary, Electricity
Generating Company (EGCO). Then EGAT launched its so-called Independent
Power Producers (IPP) scheme, offering long-term supply concessions to
private companies who would finance and build their own power plants,
and sell their entire output to EGAT. EGAT received over 30 bids from
international consortia offering to supply EGAT with 32,000 MW, which,
at that time, was more than double the utility’s projected needs for
the next 15 years.

EGAT pandered to the private sector by offering guaranteed long-term
revenues to IPP bidders, which, in turn, promoted expansion of grossly
oversized power plants: sixty percent of the new IPP capacity is to
come from coal-fired plants in the 700 MW and 1400 MW range. If it
turns out that there is no customer or market for IPP power, EGAT, the
monopoly supplier, is legally obliged to pay for it. Even the World
Bank, a longtime financier of massive-scale power plants, has advised
the government to avoid plants larger than 300 MW because they require
enormous amounts of capital, limit competition, and have no economic
advantage over smaller-scale plants. By 1997, EGAT had signed contracts
with seven IPP consortia for about 6,000 MW worth of new generating
capacity. Only two of them, both 700 MW gas-fired combined cycle
plants, have secured financing to date (See Appendix A). The other five
IPPs are having trouble securing financing mainly because of EGAT’s
deteriorating financial performance which has would-be IPP investors
worried that EGAT will not be able to honour its IPP commitments. In
the case of coal-fired IPPs, public opposition has also deterred
investors.

CONTENTS

3.1 Small Power Producers Restricted

In parallel to the IPP scheme, EGAT launched a Small Power Producers
(SPP) scheme and invited large power consumers (rice millers,
pharmaceutical companies, manufacturers and industrial estate owners)
to build their own power plants and sell electricity to EGAT. By
December 1998, there were 31 SPPs in operation, ranging from companies
generating several megawatts of electricity using non-fossil fuels
(i.e., rice husk, wood chips, bagasse) to industrial estates
cogenerating electricity and steam in the 100 to 300 MW range to supply
their own needs and sell electricity to EGAT. Every major industrial
estate in the country now has at least one cogeneration plant and every
large sugar factory is producing its own power using bagasse fuel.

One-third of the SPP licences went to industrial power consumers
concentrated in Rayong province. Thailand’s agro-industrial giant, Soon
Hua Seng, was awarded six SPP licenses for two coal-fired cogeneration
plants, and four non-fossil fuel power plants. Some of the first SPP
companies were awarded multiple licences while other potential small
power producers (i.e., municipalities, universities, hospitals,
shopping malls, hotels, and rural cooperatives) have been denied the
opportunity. Now that EGAT has a glut of generating capacity and
doesn’t require any supplemental power, it has stopped issuing SPP
licences for at least seven years.

The problem is that EGAT remains the gatekeeper and is so perverse
that it sees cleaner, cheaper power producers as a threat. SPPs are not
allowed to by-pass EGAT, the monopoly supplier, to find their own
customers or market. They are treated as supplemental producers, to be
switched on or off depending on EGAT’s needs, not as competitors. The
bulk of consumers still have no choice but to buy increasingly
expensive electricity from EGAT and its chosen IPP monopolies.

Apart from its private power purchases, EGAT pressed ahead with its
own massive-scale power plant, ignoring the warning signs of an
electricity glut. The first stage of EGAT’s 4600 MW gas-fired station
in Ratchaburi province was scheduled to come on-line last year but EGAT
ran out of money and was forced to delay commissioning of the first six
gas turbines. Because of the delay, EGAT’s gas supplier, the Petroleum
Authority of Thailand, now owes millions of dollars in fines to the gas
producers in Burma because it failed to take delivery of the gas on
time. To pay its Japanese sub-contractors, EGAT borrowed $170 million
from Japan’s Export-Import Bank. This year, the government is preparing
to privatize the unfinished plant and use a portion of the proceeds to
help EGAT finance new investments.

CONTENTS

3.2 EGAT – A Public Liability

Thailand’s economic crisis has exposed EGAT as a growing financial
liability to electricity ratepayers and taxpayers. Hard-hit by the Thai
baht devaluation, EGAT is faced with rising costs, debts worth $5
billion, excess generating capacity, declining electricity demand, and
poor returns on its investments. For the first time in its history,
EGAT had to defer its debt-service payments of $500 million by one
year. At the same time, EGAT’s 10-year plan calls for a whopping
investment of US$11.5 billion on new generation and transmission
projects. Credit rating agencies, such as Moody’s Investors Service,
have warned that EGAT’s financial outlook could get worse this year due
to “its sizeable capital expenditure programmes, payment obligations to
Independent Power Programmes, and the uncertainties arising from
privatisation.”

EGAT’s chief financier, the World Bank, wants to ensure that its
client services its debts and stays eligible for new loans. To bolster
the utility’s deteriorating financial performance, the World Bank has
encouraged EGAT to raise funds for expansion and, at the same time,
pass its rising costs onto consumers. EGAT increased rates three times
in 1998, by a total of 15 percent and 7 percent for bulk and retail
electricity, respectively. Bangkok residents can expect to pay 20
percent more for electricity over the next few years, according to a
study by PriceWaterhouseCoopers, because EGAT and the two distribution
utilities have signed an agreement with the World Bank which commits
them to financing at least 25 percent of their costs out of their own
funds. The Bank has also helped EGAT sell $300 million worth of bonds
to institutional investors in the United States and Europe last year by
guaranteeing its bond issue.

Thailand’s National Energy Policy Office (NEPO), on the other hand,
the agency responsible for EGAT’s privatization, wants to accelerate
the utility’s sale as a strategy for national debt reduction and
cajoling private capital back into the country. As a condition of the
International Monetary Fund’s $17 billion bail-out package, the Thai
government must use a portion of the privatization proceeds to pay
debts incurred by the government in its bailout of local finance firms
and commercial banks. Recently, EGAT sold 15 percent of its stake in
EGCO to the Hong Kong-based utility, China Light & Power, for
almost $240 million. This year, the government expects to earn up to
US$1 billion by selling a 30 percent stake in EGAT’s Ratchaburi plant.
(EGCO is reportedly seeking funds from Japan’s Export-Import Bank and
the World Bank so it can bid for shares in Ratchaburi.)

A group of Thai academics and economists have criticized the
government’s focus on selling EGAT’s assets, without restructuring the
electricity sector, because it is creating private electricity
monopolies. “Privatisation should not be treated as a fiscal policy
which has to be urgently implemented,” argues economist Vuthipong
Priebjrivat, a former president of Thai Rating and Information Services
Limited, because it “could result in massive damage later.” Vithiphong
has also criticized NEPO’s privatization master plan for its failure to
“provide a clear answer on its objectives, regulatory system, consumer
protection, selling strategy or control over foreign holdings.”

NEPO initially proposed breaking EGAT into three new private
companies, based on the British model, and leaving EGAT responsible for
the transmission system. But NEPO’s plan was derailed by EGAT’s union
due to fears that privatizing the utility would lead to job losses and
reduced employee benefits. Most recently, World Bank-financed
consultants, London Economics, have worked with NEPO to introduce a new
regulatory framework for competition and customer choice by the year
2003. But political uncertainties about how EGAT should be privatized
have delayed development of the new framework, according to London
Economics.

CONTENTS

3.3 EGAT’s Perverse Monopoly

Thailand’s economic crisis has exposed EGAT as a perverse monopoly,
putting its own survival before the interests of consumers. At a time
when recession-hit companies were forced to slash prices, cut costs and
sell off unproductive assets in an effort to survive, EGAT has remained
buoyed by its monopoly power, able to impose rate increases on captive
consumers. Thai consumers and the media have accused EGAT of
overcharging customers so that the utility could give its 31,000
employees salary increases, bonuses, and free electricity. Others blame
EGAT’s incomplete privatization for driving electricity prices up,
instead of down. According to the Nation’s business reporter,
Watcharapong Thongrung, the problem is that EGAT is still allowed to
pass its losses onto consumers. In a competitive system, such a tactic
“would be suicide,” Watcharapong writes, because consumers would simply
stop buying or turn to cheaper alternatives.

“Consumers shouldn’t have to pay for EGAT’s mistakes or inefficient
operations in the form of increased rates,” said the chairman of
Thailand’s Federation of Thai Industries, Tawee Butsuntorn. Tawee, an
executive of Siam Cement, one of the country’s largest power consumers
and an IPP shareholder, wants more competition to bring in new
technologies, improve services, and lower energy bills. He also said
that a major problem for the country’s manufacturers is the poor
quality of electricity supply from EGAT.

Academics at the Bangkok-based National Institute of Development
Administration (NIDA) have argued that privatization without
competition is not serving the public interest. Economist Vichit
Lorchirachoonkul of NIDA has urged the government to let the private
sector takeover the electricity generation business and leave EGAT
responsible for the transmission system (as proposed by NEPO).

Even NEPO’s chief, Dr. Piyasvasti Amranand, admitted last year that
partial privatization has “not yet borne any obvious benefit to the
consumer.” NEPO has allowed EGAT’s partial privatization and the
introduction of private power producers to be driven by patronage and
central planning rather than by the demands of consumers.

To its credit, NEPO has criticized EGAT for its expansion plans and
recommended more competition among power producers. But the agency has
failed to promote public accountability and has no legal authority to
implement its policies. NEPO’s focus is splintered by competing
bureaucratic interests. Day-to-day responsibility for the electricity
sector remains scattered across nine different ministries. Apart from
NEPO, the National Energy Administration within the Ministry of
Science, Technology and Energy plays a regulatory role and EGAT’s
investment plans are approved by several departments within the
Ministry of Finance.

As the de facto regulator, NEPO is further disadvantaged by its
highly centralized approach to governance; as with EGAT, it is starved
of the information it needs from consumers to create a
consumer-oriented electricity system. NEPO has taken its policy
directions from international creditors and their stable of
privatization consultants, without consulting the country’s future
market participants. NEPO has engaged one set of consultants after
another, in the belief that it can “master plan” a new electricity
market, based on the experience elsewhere, without involving consumers
and citizens in its design.

CONTENTS

4. THE CASE FOR CITIZEN-ORIENTED REFORM

The real obstacles to a consumer-oriented electricity sector are
government rules and practises that squash competition among power
producers and discourage private investment in clean and decentralized
generating technologies. Consumers and citizens need rules that will
guarantee results – such as cleaner air, lower electricity bills,
better electricity services, and less environmental damage. Consumers
need an electricity system that makes the rights of consumers and
citizens preeminent.

Earlier this year, Thai academics and economists urged their
government to suspend further privatization until it finds ways to
introduce public participation and oversight. The problem, according to
economist Vuthiphong Priebjrivat, is that “politicians and bureaucrats
shut their doors when talking [about privatisation], while the public
and the state enterprise workers have taken no part in the
decision-making. Hence the conflicts.”

Citizens have a right to demand public accountability, transparency,
and guaranteed results from the privatization process. They can demand,
for example, that asset sales agreements be made public and specify
certain operating constraints and requirements of the new owners.
Specific penalties for failure to meet these conditions can be agreed
to in advance with the purchaser. Members of the public (i.e.,
environmental groups, local communities) have the right to demand a
tightening of regulatory standards for private power producers (i.e.,
higher plant efficiency ratings and lower allowable emissions) to
ensure that inefficient and polluting producers are replaced with clean
and efficient power producers within a certain time frame.

What the government needs to do now, writes Bangkok Post columnist
Pichai Chuensuksawade, is “set the rules and bite the bullet” on
further privatization and ensure that “providing the public with the
very best service [is] the main objective.” As another Bangkok Post
writer, Suvicha Pouaree, put it: “We have the freedom to elect our
officials; we should have the same freedom to choose the best product
or service, at the best price.”

To ensure that privatization serves the public interest, the
government must first eliminate or minimize its own conflict of
interest position – as investor, owner, monopoly supplier, regulator,
and political agent – which has prevented effective public control of
the electricity sector until now. The government should stop risking
public funds in the electricity sector, abandon its investor role,
breakup the state monopoly, and concentrate on becoming an effective
regulator of the newly-privatizing system.

CONTENTS

4.1 What Needs to Be Done

  • setup a regulatory commission to protect consumers from
    monopoly pricing and to ensure that the system provides the best
    quality electricity services for prices that are acceptable to the
    consumers, investors, and producers.
  • introduce
    market-based investment decisions; power producers should not be
    allowed to rely on public funds to finance their schemes or to find
    customers for the electricity they produce; the burden of uncertainty
    in electricity demand, construction costs, currency values, and fuel
    prices should be placed on private investors, not on government and
    ratepayers;
  • separate potentially competitive activities (generation and supply) from monopoly activities (transmission and distribution);
  • provide power producers and suppliers equal access to the transmission grid;
  • constitute
    a new transmission company independent from power producers and fuel
    suppliers: new transmission lines should be financed by beneficiaries
    (i.e., power producers and their customers), the company should be
    responsible for maintenance of the system and coordinating use, its
    costs should be financed by user fees collected from power producers
    using the grid.

CONTENTS

Grainne Ryder

Categories: Mekong Utility Watch

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