Power to the People: Electricity Planning in Developing Countries

Increased burning of fossil fuels to meet the growing demand for electricity throughout the world could create havoc for our climate. Many argue that greenhouse gas emissions (primarily carbon dioxide) from producing electricity using fossil fuels contribute significantly to global warming. Over the past two decades, carbon emissions grew fastest in developing countries such as China, Brazil, South Korea, and India, primarily because of high growth rates in electricity production. From 1970 to the present, for example, carbon emissions increased by only 30% in the developed countries, while increasing by 80% in developing countries. Scientists believe that using combinations of resources different from those used in the past to produce electricity—and integrating them in a cost-effective way—could ease the health, economic, and environmental effects of increased worldwide demand for electricity services. In developed countries, for example, electric utilities and energy planners have combined planning for electricity-capacity increases to meet growing demand with cost-effective reductions in the use of electricity.

This combination reduces the total amount of electricity needed yet maintains the same level of electricity services. This planning process is called integrated resource planning (IRP).

The electricity planning problem in many developing countries is more complicated than in developed countries. The challenge is not only to substitute investment in cost-effective reductions in electricity use for investments in power plants as in developed countries but also to obtain financing for any electricity-related investment. Power development is difficult because electric power industries are among the most capital-intensive in an economy, draining scarce financial resources. And, for countries lacking energy resources, importing oil and other fuels is also a major drain on foreign exchange reserves (the amount earned on exports minus the amount spent on imports).

The capital and foreign exchange required to develop modern electric power sectors, of course, compete with those same requirements in other sectors of the economy. That is, the electric power sector's drain on scarce capital and foreign exchange is exacerbated by the process of economic development itself: The transition from a self-sufficient, agriculturally based economy to a more specialized urban one requires capital and foreign exchange. Electric power is an important factor in this development process, fueling urbanization of an economy, its industrial growth, and rising standards of living.

Environmental problems, such as higher levels of carbon emissions that go along with economic development, further increase the complexity of electric-power decision making in developing countries. For example, the agreement at the United Nations Conference on Environment and Development in June 1992 that all countries should adopt programs to limit increases in greenhouse gas emissions is an example of an environmental obstacle to developing the power sectors of many developing countries.

IRP of the type practiced in developed countries is a management tool used to help reconcile power-sector capital and foreign-exchange requirements with the same requirements in the general economy and with the need to meet environmental regulations in producing electricity. Concisely, IRP is a tool that allows electric utilities to compare consistently the cost-effectiveness of all resource alternatives on both the demand and supply side, taking into account their different financial, environmental, and reliability characteristics. If applied properly, IRP leads to the most cost-effective electric-power resource mix, reducing the financial requirements to satisfy electric-power service needs. IRP is especially useful as a planning tool in growing economies that have increasing electric-generating capacity needs and, consequently, high power-supply costs.

IRP in Detail

In the IRP process, altering patterns and levels of electricity demand and constructing nontraditional generating plants (e.g., biofuel combustion) are weighed as resource options on an equal footing with traditional supply resources, such as building conventional fossil-fuel generating plants and extending the life of old ones. Or, alternatively, the IRP process is a combination of (1) traditional least-cost planning, a process by which utilities minimize the cost of generating a given amount of electricity, and (2) demand-side planning, a process by which utilities quantify and assess programs to alter the pattern and level of their customers' demand for electricity. The goal of IRP is to provide electricity at the lowest possible economic, social, and environmental cost.

Demand-side planning is part of a dynamic electric-utility planning process. This process (shown in the following figure) includes (1) motivating utilities to consider IRP, rather than using traditional methods of energy supply planning, (2) placing demand-side planning and supply-side planning on an equal basis in the planning process, and (3) implementing and evaluating the most cost-effective mix of demand and supply options. The process is dynamic not only because planning by its very nature is evolutionary but also, as shown in the figure, because the performance of demand-side management (DSM) programs and supply alternatives has feedback effects on both the process of selecting the programs and the way in which they are implemented.

Integrated resource planning is part of a dynamic process.

Besides regulatory factors, characteristics of both a utility's supply system and customer demand influence the decision to engage in IRP. For example, the types of generating units used by electric utilities can be a motivating force to engage in IRP. If a utility relies on fossil-fuel units and fuel costs are rising, it may find IRP attractive. On the demand side, utilities with low load factors are more likely to seek ways to alter demand patterns to shave peak load (maximum daily demand for power) and forego the need to build peaking capacity. Several powerful tools can accomplish changes in demand, including setting cost-based electricity prices—prices reflecting the actual costs of power used during different times of day. The goal in all cases is to find the mix of supply and demand resources that lowers present and future costs.

When comparing resource options in the IRP process, their varying characteristics complicate the process. That is, although DSM programs and supply resources have the common characteristic of meeting future energy and capacity requirements, they typically differ in reliability, cost, and economic impact, including considerations such as external costs (e.g., environmental degradation and injuries to workers) and the value of service.

The final two sets of blocks on implementation and evaluation in the figure are important. DSM programs are implemented and evaluated in the same way that supply resources are. That is, DSM programs are treated parallel to the manner in which a utility (1) chooses to build a power plant, (2) constructs it, and (3) evaluates its performance. The problem that many utilities in developing countries confront in treating DSM and supply resources in a parallel manner is the lack of data on running DSM programs. The technical savings of these programs are generally well known. Information on the marketing side is deficient; for example, the number of customers using different types of electricity-using equipment and the possible market penetration of energy-efficient equipment are not well known.

An IRP Example

China is a good example of a country in which IRP could make a difference by reconciling financial and environmental considerations in the power sector. National electric-power capacity in China is currently estimated to be 20% short of requirements, stifling economic development and growth. By 2000, authorities estimate that $100 billion will be required to construct needed generating capacity in an economy now growing at a rate of more than 10% per year.

As an indication of the potential of IRP to reduce the amount of funds required for the power sector in China, our group at ORNL applied IRP principles to the power sector in Hainan Province, China, one of the most rapidly developing areas in all of China. In 1988, Hainan Island off the southeast coast of China was separated from Guangdong Province, organized as a separate province, and designated China's fifth—and largest—special economic zone (SEZ). SEZs are areas designated to develop products to export as part of China's mixed development strategy.

In a prefeasibility study, we found that electricity savings from implementing DSM programs could be quite substantial. We estimate that Hainan could cut as much as 80% of its 1992 peak electricity demand by 2000 by investing in cost-effective DSM programs. Then we identified economically attractive, environmentally benign energy resources as alternatives to constructing coal-fired power plants in Hainan.

An important potential cost-effective source of savings is setting electricity prices that reflect the real costs of producing and distributing power during different hours of the day and days of the week. To varying degrees, many countries use electricity prices as an economic development tool. As a matter of policy, they set prices below costs to foster economic development, rather than at cost-based levels to reduce electricity demand. In the process, national governments subsidize electricity production. China is no exception. Changing these prices to reflect costs and, therefore, lowering the demand for electricity is an important alternative to constructing coal-fired power plants in Hainan. Also, cost-based pricing compares favorably with other technology-related DSM programs as alternatives to constructing generating plants.

Another cost-effective alternative to constructing power plants is to set more stringent standards to ensure construction of energy-efficient buildings in the three rapidly growing cities of Haikou, Sanya, and Yang Pu. These cities are currently experiencing a construction boom that is expected to continue. Therefore, now is a particularly favorable time to implement standards that require insulation, energy-efficient windows, and other conservation measures for new commercial construction.

Hainan also appears to have the climate to support a cost-effective residential solar water heating program. A program to increase the penetration of efficient lighting in Hainan is also cost effective, resulting in significant demand-side electricity savings for the Hainan Electric Power Company while lowering energy costs for household customers.

Modern, new buildings in Haikou, Hainan, the capital of Hainan Province, China, could be less costly to operate with improved building energy efficiency standards.

Outlook

If the estimated savings in Hainan Province from using cost-effective resources other than power plants is indicative of the amount of savings possible in all Chinese provinces, the use of IRP as an electric-power planning tool has much to offer Chinese policymakers. First, China's economic modernization program would benefit; by identifying and acquiring cost-effective resources such as cost-based pricing, new building conservation standards, efficient lighting, and solar water heaters, Chinese policymakers will free funds for use in other parts of the economy. Second, China would slow its growth in greenhouse gas emissions by satisfying electricity service needs with resources other than power plants that burn fossil fuels. Clearly, integrated resource planning would be beneficial for not only the world's most populous nation but also the world.

Larry Hill is head of the Public Utility Studies Group in ORNL's Energy Division, which he joined in 1980. His group works on electric power issues for both domestic and foreign utilities. He is also a visiting fellow for the National Conference of State Legislatures in Denver, Colorado, where he works with state legislators and their staffs on issues and legislation associated with restructuring the U.S. electric power industry. He has a Ph.D. degree in economics from Indiana University.

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