Energ Sector Restuturing PogrVolue 4: The Electricity Lgnite Subsectors
Report No. 153/93
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JOINT UNDP / WORLD BANKENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)
PURPOSE
The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) waslaunched in 1983 to complement the Energy Assessment Programme, established three yearsearlier. ESMAP's original purpose was to implement key recommendations of the EnergyAssessment reports and ensure that proposed investments in the energy sector represented the mostefficient use of scarce domestic and external resources. In 1990, an international Commissionaddressed ESMAP's role for the 1990s and, noting the vital role of adequate and affordable energyin economic growth, concluded that the Programme should intensify its efforts to assist developingcountries to manage their energy sectors more effectively. The Commission also recommendedthat ESMAP concentrate on making long-term efforts in a smaller number of countries. TheCommission's report was endorsed at ESMAP's November 1990 Annual Meeting and promptedan extensive reorganization and reorientation of the Programme. Today, ESMAP is conductingEnergy Assessments, performing preinvestment and prefeasibility work, and providing institutionaland policy advice in selected developing countries. Tbrough these efforts, ESMAP aims to assistgovernments, donors, and potential investors in identifying, funding, and implementingeconomically and environmentally sound energy strategies.
GOVERNANCE AND OPERATIONS
ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of theUNDP and World Bank, the governments and institutions providing financial support, andrepresentatives of the recipients of ESMAP's assistance. The ESMAP CG is chaired by the WorldBank's Vice President, Finance and Private Sector Development, and advised by a TechnicalAdvisory Group (TAG) of independent energy experts that reviews the Programme's strategicagenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energyplanners and economists from the Industry and Energy Department of the World Bank. TheDirector of this Department is also the Manager of ESMAP, responsible for administering heProgramme.
PUNDING
ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nationsagencies, the European Community, Organization of American States (OAS), Latin AmericanEnergy Orgalization (OLADE), and countries including Australia, Belgium, Canada, Denmark,Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,Portugal, Sweden, Switzerlknd, the United Kingdom, and the United States.
FURTHER iNFORMATION
For firther information or copies of completed ESMAP reports, contact:
ESMAPc/o Industry and Energy Department
The World Bank1818 H Street N.W.
Washington, D.C. 20433U.S.A.
POLAND
ENERGY SECTOR RESTIRUCTURING PROGRAM
Volume 4
The Electricity and Lignite Subsectors
January 1993
Power Development, Efficiencyand Household Fuels Division
Industry and Energy DepartmentThe World Bank1818 H Street, N.W.Washington, D. C. 20433U.S.A.
This donw ha restrlced disbibuton and may be used by recipientsonty In the porlbwm of their o¢flal duts. Is contents rmy nototherwise be dicosd wIthout UNDP or MM1d Bank authoration.
PREFACE
This report-the fourth of a five-volume series of studies of restructuring in the Polish energysector-is based on work completed during 1990. The results of the study were examined in aseminar attended by representatives of the power industry, the Ministry of Industy and trade, theBank of Poland, the Ministry of Fin.ance, the Ministry of Privatization, trade unions, as well asPolish experts, consultants, the World Bank, and ESMAP. This report provides an opportunityto bring the analysis of the restructuring issues and lessons learned in Poland into a widerperspective, allowing other countries pursuing similar restructuning goals to benefit from thiswork.
More and more the electricity supply industry in Europe is being seen as a commercialconcern, and electricity less of a public service and more of a commodity. Existing surpluscapacity, access to transmission networks of other European countries and the economies ofsystem interconnection, provide security of supply and insure each country against loss of service.This has reinforced the strong trend in Europe towards the reduction of state involvement in thepower subsector, trend which is likely to become even stronger in Poland driven by budgetshortages and the requirement that power utilities should be cost effective and financially selfstanding.
Several issues involved in the restructuring of the power subsector need to be tackled ina timely and resolute manner if successfil restructring is to be achieved. It is also probable thatother issues, not presently foreseen, will emerge as the process develops. The following issuesare the most relevant at this stage: (1) the structure of the lignite producers and generatingplants, (2) the criteria for merging the coal fired plants into commercial viable companies, (3)ownership criteria for transmission facilities, (4) the criteria for grouping distribution enterprisesinto viable companies, and (5) the role of contracts in establishing good business practicesbetween the various entities in the industry. The Energy Restructuring Group (ERG) has arelevant role to play in resolving these matters.
Work on energy restruchuing is the responsibility of the Ministry of Industry and Trade(Mol). Given the complexities of sector restrucbtring and the importance of the energy sectorin the economy, an Assistanuce Program for Energy Sector Restructuring has been designed tohelp MoI in this activity. This Program relies on four groups (see Annex C in Volume 1 of thisreport): The ERG, the counterpart group, the coordinating group and ESMAP.
The ERG consists of a team of inteational and Polish experts-that began work inDecember 1992 in Warsaw and will have a continuous presence there for approximately eighteenmonths. This Group, funded jointly by the European Community, the USAID and the UKKnow-How Fund, will be closely supported by U4P. To cary out rehabilitation andrestructuring proposals, a coordinating group in each subsector headed by higher management has
I
been established. To assist Mol and the ERG, a Counterpart Group has also been established,staffed by secondees from the energy industries themselves. This group will assist the ERG inthe collection and understanding of data, gaining access to industry executives as appropriate andoffering comment on the implementation options. The Counterpart Group will assist the Ministryof Industry and Trade by identifying important matters for consideration and ty ensuring thatconsequential actions which involve the coordinating groups and other parts of Government arealso pursued in a timely manner. ESMAP will support the work of the ERG through (a) theproposed activities to be carried under the ESAP program, and (b) the active involvement inERG activities.
ERG, in carrying out its tasks, will need to establish an early understanding of theprogress made by the Power Coordinating Group -(PCG) a body of industry executives andhigher level technical staff- chaired by the President of the Power Grid Company. The PCGhas been meeting regularly throughout 1992 to examine restructuring issues. It should bepossible to build on this work and make early progress in the implementation of the restructuringprogram.
The sbcwcw offlinite hawdgeewta needs special consideration to arrive at a soundeconomic structure of the lignite producers and generating plants. Two alternative structures needto be examined and the likely consequences appraised for a proper choice: (1) the merging ofthe lignite power producers and the lignite mines into a single holding company, and (2) themerging of these into three holding companies. Given that about 40% of electricity requirementsare being met by lignite based generation, the single holding company approach might limitcompettion in bulk supply. It may also give the holding company inordinate power to influencein its favor major decisions on restructuring, pricing, environmental standards, etc. There aredifferent views on these matters within the industry and the importance of an independent andobjective assessment by the ERG will therefore be great
Regarding hkd ead bued geoaeowtbe, it should be possible to agree quicldy on thecriteria for merging generating stations into companies. This will enable the ERG and the PCGto concentrate on the important questions of contracts for coal use, the methods for pooling anddispatch, and the best way to ensure that new investment for additional capacity will beforthcoming
The grid company already exists but it will be vital to ensure that it owns the highwiltegpoew lies that constitute the transmission system for the whole country. Criteria forgrupin Of aeneqO must be settled ealy and this will require a goodunderstanding of the cost and price implications.
The rlke qf eo cdx in establishing good business relationships between the various partsof the supply system is important. It will be desirable to sketch out a scheme of contracts at anearly stage and to involve the industry executives, so that there is a growing confidence in theability of the industry to work effectively in a market environment after it is disaggregated.
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Several World Bank and ESMP staff participated in the preparation of this report.Jayme Porto-Carreiro (EMP) was the task manager for the study, assisted by a Bank core teamconsisting of David Craig, Henk Busz (EC3E) and Christopher Brierly (EMA4P). Luis E.Guti6rrez (ESAP), curent ESAP task manager for restiuctwing activities in Poland, wasresponsible for the consolidation and drafting of this report. The report benefited considerablyfrom the comments and suggestions of Robin Bates (ENVPR), John Besant-Jones (IENED),Rachid Benmessaoud (EC2EE), Gaiy Stuggins (EC3IE), Alvaro Covarrubias (LATIE), BobBorlick and Michael Block (Consltants).
Funding fo. the work was provided by the LTnited Kingdom's Know-How Fund and byUNDP through bilateral contributions to EMP. The United States has also provided fundingfor the follow-up work since 1991.
ESM P wishes to express its appreciaion to the govemment of Poland and the manyenterprises and organizations in the energy sector for the cooperation and assistance rendered toESMAP staff and the various consultants during the preparation of the studies.
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CURRENCY EQUIVALENTS
Currency Unit- Zloty (ZI)Calendar 1991 US$1 - ZI 10,559 (Average)
Weights and Measures
Gcal Giga calorie (one million kilocalories)GW Giga Watt (1,000,000 kW)GWh Giga Watt hour (1,000,000 kWh)kcal kilocalorie (4,187 Joule)kW kilo WattkJ 1,000 JouleskWh kdlo Watt hourMt Million tonsMtce Million tons of coal equivalentMtoe Million tons of oil equivalentMtpa Million tons per annumMW Mega Watt (1,000 kW)MWh Mega Watt hour (1,000 kWh)Pi Peta Joule (34,129 tons of oil equivalent)TW Teta Watt (1,000 GW)TWh Teta Watt hour (1,000 GWh)
Abbreviations and Acronyms
BST Bulk Supply TariffC&C Control and CommandCMEA Council for Mutual Economic AssistanceCHP Combined HIeat and PowerDHE District Heating EnterpriseERG Energy Restructuring GroupPCG Power Coordinating GroupFGD Fire Gas DeslfurizationGDP Gross Domestic ProductGUS Central Statistical OfficeHOB Heat Only BoilerHV High VoltageIBRD International Bank for Reconstruction and DevelopmentITB Invitation To BidLV Low Voltage
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LRMC Long Run Marginal CostMV Medium VoltageMoI Mnity of Industry and TradeERA Energ Regulatory AgencyNPC Natona Power Contiol CenterPDM National Load Dispatch CenterPONG Polish Oil and Gas CompanyPPA Power Purchasing AgreementPPGC Polish Power Grid CompanyPSENN Polish Gfid CompanyWEWB Power and Lignite BoardWTP Willigness to PayWWK Hard Coal BoardZE Zalad Energetyczne (electricity distribution companks)
Polish Fisl Year
January 1 to December 31
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CONTENTS
EXECUTIVE SUTNIMARY ............................................ IIitrolduction ............................................. IBackground .................. ...................I...... 1RestructuringIssues ......................................... 2Restructuring Models ........................................ 3ImuesofFinance and Regulation ................................ 4Restructu ing EnergyPdicing ................................... 5
I. OVERVIEW OF THE POWER AND LIGNTrE SUBSECTORS ..... ........ 7Orpg izadonandManagenent ................................. 10MeitOrder Dispatch ....................................... 11Purchamesfom Power Staions ........... ..................... 12Trnsmission Gid . ........................................ 12Distribution Systems and Electricity Pricing ....................... 13Investment Planning ......................................... 13Transmission and Distribution Investnent ......................... 14Ancillaty Enterprises in the Power Sector ......................... 14Issues in the Lignite Subsector ................................ 15Compliance with Environmental Standards ........................ 15
1X. OBJECTIVES AND EVALUATION CRITERIA ...................... 17Objectives of Energy Sector Restructuring ......................... 17Objectives for the Electricity and Lignite Subsectors .................. 18Evaluation Criteria .......................................... 19
M. STRUCTURAL OPTIONS AND THEIR EVALUATION ................ 21Range of Activities Included . .................................. 21The Extent of Verical ntegaion .......... .................... 21The Extent of Horizont Integration ............................ 21Trading Relationships Within an Industiy ......................... 24Specification of Broad Models ............ .................... 25Broad Options for the Lignite Subsector .......................... 28
IV. DEVELOPMENT OF SHORT LISTED OPTIONS .................... 35Generation ........................................... 35
Competitive Hard Coal Fired Generating Plant ................... 37Lignite Generating Plant . .................................. 37Combined Heat and Power Plant ............................. 38Other Generaming Plant ................... 38
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Transmission ................................... 38Distribution .................................... 39Number of ZEs .................................... 39ZEs as Balanced Businesses . i .............................. 39Sources of Bulk Electricity Supply ............ ............... 39Monopoly of Supply .................................... 40
Ancillary Enterprises and Activities ............. ................ 40Reintegration ......................................... 40Enterprises tc b : *''2 -inmon ............ ............... 40Enterprises for Divestiture and Potential Privatization ............. . 41Enterprises whichwill remain State Owned ....... .. ............ 41
V. OWNERSHIP AND FINANCIAL STRUCTURE ........ ........... 43Options for Corporate Form and Ownership ....................... 43
Generation and CHP Companies ........... .................. 44Polish Gidd Company ..................................... 44Distribution Companies . .................................. 45
Existing Financial Structure and Funding ......................... 45Eq,ity and Reserves ....................................... 45Investment and Opertional Financing ......... .................. 46Subsidies ......................................... 46Mechanisms of Company Formation ........... .................. 46Financial Structures for New Enterprises ......................... 47Sources of Finance for Companies ............ .................. 47Transmission Assets ........................................ 48
VI. REGULATORY FRAMEWORK .............. .................. 49Extent and Type of Regulation ............... ................. 49Proposed Regulatory Structures .............. .................. 49Regulation of Generation ..................................... 50Regulation of Transmission . .................................. 51Regulation of Distribution .................................... 52Regulation of Lignite Mining ............... .................. 53Other Regulatory Mechanisms ............... .................. 54
VII. INVESTMENT PLANNING . .................................. 55Proposed New Arrangements ................................... 55Responsibilities of PSE . .................................... 55Responsibilities of Generating Companies ......................... 56Responsibilities of the Distribution Compaies ...................... 56Responsibilities of Regulatoty Agency ......... .................. 56Responsibilities of Government .............. .................. 57Planning Cycle and Procedures .............. .................. 57Invitation to Bid ......................................... 57
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Power Purchase Agreement ..................... ............. 58
VlW. PYVICNG ............ 59Objectives of Price Relationships. 59Pricing Frinciples ....................... 59Generator to PSE Price Interface ............................... 60Local Generator to Distribution Company Price Interface 61PSE to Distribution Company Interface .. 61Distribution Company to Customer Price Interface . .61Taiff Levels .. 62Lignite Pricing .. 62Mine-Power Station Internal Contract and Structure of Price . .62
IX. ISSUES ASSOCIATED WITH RESTRUCTURING .65Operational Efficiency in Generation .65Operational Efficiency in Transmission and Distribution .65System Operations .65Procurement and Inventory Management .66
Spare Parts and Materials .66Fuel .66
Senior Management in the Ne-w Institutional Structure .67Financial Management .67Power Generation and the Environment .67
ANNEX A: ENERGY SECTOR RESTRUCTURING PROGRAM: ELECTRICITYMAP OF POLAND - IBRD 24130
Boxes
Box VI-1: Smart Markets Approach .60Box IX-1: Market incentives prove better than C&C instruments to meet
environmental goals .68
Figures
Figure I-1: Generation Source in 1991 .................... 8Figure I-2: Capacity by Plant Type in 1991 ............. ....... 8Figure 1-3: Structure of Sales in 1991 .................... 8Figure 1-4: Organ.zations of Power Subsector ................ .... 9Figure E- 1: Broad Models of Electricity Subsector .26Figure m-2: Broad Models of the Lignite Subsector .29
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Tables
Table I-1: Capacity and Generat!on in 1991 ......................... 7Table 1-2: Electricity Sales in 1991 ............... ................ 8Table II-1: Macroeconomic and Energy Sector Linkages in Restructuring ..... 17Table II-2: Evaluation Criteria .......... ................. 19Table IH-1: Range of Core and Non-Core Activities in Electricity and in Lignite 22Table m-2: Number of Generating Companies in Western European Countries. . 23Table m-3: Models of the Power Subsector . 24Table E114: Ranking of Structural Models for Power. 27Table m-5: R.4nking of Strucral Models for Lignite . 30Table m-6: Organizational Arrangements for Lignite and other Mines
Linked to Power Stations in Market Economics . 32-3Table IV-1: Recommended Structure of Electricity and Lignite Subsectors . 36
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EXECUTIVE SUMMARY
ntroduction
1. lhe Polish goverene has embarked on a move towad a marketbed economy. A "hands-off' approac in the ene setor is not apppree due to the naural monopoly features in some of theindusties and their imporace for the oomy. Thus, Poland needs to find adequate ways to reorganits 6ticity system as part of its pogm of mplemenig a markt-based economy, and, as a relatedise, to reorganize the four lgi mne ta sel their exclusively for power geetion. Mmmai missues that as i the retucdung ofthese two energy subsectors concem th pricing of both powerand th fel for it, the lationsip betwee eegy anw d lignite producs, the divestire of ancillaryente_piss in both subsectors, e epacts of electicity genation nd linite miing adth modaities for finmcing nd ng restructured 1eies. In addidon to meetng the need toinsur efficient use and adequate supply of enegy, soludons to the subsector isse must also be constewith the gneal goals of Poland's refrm, stabilition and adjustmen efforts. .
2. The principal objecves of the stUuctuing prog-am of the power subsector are to:
* ensure that the in system is operatd at minimum cost and, wheroappropiate, considenng environmental impacts;
* set economic pricing to encourage te efficient supply and use of energy;* provide incentives for invesent in new caacity;* consider the relationship of ancillary entupries to those of the core;* provide access to electrity with an adequae quay of supply;
be onsistuet with the Govemmenas gener poliies of reform, econemie stabilizionand adjustment.
3. The principal issues in the lignite subsector are:
* whter efficiency would be supeior if the lignite compamies coninued as separaterprises or wher te should be merged with the power stions;
* which stctue would be beter, a single holding company grouping all lignito minesand genaing staion, or hee holding companies;the nature of pricing and conac with custmers if iey remain sewparate;
* the divestiture of ancillay eneies.
4. MIis Volume comprises nine chapters. The first one prsents an overview of the electricitysupply industy and the associated gnte industry. Te second Oapter sets out the objectives ofrestructurg and evaluadon criteria. Chapter m outlines the broad options for each subsector and theevaluation crifteia applied to ariwe at the prefred options. Chapter IV exands in more detil theprred options. Questions of ownership and financi suctue ar addressed in Capter V, whileChapter VI addreses the question of the regulatory fiamewodc In Chapter VII, the procedum forunderWtng new invesme are examined, and i Chapter VMI the approach to pncng is described.Chapter IX deals with a number of additional related issues to restuing.
Background
5. Of the 56 tiermal geerating stations accounting for 27 Sigawats of eistaled capacty, 33produce bot heat and power (CHP). Terma generation provided 97Y of Poland's power in 1991. Fivetheal sations with 9 GW ae ligie fired, and generatd about 40 peret of the nations electricity.he rmining 51 staions burn hard coal. Ofd he tot ey producion in 1991, 53% went to industry,
Page 2 Volume 4- Electicfy wad lignite Subsector
21.6% to households, 10.2% to commerce, 8.7% to fims and 6.5% to other consumers. When demandreached a 1991 maxmum of 22.2 gigwas in winter, the system rtained a reserve capacity of about 17%(assuming 100/ availability), a margin that could shrink as age affects many of te power and CHP sa-tions that are over 20 years old and at, together, produce approximately one third of Poland's power.
6. A Joint Stock Company called the Polish Power Grid Company (PPGC) was established inAugust 1990. ITe PPGC controls a national power dispatching center called the National Power ControlCenter (NPC). Five Regional Control Units (RPC), are oranized as branch operations of the NationalControl Cenr. The Polish grid is connected to the power grids of former COMECON member countris.The power generation subsystem comprises 33 independent enterprims: hydro and themal power statons,includig ntesprises engaged in combined heat and power production. Another 33 distribution enterprisespurhae power from the Polish Power Grid Company (PPOC) for distribution and resale. lbree dozenoer compaes ae involved in related system support activities, i.e. manufcuring power staionequipme and spare part, maintaining power stations and the tsmission networks, providingegineing and technical support for the grid and the electricity industry. The lignite subsector includesfurmines, treenterprises m cu g mining equipment, two civil eng'eering finns, and one designand research insute.
7. The various enterprises had and retain considerable financial autonomy within a stucture tathas fostered least-cost operion of the system by calling on the 15 largest power generators to deliverelectricity in confonnity with a thermal efficiency mert order reflecting actual generaion costs. Currentcost measurements make lignite appear less expensive than hard coal, a relationship which may shiftfirther as coal prices rise.
Restructurig Isues
S. Pricing, investment and environmental concens are interrelated issues at the heart of anyeiot to restucture the power and lignite subsectors of Poland's energy system. In the case of electricity,the old pricing reWme set unifor charges once a year for power supplied to the distribution enterpnses(ZEs). Refleoting the monopolistic nature of the single grid, the system limited incentives for distritorsto oontn thdir coss and masked regional ditferences among the ZEs. Once the ZEs have to pay forpower according to the acal genetion costs, those differences are likely to show up cleady either aswide swing in profits and losses at different ZEs and/or as varying rates charged to consumers and/or inchanges in demand due price elasticity efficts.
9. The price for lignite supplied to power stations as fuel has been set on a cost-plus basis thatmade lignito subsantialy cheaper than hard coal. More economically realistic pricing would measue thevalue of lignite in reftrence to its substitute fuel -hard coal-, allowing for the fact that power cujtionsta bum lignite are more costly to build and operate. The effect of such pri'ning would be to createproper incentives for, on the one band, investors to buy the lignite mines and, on the other, to conrrl andcu their costs. The potential rents from this scheme could be capured by the govenmment throughroyalties, or better still, through the purchase mine price, where the mines with the best geology wilcommand the higher prices. (The higher the toyalties, the lower the mine price, and inversely.) Shiftingto such a prcing system m subsectors where capital-intensive mines and power stations are muuallydepedent will require govemment intervention to help define contractual aangementsa a compettiveenvimnent to reach sound mine pnces.
PokWnd - wrg Se&tor Restrcturing Page 3
10. One of the most important goals of Polish power industry reform is to introduce competitionin geeration. Therfore, privatization within this subsystem must be promoted. However, acceptanceand support by employees and btade unions is a necessary condition. Similary, te trading andcommercial dimensions of electicity makets, as well as intemational ownership in generation, must befMlly accepted by the govemment.
11. Planners in the power subsector contemplate the need to invest some $5.2 billion ingeneraing capacity between 1991 and 1995, to meet new demand and replace existing plant as well asto instll pollution control devices. Even though the asset net book value of $2.5 billions is not aneconomic concept, it serves as an order of magnitude to compare with that generating investmentrequirement, which does not include estimates of over $900 million needed to upgrade smission anddistribution fcilities to reduce power losses.
12. Environmental issues are of special concern in both subsectors. In the energy sector ingeneral, te Polish government will have to play a strong role both to protect consumers from the abusesthat would otherwise tempt natul monopolies and to insure that enterpnses which generate so muchpollution also pay for the atte environmental hbs. While the major environml impact of lignitemining i surface degrdation -in contast to the water pollution that is the worst by-product of had-coal_ining- the emissions of sulfur dioxide, nitrous oxides and particulates from buning either fuel causesignificant atnospheric problems in Poland. To address the latter, especially with more strngent emissionstandads in prospect for 1998, the power industry will have to make significant changes. Among themare the purebase of cleaner fuels, especily washed coal; the modification or replacement of many boilersand the instlation of equipment to remove sulfur from flue gasses.
Restucturing Models
13. Two likely models for ructuring the power generatg and distribution industry and twoothrs for the lignite subsector emerge fiom an evaluation of various efficiency goals and ways to attainthem through the verical integration of some acvities and the horizontal integration of others. For thepower subsector, one model would be close to the arrangements used in Spain and the Nethelands wherea single, independent tansmission company contacts with disaggregated power generation enterprises toobtain electricity and with distribution firms to pass electricity on to consumers. A vaiantof that model would, as in Sweden and Norway, give the tansmission company ownership of somegenerating capacity of its own, a way to even out geographic disparities and to fund the development ofnuclear energy.
14. Two extreme models could be considered for the lignite subsector, both of which wouldsepaate the mines fiom all ancillary activities. The first model would integrate h mines with the powerstation that consume their output. The main problem of this model is the risk of loosing regionaleoonomies of scale and managemen Regional concentrion is natal because of overheads (costs andviability). The second model would merge all exisng mines and lignite-fired stations into a singleholding company. The problem here is that about 40% of system requirements comes from lignite basedgenerion, posg a risk to competition. This lae maket share provides the holding company inordinaemadket power to influence crucial decisions on pricing, regulatory measures, envirormental standards, etc.
15. Between these extreme models, ther is the altnative arangement of ceating three holdingcompanies ta would take ito account geographical and geological chracteristic: (i) Belchatow; (ii)Turww, and (iii) Panow, Adamow and Konin. Each of these companies would be strong by market
Page 4 Volume 4- FectrIty mad Lignite Subsector
shadards and able to capture regional and opetional economies of scale. This arngement attempts tostike a balance between maintang compeion hoh the presence of a sufficient number ofg_;D groups, while preseing scale economies.
16. To promote competiton and efficiency within each subsector using the suggested models ofa restuctured industry, it would be advisable to divide the 15 existing generaton plants that bum hardcoal among at least four new enterprises, each laige enough to be financially viable, yet none so privilegedin the quality of the plants it owns as to dominate the meit order under which generators are called onto supply power to the grid. The four separate mines, now working the most viable lignite deposits inPoland, and the five power stations they supply should be integted into three sngle holding companieswhich need not be a subsidiary of the tansmission system as long as it is conacually bound to honortba ysems calls for power supply. For CHP plants and both mn-of-rver and pumped storagehydroelectric geentors, a vaiety of new organizationa ties is indicated.
17. While ajoint stock company has been formed as the nucleus of a future, independent nationaltrsmision grid, decsions are sill pending on the issues of how many distibution entepimes and withwhat boundaries should be created fiom the existg 33. Similary, the fate of the ancillary enteprisesin the two subsectors -seven connectd to lignite minig and 37 to electicity- remas to bedetemined. It would seem advisable to inbge the maitnce activities with the new eterprises theyserve in mining, power generating, power grid trwnsmission and distribution, while divesting all otherservice firms that are not monopoly providers to be privatied.
ssues of Finance and Reguation
18. Given the inherenty monopolistic character of Poland's enery generating system and thenlikelihood of much foreign investor interest in its component parts, it seems advisable to move grdualy
into joint-stock ownership of the reorgaized enterprises. Slow-motion pnvaizaton would occur asdiscount-pce shares are initially sold in limited numbers to managers and employees and through largerpublic offedngs at a laber stage. The single lignite mining and generting company would have to remainwith the government which would also rtan a maority ownership interest in the power transmission gndAd, for some time to come, 100% ownenship of the regional electricity distibution firms.
19. Although direct bidies have b elimiated in the subctors, indirect ones remain, andthe state h claim -in the form of annmal 8% dividends- tos ry finds on each entepise's balesLeet. h ste has dso be, unil recently, the soure of most of the industrys capital xpenditu,although the role of commercial borrwing has been growing.
20. For the new companies to meet the expectaion ta t will operate on a completelycommecl basis fiom th sta of tieir corpore lives, it will be necessary to revalue their assets and totquire financial projections of their cash flow needs and intal financing resources. As manager of thistsiton, e govemet will also have to guide the evolution of prices, espcally for coal and elec-tricity mes er arria and help prepare development plans reliable enough to srve a the bass forth govermentguaranteed loans most of the enterprses will need to supplement their major source offinancing: the finds they will be able to generate intemrly.
21. New coooination gements, replacing the role played by the WEWB, will be needed toplan futue investments -prefrably in a two-year cycle- in order to maintain a reliable energy supply.
me tsnsission enterpdse, for example, would be responsible for projecting development needs and costs
Poland - Energy &ctor Restructuring Page 5
on the basis of demand and fuel-price forecasts. In conformity with that overall plan, geneatingcompanies would miake their decision on what capacity to rehabilite, what environmental projecs toundertake and what new plants to seek to develop.
22. Poland will also need a new, comparatively non-intrusive, national Regulatory Agency forthe electicity subsector, independent fiom the Govermment and separately funded. lhe regulator wouldlicense power geneating companies and their different plants, the transmission grd company and theregional electricity distributors with special measus to insure, iniially, the continuance of the unifomnnational tariff for the ZEs' prices. The Regulatory Agency would not need to exercise similar control overthe lignite mining subsidiaries of the three holding companies that would unite them with the generatorsthey serve.
23. Environmental regulation of the power and lignite subsectors would fall to the Ministry ofEnvironmental Protection and Naual Resources. Among the many unresolved issues concerning the airpollution associated with the use of lignite is the question of whether fees and fies can be made highenough to be effective restraints on emissions or whether other incentives can be introduced to inducepower generators to cut their output of atmospheric pollutants.
Restructuring Energy Pricing
24. For the short run at least, Poland's enery sector can best set its intemal prices within astrucue based on opportunity costs for geneic types of geneatig plant subject to the dispatch ordersof the tnmison grid. Such an interm system will encourage efficiency on the part of the genetorswhich will be able to in all their savings and, because it is similar to the historical system, can beeasily implemented. Within such a patten, the pnoe for lignite -directly linked to that for coal- canbe calculated in a way as to assure mines a reasonable retm on capital. Pricing on the long-nm shouldtend towards competitive pricing, where pree and quantities are maret detemined: Bulk suppliehs offertheir output at agiven price and the supplierwith the lowest price get to sell most of its output, while thesuppliers with the higher prices sell less (or nothing of their output). Plant dispatching under this long-term system is deermined by the selling-buying equilibrium prices.
25. Generators not subject to dispatch onres should be able to sell their product under a powerpurchase tariff system in which a single capacity payment is supplemented by charges that match aschedule of tariffs according to the time of day and season when the power is sold.
26. No matter what combinations of pricing mechanisms are adopted within the electricitysubsector, Poland fices the issue of aligning tariffs with economic costs at a time when all fuel prices arebeing raised to intemational levels. Electricity prices need to be raised to levels that enable the enterprisesto become fully viable and to atract the additional capital needed for refiurishment and development.For instance, world rates for household electricit are about twice as high.. Furthennore, the stucture ofthese prces needs improvement to achieve economic equity among users, so that the pries paid refectmore closely the costs to the enteises of supplying their demands. Transition arangements will haveto smooth the path toward a tariff structue in line with the oppomnity costs of generating, transportingand distibuting electrcity, at the same time that the electricty subsector works to improve its efficiencyin transmission and distbution, in fuel and spare pats procurement and in management and to lessen theenvironmenlal harm it does.
Page 6 Volume 4- EecVcIy wad lignite g bsector
27. In Poland like in other ex-socialist countries, the wide social benefits are an impoxat ndcostly fimction for the power industry, and should be eliminated. Tlere should be cost tanspac andappropdate labor payments. he elimination of toss-subsidies (he itoduction ofthe economic efficiencyprnciple that pnies must reflect cos) is neesary to achieve cost bansparency.
L OVERVIEW OF THE POWER AND LIGNITE SUBSECTORS
1.1 In 1991, the installed electricity generating capacity in Poland amounted to about 32,000 MW-about the same as in Sweden. Of is, about 28,800 MW (173 stations) was operated by public utilities,with the remaining 3,200 MW (220 plants) owned by industrial autoproducers. (Annex A presents a mapof the country with the main generating stations, Utnsmission lines, coal and lignite deposits.) Generationis basically themial, accounting for 94% of public generation capacity, and 97% of gross electricityproduction. Generation is basically fueled by hard coal (52%), lignite (40%), with 3% from pumpedstorage and hydro, and the remainder 6% from industrial self-generation. Capacity mix includes: hard coal(55%) and lignite (28%) fired units (some of which are combined heat and power stations), pumpedstorage (5%/O), and conventional hydroelectric stations (2%), with the remaining 10% capacity pertainingto industrial autogeneration. Table I-1, Figure 1-2 and Figure I-1 pesent the capacity and generatingstatistics for 1991.
Table I-i: Capacity and Generation in 1991
Thrapower plants 56 26.81 130.7
Lignite pred 5 9._ 56.6 43.35
Hard coalfired S1 7i 74.1_ 56.7%
Water power plants 1172 4.0Pumped storage 4 1.' 2.0 1.5%
Other hydro 113 0._' 2.0 1.6%
Industrial self production 220 3. 8.1 6.2%
System and Plant Uses: _ 12.1
Station use| 9.0 6.9%
Pumping/Hydro l 2.7 2.1%
Sef-Producers 0.4 0.3%
Net Generation _ . 130.7 l
Losses (CMf*) 14.4 11.0%
Domestic Supply 116.3
Net Trade (exports - imports) -2.6
Totals 393 32.0 113.7
Page 8 Volume 4 Electricty and Lignite Subsector
NWrd WM * Hod 61. Hi*d 8511% l
t~~~Ind. 90il =6ucm .7%6-- -9
rgre I-1: Generation by Source in 1991 11gre I-2: Capacity by Plant Type in 1991
1.2 The Ntional Power System is composed of 750, 400 and 220 kV ansmission lines andsubstations. About half of the installed genertg capacity is coected directly to the 400 kV and 220kV networ, while the other half to the 110 kV networks. The grid is operated by National DispatchingCer (with S Regional Subces) in parlel wth the cmbined system of Eastem and Central Europe(Czechoslovakia, former East Gennany and fotmei USSR). Distribution network voltages are extemelydiversified, with voltages of 110, 60, 40, 30, 20, 15 and 6 kV. Only tlhe 110, 20 and 15 kV networks arecoiderd for finher devclopment while the othm will be eliminaed gradually. Network losses amearound 1 1%, compared to an average of about 8% in e, and bave been Asing from about 8.5% inthe 1960s.
1.3 Industrial users consumed 53% of total electricity sales in 1991, residential users followedwith 22% and commercial users witi 10%. Maximum demand (Wmter) was 22.2 GW, represening amarin of reserve of about 17%. With 7 GW of the power station capacity and much of the CBP capacitybeing over 20 years old, the situation is likely to deteriorate. The Word Bank has projected gross
Table 1-2: Electricity Sales in 1991 o" _
S Wh 1001 102.5 9_Homhu 16.11 22.2 20.8 21.6 _______ 61.9 57.3 51.1 53.0Y
C(bcdl 8.2 8.2 9.8 10.2%Fa 7.2 8. 8.4 &7% hiy W 3A0%
Traclk. 5.5 53 4.9 5.1%Shet LW 13 1.3 1.4 1.4%
F1gm 1-3: Strado 1 of Sal in 1991
Poland - Energ Sector Restuturing Page 9
Polilsh Electrlclt lIndusltry
r_ __ PDM
1_ ~
-------- 28 Generators Enterprses
EmbeddedL_ Genermtion V1Fu 33 Regional Transmission and
electricity consumption togowattesranDisnfrbu3ton Enterprises
t Auto Gener in Consumers in each Region
Finangfalllnfunation ue-----------Flows
Energy Flows aa
r*mF 14: Orpanization of Power Subsector
electricity consmption to gPwG at wates twn fPom 3 to r% pat during are 1990s, depending onintenla4ed faaons suc as eoonumc growth, eyW price ref&nns, macroeconomic reforms generally and1he pnority given to eneWg efficiency. Ihus, subsetu ivestment in generating capacity will berequired over th peno 1995-200S. Ihe main dema«d sidcs are summaized in Table I-2 andFigur I-3.
1.4 End user tarfis anrue ed by the Mmiisa of Fmance. Prices for bulk supplies betweengeneaion companies and PPGC as well as between PPGC and distribution utilities are supemvsed by MoI.End user tariffs and bulk prioes proposals are prepared by PPGC and presented for approval to theMinistry of Finance or Ministry of Industry and Trade, respectively.
1.5 Tariffs in Poland are extremely low when compared to other countries at the official exchange
Page 10 Volume 4 - ectrldlty and Lignite S&bsector
rate. While tariffs in LDCs were around 7 cents per kWh, in Poland the average rate amounted to lessthan 4 cents. This price is below LRMC and adjustment is necessary. But more important is to improvethe structure of tariffs to end-users. For exanple, the average price for households in 1991 was equal tothe average for industry, while the appropriate relation (household/mdustrial) based on supply costs shouldbe about IA.
Organization and Management
1.6 The power and P-own Coal Board (WEWB) which was liquidated in 1990, was replaced bythe Polish Power Gild Company (PPGC). Ihe PPOC, established by the Ministry of Industry on behalfof the National Treasury, is organized as a Joint Stock Company. The PPGC has the following executivedivisions based on functional lines:
e the National Power Control Center (NPC) and the regional dispatch centers whichcontrol the major power stations and manage te high voltage grid;
* a Technical Detment which monitors system performance and coordinates activitiesin generation and grid operations;
* an Investment Department;* an Energy Trading Department;* a Legal Office;e a Public Relations Division;* and, divisions for finance and accounting, personnel management, civil defense, board
administration.
lhere are another three divisions with a primarily support role organized based on strategicfunctions:
* a Development Department;* an Economics Division;* an Intemational Stategy Division.
1.7 Figure 14 prsents the 1990 organization of the electicity subsector in Poland. There were,and still remain, a variety of enterprises:
0 28 enterprises in the electricity generation subsecor responsible for lignite, hard coal,CHP, hydro and the Zanowiec nuclear stations;
0 33 electricity distribution enteprises (ZEs) which buy power fiom the grid and sell itto final consumers, maintain the tnsission and distribution network in their area andoperate some smaller CHP, heat only and pumped storage stations embedded in teirnetworks;
z 6 enterprises responsible for manfcturngspare parts and equipment for powerstations;
o 6 enterprises responsible for maintenance in the power staions;* 12 enterprises responsible for maintenance of the transmission and distribution
networks;* 13 other companies involved in civil engineering, design and construction of high
voltage grids, technical services and tmrsport to the electricity industry and scientificreseach.
Poknd- Ra Secr ftg Page 11
1.8 In te lign ite subsedor tr ame:
* four mining entepfis;* 3 eipment mancturng enterprises;0 2 civil engineering entprises;* an open cast miing serch and design instiute.
1.9 From the financial point of view, WEWB did not function like a nationalizetd indusry inWesern Europe. Each enterprise paid its own taxes and a fixed dividend on its founder's fund to theMinistry of Finace -these arangements condnued under the new ownership rangement. WEWB'sprmay role was to set the intemal transfer pnces for electrity, which dete_ined how revenue wasdhared between the ZEs
Merit Order Dispatch
1.10 In Polad geration costs were about 70% of the delivered cost of electricit in 1989. Thishro will rse as cod pces move towas border prices. Hience an impont economy of co-ornation
which bas to be preserved in the new stucue is t of least cost peration of the ystem. TIis isachieved by controlling the operton of generation plant to follow the demand for electricity in a sticthbort-nm mnan costs sequence -the merit-orteda.
1.11 Ihe control of merit order is underftak by PDM which detemine which plant is availablefor dispatch, sancions outges and dispatches according to mert order. PDM dispatche the 15 mostimpotant power stations leving the re to be dispated regionally. ts dispatch is relativelysophisticted and takes into account a fiul range of the appropriate costs.
1.12 The dispach is broadly detemined according to he hemal efficiency of the stations andleads to a "merit-orde which tpically nms m the followmg sequence as demand increases:
3 nm-of-river hydro;* electricity output from CHP stations meetng heat demand;* lignite fired power stations rwming on lignite with some oil-bum for flame
stabiition:* plant fired by lignite only;* had ca fired plant;* pumpedstorage plant for peak lopping;0 lgite and hard coal fired stations running with oil ovetbum;* lPanw oil fired units.
In praice, beas ofthe underpicing of coa and lack of flexibility in plant n g after shut down,ony 20%A of total plant capacity operates with full flexibility.
1.13 lbere are a number of features of cure operating pracots which ar likely to change aspines ao liberized:
* power stations will become more aware ofthe true costs of geneion as trnport cossbecome a significant proportion of fuel costs for power station in cenal and northem
Page 12 Yolume 4- Ekctricty and Lignite Sbsector
Poland, and as the nise in coal pries rlative to oil pries makes low part-load and two-shifting more atractive;
* power stations may be less willing to submit to centrally planned outages withoutcommercial incentives or rglatory stctues;
o power exchanges with neighbonng counties are likely to alter as relative fuel pricesshift and political relations dcange.
1.14 A rough estimate of the future energy supply curve suggests that, allowing for a weekdaywinter minimum to maximum range of about 17 to 24 OW, all CHP and lignite plant will operate onbaseload. While there is a substantial variation in demad over the day, the inflexibility of much of theplant means that the scope for competition between power stations to be dispatched, to meet daily demandvariations, is quite limited.
Purchases from Power Stations
1.15 The intemal prices under which power stations were paid for their output comprise:
* an energy charge of zMWh generated;* a capacity charge of zUMW declared available;* a penalty of zUMW by which actual availability feU short of declared availability;
some specid payments to generators subject to tie-line control or to pumped storagestations providing reserve capacity.
The charges were fixed at the beginning of the year and were updated if there were significant costchnges.
1.16 To the extent that salaries and wages depend on enterprise profitability, the system describedabove does provide some incentives for improving efficiency. However it does have a number ofweaknesses:
* the annual price revisions have the effect of clawing back efficiency improvements;* power stations low in the merit order, which are seldom called on to generate, may
overstate their true capacity;* there are no formal performance benchmarks on which to base charges for similar plant;* payments for some services are not cost-reflective.
Trnsmision Grid
1.17 As mentioned in Paagh 1.2, the Polish grid consists mainly of400 kV and 220 kV lines,witi a 750 kV inter-tie with the former Soviet Union and some stwegically important 110 kV lines. Thesytm is part of the CMEA netwok which is fuily iernnnected aaAC grid from the fomer East
Gemany to te Soviet Union. Thc CMEA grid is supervised in two parts, with the westem portion ofughly 100 GW controlled for intemational power flows fiom Pgue, and the remainder (about 200 OW)
conolled within the Commonwealth. Poland will wish to remain part of this system which pnrvidesreserve benefits and frequency support. Moreover, Poland is bound by existing export and wheelingcontac
Poand - Eergy Sector Restruclwrng Page 13
1.18 It is apparet that th Polish wetwork has bee planned ad developed as a shgle naonadasset and operated accordingly. It is also closely tied in with t sysoms of neighboring ouns. Anynew insitutiona scture will Nd to:
* allow for the monopoly chactistics of dth guid;* provide for oordinated opeaton of power staions and grid;* establish a basis for centralized planing ofgrid development and power station sitting;* deal authoritatively vith neighbonng counties and the Pue CMEA grid control
center.
Dstribution Systems and Electriity Pricing
1.19 Ihe main issue arsing in relaion to the ZEs concerns the basis on which they purchasepower from the grid and the implications of moving towards a mo ost rlectdve pricing system.
1.20 The ZEs obtain enery fiwm two souces:
a bulk purchases fiom the grid for which paymen are bsed an a power cg (zMWand an e charge (zUMWh);
* puchae fiom smaller embedded power stations locatd in the ZE fi=chise area forwhich paymea*s are usuly for ery alone.
Under WEWB th ener charge film the grid was uifm and did n vary by season or time of day,but the power chre was individual to each ZE. It was set to ensure that expected tariff revenue wouldjust cover total expected costs and a profit margn. The wate for purcases firm a embedded gentoris mutually agreed between the two parties. The ZE is in a strong position as a monopsonist but has litloincentive to use this power as it cannot retain savings.
1.21 Under WEWB's pricing regime there was only limited incentive for te ZEs to contain coossmce any savig would be removed the next year by an adjustment of the price at which it purchasedpower.
1.22 Of greater importace is the imbalance between the ZEs which has been madskd by the bagson which electicity was charged. If a more cost flecfive apprach is usd then e will be widely46ning profits and losses between the ZEs, or widely diffent tadffs for consumm.
nvsmeent Planning
1.23 Investmen has been plannd ad fimded at two levels. Iarge proect (e.g. power stations)were planned at WEWB headquts level and were cerally finded, while small projecs were plamnedat etprse level and funded out of the entpse budget
1.24 The key issues for rstucuring conc the amount and naue of investmen requid overte nex few years, particulary in the aas of geneaion and transmission whe large econome aavailable fiom coordinton at national level.
1.25 Given a set of prioes, investment in generating plat is driven by trei in maximum demandand by the retirement program for exstig plant With regard to demand, both the level and load dwp
Page 14 Volume 4- Elelct( and Lignite Subsector
are likely to change as snctmung tames plae throughout the economy. lbere will be twoinfluences. The first one -associated to the economic slow down- will lead to a short term decline indemand and to a peakier load profile. In the medium term demand will recover but temain peaier aslight industy and services replace heavy industy. The second influence -associated with theimplementation of cost reflective tariff and time of use rates- will tend to flatten the load curve. Givenpresent shortages of flexible plant and peaking plant, to avoid power shortages economic pricing ofelectricity should be rapidly implemn'ted.
1.26 On the supply side there is geneal agreement on the need to complete the hard coal unitsalready strd, but some debate as to the balance to stike between peaking and merit order plat This need for rehabilitation and life extesion of astig plat, particularly bece of the need to retrofitpollution control equipmen.
127 Pmesent esimats sugge tt at 199 pices some $52 billion will boneeded for investmentin generation over the petiod 1991-1995, including expenditure on envmental improvement. Thiscompares with the current net book value of $2.5 billion. In order to achieve even a nmor part of thisinvestment companies will need to be finacially robus.
Transmission and Distribution Investment
1.28 The tansmission network is generally sound but there is considerable scope for imvestmentto reduce distrbution losses. The estimated requirements for the same period as above ae $307 millionfor transmission and $622 million for distrbution.
Ancillary Enterprises in the Power Sector
1.29 These enterprises undertake a wide range of activities, some of which are integal to thepower sector (e.g. maintenance of high voltage netwoks). Since the refoums of 1990 they have becomeautonomous.
1.30 The sucoes of the restructuring of the power subsector, the promotion of efficiency thoughcompetition and the participation of private investors, depend to a late exate i th i restructingof te utilities. There should be a successive eparaion of sever noncore fiunions and ancillaryactivities, such as tansport svices, maitenance, par and overhaul of equipmet, cafetea, etc.
1.31 A feature common to the high (1) and low (12) voltage grid mantnance enteprises is tecombination of maconstruction and maitonce finctiois. Maintenance ad gdt operationneed to be vey closely coordinaed, and in other countries it is common forthe grid companies to canyout maintenance intemally, while the other functions am carried out etemaly.
1.32 For power station maintenance the recenly separated companies keep saff at the powerstations on a fill time basis while also servicing boilers and gentors in industry. ITe five productioncompanies (of electical and mechanical components) are organized around their mufi ring fcilities.
1.33 Most of the activites undertaken by the ancillary enterprises are poteially competitive. Atprsent this competition is rather limited and each company is strongly linked geogaphically to the areadefined by former Regional Power Boards.
Poand - Energy Sector Restnuwwrlng Page 15
1.34 Another group of ancillary enteipnses provides centml faciltes or services (e.g. the CeralEnergy Statistics Office). Many of these activities are uncompetitive and tfie logic of separation is toenable them to serve the whole industiy.
Issues In the Lignite Subsector
1.35 Ihe main issue in the lignite subsector concems the price at which fuel is sold to the powerstatiohs. In 1989 the price was set on a cost plus basis, which made lignite substatially cheaperthan hardcoal. However, from an economic standpoint, the minimum sales price of lignite is th long run marindalcost (inclusive of all costs of exploration, development, production, transport and distribution), and thmaximum price is the netback value of the altemative fuel (hard coal) -i.e., the pnice of coal adjustedfor differences in quality and in consumption costs (lignite fired stations cost morm to build and operate).The difference between these two values could be capured by the Goverment through a royalty payment.A price set in this way could provide proper incentives for a lignite mine to control and reduce costs.
1.36 Such a pricing policy could leave mines with the best geology with very high profits so thatthe Goverment could capture these rents through the selling price of the mine to private investors orhrough royalty paymens. lhe Govenmment can get tht rents now -by maximizing the selling price ofthe aset- or later through royalties or levis on the lignite. The toyalty could be mine spedfic and fixedfor several yean to preserve incentives. From time to time the royalty could be mviewed to take accountof changing mining racteristics.
1.37 Once the lignite mines and their associated geneating stations are merged and there is acunpetitive generating market, there is no need for Govenment involvement. The lignite price becomsan intemal transfer price. The viability of the whole mine/generating plant operation will depend on dwselling price of power, which will be set by the market.
1.38 Whatever the pricing policy adopted, the avoidable costs of lignite mining, which is capitalintensive, are quite low. Once the initial investment has been made it is therefore essential that the powerstation operates to the fullest extent possible, which requires the low avoidable cost to be reflected in theelement of price used for power dispatching. Intervention will be needed by the stte in order to defineconttal arrangements and set prices between the mine and the power ston becuse of problemsraised by their mutual dependence.
1.39 With respect to ancillary enterprises, the main issue concerns the makers ofexcavators/spreaders and of conveyers. Being the sole Polish manufcturers and repairers in Poland theyhave considerable monopoly power. There is potential competition from abroad and it is doubtful whetherthe Polish market alone can support the eisting firms, so that some rationaliztion will have to take place.
Compliance with Environmental Standards
1AO Both power and mining industies in Poland are cumently polluting the environment to anunacceptable extent, in the view of the Govemment In the power sector, atmospheric emiions of SO.,NOx and particulates are already subject to limits, which are to be made considerably more stringea in1998. In practice this will mean that new power stations must be designed with sufficient flue gasdesulfurization (FOD) capabilities.
Page 16 Volume 4- Electricty and Lignite Subsector
1.41 In haid coal mnig the msior envuonmental problem is water pollution, which will in fiuabe controlled by ton new regional water authorities. For lignite mining the major environmental problemis degpadion of the sr&ce landscap.
1.42 Compliance with the new andards will pmsent both the power and mining subsectors withmaor challenges. The atmospheric standds for the power stations can be met mainly by a combinationof.
* buming cleaner fulels, paiticulady washed coal;(b) modifying and replacing powerstation boilers;
* installing various types of FOD equipment in power stations -cheaper less effectivetchnologies would be used for older plant, while the more expensive dry technologywould be installed in new plant.
To date the penalties for breaching the limits have been insufficient to make compliance financiallyactive (retofitting can add up to 20% to generation costs while fines have typically added only 1 to3% to costs).
1.43 Similar problems of enforcement exist in the ming industry. Ihe installation of thenecessazy desalination equipment would cost the industy about $05 billion; it is therefore likely that hardcoal mines will continue in breach of the standards for some time.
II. OBJECTIVES AND EVALUATION CRITERA
Objectives of Energy Sector Restrucuring
2.1 The proposed rstnucuring of the electrcity and lignite subsectors must be seen within thewider context of the move towards a madket economy. A rapid process of structiusi adjustment beganin 1990, involvig price liberalization, wage controls, exchange rate liberalization and dte abandonmentof output planning. These polices have sharply reduced inflation, while real wages have fallensignificantly.
2.2 There are impott links between the macoeconomic policies and the energy sector shownin Tabie 11-1. Efficient resource allocation will be onacially dependent on achieving efficient supplies ofenergy, with different sources priced to reflect relative oppotnity costs. However, achieving these picelevels for energy must not be at the expense of damaging the Govenmment's anti-iion policy -themigration to "border prices" for enery must be caUlly managed in the initial phases.
Table II-1: Macroeconomic and Energ Sector Linkages in Restructuring
Promote an efficient nsoure allocaion in the Achieve an economic and reliable supply ofeconomy based on competitive prices and eledlridcy.competitive behavior.
EFtbil and sustain competitive mar*ets wherwer______________________________________________ possible.
Reduce price distortions while reducing inflation. Achieve Investment and operation efficiency byaligning input prices (particularly fuel and captaloods prices) with border prices
Achieve efficient energy use throughfuel pricingbased on opportunty costs with fmll pan through ofinput price a44usnenft
Mobilize interna and external finaal resouwe mote corpoate autonomy andfinancialsfficency.
Promote private sector participation andcompetitfon.
Pwent inveshtent shortages and non-economicInvesmnett
Reduce public sector management and ownership.
Recognize external costs. Ensure that environmental and soial coats of powerproduction are refected in economic decisions.
2.3 Similauiy in areas where significant extvmal cost are present (mainly due to pollution) finnscannot be fiee to maimize profits. The must be some form of region to enmre that -te polluterpays". Fims can maxmize profits subject to inclusion of the environment cont in their costfunctions.
Page 18 Volume 4- Elekcrcty and Lignite Subsector
2A Inevitably th govemment will be confionted with policy choices since to achieve given endsimplies potetaly conflicting srtegies. Moreover, allowing complete financial fieedom to enterprsesis incompatible with pwtecnDg consumers fiom the abuse of naura monopolies, which are a particularfuatue of the networks- found in the electricity sector.
Objectives for the Electricity and Lignite Subsectors
2.5 Becse the two subsectors are so closely linked (there being virtually no other uses forligite than as for a fuel in electricity generation) a common set of objectives can be defined, althoughthere are some distinct haisics which lead to specific objectives. For both sectors, restructuingcan be seen as the attempt to ceate a sucture where relationships both among enterises and betweenenterprises and consmers, are such as to ensure that:
* supply costs are minimized, subject to constraints on safety and reliability;0 enterprises can negotiate prices for inputs and are obliged to set prices for their outputs
which are efficient in economic terms;* existing and potential new enterprises are able to atact new sources of debt and equity
capital;* consumers are protected fiom exploitation of the natural monopoly characterstics of
networks;* enteripies ae able to meet environmental standatds imposed by the govenmment;* the structur ar capable of firther evolution as the energy sctor becomes more
commercia and market oriented.
In addition, the non-storable chaacterstic of electricity leads to substantial system economies fromcooinat geneaion. Ihese economies require both horizontal coordination (merit order dispatch)and wa coordination, to optimize the smultaneous provision of genertion and tansmission. Arucia objective must be to protet thes co-ordination efficiencies.
2.6 In ligite, tere r fewer benefits of horzontal co-ordination, but the need for verical co-orinaton with the power stations is veRy considerable. This is particulady true because lignite, likeelectricit, is non-storable (the riscs of spontaneous combustion make the coss of buffer stockprohibitive). A steady flow of fool from mine to power station must instad be maiained. In addition,because of the low avoidable costs of production (once it has been developed), there are strong reasonsto ensre mwaimum mine throughput, while protecting the mine fiom over-exploitation from the singlebuyer.
2.7 The high capital intensity of lignite mining forms a barrier to entry, while the individualityofthe lignite deposits implies that a single market price (related to, say, coal prices) would imply widelydifeng profits across the industzy. Some form of regulation is needed to ensure that the economic rentsar propely cured by the state: either through the selling mine price (if there are buyers), or through
yalty payments.
2.8 These featu ofthe subsectors imply that estucurng cannot merely consist of establishinga fiamewoik for unftered compettion. There are inherent sources of madret failure which require teidustry to be subjected to some public control.
Poland - Aergy Sector Restctring Page 19
Evaluation Criteria
2.9 The citeria showm in Box l are in part specific to each subseaor and in pat are common.lhe sepamte citeria reflect potntialy onficting objectives -no single structui is likely to be prefenredon all conts.
Table 11-2: Evaluation Criteria
Efxent ofpreservation of merit order EIOecthvene orhard Effectiveness of co-ordInatfondispatch budgetpdlscipline between mines and power
stationsEase of ensuring total iystem costs are Ability to negotiate efficient Ability to share expertiseminimized Input prices among mines
Ability to mantan adequate ser Atracveness to external Ability to enr least costmai un for sy.te*m nveston mine development
Extent of Intrusive regplation 0 AbilIty to attract new 0 Opportunities to developentrants new mines* Ability to find envromet 0 Ability to achieve adequateinvestments selling prices* Ease of mplemntation and 0 Ability to capture difJerentid
-____,____._________ .,____ evolulfonayJexbllity rents
III. STRUCTURAL OPTIONS AND THEIR EVALUATION
3.1 The definition of a workable industry structure involves difficult choices overa number of matters:
* the decisions as to whic activities should be taed as intnal to the industry;* the organizaion of dfferwt activities wnthin the subsector, and the degree of vertical
integraion;* the oganization of the me activities -the extn of horizontal integration;o the trading eadknsh!ps betwear business entities within the subsector, and with
enterprises extemal to the subsector.
'Tere are a range of choices open in each of the areas listed and these are examined below.
Range of Activities Included
3.2 The production and supply of electricity is usually charcterized as the activities "generation","ansmission" and "distribution", although in foct there is a much larger list of discrete activities withinthe industy, some of which could be undertdken by companies outside the industry. Similarly ligniteincludes a large number of activities. Box m-I categorizes these activities as "core" (C) and "non-cor"(N) functions. For the purposes of evaluation the subsector is trated here as consisting ofjust the "core"activities -the "non-core" activities are discussed in Chapter IV.
The Extent of Vertical Integration
3.3 The broad fimctions can be vereically integrtd in diffret ways: in some countries (e.g.France and Italy) all ee stages are undertaken by a single company, while in others ombinations of twostages are undertaken by siogle companis. No single foeign structure can thus be taken to provide aclear model for the extent of verical integation in Poland.
3.4 In lignite there is a high degree of integration of some support activities within the miningenterprises, but the mines are not integmted with the power stations. Indeed recent changes have servedto reduce the degree of vertical integration.
The Extent of Horizontal Integration
?.5 Horizontal integrtion can be assessed from the viewpoint of the number of sepawateernterpdses undertaking the same activities, and from the closeness of the relaionships between theseenterprises. There is considerable variation in the degree of horizontal integration in other countries inthe electricity sector. In Table m1-2, for exanple, the number of separate generating companies (connectedto a national or regional grid) in a variety of Westem European countries is shown -rangig from acompletely integrated industry as in Italy or Ireland, to the disaggregatd generation which is a featurein Gemiany and Denmark.
l t t W ~ ~~~~~~~~~~t! l't
l _ . p>w>ug~~~~~I sS*eg
ft~
1Xl~~~~~~~~~ii
Poland - Energy Sector Restrcturing Page 23
Table D1-2: Number of Generating Companies in Western European Countries
Belgium 4 (pstus snail hndependentsJ 13 (4 only) 3
Denmark )1, 8
England and Wales 3 57 19
France EDF 96 96
Greece 8 8
Ireland 1 4 4
Italy I (over 3MJ 48 (over 3M 48
Netherlands 5 14 3
Northern Ireland 1 2 2
Portugal I 6 6
Scotland 3 10 3
Spain 10 (plus small Independents) 42 4
West Germany 8Bfg 8" 70 9___________________ Approx 700 others 26 0.05
3.6 Variations also exist in the extent of horizont inegation in distribution in these countries-ranging from a single company in countries such as Greece and Ielad to around 1,000 companies inWst Germany. Only in t11sission is te generalfy a high level of integrtion. It shoud be stressedthat, to the extent that honzonl integtion tsmision and distribution occa, it is geogWhic mnatnre -and even disagggated distribution entapises genely retain local monopolies.
3.7 I he nature of the relatonships between busess units also vaies frm single compans withstrong central managemeDt (EDF in France), trugh single companies with separate profit centems (ESBin Ieland), holding companies with subsidiai (ENDESA in Spain), sopate companies with owneahiplinks (Belgim privae utlities), separate companies with nationa cooperove argenm ts (Denmak),separte companies with selecive/ocal co-operaive ammgements (W. Geray) to fill compedtion(PowerGen and National Power in the UK).
Page 24 Volume 4- Electrlc4y and lignite &Subsector
Tal 111-3: Models of the Power Subsector
.... :*:....:~~~~~. . ;-:;:.:::............. .
Model P1: Nation wide. FranceNational Integrated Monopoly Generation(NIM) Tranamission
Distribution
Model P2: Region wide: GermanyRegional Integrated Generation USAMonopolies (RMs) rnsmision Canada
__________ ________ Distribution
Model P3: Nation wide. Austria• National Generation and Generation UK (pre 1990)
Transnission monopoly Transmission(NGTM
° RDMs Region wide Distribution
Model P4: Competing generation companies feeding Pakistan* Independent Generation national grid
Companies (IGCs)* National Transmission Nation wide Transmission
monopoly (VTA) Some generation* RDMs
Region wide Distribution
Model PS: Disaggregated generation companies Sweden* RGCs Norway
NTM plus G Nation wide Traiwnisslon with some° RDMs generation
Disaggregated regional distributionmonopolies
Model P6: Competing generators selling to competitive U.K (since 1990)* IGCs power pool and atso directly to customers Florida, USA* NT7 and distributors Chile (since 1989)o RDMs
Trading Relationships Within an Industry
3.8 In general, the most effective incentive twards supply efficiency is the nsk of loosing.While some degrce of risk sharing with buyers is necessauy, te substantive part of the needs to be bearby the seller, who can influence the outcome. Thus, simple "cost-plus" pricing-widely camcd throughfiom coal and lignite production to eleticity generation, to distribution in Poland- all the busiess riskis effively cared by he consumers, leaving little ik with te suppliers and offering little inducementfor efficiency impovemenlts.
Poland - Energy Sector Restructuring Page 25
3.9 At the other end of this spectum, tading in a pure spot madcet should prevent individualbuyers from ifluencing indivitdual selles and vice vera. However, etablishing the necessazy conditionsfor spot tuding in electricity would require complex legal structr, which have been attempted only inthe Chile and the U.K. to date. Power pools in other countries tend to be administered and controlled bystrong cental entities.
3.10 Vaious termediae levels of competitive tn can exist, with most built around bilateralcommercial contracts. In capital intensive industries, with low avoidable costs and few customers, thesecontracts are typically long term. These contacts allow suppliers to recover capital but transfer to thebuyer much of the risk during the life of the contact.
Specification of Broad Models
3.11 To assist in the choice of an appropriate structure, six broad structural models were identifiedbased on country experiences and theoretical considerations, which were then evaluated with the proposedcriteria. The models are explained below and presented in Table Im-3 and Figure m-1.
0 Model Pi is a natonally ntegrated monopoly, with a single finn controllinggeneration, transmission and distribution. A centralized management uses intemaltransfer prices to manage the business. Examples are EDF in France, EdP in Portugal,ENEL in Italy and ESB in Ireland. Me model has been adopted for both small andlarge systms, where most of the rest of the market is competitive. A recent trend hasbeen to introduce dealiion and financial accountability within these monolithicStructures.
* Model P2 is the case of regionally Intrated monopolies, with separate completelyvertically integrted companies in different regions of a country. Ihis model is astandard sucture in both Germany and the U.SA. Both countries share a tradition offederal administrative and political systems. In Germany, unlike Poland, load andgeneratg capacity are evenly sprad (all but one of the eight vertically integratedcompanies have an installed capacity of over 4 GW). Trading between regionalsystems takes place, but not all opportunities for power exchanges are exploited.
* Model P3 has asinglevtay Integrated generation and transmssion company butwith separate regional dibution monopolies. This structure is close to the formerpaem in the U.K. and in New Zealand, and is also used in smaller countries such asAustia. Regional disaggregation would probably lose significant economies of scalein generation and transmission.
O Model P4 has disagregated generation and dZaggregated dstAbudon together witha singk tranmisn company with some of its own generatdon capacity. This is themodel found in Sweden and Norway, where the single transmission company has 50%/Oand 300%, respectively, of tot generation capacity. This is a possible solution wheothere is not a good enough geographic match of load and generation to justify regionalutilities, and where competition in a particula segment of the market (e.g. nuclear) isdifficult to engender.
Page 26 Volume 4- Eleectricty and ignite Subsector
* Model PS has dLsaggregatedgenerato and dwsaggregated dLsibuton companies witha single sqe te ras,nLss con iipany. Variants of his model such as those in Spainand the Nethrads involve the trnmission company selling the power back toveticsilly intgmted generation/distribution companies on the basis of pooled costs.
Model P1s NationaL Model P2: Regional Model P3: National Generation &Integrated Nonopoly Integrated NMnopoLies Transmission with Regional
Distribution Monopolies
G G G G S
1' T T T T
D D D D
Customers (C) C C C
Model P4: Competing Generation, Model PS: Comp. Generation, Model P6: Comp. Generation,National Transmission with Ga- National Tran., Regional National Tran., Regionalneration, Reogonal Distribution Distribution Monopolies Distribution MonopoliesMonopolfes coovpeting with Generators
via comnon carriage
M an G no rn. S S G - I nG
T~~~~~~~~~~~~~~~~~~~~~~~~.7 + m Competiltive Pomers
Fun 111-1: Broad Models of Electricity Subsector
0 Model P6 has the maximum range of compettion. Horizontally disaggregatedgenerators bid to supply electricity to a common pod, and the price of the pool is setto clear the maiet. A transmission company (that acts as a common carier) then sellsthe pooled electzicity to suppliers at prices which reflect the pool clearing price plus thedifrntial transmission cost. Suppliers then compete to sell electricity to finalconsumers. The regionally based distribution companies do not have a monopoly, butmust make their grds available to any licensed supplier at published common carriagetariffs. The woikability of this structure, now operating in the U.K. (since 1990) andin Chile (since 1989) is relatively untested.
Poland - Eery &ctor Rest*clwng Page 27
3.12 These altenatve models have been evaluated usg the general criteria outlined inTable M4. Eah citerion has been kdked on a hee point scale (0,1 and 2). Model P2 is the lowestrked with 10 points out of a possible 22. Models Pi, P3 and P4 follow with 13, 16 and 20 pointsrespectively. The most favored models are PS and P6 with 21 and 23 points respecly.
Table Iil-4: Ranking of Structural Models for Power
ES i E sE~~~ 2 5. 4 I
NI1M RIMs NGTM IGCs IGCC IGCsRDM. NTM NTM + G NTM
1RDM RDM. (poo)
SW Of wwshehm CogfauPPIY 1 0 1 2 2 2
) ExA* ofpv,.won qfmeu* eoder dipat 2 1 2 1 2 2
) Abiity masb&un adequa wtem ewlabmiUy. 2 1 1 2 2 1 1
Haor udget dcple, evapabilyfor 0 0 1 1 2 2fJacig and aco.w&bl%orfanwa
A) bsot b ese , fe pkca. 0 0 0 I 1 2
%) Rxtentofl v/cuesh,e1iwguax lmn 2 2 1 1 1 1requluwd.__ - --
Abf to a ,wcng,fiwm dome.q* and I 1 1 2 2 2
* kw7endem II_ - -
Ab to atlrat neW wnwa( lncadfhe co- 0 0 0 2 2 2
) Abity tofwsd ae elnmy sntto 2 1 2 1 0 0
lO) of 2 2 2 1 1 I
11L BVQhWMWyflWxibft. _ 0 0 1 2 2 2
Tooal Score 13.00 10.00 16.00 20.00 21.00 23.00
ey. 0 Poor, I = F467 2 = (iod
3.13 Model Pi -the wholly integrAted structure- offers the advantages of central control:effetive merit order dispatch, adequate reserve margins, and meeting environmental targets wherenecessazy. However, there is considerable scope for inefficiencies and cmss-subsidies in operations andthere is no automatic pressure to use investment resources efficieny.
3.14 Regionaly vaertically integrtd structures (P2) do net seem to be appropriate for the Polishcase. They share many of the disadvatages of a unitary structure, while diluting some of the advantagesof centl control, which is likely to be particulary important in Poland (where load is sometimes divorcedfiom centers of generation).
Page 28 Volume 4- ElectridIty and Lignite Subsector
3.15 The relative advantages of the highly competitive structure represented by P6 are theopposing miror of those of PJ. Financial accountability and internal efficiencies are much improved,while competitive bidding should ensure efficient merit order dispatch. While efficiency in investnentis harder to ensure, while the maiket remains competitive, investment will follow profit signals. The mamndisadvantages for Poland are practical in nature. Implementaion would be difficult in the absence ofhistoric market mechanisms.
3.16 Model P3 offers a compromise between pure cntralization and decentralization. Howeverthe system integration advantages (shared with model PI) are outweighed by some clear disadvantages:
* price signals for efficiency in generation are weaker than if generation were separatedfrom taansmission, and hence open to some competition;
* the presence of a monolithic central generating company discourages new entrants dueto fears of predatory behavior,
* philosophically, merging generaion into a single unit would represent a step backwardsfor Poland, where power station directors are already developing entrepreneurial skillsin fuel acquisition etc.
3.17 Models P4 and PS offer a compromise for capturing the benefits of co-ordination andfinancial autonomy. However, they also have some disadvantages:
* it would be difficult to ensure an accrte flow of information so that efficient meritorder dispatch can be maintained;
* without central diretion, it will be more difficult to ensure that generators conform toenvironmental standards;
* both structures require wide ranging extemal regulation. In this regard, model PSwhere the transmission company has no active role in generation, will require moreregulation.
Both models are consideredr in more detail in Chapter IV.
Broad Options for the Lignite Subsector
3.18 There are four broad structual models illustaed in Figure m-2 to be considered. Ancillaryactivities are assumed to be sepate from the mines in every case.
* Model LI is of separate autonomous enterprse, where each mine would continue aspresent. Sales of lignite to power stations would be made under a long term contract.Inputs would come from within the fium or be bought in, while finance would beintemally generated or borrowed against the security of the assets;
* Model L2 would have one or two larger mining enteprises, each headed by a directorwho would appoint mine managers. Some inputs could be shared between mines. Thisstmcue would resemble that which existed prior to 1987.
Poland - Eergy Sector RestnAchurtng Page 29
Model Li: Separate Model L2: One or two largeautonomous enterprises m companies
MI M2 lM3 M4 M1+ NM3+M4
Ie e e eJ e e eL e
I lModel LI: Mines Model IA: Mines andIntegrated with their power stations within
power stations Ithe same organization__
M3 + Ml + M2 + M3Ml M2 M4 + M4
G G G+ G + G +
G ...
lg-ue M-2: Broad Models of the Lignite Subsector
0 Model U is of mines ingted with Cowmg Power &adon. Undera tis scheme,both mine and power station would be owned and controlled by a genertg enterprse(or holding company), which could own several other power stations. There would besre mange for te mine and the power station, both answering to a Director ofOpertons. Trnsfer pdies would be set for lignite (rather dtm a contact) in a wayto provide incentives for efficiency at the mine. Finance could be borrowed against thecompanies' overall activities.
* Model U merges 12 and Li to give a single bgrated ming and generadtngcompany.
Some mixed models are also conceivable.
3.19 These four broad models have been evaluated on the basis of the criteria set out in ChapterII by a method analogous to that for the electricity subsector, discussed above. The results of theevaluation can be seen in Table m-s. Ihe maxmum score is 22 points (on a zero to two scale) and tevetically inead models Li and U emorge with he highest soores (15 and 13 points, respectively).
Page 30 Volume 4-klectrid1ty and Lignite Subsector
Model Li (12 points) does least well beaus there is a serious danger of losing economies of scale andco-ordinuion. Ibe horizontally intgated industy model L2 (14 points) avoids this danger but has noscope for competiton within Poland to emege.
Table m-5: Ranking of Structural Models for Lignite
1) Hard budget discipline, responsfbflfty forflnancing 2 I 1 0Iand accountabili y for financial performantce.
2) Effectiveness of mine-power station coordination. _ __ 2 2
3) Ffectvness of mecni for sharing know-how0 2 0 2skflls _____ _ __
4) Ability to negotiate effixcent r nput prices. l _ 2 2
S) Attractiveness to external capital. 0 ___ 2__2
6) Ease of ensurSng least cost system dvlpet1 l22fIncludIng new lignite stattons.l
7) Capability to fiId envirnmenta investments. l 2 _2 2
9) Ease of ImplementatIon. I_ _ 2 O
9) Abilfity to attract new entrants 2 I I 0
10) Extent of Intrusive/complex regulation required. 2 I I I
1) Evolutionaryflexbility. 2 1 1 0
Total Score 12.00 13.00 _15.00 100
Key: 0 = Poor; I = Fair; 2 - Good
3.20 Ihe vertically integrated mine and power station (Model L3) has the fill advantages of co-ordnation between mines and power stations (which are probably more important dtan economies of scalebetween mines). A lignite power station is capital intensive and should operate on baseload; it thereforedepencis on a secure supply of the fuel, meeting the right specification. Seity of fuel supply isparticulary impotant as buffer stocks are low. Failures of fuel supply or forced outage caused by poorquality fuel lead to under-utilization of assets and additional consumption of mor expensive fuelelsewhere on the system. ITe benefits of good c-ordination between mine and power station amtherefore considerable and this explains why a vertically integrated structure is most commonly adoptedin maiket economies. Table m-6 smmaizes the position in different counties.
3.21 Model U captres sucb economies of scale without losing the advantages of co-ordination.The drawbacks to this structual model is that incentives to efficiency may be lost within a very largeenterpne, and that tere is the poten threat -if the lignite fired plants supply a significant shae ofthe system requirements, as in the case of Poland with about 40/- against competition. Cross-subsidiesmay readily occur and it is not easy for those outside the company to establish or compare the
Poknd-~EMAWWA- fP Si
p.i*mmu f lImo di Xa.t acdvitis whida aa " ~wmp.d togehpr. Anot_pctdvrt ofMdel U b ha w woold be Xdy a Poish linte mini ompmy to d op ew =sue oflini. If miming lcs u to be ared an a competiive basi cmpetiti d w oud hot tocomeoficn hsisaloamphwalekwhomightbe ata wihoutalodpueeor inldesubm ioto.di of kw opio u wxmined in mom dei in Capt IV.
Page 32 Volume 4- lecdrity and Lgnite Subsector
Table 111-6: Orgaizational Arragements for Lignite and other lMies Linked to Power Stations in Market Economics
W. Genar Regiond Power Boards two of which hael7gnb power stationviies:
* RWE (5 lignite power stations). Min horiztly inte ed Ligwte sold at i_nt ly areedHolding companyfor power stotons and via bwtnsport systeiL trnusfer priceand mine Report to common holin company with
power staton., i.e.. high level vewrtcal
* Preassenelkter (4 lignIte power 7o sepate group of mines horizontally Working s esfilystations) fn_grated Aines and power stations both
repesented by same Bard Dfrector, i.e.,high level vcal Inegration.
Spain Pubilc and private regional power boards Mines and power stations vertically Working _ *cce&fyTwo lignite power stations and mines Integrated Group Directorfor eachowned by state generating company miw/power station pair ports to HeadENDE$4 Office, .e., high levl hoizontal integration
Greece Public Power Corporation, the state AMies horizontally integrated Working succWlilyelectklcldy monopoly, owns all generation orgamalonally reporfing to PPC Head(2 lignite power stations and mines) Offioe with power stations ie., high level
vertical interadon
UK (Scotland) Scottis Power, a regional power boar4d Mfne owned and operated by state mining Serious disputes over coal pricingowns the Longamnet Minemouth power company British Coal. No verticalstation burning low grade coal intration
Poland - Enrg Sector Restructuring Page 33
It4y EWELa the state electricity mnmopoly owns Mfines horiontally Integrated Mines and Working succesollyall generation (2 small lignite power power station report to ENEL Head Officestations and mines) i.e., high level Wertal Integration
India Neyveli Lignite Corporation. a fiel specifc AMines Integrated horizontally Mines and Working scesiygenerating utility. owns 2 lignite power power stations report to same Deputystations and mines Chalan Le., high level verticat
iegration
Twrey Al power generation owned and conatrled Afines owned and controlled by separate Coodnaton probkms atby 7E (2 lignite power stations) organzaon TKL. No vertcat integrtion EThistan but not at the other site
Thalsand EGAT owns and control Mae Mok lfgnite Vertical integration with mine and power Worbng _ccsfidlystation and mine stton ngr reporting to same person
Indonesia All generation owned by PLN which Bukdn Asin mine operated by State Coordinton probkeawoperated large power station buning low Mig. No vertical ngratn Separateg.de col co.pay responsble for coal tanport
IV. DEVELOPMENT OF SHORT LISTED OPTIONS
4.1 The broad strctuc models that have emerged as possible solutions (P5 or P6 for electricityand L3 or L4 for lignite) all require further developmen and evaluation in the Polish circumstances, themain issues which have to be ;dressed concem:
* the number and type of geneating stations, the position of CHP sations and thenumber of distibution enterprses;
* the functions of the differet enterprises and the role to be played by the grid company,PSE, in the new stucture;
* ownership and financial stucture of the enterprises;* pgulatory anangements for the subsector,* commercial relationships between the eaterpnses;* problems to be addressed by the management of the restrdctured enterprises;6 action required in relation to the ancillary enterprises.
The firt two items are dealt within this Chapter and a final recommendation derived. The question ofthe ancillary enteprises is also discussed since these issues are prior to the others, which are discussedin later chapters.
42 The recommended structure of the electricity supply industry is prsented in Figure IV-1.In the following sections, each ofthe stages of the production-distribution chain is examined in tum.
Generation
4.3 Chapter M has agued for a disggrgatd generation sector on the grounds that competitiveprers could lead to greater efficiency. lhis competition could arise in two ways:
* bidding to provide additional or replacement capacity;* bidding on a daily basis to supply energy.
Compedtion fr new capacity should be adopted when new capacity is next needed. For reasons explainedbelow in chaptes VI and VH, it is unlikely that competitive bidding to supply energy will be pracicedin the shot run, even though it is highly desirable in the medium term tat this be adopted in order tohelp with restucuing. Intead, an interim system in which generators should be paid prices for capacityand nery on the basis of stadard costs as proxies for opportunity costs, could be used. Of course,paicing on tre basis of stadard costig -where costs are based on financial ratherthan marginal costs-is not economically effcient On the long-nm, the system should tend towards competitive prcng, whereprees and quntities are detenmined by the market.
Page 36 Volume 4- Electrility and Lignite Subsector
Electicity and L ite Subsectors
Hot COD | Ede M/OB|-4to 5(kegoesg -90_el
4 ~~~~CoMF O-bwdO Geuat Conm_u
-~:i 3 tocJ
ltarsi*som Company PSE (1)1
I_~~~F
Embedde Igeneration I AutogendL etco
Fi'gure IV-I-. Recommended Structure of Electricity and Lignite Subsectors
Poland - Energy Sector Restructuring Page 37
4.4 Chapter I explained how there are a series of steps in the relation between cumulativecapacity and marginal energy production cost relating to the different types of plant:
o some 13 OW of hard coal fired plant which is the most expensive source of energy,and which offers the most potential for the use of compedtive bidding to incasofficiency;
* some 9 GW of lignite fired plant which operates on baseload almost all the ime andfor which marginal energy costs (avoidable cost of lignite extraction) are substantiallylower tan for the cheapest coal fired plant. In these circmstances competitive biddingis unlikely to help in improving efficiency;
* some 3 GW of CHP plant, power output of which is govemed by heat demandMarginal electricity costs will normally be significantly lower than other thermalsources and here also competitive bidding would be neither pactical nor effective;
* some 0.5 GW of river run hydro plant and some 1.5 GW of pumped storage capacity.
Each of these groups is analyzed in tun for the most appropriate institutional structure and then theoverall merits of models P4 and PS are reconsidered.
Competitive Hard Coal Fired Generating Plant
4.5 At present there are 15 power stations usg hard coal firing and the key issue for thiscategory of plant is how many entepnses there should be. There should be enough to stimulate effectivecompetition but each should be of sufficient size to be financially viable. It is suggested that there shouldbe at least four different enterprises with a mix of high and low maginal cost plant so that no companydominates the mert order. Enterprises with a portfolio of power stations can hope to capture economiesof scale in operations and management (stores, maintenance and other "Head Office" fumctions), inprocurement and in the use of scarce senior management resources. 'Me overall level of rsk due tooutage on a generating unit will be much reduced if the enterprise owns more than one stion, andaccordingly borrowing will be easier. Finally the existence of a smaller number of larger generatinentities would provide a valuable counterweight to the natural monopoly &atures of the grid company.
Lignite Generating Plant
4.6 There arm five lignite power stations owned by three different enterprses, with the lignitobeing supplied by four separate mining enterprises. Given the recommendation that the lignite powerstations should be integrated with their mines there is still the issue of whether there shou-d be separateenterprises (model L3) or a single enterprise (model L4). No firther disaggregation of power station unitsis desirable because of the loss of scale economies, so only the question of horizontal mergens needs tobe discussed. Ihe case for separte enterprises would rest on the desirability of introducing competiton,and since these stations operate on base load at all times, there is no way to introduce meaningfillcompetition into the sector. The fict that most viable deposits of lignite have already been mined, meansthat there is also litfle scope for competition to develop new deposits. On balance it appears that theadvantages of model L4 are predominant becuse this allows the benefits of horizontal integration to berealized. The existing enterprises should remain but be subordined to a lignite seneration holdingenterprise. 'here is no case for the tnmission grid to have direct control over this substnti portionof generating capacity, providing that the load dispatch center has sufficient authority to give operatinginstuctions with which the power stations comply.
Page 38 Volume 4- ElectrcIdy and Lignite Subsector
Combined Heat and Power Plant
4.7 There are 34 CHP plas (many with HOBs), owned by may diffrent enterprises. Inaddition, there are 16 separte HOB plants selling heat direcy to local District Heang Enterprinses. Indeciding on future ownership options, it appears that no single solution will be the best for allcirumstances. An important principle is that since no enterprise should be entirely dependent on a singleasset (station), being unable to be financially viable under hard budget disciplines, each CHP/HOB orHOB station should belong to a larger entity. The largest systems could remain as separate enterprisesselling their output to both the heat and power subsectors, while not belonging to either. For smallersystems, where retention of the vertically integrated district heating stucue is most likely, thoindependent CHP/HOB enterprises should be owned either by the District Heaing Enteprise or by a localgenerating company. Where a disaggregated district heaing structure appears desirablo, then theC]HP/HOB stations should stay with electricity distribution enterprises.
Other Generating Plant
4.8 The run of river hydroelectric schemes are operated by the distribution enteprises and theirinvolvement in small generation projects of a local chaacter is likely to yield benefits not othewiavailable. For the pumped storage stations, there is a need to minimize energy producion costs and toprovide peaking capacity and spinning reserve. ITis requires a very detiled knowledge of manlnergy costs at different times of the day. Very close cooperaion is needed between the local dispatch
center and the pumped storage stations and this will not be easy to achieve with a company seprte fiomthe grid. To achieve this, while maintaining some measure of independence, the pumped storage stationscould be vested in separat subidiwy companies within the grd company, and reportng to the sameBoad.
Transmission
4.9 ITe first steps towards establishing an independent giid company have already been takn,with the cration of ajoint stock company (PSE) which has as its objects the ensuring of he economicaloperation of the Polish electricity supply with due regard to generation costs of diffent power stations,uansmission costs and international power exchanges. The commercial activities listed in the statute ar:
X acquisition and dispatch of power to meet demand on a continuous and reliable basisat minimum cost;
* maintenance and development of load dispatch and system control facilities;* management of transfor pnces for power untl the removal of subsidies makes this
unnecessaly;* co-operation with systems in other countries;* manenn of technical reserves required to ensure reliable supply,* operation and development of the high voltage lines;* operation and development of the pumped storage hydroelectric plants;e prtection of the environment against impacts from the grid;* making available finacial resoures for investment in the rnsmission sector.
Mme admiis tasks to be perfonned on behalf of Mol are:
O ensuring that there are adequate stocks of fuel at the power stations;
Poland - Energy Sector Restucturing Page 39
o preparation of load forea and initiation of new generation projects to meet theforecasts;
* initiation of research and development on technical and economic aspects of electricity;* making available fincial resources to support investment in the constrcudon of
generation plant;* or8tgization of tasks relating to national defence.
Comments on certain of these points are made later in this Chapter and in later chapter.
Distribution
4.10 'Me favored models for the treatment of generation and transmission activities share a similarstructure for distribution: that of a number of geographically based fanchises. Ibis leaves open the issuesof the number of distribution enterprises (ZEs), their size in relation to possible economies of scale, thebalance of their business in terms of risks, altemative sources of supply and whether they should have amonopoly of retail supply.
Number of ZEs
4.11 At present there are 33 ZEs based on the 49 voivodship boundaries. They have the sausof public utilities and the management is under the direc control of MoL Evidence on costs and scalesuggests that the smaller ZEs have higher added costs per cutomer, while wowk fwom the Netherlandssuggests that the optimal scale is at about 300,000 to 400,000 connections. Some 9 ZEs have less than300,000 and 15 have less than 400,000, so it does appear that the meer of some ZEs could lead tofarther economies of scale.
ZEs as Balanced Businesses
4.12 Various mergers between ZEs bave been considered with te aim of capturing possibleeconomies of scale, while reducing disparities between them with retto demand haacteristics, suppl:'costs and levels of opering efficiency. A less radical regouping suggested 27 new ZEs, while a secondgrouping produced 15.
Sources of Bulk Electricity Supply
4.13 Economically, there is a prma facie argument for distributors not to owe generation facilities.The natural tendency for a finn with generation and distribution concems is to favor its own faciJities.Thus, there is the regulatory problem (and a transaction cost) of how to pmvent ZEs fiom giving firstbuying-choice to self generation, even though it might not be the leas cost option. Distributors shouldtry to avoid buildmg and openg generting capacity themselves, the exceptions being local generationfacities -small CHP and heat only stations.
Page 40 Volume 4- Electrfcity and Lignite Subsector
Monopoly of Supply
4.14 At present the ZEs' exustng monopoly of supply should remain unaltered (with localfianchises being conferred on new ZEs). The exception to the mle should be large direct costumers,which should be able to buy the lowest cost supply and pay adequate tols for the use of the network.As with transmission, competitive supply should be maintained as an option for the futur.
Ancillary Enterprises and Activities
4.15 There are seven ancillary enterprises in the lignite subsector, and 37 in the electricitysubsector. There are four options to be considered:
e reintegrate all or part into one of the new core businesses proposed for the powersector,
* hold an enterprise in common as a service company among different core sectorbusinesses;
* transform the enterprise into a company with voting share capital, with a view todivestiture;
* etain as an autonomous state enterprise;
4.16 In addition to non-core activities caried out by separate enteprises, there are a range of suchactivities caried out within enterprises that are paut of the core businesses (cantens, housing etc). Wherethe activities are part of the core business, then it is necessay to provide them as efficiently as possible.Where they are separate and significant in relation to the total business then such activities should beestablished as separte profit centers. Intemal services could be forced to compeNe from time to timeWainst extemal competition. Experience with contacing out of services suggests that the majority of
intenal staff are re-employed by the contractor.
Reintegration
4.17 There is a case for reintegraing the mainteance activities of the company responsible forthe high voltage trnsmission grid, of most of the generation companies and of the distribution companiesback into their respective sectors. In each case there is a solid baseload of work and its planning andprioritization should be an integral part of their business, being essential for the security of electricitysupply. All manufactring and construction activity, where co-ordination is less important, should routside the electricity subsector in a competitive enviromnent. Similar considerations apply to the lignitesubsector the maintenance activities should be reintegmated to the mining sector, while the manufictuingactivities should remain outside the sector in competition with other manu er.
Enpris to be bdd in Common
4.18 The maintenanc wodshops that emer fiom the rstucuring proposed above are oneexample of an activity which should be held in common. They could be owned jointly by all the mines,or held as a subsidiary of the lignite holding company. The other enteWrise in the lignite subsector whichmight be suitable for this tment is the design and reswrch cener for open pit mining. However, sinceS0% of revenue already comes from outide the industry t appears tha the is a good cse for allowigit to remain independent. In the electricity subsector the entprises ta might be best held in commoninclude the Center for Energy Infomation, The Insitte of Energy and various other research institutes.
Poland - Energy Sector Restructuring Page 41
Enterprises for Divestiture and Potential Privatization
4.19 It is suggested that, with the exception of enteiprises which offer a product or service on amonopoly basis, any other enterpnise should be permitted to become a company with a view toprivatization. IThe benefits would include additional funds for the state from the sale, incrasing accessto capital markets for the enterprise and greater incentives to efficiency. In practice, the rate at which stateenterprises can be privaized is largely dictated by the availability of local capital, and those which haveexport potential are being given priority here.
Enterprises which will remain State Owned
4.20 The other enterprises in the electricity subsector should remain autonomous swte ownedenterprises subject to hard budget disciplines -market forces would then determine which would survive.To strengthen market forces, core power sector companies should seek competitive bids for products andservices. Intervention may be needed in the case of enterprises which have monopoly power.
V. OWNERSHIP AND FINANCIAL STRUCTURE
Options for Corporate Form and Ownership
S.1 Virtally all activity within the ligrite and electricity subsectors is at present undertaken bysta enterprises. The main options for the fiuure corporate fonn of these enteprises are:
* maintaining their present status with MoI as the founding body;* retaining their state enterprise status, but with a different founding body;* becoming new limited liability companies operating under the Commercial Code;* becoming new joint stock companies, under the commercial code;* becoming joint ventures with foreign investors.
3.2 lhe joint stock company appears to be the most suitable corporate form for the subsectorsconcemed at the present time. State enterprises established under the 1981 act suffer fiom a number ofshortcomings in the context of a market environment:
* te cannot parficipate directly in the market for equity capital;* ownership and control of capital are not clearly identified;* there arm potential conflicts at management level between the respective demands of
cital and labor (workers' council);* there are no simple me iusms for effecting mer8ers or for restructring;* corporate objectives - nt clearly defined relative to national objectives.
Given these poits, there appears to be little benefit just in chaging the founding bodies of the enterprisesconcered. At the same time there is likely to be only limited direct foreign investment into Poland atthis time so th joint venres could not be the standard form, although they will occur in specific cases.Finaly limited liability companies, where the owners have responsibilities for losses limited under thecommercial code, must have all shares owned by parters in the company. This effectively means thatares cannot be issued to the public.
5.3 Joint stock companies have greater flexibility with regard to the issue of shares, and specificprovisions exist for public shareholdings. This gives more immediate access to stock markets, thusmaking them the most suitable vehicle for privatization in this subsector. Many of the efficiency benefitsshould arise irespective of the ownership of the equity, provided that public sector shareholders act in amanner comparable to their private sector oounterparts. Private capital reduces the rsks of politicalintervention and makes the imposition of financial discipline more likely, but it may be more expensivethan govemment capital. There are varous options for the sale with, in each case, the possibility ofselling a majority or minority of shares:
* rein 100% govenment ownership;* selling shares to mangement and employees at a discount;* twasferring shares to other public bodies (e.g. local govenmment);* selling shaes to consumers;* selling shares to private Polish companies or overseas companies;* selling shares to the general public through a public flotation.
Clearly, there is no need to have the same pattem for all parts of the subsector and suggestions for themost suitable ownership patems for the various elements are oudined below.
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Generation and CHP Companies
5.4 Ihe strucure oudined in Chapter IV for generation envisaged four or five independentcommercial companies (each with a portfolio of hard coal fired plant), a single lignite holding companyand several independent CHP companies. In the longer run these companies could well be privatizcd, andthis could stimulate competition. However, in the short run, there would be ptical difficulties inobtaning this objective. In particular, the sale of generation would absorb much of the scarce capitalpresently available in Poland, and with prices still not at long term equilibrium values the Governmentwould be unlikely to receive full value for the assets being sold.
5.5 Instead, a gradual approach to ownership change could be used -initially there would be100% govenmment share owning, with a limited number of shares being subsequently sold to managementand employees at discounted rates. Theleafter lauger tranches of shares could be sold by public offering,with such sales being coordinated across all the generators in order to allow investors a choice. Therewould be controls on the total ownership of any company by a single party and on the degree of foreignownership.
5.6 For the lignite company, with its natuwal monopoly of the resource, there would have to beroyalty arrngements to ensure that excessive rents were not retained. As well, the govemment wouldhave to maintain a majority stake in order to control the market power of this company.
5.7 All existing coal fired capacity, including those under construction, could be owned byindependent companies. New capacity need not be provided by the government -instead tenders couldcome from joint ventures, foreign investors and the independent generators. Only the Zamnowiec nuclearsion (where construction has been suspended) would remain as a state enterprise, with managementrporting to Mol.
Polish Grid Company
3.8 Ihe shares in the grid are at present owned 100% by the Government, and due to the crucialcoordinating role in the electricity subsector, it may not be appropriate to sell more than 49%/O of theseshares at present. In the longer term ctmplete sale together with the establishment of particular rights (viaa "golden" share) would be possible. No share sale can be contemplated until:
* the grid company (PSE) has acquired the ownership of the HV transmission andpumped storage assets;
* the mechanisms and price levels necessaiy to administer payments to the generatingcompanies and sales to distribution companies have been properly established;
* the discrete business activities of PSE have been established in separte organizationalunits;
* it has established a track record of earnings.
Once these steps had been taken, it would be possible to start selling shares in the grid, while taking carethat no one investor held too large a stake in the company.
Pokand - Energy Sector Restructuring Page 45
Disribution Companies
S.9 Direc control over etail twiffs by to Minisby of Finance is still being exetcised, and giventhe rate at which these can be increased towards intemaional levels, it will be some time before thedistributiot companies will be able to make comme retmrs on the capital employed. In consequencethere would be a particular difficulty in achieving a satisfactot- sale value so that, as with the generatingcompanies, it is sensible for the Govemment to have initially 100% ownership. In the longer term aminority of shares in each company could be sold, which would inject a measure of competition for fiudsbetween companies. Shaes could be sold to consumers in the franchise area and to the general public.
Existing Financial Structure and Funding
S.10 Historically, individual enterprises have had little input to the determination of the finacialstrutures within which they operated (with the exception of the commercial debt). The accountinginformation compiled has been to a format designed to ensure systemaic recording rather than to act asa management tool. This has made it difficult to compare with Western accounts, as has the hyperinflationof the last few years. Revaluation of domestic assets has in general still left the net book values of assetsaggig well behind depreciated replacement costs.
3.11 An examination of the enterprises at the end of 1989 revealed the following:
a lhigh proportion of total assets are fixed, reflecting the capital intensive nature of theindustry;
* power generation acoounted for 48% of the total (of which 15% was in the newlycompleted lignite fired station).
5.12 On the financing side of the balance sheet the following features stand out:
* the generaion and mining enterpnses have the highest proporbon of debt to capitalemployed, with the majority of the debt representing borrowing to finance the recentycompleted lignite fired power station at Belchatow;
e gearing for all enterprises, excluding Belchatow, is quite low relative to levels inWestem Europe; all enterprises appear to have significant unutilized bofrowingcapacity.
Equity and Reserves
5.13 After reforms in 1989, most state enteprises had reduced the number of funds in he balacesheet to the following:
* Statutory fund representing the state's contribution to the enterprise (a "dividend! of 8%on the value ofthis fund is paid to the state);
* EnterpsIsefund representing the intermally generated reserves of the enterprise;* Fundfor Sol Obligaows used to pay for housing and other staff benefits;* Reserves.
ITe state is the rognized owner of the statutoy fund while the enterprise claims tide to the enterprsefimd. Should a joint stock company be created, these funds would be transfeed to th new company.
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Investment and Operational Financing
5.14 Untl recently much capital expenture was financed by the centrl govemment, althoughminor expenditures and maintenance were internally funded. With the increased limits on central fundingin recent years, enteprises have had grater recourse to commercial borrowing from local bak on thebasis of ftue enings (rather ta being secured aginst specific asset). operional expenditus aregenerally intemally fimded, although there are some commercial "operationalA loans to cover short tenncash deficits.
Subsidies
5.15 There are no longer any direct subsidies to the electicity and lignite subsectors. However,there are still a number of implicit subsidies:
e income tax holidays;o "dividends" to the state paid at a te of 8%;* revaluations which have not kept pace with inflation so that "dividends" are paid on
undervalued assets.
Mechanisms of Company Formation
5.16 Establishing a sound commercial footing for the restuctured industry will require carefulplanning, with the necessary steps taking place in the proper sequence. The keys steps will be applicablelargely to both generation and distribution companies. At the outset there will need to be a clear policyframework in four critical areas:
* the Government will need to specify how the prices (especialy retail electicity taiffsand coal prices) it controls in the subsectors will evolve A1 the futre;
* least cost development plans will need to be prpared to provide guidance on the typeand quantity of geneting capacity required by the system as a whole;
* regulatoy stnuctures should be established in advance of company formation;* merger criteria for generation and distibution enterprises will need to be confinmed.
5.17 Each enterpnse should be required to identify its own investment requirements and to valueits assets on a depreiad replacenent cost basis. From this information, and that on expected cash flows,a preliminary valuation of the enterprise can be obtained. Of course, the corrct valuation depends on thefuture eaming potential of the asset Thus, once the enterprises are sold-off the purchase prce willdetermine the asset values.
5.18 The Ministry of Industry should at this stage publish the conditions under which the newcompanies would be licensed, including details on the arrangements for price control. Proposals fromsubsector wodking groups would then be prepared for grups of enterprises to trasform themselves intocompanies and to merge. This process, which would require the approval of the Ministy of Privatization,could be conducted under the provisions of the Privatization Act.
5.19 "Volunty" mergers and company formations of this nature should be encouraged providedthat the relevan criteria are satisfied. However, not all enterprises wil be able to agree on saisfctoryproposals on this basis and so a "maagd process of company formation is likely to be requird,
Pokand - Enery Sector Reshwctung Pep 41
pricuay in the lignite subsector. In both cases the new compaes should be vesotd with the asevalued at the ectd eanings stcam, with the corponding liabilities (debt and equit) in the openingbalance sheet
S20 n the early years, as electniity prce se significantly towarfs Werm Euopean levels,eaming steams will also increase rapidly so ta retums to debt and equity will be low in th firt yers.Indeed, for some companies thene may be insufficient interest cover to support any sgnificeand the taet ums to equity may need to be set vety low. This need not imply cash ijectioas by thgovernment as shareholder, as the depreciaon charges on the revalued assets are likely to be rlativelyhigh.
5.21 Notwithstanding such tansitional financial targets, the companies should be expected tooperate on a completely commercial basis fiom incption. Ihere will need to be contcs for th purheand sale of electricity in place at vesig.
5.22 Wlithin the two year limit, prescrbed by the Privatization Act, some sales of shames must takpla -more could take place at a later date, when the value of the shares has inceamsed in lin with
3.23 Ibe full restructring proes is liklcy to take many months and a crtical stae in the processis the point at which th new companies beg opeaions. In order to smooth thi pcs agem t athe future stucture of each company, with its constituet financial physical and human resource, neesto be setted weU in advac of its rgstrion. Experience ebewher has shown dtat it is impot toappoit the Board and senior management in advance of their aun peaonal rli. Sucbst4 not only could shadow coun_rat in dt existn entepnrses, but also should play a loading rolein negotati the opening balance shet of the new oompanies with the Govemment and astingenterpises.
Finauclal Structures for New Enterprises
5.24 On the creaion of a joint stock company, tie fiuns would be combined to fonn th equitycapital. This sum would be split between sha capital and reserves in proportions considered appopiaton a case by case basis. It will be necessary to revalue the assets of each enterprise prior to formation.The Govemment also has the option of injecdng new debt into the present enterprise reducing te amountof equity that would need to be sold on privatiation and increasing the total proceeds. However, befrefixng the financial structure of the new enterprises, it will be essential to prepare finmcial projections.These must demonstate that the company has sufficient cash flow to serice both debt and equity and willbe able to finace a rasonable proportion of investment (say 20-30%) from intemaly geeated fiun.
Sources of Finance for Companies
5.23 Ihe National Bank of Poland, presently used as a chnel for Govemment garanteed debtfinan, is unlikely to continue to be a major soure of funids, since new investment in the electricityindusy is not a high prority. Wihout a govemenmt guarntee, commeial banks are willing to lendfor up to 10 yeas, but at present the cash flow of most enties in the electicity and linite signitois not sng enough to service significant debt over such a rlaively short period compred to e lieof the investments. This shoud impre as electricity prices dse and as merged companies inre instrulgt.
Page 48 Volume 4- EFectridty and Lignite Subsector
526 Intemally generted fimds will thus be a cmcial source of finance. Govenmment may needto assist cash flow by setting modest targets for dividend income. Measures such as intoducing anaccelerated write off for capital expenditur, and thus reducing tax bills in the early yeas of a project,could also be helpfil.
Trnsmission Assets
527 The tansmission eOmpany's (PSE) financial structure has aady bee decided, so that themain isse confionting PSE is how to achieve, now or in the futre, the transfer of trnsmission assetsfiwn the ZEs. At current valuation (assuming the assts are roughly halfway through their lives), thevalue appears to be grater tan the total capital of PSE. The simplest way of making an effective tansferofthe assets would be for the Govemment to pass a law requiring the ZEs to transfer their assets and tomake a corresponding reduction to their statutoly finds. This would minimiz the disruption to the ZEsand the assets coud be included in the PSEs balance sheet at a value linked to replacement cost.
VI. REGULATORY FRAMEWORK
Extent and Type of Regulation
6.1 Expenence from other counties suggestw that tiere is no absolue standad for the dege ofregulation -rather the regutory stuctre should match the institutional smcture of the industry.Vauiations in rngulatory stucture occur in a number of areas, including:
e whether the regulation is fedetally or centrally orpaized;° whether the regulation is intrusive or reactive;O whether the regation is undertaken by a separate speciaist body, or direcy by centrl
or local govemment organizations.
6.2 In Poland, the adoption of an industay stucne oanized at a nations level (around PSE)points strongly towards the need for a national rguatory focus, as does the short supply of specialistskils required for economic reguation.
63 Ihe broad conclusion from intemaonal experience is ta regulation is less active andinrusive the less there are direct commercial pressurs between participants in imperfect markets. Theneed fo cormtervailing regulatory power is less when there is no incentive for industry participants toabuse marcet imperfetons, which is the case under competitve environments. In Poland, where thereare long term aims of securing significant meures of private sector involvement and competition, therewill need to be a comparably active rgulatory approach at the begnning.
6.4 Given the importance of regulaory activity in ensring the efficient and equitable fimctioningof the recommended new structr, it is likely th autonomy will be important for the ReguaoryAgency. In particular, it would:
: provide a clear distinction between the public sector's role as owner, policy maker andthe regulatory oversight of the subsector,
* ensure neutmality of treatnent between participants;* reduce the threat to efficient behavior fiom political pressures and lobby groups
6.5 In summay, it is recommended that
* there should be a national regatoy body responsible for oversight of the electicitysubsector,
O this body should be empowered and have the necessy expere and resoures todischarge its responsibilities;
* the body should be established a an autonomous agency.
Proposed Regulatory Structures
6.6 Two options can be considered for the establisment of the Reguatory Agency: independentagency depending fiom the executive, and dependent to Mol The former set-up has two importantadvantges: (a) it ensures proper separation of regulatoy oversight from ownesip and policy makingfinctions; and (b) it insulates the regulatory authorities fiom political pressures. Some of the potendangers of a Regulatory Agency under the Ministe?s responsibility are:
* conflict between the Ministry's role as energy policy maker and that of regulator,
Pag 50 Volume 4- Eleccigy and gnite Subsecor
* unclear "iies of the game", whereby each new minister would appoint the ReglatoryAgencys director and provide general policy gdelines which may be diffen to thoseof the preous miniser,
* political problems, where the agency is used as an extension of te ministers interests,at the expe of th regulatory fimctions; and
* budgetary problems whereby budgetay constrin affccting he Ministay could -intheory- affdct the agency more, since the minister might allocate more to otheractivities under it responsibility.
6.7 The agency should be independent body of commisuiones who can not be fired onceappointed. It should not be a branch of another entity. It should be energy sector specific to allow it todevelop the special skills requird, which might not occur if it were merely a branch of the An-MonopolyOffice. It also ensures at it would rspond to the guiding principles in the electricity law and thegeneg lsweep of eney policies, which would be less easy if it were directy responsible to the Coucil ofMiniseas. The Agency would have it own funding, and should not in genel coslt anybody in theGovernent conceming the dayto-day discharge of its duties.
6.8 The pnmy insrmens of gulation should be the licenses issued by the Agency to thegenerton,transmissin and ditibution companies. hee lices would differ in foam dependig anthe actvity, alhough they would share common p mions. These deal ae discsd below.
6.9 The Ministy of Envioment Prction and Natural Resources would bave a disidn anmdsepat trole to pla in the e i lregution of he subsecor. It would set en ental
ide, and f al at a nationa level, with the administon of these standards ad collecofes deegated to voivods at local level. Fuither details are set out in Chapter IX.
6.10 in genal, environmentl regulation should be applied as a constint, wi the companiesseeing las-cost altermatives t' satisfng the constraints. Standd costs shold reflect te oppoticos of opeafting and expanding supply and of meeting eni stndds for particular tpe ofplant; companies should tien, in general, be able to make commercial mns and meet eiso limitswith payments based on such opportnity costs. A possible exeption may be the lignite sions, whichhave limited choice over fuel source and generation technology, and whe the cost (in fees or fines and/ornew investent) of fill compliance could constitute a sgnificant propotion of total productionexpenditu. The costs of specific environment rglation would need to be conidered by PSE, andhence the Agency, in setting payment rates for these sations.
Reguation of Generation
6.11 A lieme would be requd by any company wshing to generatelecticity for se toaoter paty, subject to possible exemption crtera for very small sations. Separae provison wouldbe need for dif t types of geneaton:
* pla subjec to dispatch by PS* embedded generation plant;* pumped stoage plant,0 combind hee and power plant
Poland - Energy Sector Restructuring Page 51
Each company would have a license covering all plant of a given type, with schedules detailing theparicular chareristics of individual generting units. If a particular station failed to meet licensecriteria, it could be removed fiom fte license, while the regulator could retain the stronger sanction ofwithdawal of the company's entire license.
6.12 For centrally dispatched plant, subject to PSE operational instuctions, these conditions wouldprobably be:
0 submit the offer price of supply along with the details of expected operating andfinaal performance to PSE to allow determination of the merit order,
* maintain separate accounts for non-generation activities;* use best endeavor to comply with dispatch instructions, and with instructions as to the
timing of planned outages for maintenace;* sell electrical output to PSEl;* maintain fuel supplies and standby capacity as directed by PSE to ensure senty of
Supply;* comply with technical, planning, installation and generating codes;3 make financial contributions to activities of common benefit to the industry, including
the Regulatory Agency.
For smaller plants the licenses need not be so rstrictive and there would need to be only reserve powersfor PSE to dispatch plant, and companies would be free to sell electricity as they wished. The mainrstrictions in these licenses would be concemed with technical codes.
6.13 The licenses for pumped storage would be similar to those for other centrally dispatchedplant, but would require stronger prosion in rspet of the obligation to maintain capacity available.In pactice the bulk of pumped storage will be owned by PSE so that such provisions would be ofpariclar importance for independently owned capacity.
Regulation of Transmission
6.14 PSE would be granted a license conferring on it the right to own and operate the high voltagetranmission system. The key conditions of the license would include:
• a requirement to maintain separate accounts fcr the umission business, for thetrading activities relating to the purchase and sale of electicity and for theadmninistrative functions. Cross subsidy between these diffent activities would beprohibited;
* an obligation to purase bulk electricity at least cost and to issue dispatch instructionsand outage schedules to ensure merit order operation at all times. A ban on PSEowning generation capacity (other than pumped storage) may be necssay to ensurethat it fills these obligations;
° an obligation to ensure security and adequacy of supply;* a requirement to draw up and maintain the technical code;* a requirement to ensure that PSE complied with Poland's intational obligations, as
part of the CMEA ransmission netwok, including submitting to the disciplines of thePrague control center,
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*3 a requirement to pepare -in the intertm- prices for payments to generators based onopportunity costs, and for bulk supplies to distribution companies on a cost-reflectiveand non-discriminatory basis;
* a requirement to form -on the long-nm- a competitive eletricity exchange marketbased on the gradual privatization of generation facilities, where prices are mawketdetermined;
o a requirement to make financial contribudons to industry wide activities.
In addition, the license would require the regulators approval for major modifications to the HV grid, andwould specify maximum levels of charges PSE could make for its use as a component of the bulk supplytariff.
6.15 Of the two broad altemative mechanisms for regulating these charges, viz. rate of mturregulation or price based regulation, it appears that the latter is more suited to the case of the transmissiongrid in Poland because:
3- intrusive regulation would run contrry to the prevailing market based philosophy;* PSE should have the discipline of regulated revenues rather than the environment of
cost plus pricing, in order to encourage efficiency;* a price based mechanism is simpler to administer,
p npce based regulation provides more btspant signals to the rest of the subsector.Mhe major shortcoming of the price based (RPI - X) approach to regulation is the need to tr majoritems of capital expenditure differently. When projects are 'lumpy" and unpredictable it is difficult tomake allowance for tem in the pre seting fomula so that they have to be charged for on a rate ofreturn basis (the UK prvaized water industry has adopted this mixed approach to reguation).
Regulation of Distribution
6.16 All distrbution companies would be licensd, using similar mechanisms to those forgeneion and transmission companies. Ihe provisions of each license would require each company tomaintain separte accounts for its distribution network business and its supply acidvities respectively.
6.17 Conditions imposed via a ditibution license would include:
* the requirement to fmiish operational and financial details to the Regulatory Agency;* the requirement to provide PSE with a forecast of demand on the high voltage grid (say
10 years ahead);* an obligation to ensure secuity and adequacy of supply to its customers;* a requirement to drw up a technical code (in consultation with PSE and the Agency)
goveming connections to and operation of the distribution network;* a requirement to dmw up, for the Agency's approval, a code of practice govering
supply activities with consumers. This would cover draft forms of contract, servic4standards, debt collection and disconnection procedures, rights of appeal and sourcesof information;
e conditons goveng the prparaton and publication of the company's tariffs, includingta they should be non-discriminatory, cost based and identity the respective costs ofbulk supplies, the distribution network and other supply costs;
Poland - Energy Sector Restructuring Page 53
* an obligation to connect and supply any consumer on request at published rates (withprovision to charge extra in specified circumstances);
o a requirement to contibute to tie fimding of industry wide activities.
The company would be grmted an exclusive fianchise to supply all customers (except large costumers,say above 1 MW of demand) within a specified geographical area with electricity purchased in bulk fromPSE.
6.18 The critical issue for the distribution companies will be the control of price levels. At presentthe Ministry of Finance allows a uniform national tariff to be maintained, which promotes cross-subsidization and a regional misallocation of resources. Tariffs rates should be raised to cost recoverylevels and tariffs should reflect regional cost differences to ensure locational economies. During the periodof transition, surcharges could be levied on the least price responsive elements of electricity consumption,such as peak demand charges, while energy charges, being more price elastic, should be cost reflective.
6.19 In the longer term, distribution companies should set their own tariff levels, subject toregulatory oversight with open markets for large consumers, who can chose their suppliers while payingtolls for use of the grids. These tariffs also should be price rather han rate of retum based. Their shouldalso be provisions for equivalent exceptions such as 'lumpy" ad hoc expenditures.
6.20 Competition in supply via third parties' use of distribution systems -common carriage-should be the goal for large costumers; i.e., prices determined in a free market environment. Distributioncompanies should be grmted supply franchises for small users for a limited period -say 7 to 10 year.A nrle should be establish where tarffs within the franchise area should not be higher than a certainpercentage -say 10%- of the equivalent free market prices for large users (and the same type ofelectricity), once all distribution costs are pmpedy accounted for.
Regulation of Lignite Mining
6.21 The suggested stuctre for the organization of the lignite subsector envisages ownership ofall the mines by a single holding company. Tbere is also likely to be little oppotunity for competitionin the provision of new capacity. Given this background, the two key issues are:
* whether the contacual relationships between the mining and generation companiesneed regulatory oversight;
o how the rents could be capured, via selling price of the lignite mines and/or of throughroyalty payments.
6.22 There appears no reason for the electricity Regulatory Agency to be directly involved withthe commercial relationships between the mir;ng and generaing subsidiaries ofthe holding company. Theshareholders of the holding company should provide adequate pressure to ensure the contracts maximizetotal retus from mining and generation. Instead, the regulator should focus on the generation companieswithin the lignite holding company, whose operations would be subject to licensing as described above.The rguator would have oversight of the (oppotmnity cost based) prices paid to these generatingcompanies by PSE.
623 Economically and on practice, the best way to capture lignite rents is dtrough the selling priceOf the mine-generating plant consorium. However, royalties may be the only feasible alternative, since
Page 54 Volume 4- ElecfclOt and Lignite Subsector
there may not be buyers at the beginning. A royalty could be established so as to ensre that, when addedto production costs, the total cost of production would be equivalent to the estimated coal equivalent price.The royalty could be periodically re-exanined if appropriate indices of coal and trisport cost movedoutside speified ranges. Royalties payments would involve te following complicated actions:
0 each company would need to submit the Minstry projections of cost and output for aspecified perod (over which the royalty would be applicable). Ibe cost souldinclude emates for complying with enroental stas and approprite rturnsto capital employed;
* the Ministry would estmate the appropriate coal-equivalent prices (takdng accountadjusamn for calorfic value and the additional cost of lignite vems coal) for thedelvery of lignite to te generators. Ihese pnces would not i bietated to the minesbut used only as a basis for royalty calculations.
Other Regulatory Mechanbms
624 Regltion applied more genealy would also apply to these two subsectors. Mining saftylaws applying to coal would also apply to lignite. The general Commercial Code would apply: includingprovisions on tax legislation, minimum wage and ant-inflaon laws, duties and fees for imports etc. TheAnti-Monopoly Office has strong powers to prevent monopolistic practices and to maintain ompeiionand so there would be no need to vest similar powers in the Regulatory Agency.
VIIL IWESTMENT PLANNING
7.1 In recer. years there has been no gular investnt planning ycle as the was littleinvestment; instead pans were pepared on an ad hoc bais. lbesc sdi woe instigated by WEWB butwith the work often being contractd out to experts from other instiuons in te subsector. The planningprocess was charactrized by a high degree of co-ordinaion of generatio and tnsmission exion, andby the separation of funding responsibility from investment implementato. lTus many of e existingsubsecor enterprises have little experience of investment ficing.
Proposed New Arrangements
72 Without the coordinating role previously exercised by WEWB, there is a serious risk tha thebenefits of least cost system planning will be lost, unless new co-ordinadon anngements are introduced.Vertical co-ordination between the generators and the tansmission company is need to ensure thatproposals for new generation take inte =scount the associated costs imposed on tansmission. There isno need for horizontal co-ordination of the activities undertaken by indqepndent genertors. Undercompetitive conditions, the maTket ensures the right balance of plant ty: that plant mix which is themost economic and reliable, thus, ensuring higher rur.
7.3 The obligation for PSE to ensure continuos and rliable supply at lat cost has twodimensions:
* the obligation to operte the plant stock in lea cost fashion through the use of meritorder dispath;
* provide infomlation to potential investo of fitre quimements and potei lea costpjects.
PSE would then need to do indicative planing to promote investors ndere and aume co-ordinationbetween generation and transmission development PSE is the approprate oaization to undetae thenecessazy co-ordination of investment and system development
7.4 Some areas of investment should be decided by the relevat ompan hemselvs withinthe regulatory and pricing amngements:
* new generation which is more cost efficient than that indicated by PSE developmentplans;
* generation rehabilitation and rfurbishment (excpt to reschedule major outages);* small generation projects to be connected to the distrbution system;O distribution system development
Responsibilities of PSE
7.5 PSE should be responsible for indicative planning, prducing a development plan on a regularbasis using:
0 esfimates of project cost from interational data;* fiuel prce projections reflecting opportnity costs of differnt fiels in Poland;O forecasts of electricity demand, eneration capacity of exsn plant and their
retirement dates;o Ministiy of Finance data on mc indicator.
Page 56 Volume 4- ElectrIcdty and Lignite Subsector
PSE would then evaluate any unsolicited proposals fiom poteial generators in the light of the existingdevelopment plans. The plan would be used to identify generic new plant requirements and general plantlocations; once this had been done PSE would invite existing and potential new generators to pre-qualify.Those meeting pre-qualification criteria would be asked to tender to finance, build, own and operate newplants of the types identified (in the case of pumped stoage only construcdon would be contacted out).Finally PSE would conclude a power purchase agreement (PPA) with the successful bidders -the paymentstructure would reflect amngements with existing generators.
Responsibilities of Generating Companies
7.6 With respect to existing plant, the generating companies would be responsible forrehabilitation, repowering and environmental improvement projects. Investment decisions would be takensolely on commercial grounds, in response to incentives implicit in the payment arrangements agreed withPSE and other customers, and to environmental legislation.
7.7 Although generating companies would not be required to participate in the development ofnew generating capacity, it is likely that in practice they would do so, both in response to the competitionset up by PSE and for opportnities they had identified themselves. They would be wholly responsiblefor raising all the necessary finance.
Responsibilities of the Distribution Companies
7.8 The primary responsibility of the distribution companies is to provide reliable supplies aseconomically as possible. The main source of supply will be the grid where they will purchase under thebulk supply tariff(BST). However, some of the existing ZEs already have generation embedded in theirown networks (in the form of CHP, hydro or industrial auto-generation) and there will be opportnitiesfor fiuther development of cost-effective local power sources. In practice, such projects would beevaluated by the distributor against the cost of buying fiom the BST.
7.9 The responsibilities of the distribution companies can be summarized as:
* identification, financing and constuction of local new capacity options;* identification of cost-eftive options to reduce mwamum demand imposed on the grid
(e.g. distibution loss reduction);* preparations of annual gross demand forecasts and net purhase requirements from PSE
for the medium term;* maintining adequate distribution facilities;* financing and construction of new distribution system development;* compensate consumers for outages due to distribution breakdowns.
Responsibilities of Regulatory Agency
7.10 The Regulatoiy Agency's primazy role in the investment planning process would be that ofensuring PSE meets its license obligations. It would assess whether the overall supply/demand balancesproposed in the PSE development plan were reasonable, whether they facilitated competition; it wouldreact to complaints brought by third paries and issue generation licenses to new operators.
Poland - Energy Sector Restructuring Page 57
Responsibilities of Government
7,11 The role of the Govemment in the subsector development should be limited to matters whichaffect national policy or the national inters. Mhm tole would be narrow and specific, excluding issuesof detail (e.g. plant sitting, selection of bid). The Ministr of Industy would be expected to take theadvice of the Regulatory Agency in approving the PSE developmentt plan. However, an exception to thegeneral rule of a passive Govenmment role would occur if the competition for new generation capacity ledto insufficient bids being received -this is discused below.
Planning Cycle and Procedures
7.12 Initially a two year planning cycle might be adopted of which the major output would be aSystem Development Review incorporating transmission plans and requirements for generation capacity.
7.13 After the publication of the Systems Development Review, PSE would start to producefeasibility studies (i.e. studies which go beyond abstract plan towards site-specific plans) to provide abasis for the invitation to bid (1IT) and subsequent bid evaluation.
Invitation to Bid
7.14 During an interim period, detailed information wili need to be provided on the requiredgenerating charteristics. Adequate specification is likely to lead to fewer and higher priced tenders;loose specification may lead to tenders which do not conform to the requirements identified in the SystemsDevelopment Review. A compromise approach would have a minimum functional specification but allowflexibility over detailed design. The elements which might be specified in the ITB might include:
*O plant type (e.g. combined cycle);* indicative station and unit size tange;* fuel type and likely quaity: transport arrangements;* prefered location;* indiative lifetme;* indicative commissioning date;, expectd operting regime (baseload, peaking);, flexibility requirements (number of two-shifting operations over station life);O technical requirements for compatibility with the grid;* price framework into which binding bids must be made;o information on emission levels and other environmental regulations which will have to
be observed;* key parameters to be used in the evaluation (e.g. discount rae) and criteria for selection
of bid;O date of bid submission and decision date.
A successful bid would not neosssarily be the one which appeared to offer the cheapest electricity; othercriteria, such as the degree of flexibility and the likely availability of the plant could be take into account.Once the generating maret is up and running, plant characterstics could be left to the bidder. PSE willonly specify how much capacity is needed and when. Market forces will detemine the plant scales, plantypes, location, and fuels: The bidder with the lowest bid, considenng reliability and environmentaleffects, would get the contact
Page 58 Volume 4- ElectrJcfty and Lignite Subsector
7.1S In orderto protec PSE fiom the possibility of collusion it is suggested that at least three bidswould be required. In the event tat theme wore less than tee bids rmecived the Regulato,y Agencywould have to decide whether to approve one of the bids. If it did not do so, then the Ministry wouldhave to intervene and take additional measums to stimulate the necessary competitive activity. Thesemeasures might include:
* measures to reduce project risks, such as guarantees on dividend payments;* provision of debt or equity finance for a proportion of the new plant;* approval for PSE to raise finance for the new plant (eg. through commercial loans
topaid by increases in the bulk supply tarifO).
Power Purchase Agreement
7.16 PSE would enter into a biding PPA with the successful bidder. This contract would commitPSE to purchase eecticity over a period long enough for the investor to recoup its investment, allowingthe bidder to ie finance for the project agst the guamateed revenue stteam. The PPA would include:
* tems for capait purchawse including incentives to maintain declared availability;* terms for cea purchaws* teku for odh services such as two shift flexibility, fiequency response capability and
MVAr support;* indexatio of capacity and eney purchase payments to allow the generation company
to pass o cost increases which * e outside its control;* price reopeners to allow the generating company to protect itself against, for example,
legislative changes and specific risks which cannot be assessed before detailed site workbegins.
VIII. PRICING
8.1 The pricing stucte applied fonnerly ha four interfces:
* the generaor to WEWB sale price which comprised:O an eneg ce;o a capacty hare;o a penalty per MW for any shortfall between aca and declard availability;o some payments for specia services.
* the embedded genertor to ZE sale price which usudly onsised solely of an energycharge.
* the WEWB to ZP b sale price which comprised:o an energy cuarge;o a demand charge.
* the ZE to customer retail tariff which varied accoing to customer class.
Under the previous system WEWB occupied a key position in the subsector, through detemuningpayments to generators &and prices caged to distribution companies. These were designed to ensure thatthe entrprises concemed remained finmcimily viable. Ihere were some incentives also to control costs.
Objectives of Price Rdationships
82 In a madret economy, the price structue takes on a much greater importance and must meeta nmber of important objectives. For prices established for transactions betwen companies in thesubsor the objectives are:
* to provide signWls to encourage efficient use of resources by paying more at times ofday and year when it is more valuable, and by rewarding companies which contolcosts most efiectively;
* to be equitable;* to allow the enterprise to be financially viable.
For retail tariffs the objects are similar, but in addition they must meet any social objectives which cannotbe saisfied more effictively by other means, such as the social security system. In addition all picestrucre have to consider the cost and practicality of measurement, the transparency of the price signal,the ease of regulation and the ease of implementation.
Pricing Principles
83 The key featue of economically efficient pricng ystems is that prices should reflect thecosts imposed by an additional unit of sale: they should thus be forwand looking and not relted to historiccosts. Hence prices at each itrfac should reflect the maginal costs at that imnterfce both of the energycosumed and of incremental capacity. However, maial cost pricing can conflict wihi other objectives,such as Jhe need to service debt on past investment or to keep prices to consumers to socialy aceptablelevels: in such cae the aim is usually to keep the suctre of prices to match hat of marinal costs butallow the level to be determined by other objectives. There are a number of was in whicb pnces at eachinefe could be determined while st reflecting maral costs. The altemaives are evaluated below.
Page 60 Volume 4- Elekctrty and Lignite Subsector
Generator to PSE Price Interface
8.4 All approaches would include separte terms for capacity and for energy and incentives wouldbe included to encourage high plant availability. lhe approaches are:
O an energy auc&on where generators offer prices at which they are prepared to supplyand PSE chooses the cheapest on an hour by hour basis. Some fonn of separatepayment for capacity would be required;
* afreely negotiated price agreement with each generating company;* a system of prices based on opportunity costs fiom generic plant types;* a power purchase tariff reflecting the daily and seasonal profile of avoidable costs
common to all plant.
lhe auction system can be readily implemented given the advances on smant-computer design of networkmarkets (see Box VIII-1). The freely negotiated price agrment is unlikely to be equitable (because ofthe diferent bargaining strengths of the two sides), unless PSE acts only as common camer anddistibutors (and large consumers) are fiee to reach their own prices and quantities. Ibe other twosystems, although having an element of central planing, areasy to implement. Also, if properlyimplemented they may be equitable and likely to preserve financial viability, while being easy toimplement.
*rpac fly cansbvsdi&v covpnvlded by decen~lise Q ewae ..~ .:Uei~and. .egut&.or. wMh. a.mpeUtIve m*ext-udteo on sMpiSW des e p mo lb dupewsed.*hian deciiran-~kwho know d.tirot ciwn*.we ad iffane* . whos btureL 7
'Aed .byeval#g dils btlonmon iing cent;t 4 iocnter algoandu..- ,the mesi,eges to deenne the p,eadqanitfiie _that in~6k wtotl_5tj* N.ehage.
.P. ~ .dit~ towndelatio in *hda*e* etch kcbf4ysp0 spaeine elne eo?*f. desiretosbstitute ."cen"tidp j n C. e d aa ,r "competitive
* iecopid,pto e lihtned.ipiwg&eke".h daUentkii. an ul*epotential pplatm of92 ,.' s f r ,'. e , fN #u*~~~~~~~~~~t makes, whem
ii A ,wwia.t*g ab cow m, e wwi*aidsvet* DO AttCIIWY-commonev to tte proces
Sane ithe .wwms2 if *wj?c -whic.hinder a:sw-occur be'm' of ( lk... B.: p4 t iaesof the, pue2)pav~aucere receive distiMed price rsaLijqut b.~n of whattoto p,u&.
05W tdbypftYf *11Mg e Nze~sw bym ftrofteph.s
Bx I1 SBo WI1-I: Smart Markets Approach
Poland - Energy Sector Restrucring Page 61
8.5 In the interm period, a prcing structur based on oppornity costs for genenc plant tpesshould be applied for existing plant subject to dispatch. This would encourage efficiency becase,providing generators keep their costs below the assumed by PSE when setting pdies, they will tainall savings made. The system would als be faidy simi to the previous WEWB proced and shouldthus be easily implemented. However, this prcin system should give way to auction pricing as soon asall the necessary systems are in place and the man. t players propedy trained (say one to two yean).
8.6 The energy payment in the interm pcing system would be based on energy actuallyproduced according to dispatch instrons, while the price would be on the anticipated shott run marginalcosts at a standard termal efficiency of generation from the generic plant type, indexed for gened fuelpdees. There would be a general allowance for fuel trisport but cerin remote stations would need tohave their energy payments adjusted to reflect the unavoidable higher tansport cost element
8.7 The capacity payment would be based on the annuitized capital cost (including financingcosts) and fixed operating costs of a new plant of the same generic type. In order to encourage highavailability a credit/debit could be introduced for each percentage point which declared availabilityexceeds/falls short of some target availability, and a penalty charge levied on each occasion a generator,which is declared available, is called upon and found unable to run.
8.8 Existing plant not subject to dispatch need a different pricing sucture to give the appropriatesignals to generating companies. Without PDM insuction, these companies must decide for themselveswhen to produce electricity and hence need prce signals which reflect the value of generation at differenttimes. The power purchase tariff system reflecting avoidable costs would be the most appropa;te. Tbereshould be a single capacity payment, based on the lowest capital costs source of capacity (a new peakinggas tubine) plus energy payments made according to a taiff schedule with time of day and seasonalvariation allowances.
Local Generator to Distribution Company Price Interface
8.9 The price at which the distrbution companies purhase fiom local embedded generationshould be simply related to the marginal bulk purchase costs the distribution company expects to avoidby purchasing power.
PSE to Distribution Company Interface
8 10 Here the method of pricing should be a published bulk supply tariff differentiated by timeof day and by season. There should be separae and identifiable elements for capacity chages, energycharges and fixed charges for tnmission.
Distribution Company to Customer Price Interface
8.11 In order to signal to consumers the tue cost of consumption the best approach is to use astructure of retail prices which reflects the marginal costs of additional consumption. The main issues inretail pricing relate to the way in which this objective may conflict with the need to achieve finacialviability, the cunrent subsidy to the household sector and the prctical constraints on metenng complexity.The key staring point will be to replace the historic cost approach with a LRMC approach.
Page 62 _Volur 4- EiedcHty and lgnte Subsector
Tariff Levels
8.12 As at the beginning of 1990 evidence showed ta Polish hard coal pries would need to iseby a factor of 3 to reach world price levels; industrial electricity price would need to ince by a fictorof 3 to brng theem into line with coal prices and household electricity ptices would need to rise about 7.5times to bring them into line with other domestic energy ptices. Accordingly housebold and idustrtariffs will need substantial rebalncing to aline them with costs. Tanition arangemen wil benecessary to have a controlled path to intemational price levels for geneating fuels to maintan appropriateprice relativities.
lignite Pricing
8.13 It has been discussed above that there should prerably be an opportmity cost based pncestructure for the sale of electricity fiom a lignite based power station to PSE. This sets the total incometo be divided between the mine and the power station. The pricing issue to be resolved is the transferprice between these two. Any priing scheme should:
i recognize hat, at expected coal prce, vitally all reserves of lignite are underproducion;
* allow both the mine and the power station to be financially viable;* provide incentives to control the cos of mining;* provide a signal to the power station of te low marginal cost of lignite, which should
be reflected in PDMfs mert order dispatch.
8.14 The opportunity cost of lignite is linked directy to the coal price, less the additional costsof electricity production associated with lignite. The capital costs and non-fuel operating costs are of theorder of 20% gater than for hard coal firing, while thenral efficiency is lower. Tee fictors can beused to establish the average lignite price relative to the lberlzed Polsh bard coal price. Calculationssuggested that with a price rnge of $9-S11 ftone for 8800 kl/kg, lignite would have parity with electricityfrom had coal priced at $33.8/tone for 19700 kl/kg coal. Pricing lignite on this basis would imply thatal the rsurce rent would acce to the mines. Accordingly it was suggested that the Govemment shouldcaptue the rents by selling lte mines-where the madet value of *e mines is given by their expectedrevenues- and/or thmugh a royalty charged on each tone produced. Royalties would be calculatedseparately for each mine and would leave the mine with a rasonable retum on capital.
Mine-Power Station Internal Contract and Structure of Price
8.15 While under public ownership, a clear "iternal contr between the power ston and itssupplier mine should be established, even though both would be subsidianes of the sane holdigcompany. Once there are efectively privatized, it will be a question for management to decide. In theinterim period, the preferred solution for the price structure would be a two trndche tonnage charge sstemwith:
O all lignite delivery in excess of (say) 50% of the annual delivery taget charged at thevariable cost of lignite production for the mine;
* all the rest charged at a higher price set at alevel to allow recovery of the coalequivalent lignite price when delivery equals taget.
Poland - En.ip sector Rea*nc*w*, Papm 63
Mmis pwea a comp_mis betwne pm att AM na ma_a st to =gm no diooni to meritwrdw opiton, md proidin i;n to cono coo.
8.16 The nw-pc tWnm ofte "intea contmnt "should include& lignit qualit upodISalo SdUrie delivety quanties fir daily, motly and yoady peiods aboad.
IX. ISSUES ASSOCATED WITH RESTRUCTURING
9.1 Ihere are a number of associated with isuional reucuing whee action will berequired if the objectives discussed in Chapter I are to be achieved. 'Mese concem:
* improvements in opeational efficiency;O purchasing and inventory management;* recruitment, conditions of service and other penonnel policies for senior maagement;* accounting and financi managemet;* power generation and the environment.
Operational Efficiency In Generation
92 With the new coal pnce stuctu mares to improve tmmal efficiency and to reduce losseswill become mom attractive. There has already been a suggestion by a tuibine manufiacter to replacemajor pars of he turbines on the numemu 120 MW and 200 MW sts. The proposs ae suggested tohvoe the following benefits:
* improve the1nal efficiency and reduce fuel cosumptio;* inea ouput capacity and xtend plmt lf*;* improve plant flexibility malcdig 'two shifing" possibkl leang to higher load facton
on the most efficient plant;* reduce oveaul times and hence inrease,vailability.
9.3 Although such proposas appear sensible it is important to obtain advice firom altemavesuppliers and an independent review should be canied out first -such a review must be carried out fioma system point of view rther than from an enteprise point of view. n addition, evidence uggests thatthe consumption of electricity in audliary equipment in power stations is significany highertha in manyother European countries -a solution would be for the generating enterpises to conider investing inthynistor controls for AC motors drivg large pumps and fans.
Operational Efficiency in Transmission and Distribution
9.4 Th average loses of 2.IN in the 110 KV system and 9.0% min te MV and LV sysems arehigh by itrational standards. Loss rduction stude shoud be undertaken by PSE and te ZEs actngtogether to ditnguish between technical and non-technical factors.
System Operations
9.5 Following the choge in fuel pricing policy, PSE should undertake a review ofthe economicsof the present opertional practices of ths load dispatch center (PDM). In particur, the benefits of twoshifting plant to improve load facor on efficient plant should be considered, as well as the grater use offuel oil to support part load operation. To provide a clear basis for coordinating maintenance outages onhe transmission system and at power stations, PSE should establih a grid code, similar to at for the
UK.
Jag.6 Volm 4- Ekct and Lignte Skbsector
_homeut and Iweuto.y Mamagent
9.6 Ther bIs soroiosfeedl procurtmentd ofqipmet d d ps, limited to sme exteby die of d ie presp t supply madet The sml a of may eteipises has crated a needfor Gfaco.? (entprs which buy suppien bulk and di. rsls to individual uss), suci as theCetal Purchai Agecy wbich hs made competitive pmeu more difficult to oraniza.
Span Parts and Mdatrials
9.7 To improve the efficiency of proc ent nd iventoty management of spe pas andmatra it is recomended that
* ter shul be computer basd planning of mainennc and thi should. be linked torequIrements planing;
* srvie conoots dsod ontai a mo dilo specicai ofth wok requed andstanda* to be achieved: syems shold be intrduced for mnitng and cool.Matial contc should be tndeW vely wheeer possibe;
* training in t papWAri0I and oation of conu_a shud be givn;cozmpurbasedflem onetan _ii bdgft em s dwdbe Wdoin die ZE$;^ 1br invowsmy pmat di GOMAT system dod be replaced by individually nmodem dock cotc sysms; te shud be automatic ise ofpurhase orer linkedto stock blvs; so levels ad ivenr dhud be mxgd acsa Aoaions;dwe shud be armaGements for pooln ivtory of epeiv and seldom udspares betwen companies.
98 Mhe main ils coal promen a th lack of adequate infomation from PDM onopeatg schedles muting in too Aiquat mvisions in nomintons given to mine and too high a levelof stocks, and the lack of incatives for mines to deliver di. quantities rnmnaed to schle or tospecificaion,agin tig i exe e scks. The fidght cres for ooal a also well above levelsprev g in otr contrs. n our to ahie o ight baadna bwe seuity of supply and thedesir to mnWhimie xworig stocks it is les--ewtha
• e new _ sould eah establish Al fs uply depment to unplmen aprocuremen poly ars all he staos tey contol;
* do _ duld, within a flu maet fo coa, establish medium tern conacts
• ts Owamw soud commissio 8 rview of FKP's figh taiff structue t ensureta *t chargs a equitabe betwe diffendt cla of fiuight
e Sb to PCs" ff_W _eulnuft Iw4_ I a should be replaced by a more commeaiarmn s letrihip betwe th awa es involved.
Pokand - ErVy Sector Restrucuring Page 67
Senior Management in the New Institutional Structure
9.9 An analysis of the current employment praces for senior management in the subsectorsuggests the need for some changes. It is recommended that enterprises should:
* develop clear statements of corporate and depattmental objectives, roles andresponsibilities;
* write job descriptions for evety job in the new structur and highight the qualificationsand experience equired;
* draw up contacts appropdate to each level of management containing the right balanceof incentives and security of employment;
* establish selection panels with Mol for the post of Chief Excutive and within thecompany for other levels of management;
* establish a system of pemce management incorporting taget setting and informalperoIrmance appraisal;
* dvelop a salay system which reflects adequate differentials for rsponsibility and takesaccount of the scarcity of the skills concerned;
* carry out a trainig need nalysis for all ihe diffent jobs and develop the trainingmodules required and deliver trining tr, the relevant managers.
Finacial Management
9.10 Mangement needs a rgula flow of appropnate financial informaion m order to monitorperformance, and this can be provided only by well designed and efficiently opemted financial systems.-he existing systems require substantial chage in order to operate in the new environment and to provideth necessay inmfomation. The main pnorties for change in each company should be:
* ageement of corporate objectives and prepawtion of a busie plan, looking ahead aminimum of five yeas;
* the prepaion of annua budgets broken down by department and the monitoring ofperfoma-nce against budget on a monthly basis;
* more carefizl management of cash and the ury fimction so that short term debt is
* to draw a clar distinction between financial reports for exemal users and reportsintended to help managers mun the business.
9.11 New computeze accounting syms will be needed in many companies for a range ofapplications. Generly payroll and the general ledger finctions will be a high priority in all companies.To oomply with the rlatory system proposed, companies will need to report separtely on a numberof acdvities. Tle accounting system developed will need to be able to allocate separately identifiable costsand apporion others to these activities.
Power Generation and the Environment
9.12 The production and use of fuel for power generation places considerable burdens on theenvironment The objective is to explore how the system of rguation, incentives and monitoring can beimproved such that the environmental impact of lignite production and use is acceptable. The mainprinciples behind the eing arngements are
Page 68 Volume 4- Electrfcily and Lignite Subsector
° a general intention to makeenterprises and individuals pay u Wfor the damage to th diI*PIM0*fcOenvironment; _ fC w:
* implemnent an economic System *~ ~ omrLnof incentives for emissions, such as emnission ~aaI~*bI~~e*p.c i megalrots and emissions trading f(see Box IX-1);mlocal responsibility for Bo IX.-1: Market incentives prove better than
C&C n astruments to met environmental goals
The main concem relates to the apparentlyoverlapping rsponsibilities for environmental protection between some agencies (e.g. the voivods and theState inspectorate for environmental protection), particularly in the field of measurement, and to theprinciple of central funds to finance environmental prction at a time when the responsibility forinvestment decisions is being decentralized.
9.13 A review is required on the issues of responsibilities for monitowing and enforcement. Ideallyboth activities should be carried out by the same agency which had no other responsibilities.
9.14 The main environmental impact of lignite use is air pollution. 'he present system ofregulation appeas to have stimulated some investment in improved electostatic precipitators, but no actionapeap s to have been taken to reduce sulfur dioxide in flue gases. The lignite power stations should beable to meet the new limits introduced in 1990 for sulfur dioxide, but may experience problems withpaWicuate emissions. The tighter limits for all types of air pollution to be introduced in 1997 will notbe achievable without substanial further investment in flue gas desulfion equipment and/or coalwashing. Retrfitng of lignite fired plants is also a cost eftetive method of reducing emissions, while
ncasg the plant availability, opeting capacity and economic life.
9.1S The lack of significant investment in eronmental protection equipment is, in part due tothe fact that consumer tarffs do not take into account the full cost (including the environment) ofelecticity production. Existing fees and fines are low and not veiy effctive as incentives.
9.16 The best approach is to have policy in=ents to control emissions based on economicincentives -emission taues and tradable permits- and decentralized responsibility for investment. Themore efficient policy instument is the tradable permit since it enables the market to find its ownequilibrium price between those who require the permits and those who find it cheaper to reduce emissionsthrough investment and sell the surplus permits in the market The least efficient instruments are the"control and command" type, since they ato generally (a) hindered by negative side effects, (b) costly, and(c) ineffective. However, the taxes are the most likely policy instrument to be implemented because ofpolitical realities. Since a tax provides public revenues, enabling Govenments to reduce the budgetdeficit, or finance public projects, txes will likely be the favored instrument for abatement of g3en house
1se.
Joint UNDP/World BankENERGY SECTOR MANAGEMENT ASSISANCE PROGRAMME (ESMAP)
LIST OF REPORTS ON COMPLETED ACTIV1TIES
Regon/Cownvy Acl*ivy/Repoei llth Date Number
SUB-SAHARAN AFRICA (AFR)
Africa Regional Anglophone Africa Household Energy Workshop (English) 07/88 085/88Regional Power Seminar on Reducig Prlectnc Power System
Losses in Afica (English) 08/88 087/88Institutional Evaluation of EGL (English) 02/89 098/89Biomass Mapping Regional Workshops (English - Out of Print) 05/89 -
Francophone Household Energy Workshop (French) 08/89 103/89Inteafrican Electrical Engineering College: Proposals for Short-
and Long-Term Development (English) 03/90 112/90Biomass Assessment and Mapping (English - Out of Print) 03/90 -
Angola Energy Assesment (Engli and Portuguese) 05/89 4708-ANGPower Rehabilitation and Technical Assistance (English) 10/91 142/91
Benin Energy Am t (English and French) 06/85 5222-BENBotswana Energy Assessment (English) 09/84 4998-BT
Pump Electrification Prefeasibility Study (English) 01/86 047/86Review of Electricity Service Connection Policy (English) 07/87 071/87Tuli Block Farms Electrification Study (English) 07/87 072/87Household Energy Issues Study (English - Out of Print) 02/88 -
Urban Household Energy Strategy Study (English) 05/91 132/91Burkina Faso Energy Assessment (English and French) 01/86 5730-BUR
Technical Assistance Program (English) 03/86 052/86Urban Household Energy Strategy Study (English and French) 06/91 134/91
Burundi Energy Asessment (Enghish) 06/82 3778-BUPetroleum Supply Management (English) 01/84 012/84Status Report (English and French) 02/84 011/84Presentation of Energy Projects for the Fourth Five-Year Plan(1983-1987) (English and French) 05/85 036/85
Improved Charcoal Cookstove Strategy (English and French) 09/85 042/85Peat Utilization Project (English) 11/85 046/85Energy Assessment (English and French) 01/92 9215-BU
Cape Verde Energy Assessment (English and Portuguese) 08/84 5073-CVHousehold Energy Strategy Study (English) 02/90 110/90
Central AfricanRepublic Energy Assessement (French) 08/92 9898-CAR
Comoros Energy Assessment (English and French) 01/88 7104-COMCongo Energy Assessment (English) 01/88 6420-COB
Power Development Plan (English and French) 03/90 *106/90Cote d'Ivoire Energy Assessment (English and French) 04/85 5250-IVC
Improved Biomass Utilization (English and French) 04/87 069/87Power System Efficiency Study (Out of Print) 12/87 -
Power Sector Efficiency Study (French) 02/92 140/91Ethiopia Energy Assessment (English) 07/84 4741-ET
Power System Efficiency Study (English) 10/85 045/85
2 -
RegJon1CoWSy Ac*vily/Report 271k Date Number
Ethiopia Agricultural Residue Briquettng Pilot Project (English) 12/86 062/86Bagasse Study (English) 12/86 063/86Cooldng Efficiency Proect (English) 12/87 -
Gabon Energy Assessment (English) 07/88 6915-GAThe Gambia Energy Assessment (English) 11/83 4743-GM
Solar Water Heafing Retrofit Project (English) 02/85 030/85Solar Photovoltaic Applications (English) 03/85 032/85Petroleum Supply Management Assistance (English) 04/85 035/85
Ghana Energy At (Bnglish) 11/86 6234-GHEnergy Ratiozaliation in the Industrial Sector (English) 06/88 084/88Sawmill Residues Utiliation Study (English) 11/88 074/87
Guinea Energy Assessment (Out of Print) 11/86 6137-GUIGuinea-Bissau Energy Assessment (English and Portuguese) 08/84 5083-GUB
Recommended Technical Asistance Projects (English &Portuguese) 04/85 033/85
Management Options for the Electric Power and Water SupplySubsectors (English) 02/90 100/90
Power and Water Institutional Resructuring (French) 04/91 118/91Kenya Energy Assessment (English) 05/82 3800-KE
Power System Efficiency Study (English) 03/84 014/84Status Report (English) 05/84 016/84Coal Conversion Action Plan (English - Out of Print) 02/87 -
Solar Water Heating Study (English) 02/87 066/87Pen-Urban Woodfiiel Development (English) 10/87 076/87Power Master Plan (English - Out of Print) 11/87 -
Lesotho Energy Assessment (inglish) 01/84 4676-LSOLiberia Energy Assessment (English) 12/84 5279-LBR
Recommended Technical Assistance Projects (English) 06/85 038/85Power System Efficiency Study (English) 12/87 081/87
Madagascar Energy Assessment (English) 01/87 5700-MAGPower System Efficiency Study (English and French) 12/87 075/87
Malawi Energy Assessment LEnglish) 08/82 3903-MALTechnical Assistance to Improve the Efficiency of Fuelwood
Use in the Tobacco Industry (English) 11/83 009/83Status Report (English) 01/84 013/84
Mali Energy Assessment (English and French) 11/91 8423-MLIHousehold Energy Strategy (English and French) 03/92 147/92
Islamic Republicof Mauritania Energy Assessment (English and French) 04/85 5224-MAU
Household Energy Strategy Study (English and French) 07/90 123/90Mauritius Energy Assessment (English) 12/81 3510-MAS
Status Report (English) 10/83 008/83Power System Efficiency Audit (English) 05/87 070/87Bagasse Power Potential (English) 10/87 077/87
Mozambique Energy Assessment (English) 01/87 6128-MOZHousehold Electricity Utilization Study (English) 03/90 113/90
Niger Energy Assessment (French) 05184 4642-NIRStatus Report (English and French) 02/86 (051/86Improved Stoves Project (English and French) 12/87 080/87
3 -
Region/County AcJtly/Report' 2ht Date Number
Niger Household Energy Conservation and Substitution (Englishand French) 01/88 082/88
Nigeria Energy Assesment (English) 08/83 4440-UNI
Rwanda Energy Assessment (English) 06/82 3779-RWEnergy Assessment (English and French) 07/91 8017-RWStatus Report (English and French) 05/84 017/84Improved Charcoal Cookstove Strategy (English and French) 08/86 059/86Improved Charcoal Production Techniques (English and French) 02/87 065/87Commercialization of Improved Charcoal Stoves and Carbonization
Techniques Mid-Term Progress Report (English and French) 12/91 141/91SADCC SADCC Regional Sector: Regional Capacity-Building Program
for Energy Surveys and Policy Analysis (English) 11/91 -
Sao Tomeand Principe Energy Assssmet (English) 10/85 5803-STP
Senegal Energy Assessnt (Eglish) 07/83 4182-SEStatus Report (EngLish and French) 10/84 025/84Industrial Energy Conservation Study (English) 05/85 037/85Preparatory Assistnce for Donor Meeting (English and French) 04/86 056/86Urban Household Energy Stiategy (English) 02/89 096/89
Seychelles Energy Assesment (English) 01/84 4693-SEYElectric Power System Efficiency Study (English) 08/84 021/84
Sierra Leone Energy An t (English) 10/87 6597-SLSomalia Energy At (English) 12/85 5796-SOSudan Maagement Assistance to the Ministry of Energy and Mining 05/83 003/83
Enetgy Ammsm_nt (English) 07/83 4511-SUPower System Efficiency Study (English) 06/84 018/84Status Report (English) 11/84 026/84Wood Energy/Forestry Feasibility (English - Out of Print) 07/87 073/87
Swaziland Energy Assement (English) 02/87 6262-SWTanzania Energ A _t (English) 11/84 4969-TA
Peri-Urban Woodfuels Feasibility Study (English) 08/88 086/88Tobacco Curing Efficiency Study (English) 05/89 102/89Remote Sensing and Mapping of Woodlands (English) 06/90 -
Industrial Energy Efficiency Technical Assistance(English - Out of Prwt) 08/90 122/90
Togo Energy As t (English) 06/85 5221-TOWood Recovery in the Namgbeto Lake (English and French) 04/86 055/86Power Efficiency Improvemet (English and French) 12/87 078/87
Uganda Emergy At (English) 07/83 4453-UGStatus Report (English) 08/84 020/84lIstitutional Review of the Energy Sector (English) 01/85 029/85Energy Efficiency in Tobacco Curing Industry (English) 02/86 049/86Fuelwood/Forestry Feasibility Study (English) 03/86 053/86Power System Efficiency Study (English) 12/88 092/88Energy Efficiency Improvement in the Brick andTile Idustry (BEglish) 02/89 097/89
Tobacco Curing Pilot Project (English - Out of Print) 03/89 UNDP TerminalReport
Region/Courtry AclvIy/Report Thik Date Nwnber
Zaire Energy Assessment (English) 05/86 5837-ZRZambia Energy Asement (English) 01/83 4110-ZA
Status Report (English) 08/85 039/85Energy Sector Institutional Review (English) 11/86 060/86
Zambia Power Subsector Efficiency Study (English) 02/89 093/88Energy Strategy Study (English) 02/89 094/88Urban Household Energy Strategy Study (English) 08/90 121/90
Zimbabwe Energy Assessment (English) 06/82 3765-ZIMPower System Efficiency Study (English) 06/83 005/83Status Report (English) 08/84 019184Power Sector Management Assistance Project (English) 04/85 034/85Petroleum Management Assistance (English) 12/89 109/89Power Sector Management Institution Building
(English - Out of Print) 09/89 -
Charcoal Utilization Prefeasibility Study (English) 06/90 119/90Integated Energy Strategy Evaluation (English) 01/92 8768-ZIM
EAST ASIA AND PACIFIC (EAP)
Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 -
China County-Level Rural Energy Assessments (English) 05/89 101/89Fuelwood Forestry Preinvestment Study (English) 12/89 105/89
Fiji Energy Assessment (English) 06/83 4462-PUIIndonesia Energy Assessment (English) 11/81 3543-IND
Status Report (English) 09/84 022/84Power Generation Efficiency Study (English) 02/86 050/86Energy Efficiency in the Brick, Tile and
Lime Industries (English) 04/87 067/87Diesel Generating Plant Efficiency Study (English) 12/88 095/88Urban Household Energy Strategy Study (English) 02/90 107/90Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90
Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87Gas Utilization Study (English) 09/91 9645-MA
Myanar Energy Asset (English) 06/85 5416-BAPapua New
Guinea Energy Assessment (English) 06/82 3882-PNGStatus Report (English) 07/83 006/83Energy Strategy Paper (English - Out of Pnnt) - -lnstitutional Review in the Energy Sector (English) 10/84 023/84Power Tariff Study (English) 10/84 024/84
Solomon islands Energy Assessment (English) 06/83 4404-SOLEnergy Assessment (English) 01/92 979/SOL
South Pacific Petroleum Transport in the South Pacific (English-Out of Print) 05/86 -
Thailand Energy Asement (English) 09/85 5793-THRural Energy Issues and Options (Engish - Out of Pnnt) 09/85 044/85Accelerated Dissemination of improved Stoves and
Charcoal Kilns (English - Out of Print) 09/87 079/87
-5-
Refgon/CounWry Aculvky/Repoil lue Date Number
Tbiland Northeast Region Village Forestry and WoodfuelsPteinvestment Study (English) 02/88 083/88
Impact of Lower Oil Prices (English) 08/88 -
Coal Development and Utilization Study (English) 10/89 -
Tonga Enegy ent (Enlish) 06/85 5498-TONVanuatu Energy Assesment (English) 06/85 5577-VAWestern Samoa Energy Assessment (English) 06185 5497-WSO
SOUTH ASIA (SAS)
Bangladesh Energy Assesmnt (English) 10/82 3873-BDPriority Investment Progranm 05/83 002/83Status Report (English) 04/84 015/84Power System Efficiency Study (English) 02/85 031/85Small Scale Uses of Gas Prefeasibility Study (English -
(Out of Print) 12/88 -
India Opportunities for Commercialization of NonconventionalEny Systems (English) 11/88 091/88
Maharashtra Bagasse Energy Efficiency Project (English) 05/91 120/91Mini-Hydro Development on Irrigation Dams and
Canal Drops Vols. I, II and m (English) 07/91 139/91WindFarm Pre-Investment Study (English) 12/92 150/92
Nepal Energy Assessmnt (English) 08/83 4474-NEPStatU Report (English) 01/85 028/84
Pakistan Household Energy Assest (English - Out of Print) 05/88 -
Anessment of Photovoltaic Programs, Applications, andMarkets (English) 10/89 103/89
SridI anks Eneigy Amssment Zyph) 05/82 3792-CEPower System Loss Reduction Study (EngLish) 07/83 007/83Status Report (English) 01/84 010/84Industrial Energy Conservation Study (English) 03/86 054/86
EUROPE AND CENTRAL ASIA (ECA)
Eastemn Europe The Future of Natural Gas in Eastern Europe (English) 08/92 149/92Poland Energy SectorRestcuring Vols. I-V (English) 01/93 153/93Portugal Egy Ass t (Eng) 04/84 4824-POTurkey Energy A _t (English) 03/83 3877-TU
MIDDLE EAST AND NORTH AFRICA (MNA)
Morocco Ener t (English and French) 03/84 4157-MORStes Report (English and French) 01186 048/86
Syria Eer Amcnt (HUg1M) 05/86 5822-SYRElectic Power Efficiency Study (English) 09/88 089/88Energy Efficiency Improvement in the rement Sector (English) 04/89 099/89
-6 -
Region/Country Actvt/Report 2lk Date Number
Syria Energy Efficiency Improvement in tbe Fertlizer Sector(English) 06/90 115/90Tunisia Fuel Substitution (English and French) 03/90 -
Power Efficiency Study (English and French) 02/92 136/91Energy Management Strategy in the Residential and
Tertiary Sectors (English) 04/92 146/92
Yemen Energy Assessment (English) 12/84 4892-YAREnergy Investment Priorities (English - Out of Print) 02/87 6376-YARHousehold Energy Strategy Study Phase I (English) 03/91 126/91
LATIN AMERICA AND THE CARIBBEAN (LAC)
LAC Regional Regional Semmar on Electric Power System Loss Reductionin the Caribbean (Englsh) 07/89 -
Bolivia Energy Assessment (English) 04/83 4213-BONational Energy Plan (English) 12/87 -
National Energy Plan (Spanish) 08/91 131/91La Paz Private Power Technical Assistance (English) 11/90 111/90Natural Gas Distribution: Economics and Regulation (English) 03/92 125/92Prefeasibility Evaluation Rural Electrification and Demand
Assesnent (English and Spanish) 04/91 129/91Private Power Generation and Trsmission (English) 01/92 137/91
Chile Energy Sector Review (English - Out of Print) 08/88 7129-CHColombia Energy Strategy Paper (English) 12/86 -
Costa Rica Energy Asessment (English and Spanish) 01/84 4655-CRRecommended Technical Assistance Projects (English) 11/84 027/84Porest Residues Utilization Study (English and Spanish) 02/90 108/90
DominicanRepublic Energy Asment (English) 05/91 8234-DO
Ecuador Energy Assment (Spanish) 12/85 5865-ECEnerg Strategy Phase I (Spanish) 07/88 -
Energy Strategy (English) 04/91 -
Private Minihydropower Development Study (English) 11/92 -
Haiti Energy Assessment (English and French) 06/82 3672-HAStatus Report (English and French) 08/85 041/85Household Energy Strategy (English and French) 12/91 143/91
Honduras Energy Assessment (English) 08/87 6476-HOPetroleum Supply Management (English) 03/91 128/91
Jamaica Energy Assessment (English) 04/85 5466-JMPetroleum Proument, Refining, and
Distribution Study (English) 11/86 061/86Energy Efflciency Building Code Phase I (Englih-Out of Print) 03/88 -
Enegy Efficiency Standards andLabels Phase I (English - Out of Ptint' 03/88 -
Management Information System Phase I (English - Out of PRiitt) 03/88 -
Charcoal Production Project (English) 09/88 090/88FIDCO Sawmill Residues Utilization Study (English) 09/88 088/88
Reglon/Counry Acdly/Report itde Date Nwmber
Jamaica Enery Sector Strategy and Investment Planning Study (English) 07/92 135/92Mexico Improved Charcoal Production Within Forest Management for
the State of Veracruz (English and Spanish) 08/91 138/91Panama Power System Efficiency Study (English - Out of Print) 06/83 004/83Parauy Engy Asessment (English) 10/84 5145-PA
Recommenlded Technical Assistance Projects (English-(Out of Print) 09/85 -
Status Report (English and Spanish) 09/85 043/85Peru Energy Assessment (English) 01/84 4677-PE
Status Report (English - Out of Print) 08/85 040/85Proposal for a Stove Dissemination Program in
the Sierra (English and Spanish) 02/87 064/87Energy Strategy (Spanish) 12/90 -
Saint Lucia Energy Assesment (English) 09/84 5111-SLUSt. Vincent andthe Grenadines Energy Assessment (English) 09/84 5103-STV
Trinidad andTobago Energy Assessment (English - Out of Print) 12/85 5930-TR
GLOBAL
Energy End Use Efficiency: Research and Strategy(English - Out of Print) 11/89 -
Guidelines for Utility Customer Management andMetering (English and Spanish) 07/91 -
Women and Energy-A Resource GuideThe International Network: Policies and Experience (English) 04/90 -
Assssmnt of Personal Computer Models for EnergyPlanning in Developing Countries (English) 10/91 -
Long-Term Gas Contracts Principles and Applications (English) 12/92 152/92
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