Contemplations on the way forward for the emerging energy market of Guyana

0

The institutional background and regulatory framework for Guyana will evolve in the post-first-oil period, and various policy changes must be instituted beyond 2020. The rationale of an effective energy policy lies in the identification of underlying market failures and the corresponding government failures that arise in corrective policies. The success of an energy policy depends upon a proper analysis of such failures and a policy designed to intervene in light of such failures.

In analysing the market for energy, the focus should be on the two types of major failure – natural monopoly and artificial monopoly. The appropriate policy responses can then be set out – regulation to prevent abuse of natural monopoly, and competition policy to ensure fair entry terms where competition is feasible. The creation of a market for energy depends upon the setting of these two policies.

Though it has been thought that nationalisation ‘solves’ natural monopoly by replacing profit maximisation by the pursuit of social welfare, it must now be relatively uncontroversial to claim that it in fact ‘solves’ very little in itself. Only effective regulation can mitigate the abuse of natural market dominance.

If ownership change via nationalisation failed to ‘solve’ the monopoly problem, the lesson has hardly been learnt for privatisation. Fundamentally, the privatisation debate in the developed world has focused on the wrong question – the appropriate competitive and regulatory structure is a more important determinant of performance than ownership. The structure of regulation and competition is the central issue, not a secondary consequence of privatisation.

The important issue for monopoly is regulation. The current system suffers from a number of serious drawbacks. The emphasis on prices rather than costs is more apparent than real, and freedom to set individual prices to exploit monopoly power or support predatory intentions remains. Performance would be improved by placing targets on monopoly sectors as separate cost centres, rather than on the industry as a whole.

This location of targets gives rise to two further regulatory questions – how much of what sort of information ought to be produced, and what the optimal structure of the firm should be. Cost and profit centres should be located according to the underlying characteristics of the industry. Natural monopoly elements should be separated from potentially competitive ones, and the latter broken up into competing units. Hence individual power-stations and individual oilfields ought to be separated. For the gas and electricity industries, the national network/grid should form a separate company, and the various Area/Regional Boards each-additional companies.

Information for regulation produced competitively gives regulators appropriate ‘yardsticks’ by which to compare differential performance. Thus, the electricity regulators could compare Area/Regional Boards, pit costs could be contrasted, and gas showrooms ranked by performance. The regulator’s need for information gives rise to the potential for the capture by the industry upon which it relies for this information. The wider the range of sources, the greater the independence and effectiveness of the regulator. If the regulator is independent of the industry, then this position is enhanced. Allowing the Guyana Energy agency and/or the Department of Energy to function as the sole monitor of performance will become one of the central drawbacks of nationalisation.

Thus, a market for energy requires identified inescapable monopoly elements to be set up, ideally as separate firms, but at least with separate accounts. It employs targeted price regulation, set and monitored by independent regulators.

The monopoly regulation needs to be supplemented by appropriate measures to stimulate competitive entry, for it is competition, not ownership, which is most likely to stimulate efficiency gains. Competition does not, however, arise spontaneously. Where the incumbent retains substantial market power, regulation for entry is required. The regulator needs to set and referee entry conditions to ensure the incumbent does not create and exploit strategic advantages over rivals. This latter point is especially important where the incumbent is large – e.g. Guyana Power and Light Inc.

Competition in the energy sector typically comes from three sources – within the industries, between the industries, and internationally. Current energy policy has failed to give adequate incentives and safeguards to entrants in each of these areas. Competition within the industry depends upon the actual and expected level, structure and revision of prices. These in turn depend on the institutional method by which they are set and revised. As with monopoly regulation, independent rather than incumbent methods are more conducive to competition.

Competition between industries is typically unregulated and argued to be intense in certain markets. Indeed, it is this sort of competition, or its absence, which has been the gauge of monopoly and the need for regulation. Thus, the domestic gas market is regulated, but not the industrial one. However, a precondition for effective competition is consistent regulation of each of the industries considered separately. If, for example, the traditional electricity industry charges above marginal costs to the electricity industry, and the electricity industry ups marginal cost pricing taking the distorted price as exogenous, and the gas industry charges below marginal costs, then it follows that electricity/gas competition in the industrial market is unlikely to allocate resources efficiently. The criterion for inter-industry competition is consistency between individual industry regulation. Given, therefore, that no current framework has been devised for Guyana’s gas, the options for electricity regulation will be heavily constrained.

Competition may also be international. Increasingly, electricity and gas are becoming traded commodities. Firms and utilities would, in a liberalised energy market, choose the cheapest source of supply. In electricity, in practice, this implies that Guyana could provide powerful checks on monopoly profits. The key to competition here is access to a network of common-carrier provisions.

A competitive energy policy thus has three components – a structure which follows the natural characteristics of an industry and its market failures; a regulatory system to control natural monopoly elements and enhance entry conditions; and an information system to allow the monitoring of performance. The choice of industrial structure strongly influences the required degree of regulation for competition and quality of information. The less competitive the structure, the greater the need for compensating regulation for competition. To date, restructuring has been largely avoided, the current system suffers from a number of identifiable drawbacks, entry conditions have been inadequately addressed, and the dominant firms have effective informational monopoly. Therefore, Guyana has a long way still to go to attain a competitive ‘market for energy’.

Energy Scenario Development for Guyana

Green-State: This has the highest level of prosperity. Increased investment ensures the delivery of high levels of low carbon energy. Consumers make conscious choices to be greener and can afford technology to support it. With highly effective policy interventions in place, this is the only scenario where all of Guyana’s carbon reduction targets are achieved. Consumers are highly engaged, and they make use of efficiency gains and time of use tariffs (TOUTs).

Slow Progression: Here low economic growth and affordability compete with the desire to become greener and decrease carbon emissions. With limited money available, the focus is on cost efficient longer-term environmental policies. Effective policy intervention leads to a mixture of renewable and low carbon technologies and high levels of distributed generation.

Steady State:  Business as usual prevails and the focus is on ensuring security of supply at a low cost for consumers. This is the least affluent of the scenarios and the least green. There is little money or appetite for investing in long-term low carbon technologies.

Consumer Power: In a world where there is high economic growth and more money available to spend, consumers have little inclination to become environmentally friendly. Their behaviour and appetite for the latest gadgets is what drives innovation and technological advancements. Market-led investments mean spending is focused on sources of smaller generation that produce short-to-medium-term financial returns. Consumer Power sees the most aggressive rise in peak demand. This is brought about by less engaged consumers who use electricity when it suits them.

Encouraging different buying habits by consumers will require intervention from the government. The growth in electrical consumer usage for homes and transportation (electric vehicles (EVs)) will have a significant impact on demand. If not managed carefully the additional demand will create challenges across all sections of the energy system, particularly at peak times.

Therefore, an efficient energy policy must combine a number of liberalising legislations with ownership transfers, departing from the current consensus of planning and control. First, traditional energy policy, in the sense of planning capacity based on demand forecasts, should be abandoned. The market philosophy for energy – prices and hence output are best set by the market. Therefore, the government’s task is not seen ‘as being to try and plan the future shape of energy production and consumption. It is not even primarily to try and balance Guyanese demand and supply for energy. The task is rather to set a framework which will ensure that the market operates in the energy sector with a minimum of distortion and that energy is produced and consumed efficiently (Lawson 1982).