Cambodia - Power sector strategy

Rteport No. 19382-KH Cambodia Power Sector Strategy June 1999 Energy & Mining Development Unit East Asia and the Pacific Region _ # X d UK 1  LIST OF ABBREVIATIONS ADB Asian Development Bank AFD Agence Francaise de Development ASEAN Association of Southeast Asian Nations AusAID Australia Agency for International Development BOO Build, Own and Operate BOOT Build, Own, Operate and Transfer BTL Build, Transfer and Lease CC Combined cycle DO Diesel oil EAC Electricity Authority of Cambodia EDC Electricite du Cambodge EDF Electricite de France ENEL Ente Nazionale de'l Elettricita HECEC HECEC Australia Pty. Ltd. HFO Heavy fuel oil IDA International Development Agency IEC International Electromechanical Committee IFC International Finance Corporation IPP Independent Power Producer JICA Japan International Cooperation Agency MBTU Million British Thermal Units MEF Ministry of Economy and Finance MIGA Multilateral Investment Guarantee Agency MIME Ministry of Industry, Mines and Energy MOU Memorandum of Understanding MSD Medium speed diesel NGO Non-government organization OCGT Open cycle gas turbine OECF Overseas Economic Cooperation Fund (Japan) PHRD Policy and Human Resources Development Fund (Japan) PPA Power Purchase Agreement PSO Public Service Obligation RFP Request for Prequalification RFP Request for Proposal ROW Right-of-Way SAR Staff Appraisal Report WB World Bank Vice President Jean-Michel Severino Director: Ngozi Okonjo-Iweala Sector Director: Yoshihiko Sumi Task Manager: Enrique Crousillat  TABLE OF CONTENTS Executive Summary ........................................... i-x 1. Introduction ............................................1 Background ............................................ 1 Study Objectives ............................................2 Audience and Scope ............................................2 2. Power Sector Expansion ............................................3 Electricity Demand ............................................3 Background ...........................................3 Future Power Demand ............................................4 Generation and Transmission Expansion Plans ...........................................5 Long Term Options ............................................6 Short Tern Options ............................................8 Decision Agenda for 1999-2000 ........................................... 10 3. Financial Position and Investment Requirements ........................................... 11 EDC's Financial Position and Prospects ........................................... 11 Expansion and Investments during 1999-2003 ........................................... 15 4. Commercialization and Private Sector Participation ........................................... 17 Corporatization and Commercialization ........................................... 17 Corporate Reform of EDC ........................................... 17 Commercialization of EDC ........................................... 18 Service in Provincial Cities ........................................... 20 Private Sector Participation ........................................... 20 Scope for Independent Power Producers ..................... .............. . ...... 20 Guidelines for Submission and Evaluation of IPPs .. ......................................... 21 5. Power Sector Regulatory Framework ........................................... 24 Electricity Act ........................................... 24 Role of the Regulatory Body ........................................... 25 Establishing the Electricity Authority of Cambodia ........................................... 25 Licensing Procedures ........................................... 26 Tariff Setting Procedures ........................................... 27 Uniform System of Accounts ........................................... 28 6. Scaling up Rural Electricity Access ........................................... 29 Current State of Rural Electricity Access ........................................... 29 Potential Models for Expanding Rural Electrification ........................................... 30 Strategy ........................................... 31 7. Power Sector Strategy ........................................... 34 Future Development of the Power Sector ........................................... 34 Proposed Strategy ........................................... 35 Proposed World Bank Assistance for the Power Sector ........................................... 36 Other Donors Support ........................................... 37  Annexes Annex I Electricity Demand in Phnom Penli ................................ 39 Annex 2 Transmission and Generation Options .50 Annex 3 Electricity Tariffs .55 Annex 4 EDC Projections of Performance 1999-2003 .61 Annex 5 Scenario II': Likely Performance of EDC 1999-2003. ............................... 62 Annex 6 Cambodia Power Development Program 1999-2016 .63 Annex 7 Actions Required to Establish the Electricity Authority of Cambodia .64 Tables and Figures Table I Power Sector Strategy for Cambodia. iii Table 2 Generation Requirements .viii Table 3 Likely Financial Position .ix Table 2.1 Demand Projections and Generation Requirements .5 Table 2.2 Capacity Requirements ..8 Table 2.3 HECEC Plan Summrary of Generation Additions . . 9 Table 3.1 Old and New Tariffs for Power ..12 Table 3.2 Likely Demand for Power in Phnom Penh ..14 Table 3.3 Likely Financial Position of EDC 1990 to 2003 . .15 Table 3.4 Transmission and other Infrastructure Investments 1999-2003 .16 Table 3.5 Financing of EDC Investments 1999-2003 ..16 Table Al.1 Evolution of EDC Sales .40 Table A1.2 EDC Sales - Growtlh Rates by Subsector .41 Table Al .3 SAR Projections .42 Table A 1.4 HECEC Projections .43 Table A1.5 Summary of Suppressed Demand - HECEC Projection .44 Table A1.6 Summary of EDC Survey of Potential Demand in Phnom Penh .45 Table Al.7 Inertial Growth Rates .45 Table A1.8 Inertial Growth Sales Projections .46 Table A1.9 Hotel and Industrial Sales Projections .47 Table Al.10 Demand Projections and Generation Requirements .47 Table Al.11 Generation requirements for Provincial Cities .49 Table A2.1 Comparative Fuel Costs .52 Table A2.2 Summary of Plant Data .53 Table A3.1 Summary of Purchases .60 Table A3.2 Cost to the Customer .60 Figure A2.1 Screening Curve for Different Types of Plants .54 Figure A3.2 Purchase and Production Pattern with Straight kWh Tariff .58 Figure A3.2 Purchase and Production Pattern with Binomial Tariff .59 Figure A3.3 Purchase and Production Pattern with Binomial Tariff and c=9.Scents/kWh. 59  PREFACE This report is based on the findings of a mission that visited Cambodia in February 1999. The team included Enrique Crousillat (team leader), Peter Cordukes (principal financial analyst - sector reform), Surya Sethi (principal investment officer - IFC), P.T Venugopal (utility finances), Fernando Lecaros (power planner/engineer) and Anthony Woods (rural electrification). Additional input was provided by Mac Cosgrove-Davies (rural electrification), James Schmidt (counsel - power legislation), Christine Maurer-Voss and Fabio Tambone (research analysis) and Perry Radford and Carla Sarmiento (report processing). The report benefited from the guidance of Richard Newfarmer (Lead Specialist, EASPR) and comments of the peer reviewers Nadereh Chamlou and Jean-Pierre Charpentier. Valuable comments were received also from Anil Cabraal, Mostafa El-Erian, Jean-Paul Pinard, Raj Soopramanien, Su-Yong Song, Jamil Sopher and Barry Trembath. The task team is thankful for the cooperation provided by the Government of Cambodia, and in particular for the excellent support of the power policy team established within the Ministry of Industry, Mines and Energy under the lead of H.E. Ith Praing, Secretary of State. The report was discussed with energy sector authorities and staff in May 1999 and revised on the basis of these discussions.  CAMBODIA POWER SECTOR STRATEGY EXECUTIVE SUMMARY 1. Cambodia's power sector was severely damaged by years of war and neglect. In spite of the Government's efforts, its institutions remain weak and power supply is unreliable, costly, and mostly limited to urban areas. Consequently, only 12 percent of the households have access to electricity: the lowest electrification ratio among East Asian countries. In most cities, deficiencies in the power supply remain due to weak management and poor conditions of generation and distribution facilities. Further, the lack of a transmission system prevents a more efficient use of power supply options resulting in one of the highest electricity costs in the world. 2. After a two-year economic slowdown caused by a long political stalemate and East Asia's financial crisis, political stability is emerging and Cambodia appears to be ready to resume a sustained economic growth. GDP growth for 1999 is expected to reach 4% (as opposed to 1% in 1998) and gradually increase to 6% in 2001 while Cambodia initiates a new era as a member of the ASEAN. Important part of this growth will be associated to industrial expansion stemming from regional trade opportunities and located mostly in the Phnom Penh - Sihanoukville area. Therefore, the next 4 to 5 years will be characterized by an increasing demand for infrastructure in this area. However, while macroeconomic stability and growth are expected to be achieved, progress has yet to be made in addressing fundamental fiscal problems, including a weak domestic revenue mobilization and inefficient public expenditure management. The efficient development of the power sector, open to private participation, will be critical to support Cambodia's goal for sustainable economic growth and social development due to the following reasons: (a) the reliable provision of electricity services at lower costs is an essential condition for the growth of a competitive industry; and (b) power investments for the period 1999-2003 are expected to reach 11% of domestic investment and 2-2.5% of GDP, hence, a power sector successful in attracting direct private investment will minimize the use of public resources thus reducing the pressure on fiscal management problems and releasing public funds for social objectives. 3. Cambodia's power sector is today at a crossroad. After a period of emergency rehabilitation and reconstruction, the sector is ready to face development objectives aimed at: (a) improving sector efficiency and reducing electricity costs, (b) consolidating the ongoing reform; and (c) addressing the sector's social concerns, particularly the extension of electricity services to rural areas. It is therefore necessary to formulate and implement a power sector strategy addressing the most salient problems of the sector: * lack of a legal and regulatory framework, including the lack of transparency and competition in the current process for private sector entry; * an entrenched public-oriented approach towards the management of public utilities; * poor technical, commercial and financial performance of the sector; * weak investment planning; * lack of resources and strategy to provide electricity services to rural areas; and * a weak human resource base. A. Proposed Strategy 4. Future Development of the Power Sector. Cambodia's power sector is already considerably unbundled since a large number of small suppliers provide services throughout the country and IPPs are beginning to play a major role in Phnom Penh. It is expected that upon the enactment of the Electricity Act the private sector will increase its role in power generation and provide distribution and commercial  - ii - services in most provincial towns. A desirable evolution of the sector structure in moviing from the current single buyer model towards a wholesale market1 could include the following steps/components: * Electricite du Cambodge (EDC) should be granted a consolidated license for generation, transmission and distribution flbr a clearly defined period. Further expansion of EDC's role is not recommended, unless EDC's position offers clear technical and economic advantages. * The current single buyer model is a useful transitional step towards a more competitive market. Conditions for a wholesale market include: (a) the enactment of the Electricity Act and effective functioning of the EAC; (b) physical development of a power system linking the most irnportant load centers; and (c) the presence of a minimum number of competing suppliers (5 or 6). These conditions are not likely to be met before five to six years. * In the short to medium term (next 3 to 4 years), options to improve sector efficiency include the following, in sequential order: (a) introduce a suitable bidding process for IPPs; (b) irnprove long term contracts to rninimize operation distortions; (c) break the single buyer model allowing new IPPs to sign contracts directly with large consumers-this measure would help to minimize the utility risk and reduce IPP costs; and (d) create a parallel market-competition for bilateral contracts between generators and distributors within a gradual process to move from the single buyer to a fully competitive wholesale market. * In the short to medium term the sector is likely to get maximum gains by commercializing EDC2. The proposed performance based contract with a strategic partner would help improving EDC's performance within a period of two to three years. Once this is achieved and the legal and regulatory framework is in place, EDC could become a good candidate for privatization. * Given the current single buyer structure, the intemational nature of future transmission in Cambodia and the decreasing role to be played by EDC as a generator, it expected that EDC would execute the first transmission investments. 5. Sector Strategy. The proposed strategy aims to address the development objectives of the Cambodian power sector focusing in short to medium term measures, while keeping in mind the longer term vision presented above. It is designed to improve the efficiency of the power sector taking into account the strengths and weaknesses of the sector. Three priority elements of the strategy are: (a) establish the enabling environment for an efficient development and operation of the sector, i.e. a suitable legal and regulatory framework; (b) attract private sector participation in a transpvarent and competitive manner, as a way to initroduce efficiency, mobilize financial resources and reaching a broader human resource base; and (c) commercialize EDC, including a tariff reform to expand its market share, and availing the support of a foreign utility through a performance based contract and eventual strategic partnership. An essential condition for the success of the proposed strategy is the Government's commitment to respect EDC's commercial autonomy and the independenzce of the regulatory body (EA C). The components of the proposed sector strategy are presented in Table 1. 6. It is important to note that the different components are part of a single strategy where all parts are inter-related. A suitable legal and regulatory framework would create fair and efficient conditions for A wholesale market implies a fully unbundled structure where generators compete to sell to a large number of consumers, while transmnission and distribution companies provide open access and charge for wheeling services. This model requires separating generation from transmission and distribution, firms that are commercially independent, a separate ownership/control of market management and grid operation, and an independent regulatory system. Due to the major and complex tasks involved, the wholesale model should be seen as a long term goal. 2 Compelling EDC to operate on commercial principles.  - 111 - a public/private system, provide confidence to private investors, help consolidating EDC' s commercialization process, and promote orderly private involvement in rural areas. A financially strong and more commercial EDC would reduce risks to private investors. Finally, making rational public investment decisions would support EDC finances and help private investors to choose viable options. Table 1: Power Sector Strategy for Cambodia Development Power Sector Strategy Actions Proposed Resources Objectives Required Improve power sector efficiency & reduce electricity cost * Corporate reform * Corporatization and Short term commercialization of * Sign performance agreement with EDC. GOC. * Performance based contract with AFD funding Main requirement: GOC to foreign utility. respect EDC's commercial Short to medium term autonomy * Seek strategic partner. * Implement training program. ADB/AFD * Revamping of * Restore EDC's Short term utilities financial health * New tariff structure to reflect marginal costs. * Marketing plan (subject to IPP2 AFD funding commissioning date). * Improve collections - implement action plan signed with GOC. * Implement loss reduction program. * Review power service Medium term in provincial towns * EAC to assess current arrangements and grant licenses. * Introduce competition. * Removing * Define and implement Short term infrastructure short to medium term * Remove uncertainty on IPP2. constraints expansion * Negotiations for Vietnam and Experts support Thailand interconnections. * Initiate preparation of IPP3 (60- Experts support 90MW) for 2002. * Fuel conversion in EDC diesel plants. * Hydropower studies (hydrological Bilateral donors data, screening, feasibility TA studies). Medium term * Kirirom hydropower plan; if industrial load builds up along transmission line. * Define financing plan Seek financing from multilateral and World Bank, ADB, bilateral agencies OECF  - iv- Development Power Sector Strategy Actions Proposed Resources Objectives Required Addressing Social * Rural electrification Short term Sector Concerns program. * Develop rural electrification IDA/bilateral strategy. Medium term * First rural electrification project. IDA Establish the * New legal and Short term enabling regulatory framework. * Enact Electricity Act. environment for an a Establish EAC; IDA effective development Main requirement: GOC's - formulate and set regulatory and operation of the commitment to respect procedures. IDA power sector independence of EAC - training program IDA - set up task force - appoint EAC advisor * Policy for IPPs Short term * Formulate and adopt procedures IDA for competitive bidding. * Transparent and predictable GOC policies. . Experienced and independent advisors. B. Regulatory Framework 7. Electricity Acit. A draft Electricity Act has been prepared with donors support-including IDA funding-and is expected to be presented to the National Assembly by mid 1999. The draft law provides for the creation of an Electricity Authority of Cambodia (EAC) as an independent regulatory body. The flexibility provided by the draft for the unbundling of the sector, increased private participation and eventual privatization of EDC are considered appropriate. According to the draft law, the Ministry of Industry, Mines and Energy (MIME) will be responsible for coordinating energy policy and planning; it will transfer its regulatory functions to the EAC when it becomes fully operational thus separating two main roles of the state: regulation and policy making. The drafting of the law has been done in a very thorough and professional fashion for which MIME and other government officials can justifiably take credit. The enactment of the law is an essential step for the Government's sector reform efforts since it would set the conditions required to attract private sector in an orderly and competitive manner. Further, a sector characterized by competing public and private companies will constitute a strong incentive to the effective commercialization of EDC. Role of the Regulatory Body 8. Under the proposed law, the EAC's main functions would be to review and approve electricity prices, license power utilities, review their planned investments, finances and performance, and enforce its regulations, rules and standards. It will also prescribe license fees, enforce performance standards, handle consumer complaints, hold hearings and establish a uniform system of accounts. The EAC would comprise a full-time Chairman and two members who will be designated by the Prime Minister and appointed by Royal Decree for three-year terms.  - v - 9. The autonomy of the EAC is a key requirement for its effective functioning. The draft law is consistent with this principle since it would establish that: (a) the Chairman and members of the EAC cannot be removed except for criminal activities; (b) EAC decisions cannot be revoked by the executive branch; and (c) EAC will have an important degree of budgetary autonomy. Nevertheless, experience in other countries has revealed that, even under the protection of the law, regulatory bodies have suffered arbitrary political pressures which undermined their autonomy. It is therefore essential that the GOC makes afirm political commitment to respect the regulator's autonomy. 10. Establishing the EAC. Establishing EAC will be a very large administrative undertaking and needs to commence as soon as possible. MIME should accelerate plans by setting up a task force to address a wide range of tasks required by the draft law. Several of these tasks will be supported by IDA's ongoing project. Work needs to be accelerated by appointment of an EAC advisor and, most important, assigning suitable staff to form the nucleus of EAC. Until the EAC is operating effectively, transition arrangements will be required. It would take at least 12 months offocused effort for EAC to become operational, setting procedures and training its staff. 11. Tariff Setting Procedures. The draft law establishes the following principles: * Tariffs should reflect the cost of supply by time of day, season and type of customer;