II. The Conventional Methods of Energy Financing
III. The Emerging Methods of Financing
IV. The Impact of Financing on the Mix of Generating Capacity
V. Sustainable Finance for Sustainable Energy Development
Methods and sources for financing energy projects have changed
significantly during the last 10 years. These changes which are
expected to continue in the foreseeable future are due to two
fundamental factors. First, the structural changes in the energy
sector have resulted in greater role by private companies in the
ownership and management of the sectors, and thereby affected
the manner in which they would fund the required investments.
Second, financial markets have significantly changed to provide
a wider variety of instruments and a broader access to investment
funds with a global context.
Until the 1950s, most energy sector facilities in many parts of
the world were owned and operated by private companies. These
were in the form of small scale plants and networks. In the 1950's
and 1960s there was a recognition that significant economies of
scale could be achieved by consolidating these operations into
large-scale and integrated systems. The subsequent expansions
and integrations also raised further concerns towards protection
of consumers against these "natural monopolies." The
protection took the form of either assuming state ownership of
the system, or allowing private ownership under stringent government.
The interest of the governments in the energy sector was substantially
strengthened in the 1970s due to the concern for security of energy
supply. Almost all the governments took a more active role in
either managing or controlling the energy sector entities. By
the early 1980s, energy supply had turned into a socio-economic
and strategic matter. The price of energy was a politically sensitive
issue. Therefore, there was little assurance that consumer prices
would fully cover the cost of energy supply or would provide funds
for future investments. At the same time governments took more
responsibility for providing or mobilizing funds to ensure that
energy supply capacity is expanded to meet the future demand.
Thus, the method of financing energy projects was rather straightforward.
The energy entity (utility or oil company) would provide part
of the funds from its own resources. The remainder would be provided
by the government or mobilized with government support.
Since the late 1980s the governments of most countries have reduced
their involvement and their support in the energy sector. In some
countries this has meant privatization of state entities, or partial
deregulation of the sector if entities are already in private
hands. In some other countries this has meant letting state entities
take responsibility for investments, finance and eventually their
own survival. As a result of this structural change, the financial
aspects of the sector are being revamped in two distinct areas.
First, energy prices have become de-politicized. It has become
widely accepted that energy prices, should reflect the cost of
supply and should constitute the eventual source of financing
future investments. Second, the confined boundaries of investment
financing have collapsed, providing investors with the opportunity
to seek funding from all possible sources in the domestic and
foreign capital markets.
The conventional sources of funding energy projects included:
(a) domestic sources such as utility's internal cash, government
contributions, and domestic borrowing from local banks; and (b)
foreign sources such as multilateral and bilateral agencies, and
to a limited extent, international commercial banks.
Funds from domestic sources were all in the form of local currency
and were used to cover the local cost of a project. Funds from
external sources were in the form of foreign exchange and covered
the cost of imported components of a project. Also, all the borrowing
from multilateral and bilateral agencies were usually mobilized
by the government and under government guarantee.
The new methods of funding energy projects involve two distinct
variations from the past. First, many of state companies now go
to private capital markets (both domestic and abroad) to borrow
funds. Often they do not offer government guarantee. They borrow
on the account of the company or even the proposed project. Second,
private companies which have entered the energy sector provide
private equity funds and also borrow from private lenders.
The sources of funds still include the same general categories,
i.e. domestic capital markets, foreign capital markets, and multilateral
and bilateral financiers. However, in each area a wide range of
facilities are introduced to deal with the new business environment.
In the domestic capital markets, the role of commercial banks
has been reduced by the emergence of bond markets and the direct
participation of insurance and pension funds in financing investments.
In the international capital markets, commercial banks continue
their active involvement in investment financing while the bond
market has become also an important source of finance. Even multilateral
and bilateral agencies have introduced new facilities to provide
funds to private ventures and to lend without government guarantee.
In this report we analyze the financial aspects of energy development
in North East Asia (Japan, China, Taiwan, South Korea and North
Korea). The objectives of the analysis are:
a. to assess whether there is sufficient finance available for future energy investments in the region;
b. to examine the impact of finance on the energy mix and energy sustainability;
c. to learn about lessons that can be transferred from the experience of one country to another;
d. to explore the potentials for using innovative methods of financing which can reinforce sustainable energy development; and
e. to identify the potential roles that Japan and the US can independently
or jointly play in encouraging energy sustainability in the region
through financial instruments.
The analysis concentrates on power investments because they normally
represent the bulk of the energy sector capital expenditures,
and also because the electricity sector is the main vehicle for
making any significant change to the energy mix of the countries
in the region.
The methodology of the study is devised to trace (a) the changes in the methods of investment financing in each country, and (b) the impact of these changes on energy sustainability. The analysis indicates that methods of investment funding are largely intertwined with a country's energy policy, and that the most serious impacts of financing are likely to be on the fuel mix of the power sector and on the energy conservation programs of the country. The study, therefore presents:
a. conventional methods of financing in each country. This section examines the government role in the power sector and the manners in which energy policy has affected availability of investment finance.
b. emerging methods of financing in each country. This section analyzes the sources of investment funds to assess the present and future patterns of financing power investments.
c. impact of finance on fuel mix. This section discusses the extent to which the fuel mix has been and is likely to be affected by emerging methods of finance. An important aspect of this discussion focuses on the impact of private power on the development of hydropower, nuclear energy and clean-coal technology.
d. sustainable finance for sustainable energy development. This
section brings together the results of the study and summarizes
the concluding remarks with regard to the questions which were
set out in the objective of the study. It projects the future
financial requirements of the power sector, and describes the
manners in which innovative methods of financing can be used to
meet the requirements, affect the fuel mix, and promote energy
In all the countries of North East Asia the power supply has been
traditionally dominated by integrated monopolies which own and
operate the generation, transmission and distribution systems.
In Japan, the ownership is in private hands. In all other countries
the ownership has been vested in state companies.
Regardless of private or public ownership the governments of the
region have played very critical roles in directing energy development.
However, the reasons for strong government intervention, the form
of intervention and the impact on financing vary from country
to country. In this chapter we review the conventional methods
of financing in each country in relation to the country's energy
policy and the support of the governments for funding investment
requirements of the power sector.
Japan's energy policy aims at (a) ensuring sufficient and reliable supply of energy for its continuous economic growth, (b) maximizing the security of energy supply , and (c) minimizing the environmental impacts of energy production, transmission, conversion and consumption. Considering the small size of domestic energy resources and the large amount of economic activity, the challenge of meeting those objectives is tremendous. Nevertheless, the country has been able to overcome the challenge in an impressive manner involving strong leadership by the government and very close cooperation between public and private sectors.
The above objectives and the public/private sector cooperation
characterize every aspect of energy policy and implementation
including financing of energy projects. The country's energy companies
are mostly private. However, government keeps a strong role in
strategic decision-making regarding the mix of fuels, developing
suitable technologies and constructing the corresponding facilities.
The Ministry of International Trade and Industry (MITI) oversees
national energy policy. It is actively involved in all major energy
affairs including approval of investment plans, setting of energy
prices and supporting R&D on energy technologies.
The power sector is dominated by ten privately-owned regional
electric companies, which supply 75 percent of the country's power
consumption. The remaining 25 percent is supplied by 34 small
public power generators (mostly municipally owned), 20 power companies
which are joint ventures between the electricity industry and
major consumers, industrial auto producers, the Electric Power
Development Company and the Japan Atomic Power Company.
The bulk of investments in the power sector are made by the ten
private companies. Their annual investment was $24.5 billion per
year during 1986-1990 and $41 billion per year during 1991-95.
From the total investment roughly 25 percent is spent on reinforcement
of transmission and distribution, 26 percent on rehabilitation,
6 percent on nuclear fuel and 43 percent on new generating capacity.
The capital expenditure for new generating capacity, is divided
into nuclear (15 percent), coal and gas (15 percent) and hydro
The power sector's investments are almost fully funded by Japanese
financial resources. Power companies contribute substantial internal
cash to funding of investments. The average internal cash generation
of the last 10 years is about $24 billion per year. Nevertheless,
the companies had to borrow about $58 billion/year to meet financing
needs particularly repay previous debts. About 92 percent of these
funds were borrowed from Japanese sources. Only less than $5 billion/year
is borrowed from external markets, mostly in the form of bonds
issued in the U.S. and European capital markets.
Until 1980 the power industry in China was completely owned by the national government. Local governments and power enterprises had no control over investment plans. Funding for capital investment was allocated by the State Planning Committee to the ministry in charge of the power sector (Ministry of Water and Power prior to 1985, Ministry of Energy between 1985 and 1993, and Ministry of Power Industry after 1993) and then to each enterprise according to national plans. Power enterprises were responsible for meeting production targets, but were not responsible for profit or losses. Indeed, there was no logic for holding these enterprises responsible for financial performance because electricity tariffs were set by the government based on a variety of social, political and economic considerations and with no direct relationship with cost of power supply. Standard nationwide tariffs remained basically unchanged for several decades. The rates for agricultural and industrial consumers were heavily subsidized. The overall electricity price was too low to cover the cost of supply or to provide sufficient funds for the required capacity expansion. Thus, investments were not only decided but also fully funded by the central government.
In early 1980s the government recognized that the huge investment requirements of the power sector could no longer be funded from government sources. Since then a series of institutional and policy reforms have been introduced to make the sector increasingly self-sufficient in financing its investments. These reforms have three main objectives:
(i) to let the provinces and enterprises take responsibility for their financial performance and their ability to fund their investments;
(ii) to require the consumers to pay prices which cover the cost of power supply and provide funds for required investments; and
(iii) to facilitate investment and financing from private (internal
and foreign) sources.
The reforms began by giving the power enterprises responsibility
for funding their investments and treating government support
as loans rather than grants. The institutional reform also included
establishing 30 provincial power companies in China's 30 provinces.
These companies prepare their investment plans with the cooperation
of provincial governments and submit them to the national government,
which prepares the national power investment plan, and its corresponding
arrangements such as impact on transportation capacity, transmission
network, electricity tariffs, etc. The establishment of provincial
companies has also shifted substantial responsibility from national
to local government. The institutional reform also included the
formal opening of the power sector to private companies though
it required that foreign investments in projects larger than 25
MW be reviewed and approved by the national government. Since
1993, foreign investment has been further facilitated but projects
larger than 50 MW still need to be audited and approved by the
Along with the above institutional changes the power pricing policy
has also changed significantly. In particular, since the mid-1980s
the government has allowed power produced from plants financed
by "nontraditional" sources to be sold at prices that
provide for adequate debt servicing and reasonable profit. Accordingly,
prices for the electricity produced from all new power plants
are now set by contract to cover financing and operating costs,
on a plant-by-plant basis, and rolled into the average power tariff.
The electricity tariff applied for plants built with grant financing
before 1985 has also been rationalized to reflect variations in
fuel and transportation costs. The average tariff for power from
new plants is about 5 cents/kWh while the average for the plants
in service is about 3 cents/kWh. The latter is scheduled to increase
gradually so that tariffs can be unified by 2000.
Investments in the power sector amounted about $12 billion in
1995, of which more than $10 billion was spent on building generating
capacity and less than $2 billion on transmission and distribution
The institutional and policy reforms in the power sector have
resulted in a fundamental change in responsibility for funding
investment requirements. The share of central government financing,
which was more than 90 percent until the early 1980s, has now
declined to less than 6 percent. However, the most important development
is that the tariff mechanism is set to provide the long-term source
of funds for investments in the sector. The average electricity
price in 1995 was 4 cents per kWh compared with 2 cents per kWh
in 1980. The self-financing ratio, i.e., the share of capital
expenditures financed by the company's internal cash generation,
has increased (from nil) to almost 30 percent for most power companies.
This is expected to increase to more than 35 percent by the end
of the decade. It would then represent a healthy range by international
With almost 80 percent dependency on imported energy, and tremendous economic growth over the past two decades, Taiwan has attached substantial importance to its national energy policy. The primary concern has been to ensure economic and reliable supply of energy to facilitate economic growth.
The power sector is dominated by Taiwan Power Company (known as
Taipower) which is managed and operated as a commercial business
utility under the general supervision of the Ministry of Economic
Affairs (MOEA). Two thirds of Taipower's stock is owned by the
central government, 27 percent by the Taiwan Provincial Government,
and remainder by institutions and individuals. Taipower until
recently has had sole responsibility for generating, supplying
and marketing electric power to the whole of Taiwan Province and
the metropolises of Taipei and Kaohsiung. Taipower still has sole
responsibility for transmission and distribution of power, but
its monopoly status in generation is expected to wane under the
measure which have been now introduced to allow independent power
The national power supply policy has under gone several radical
shifts both in terms of aggressiveness in capacity expansion and
the mix of generating capacity. An aggressive expansion program
was launched in the second half of the 1960s which increased the
installed capacity by a factor of 8 over 15 years - 1965 to 1980.
This rapid expansion is largely based on oil-fired plants. After
experiencing severe economic shocks from the oil crises of the
1970s, the energy policy shifted its emphasis from capacity expansion
to diversification. Substantial efforts were then spent on developing
nuclear power, coal-based plants and importing LNG, mostly to
reduce reliance on oil; there was no concern about shortage of
power capacity or the ability of Taipower to meet future power
demand. In the 1990s, and particularly the last 2 to 3 years,
Taiwan has experienced severe power constraints and the government
has started to doubt if Taipower should remain the sole public
monopoly in the sector. Accordingly, the government has opened
up power generation to IPPs and has introduced various measures
to encourage cogeneration. The government has also relaxed the
fuel-mix targets which would maintain a major share for nuclear
capacity. Instead, it wants to ensure that sufficient power capacity
is built. The main avenues for building additional capacity are
cogeneration (mostly for medium term) and private power (for long-term
Taipower's investment in the power sector amounted to $6.0 billion
during 1991- 1995. An average of 33 percent has been spent on
transmission and distribution, and the rest on generation.
Taipower's financing needs have been met with the direct or indirect
support of the government. The most helpful support has been a
flexible tariff policy which quadrupled between 1970 and 1980
to enable Taipower to cover the cost of power supply. Accordingly,
financing of power investments were substantially (40 percent)
dependent on Taipower's internal cash until 1980s. The share of
internal cash has fallen in the 1990s basically because of sharp
increase in investment requirements.
The electricity industry in South Korea is dominated by Korea Electric Power Corporation (KEPCO) which owns and operates 86 percent of the country's generating capacity and all of the transmission/ distribution facilities. The government holds 77.6 percent of KEPCO's shares. The remaining shares of KEPCO's stocks are held by the Korea Development Bank (1.4 percent), KEPCO employees (2.4 percent), other corporations (5.4 percent), individual investors (5.2 percent) and foreign interests (8 percent).
The power sector is regulated by the Ministry of Trade, Industry
and Energy (MOTIE) which is actually in charge of setting the
targets for expanding electricity facilities, and also the fuel
mix. In practice, the decisions are made jointly by MOTIE and
KEPCO as KEPCO prepares the demand forecast and proposes the initial
expansion plans. Other government entities and research institutes
also enter the decision-making process in an advisory capacity.
This is particularly complex in the case of nuclear power. The
overall direction for nuclear energy development is provided by
a high level Atomic Energy Commission. The Ministry of Science
and Technology is responsible for safety issues and R&D. The
Korea Nuclear Fuel Company specializes in uranium reconversion
and nuclear fuel fabrication.
KEPCO is known as one of the most efficient power utilities in
the world. The fact that it has been established and operated
as a state entity is often seen as an exceptional case where a
government owned corporation has performed very well.
KEPCO's power generation, transmission and distribution capacities
have expanded very rapidly over the past two decades. This has
required huge investments of about $ 4.2 billion per year (average
over 1985-95) of which about 50 percent is spent on transmission
and distribution, and the rest on generating capacity.
Although KEPCO is solely responsible for financing the required
investment, the government support and interventions play a critical
role in accessing internal and external funds. The traditional
methods of funding KEPCO's investments followed a classic model
of public sector utility. Internal cash generation of the corporation
represented only a small source for funding the required investments.
The balance came from government contributions and particularly
The reasons for limited internal cash generation were somewhat
low power tariffs and a cap (8 percent) on KEPCO's financial return.
Electricity prices are regulated by MOTIE and were until recently
adjusted within the context of social and economic objectives
and through a relatively long process. In particular, power prices
for industrial consumers were kept low to help their competitiveness
in the international markets. KEPCO's obligation to meet the country's
power demand has turned into continuous pressure to expand the
capacity rapidly. This pressure has been on KEPCO over the last
two decades and continues to become even more serious in the future.
It is indeed due to this pressure that KEPCO executives have now
decided that the company can no longer access sufficient finance
for building the required expansion and therefore should let private
companies to build the balance.
For most of its history, North Korea has pursued a policy of self-reliance for achieving economic development. The energy policy also followed the same philosophy. As a result, the country depends for more than 90 percent of its energy needs on domestic coal, hydropower, wood and biomass. Oil imports constitute about 7 percent of energy consumption and are consumed only in unsubstitutable uses. Even in the case of oil, the country has built sufficient refining capacity though not sophisticated enough to meet the product mix of the demand.
Power sector's installed capacity is estimated at 11,000 MW and
split nearly evenly between coal-fired and hydroelectric plants.
Although there is no reliable information about the sources of
financing of power investments, the general observation is that
all the required funds are allocated from the government capital
expenditures. In addition, North Korea receives some international
assistance in building new nuclear plants. North Korea operates
a 5 MW research reactor and was contemplating in 1993 to construct
two nuclear plants with a combined capacity of 250 MW. The refueling
of the research reactor and the plan to build new plants became
of major concern for security in the region, since the graphite
technology being developed has possible applications to nuclear
weapons. In a 1994 framework agreement with the United States,
North Korea agreed to freeze its nuclear program in exchange for
two new light-water reactors (which are considered less capable
of producing weapons-grade plutonium) and 500,000 tons/year of
heavy fuel oil to meet its energy needs until the new reactors
become operational. The Korean Peninsula Energy Development Organization
(KEDO), an international consortium led by the US government was
established to implement the agreement. In December 1995, KEDO
signed a $ 4.5 billion deal with North Korea for 2 x 1000 MW light
water reactors, expected to commission by 2003. South Korea and
Japan are providing most of the financing. KEPCO (of South Korea)
has been appointed as the main contractor for the project. The
US financial support has been concentrated on providing the fuel
oil promised under the 1994 nuclear accord. Even there, the US
has raised concern about the budget and asked for international
assistance. In early 1996, Japan announced that it would contribute
$ 20 million to KEDO for fuel oil assistance. Fuel oil supply
met its promised target of 500,000 tons in 1996 and is expected
to continue at this level during the period 1997 to 2003.
Methods of financing power investments in North East Asia are
changing dramatically. The change has two distinct dimensions.
First, all the power companies (whether private or public) have
shifted reliance to private sources of finance and even there
from bank loans to the bond market. Second all the countries in
the region have opened the power sector to private power producers.
Here also, there are two distinct developments: (a) private power
means shifting ownership from the state to private companies,
and (b) private power means introducing competition in power supply.
Although there are some common reasons for the change in methods
of investment funding, the fundamental factors behind the change
as well as the speed of the change, vary country by country. In
this chapter we review the underlying forces and the patterns
of new methods of financing of power investments in each country.
Fortunately for the Japanese power companies, the financial constraints
which are felt in almost every part of the world are not felt
in Japan's power sector. In terms of market structure, the power
sector in Japan is way ahead of that of other countries because
it is already in the hands of the private companies. However,
there has been substantial concern over the last few years about
the monopolistic nature of those companies. It is in particular
observed that power prices in Japan are higher than those in other
industrial countries. It is argued that the high electricity prices
is a reflection of lack of competition in the sector.
The government of Japan has intended to introduce more competition
into the power market but has been cautious not to jeopardize
the effectiveness of the national energy policy. It initially
introduced some marginal changes such as allowing power generation
by non-utilities. Nevertheless an amendment to the Electricity
Law was passed in 1995 and became effective in January 1996, which
has the potential of changing the industry structure and behavior
substantially. The new law allows generation by independent power
producers (IPPs). IPPs can produce power and sell it to the grid,
or sell it to major consumers in which case power companies have
to provide wheeling services.
The change in the Electricity Law has been received well by potential
investors in power generating capacity. Five of the 10 power companies
have issued bids to buy power from companies which would be willing
to invest in power generation. They have stated that they would
buy power only if it is cheaper than their own generation cost.
They have set ceiling prices of 8.7 to 11.4 cents per kWh. They
have received offers which amount to four to five times their
announced requirements. Most are offers by industrial facilities
to construct new power plants to supply power to their own facilities
and then sell the additional output to the corresponding power
company in the region.
The IPP bidders are all Japanese firms. Thus, funding of these
projects will be based on Japanese financial resources. Also,
since bidders are mostly industrial firms they are likely to fund
the construction with higher equity/debt ratio than power utilities.
Nevertheless, the methods of financing power investments will
not change significantly. The sources of funding will remain internal,
borrowing will remain corporate-based and utilities' cash generation
will continue to supply a significant portion of investment funds.
Although the financial structure and financing practices of the
power sector in Japan are expected to remain stable, they provide
lessons of great value for other countries which are adopting
new methods of financing. The most important features in this
regard are Japan's dependence on domestic capital resources and
the eventual coverage of all capital costs through consumer prices.
These features constitute the foundation of sustainable financing.
One of the dangers in the countries which are moving to private
supply of power is their increasingly heavy reliance on foreign
investment and finance. For example, countries of Latin America
which pioneered private sector participation in power generation
are also considered bad risks because of their too heavy dependence
on foreign resources and inadequacy of domestic power prices to
cover the full cost of power supply. The Japanese case is by and
large an ideal model of investment finance where private sector
participation is fully embedded in the system, funding of capital
expenditures is based on domestic financial resources, and consumer
prices are sufficiently high to recover all the capital, as well
as operating costs.
Electricity Prices In Japan, Fiscal Year 1995 Residential: 24.55 yen/kWh Commercial: 22.11 yen/kWh Small Scale Industrial: 20.33 yen/kWh Large Scale Industrial: 12.85 yen/kWh Agricultural and Others: 11.51 yen/kWh Average: 19.25 yen/kWh
In China the huge need for financing power investments has forced the government to revamp the decision-making process, the management and the pricing policy of the power sector. These reforms have been quite successful and have advanced self-sufficiency of power companies in mobilizing and utilizing investment funds. However, the reform agenda has been extended to advance further (a) commercialization of power companies, and (b) access to foreign technology, capital and finance.
The commercialization agenda aims at developing the country's
power companies into efficient, commercial, autonomous entities,
fully responsive to market forces. The process starts with separation
of the regulatory function from the supply function. The new Electricity
Law will provide the basis for the legal and regulatory aspects
of power generation, transmission and distribution. The regulatory
functions will be undertaken at central and provincial levels,
while separating government oversight functions from power company
management. Also power companies will be incorporated into limited
shareholding companies and will adopt modern accounting and financial
services. A major experiment is being carried out in Hainan Province
where transmission and distribution have been incorporated into
a shareholding company, several generation companies (including
a wholly foreign-owned one) have been created, and a separate
regulatory agency has been formed. A more ambitious experiment
is under preparation for Fujian Province. The lessons from these
experiments will be taken into account in designing the sector
structures in other provinces.
Access to foreign technology, capital and finance has underlain
the power sector policy since 1985 when the Huaneng International
Power Development Corporation (HIPDC) was formed to attract foreign
capital and technology for power plants located in coastal areas.
HIPDC, which now operates 15 plants (5,800 MW) had a mandate to
raise funds from the international financial market. HIPDC has
been able to tap bilateral and suppliers' credit, and commercial
bank loans, and to raise foreign equity capital through an American
Depository Receipt (ADR) issue in New York.
Efforts to access foreign capital and finance have been intensified
since the early 1990s when the government made an assessment that
domestic financial resources can at best meet about 80 percent
of the investment requirements of the power sector. The government
established in 1985 two power companies-the China Power Investment
Corporation (CPIC) and its wholly owned subsidiary, the China
Power International Holding Ltd. (CPIH), to raise overseas funds
to fill the 20 percent gap in funding of the power sector. CPIC
operates under the supervision of the Ministry of Power and began
work in Hong Kong in 1995. Its agenda includes floating public
power plant assets in international stock markets, issuing corporate
bonds, establishing power development funds, and channeling foreign
investment for BOT projects.
Financing of BOT projects has been facing many challenges most
of which are common with those in other developing countries.
However, there have been at least two serious constraints which
are rather specific to Chinese situation. First, the lack of clear
legal provisions for enforcing security interests has been of
concern to project financiers. Since project-based financing depends
on securitization of project assets, the legal framework should
enable the financiers to take over the assets in the event of
a loan default. Until 1995 there was no general legal provision
in China and security interest matters were treated within the
context of local laws. Some of the more industrial cities had
more developed legal and administrative systems governing security
interests but in most locales the project security was treated
within the framework of real estate mortgages and secured loans.
Since October 1995, the passage of the Guarantee Law has provided
a uniform set of rules governing the taking and enforcing of security
interests in China. The new law should facilitate project-based
Second, financiers have not yet felt comfortable enough to accept
provincial government guarantees without endorsement of the central
government. Financiers normally seek government guarantees for
political and country risks over which project sponsors do not
have any control. These guarantees are normally given by the central
government. In the case of power projects in China, provincial
governments have become the main relevant government bodies. Thus,
the central government asks the financiers to deal with provincial
governments independently. There is a serious movement on behalf
of the financiers to deal with the issue of political risk through
other avenues (e.g., insurance) and also to work with provincial
governments in China.
The way for substantial private participation was further paved
by the passage of the country's first electricity law which went
into effect in April 1996. The law recognizes a role for foreign
participation, including direct investment in power plants through
joint ventures or foreign-owned companies, provided these investments
conform to national industrial policy and are in line with the
Ninth 5-Year Plan and the long-term plan (extending to 2010).
The law also allows foreign loans, but not foreign investment,
for setting up transmission and distribution facilities. The law
will still need extensive accompanying regulation but has provided
substantial comfort for private investors eager to take advantage
of the world's largest market opportunity for electricity and
electricity-related goods and services.
There are two major developments in the financing of power sector
investments. First, Taipower is utilizing international capital
markets. Second, IPPs are allowed to play a major role in the
power sector. Taipower's use of international capital markets
is often facilitated by the fact that Taiwan's country creditworthiness
is quite high (AA-). The share of borrowing from external sources
has increased from ___ percent to ___ percent during 1980 to 1995.
This has been accompanied by a significant shift from bank loans
to the bond market.
The discussion regarding whether Taiwan should allow IPPs into
the power sector, was until 2-3 years ago an ideological matter.
On the one hand, the government sought to increase the competition
in the sector, and on the other hand, it was blocked by Taipower's
legal monopoly status which would continue at least until 1998.
There was, however, a significant turn of events in 1994-1995
when the country started to experience power shortages. The government
initially granted permission to a limited participation of private
sector in power generation. It then went further step-by-step
to remove the limits and in effect introduce a policy of encouraging
private power supply, and in particular investments in cogeneration
projects. The recent policy actions include:
a. removing the limit of 7,600 MW that the government has set for private power capacity;
b. giving a five-year tax exemption to all private power producers and cogenerators;
c. simplifying the procedure for approval of private power; and
d. offering attractive rates at which cogenerators can sell power
to the grid.
As a result of the new government policy, there has been a wide
reception on behalf of domestic and foreign firms to invest in
Taiwan's power sector. Table 3.4
contains an assessment of the capacity and the amount of investment
in private power. The majority of these projects are proposed
by domestic firms or by joint-ventures between domestic and foreign
The method of financing power sector investments in South Korea
has changed significantly over the last five years and is expected
to change further in the future. The main force behind the change
is the huge need for capital resources and the government's decision
to limit the obligations of the government in funding new projects.
The major change of the past five years has been in the area of
debt finance. While KEPCO remains a state entity it has shifted
its debt financing from government-sponsored to corporate-sponsored
borrowing. It has also shifted the borrowing from the foreign
to domestic sources.
Until the 1980s more than 60 percent of borrowing was from external
sources where official (government-sponsored) borrowing represented
the main source of funding. By 1995 the share of foreign borrowing
had dropped to less than 30 percent. Even with this declined share,
foreign borrowing is no longer dominated by official sources.
Instead almost all of foreign borrowing has shifted to commercial
sources, most notably bond markets of the U.S., Japan and Europe.
The internal borrowing which has now become very dominant has
also shifted to a large extent to the bond market.
The major future change will be in the area of private participation
in the power sector. Due to a recognition that KEPCO is not able
to raise enough funds to build the entire capacity expansion requirements,
MOTIE has announced that it will allow the private sector to build
6,250 MW of capacity for commissioning between 2001 and 2010.
Foreign companies will be able to participate but will be restricted
to an equity stake of less than 50 percent, requiring domestic
partner(s) to hold the majority of ownership. Solicitations have
been issued for bids to construct two 500 MW coal plants and two
450 MW gas-fired plants. There has been an aggressive reception
on behalf of domestic private companies. MOTIE has already selected
two domestic companies for the gas-based plants, and is in the
process of selecting firms for the coal-based plants.
The bidding process, which was undertaken in mid-1996, has convinced
the government that there is much more room to rely on private
investments for meeting the power demand. Accordingly, MOTIE has
proposed to the government a new "competitiveness" policy
to remove current hurdles to private development of power plants.
The proposal would open as much as 45,000 MW (compared with 6,250
MW in the current plan) to the private sector. According to this
proposal, KEPCO's investments will be concentrated on the construction
of nuclear plants while the private sector would build all other
plants. The proposed policy also facilitates foreign investment
in the power sector by creating a one-stop shop to handle the
entire approval process. The requirement to keep the foreign share
holding below 50 percent will be retained.
Despite self-reliance, North Korean economy suffered seriously
in the 1980's and the first half of 1990's, from a slowdown in
the global economy and collapse of the Soviet Union, which represented
the major source of external assistance to the country. The economic
slowdown has also been due to some domestic factors, notably the
poor grain harvests in the early 1990's. The economic decline
has inversely affected the efficiency and reliability of energy
supply. A large part of power facilities are of old and of an
inefficient vintage which should have been replaced with new equipment.
More generally, power systems have not been well maintained. The
power-generating capacity suffers from low thermal efficiency
and also low availability. The transmission and distribution facilities
suffer from high losses and low reliability.
Considering the conditions of power facilities, and the state
of the economy, investments in the power sector should, in the
short and medium terms, concentrate on rehabilitation, retrofitting
and some upgrading of existing facilities. Financing of such investments,
however, would be very difficult. First, domestic financial resources
are limited due to the economy's poor conditions. Secondly, external
finance is not available due to the country's isolation from most
of the world. Should the political situation resolve, there will
be a rapid turn-around in the availability of finance as multilateral
and bilateral agencies would welcome the opportunity. Nevertheless,
in the absence of such resolution, KEDO will remain the only avenue
for providing significant financial assistance. However, the mandate
of KEDO is limited to financing the proposed nuclear facilities.
Although there is no sympathy by the development and commercial
financiers to provide funds for power sector investments, there
may be some sympathy on behalf of certain bilateral donors to
provide assistance on a limited basis and through a "controlled
channel." This is an area which is certainly worth further
The fuel mix of power generating capacity has been dictated by
the governments in all the countries of North East Asia. The governments'
strong will to control the fuel mix is due to several factors
- economic supply of energy, security of energy supply and more
recently environmental aspects of energy production, transportation
and consumption. The weights of these factors in the fuel mix
strategy vary significantly from country to country. However,
a common feature is that the fuel mix may not remain fully under
the governments' control in the future. There are two basic reasons
for a freer fuel mix in the future. First, governments in the
region are loosening their grips of the power sector by giving
more autonomy to power companies in making investment decisions.
Second, the entrance of private power producers into the sector
is likely to change the incentive systems and affect the cooperative
relationships which have in the past prevailed between the government
and power companies. In this chapter we review the fuel mix strategy
of each country and examine whether it is likely to be influenced
by the emergence of new methods of financing.
Almost no aspect of the Japanese energy scene involves reaction
to the random events in the market. Everything is driven by the
national energy strategy. Finance is no exception. Japan's fuel
mix is not in essence driven by financial incentives. The mix
is determined by the energy strategy. Financial support and incentives
to achieve the strategy are devised subsequently.
The cornerstone of fuel-mix management is the Alternative Energy Law introduced in 1980, which was primarily concerned with security of supply, and aimed at:
- formulating targets for alternative energy;
- determining private sector role in achieving targets;
- fiscal, financial incentives for development of alternative energy; and
- establishment of the New Energy Development Corp. (NEDO).
The policy has been modified in the 1990s to pay more attention
to local, regional and global environmental concerns. However,
the fuel-mix targets still aim at rapid development of nuclear
while emphasizing the use of clean coal technologies and renewable
The supply target for fuel-mix is set by the Cabinet. The targets
have consistently aimed at decreasing dependence on oil. The avenues
for achieving the targets are:
a. development of energy resources (hydro, geothermal and overseas coal resources)
b. development of technology (nuclear, clean coal, solar, geothermal, other)
c. promotion of specific forms of energy (diversification of fuels in power generation, financial assistance for solar energy use in the residential sector)
d. international cooperation (both with industrial and developing
In all the above avenues, there is strong cooperation between
the government and private companies. Development of capacity
is undertaken by private companies while some financial support
is provided by JDB. The financial support and voluntary cooperation
are supplemented by an effective control system. Utilities' plans
for capacity expansion have to be approved by the Electric Power
Development Council which ensures that these plans are in accordance
with the targets approved by the Cabinet and the framework set
A major source of government support for the fuel mix promotion is the revenue collected from the "alternative energy promotion tax." This tax is imposed on electricity sales at the rate of 0.445 yen/kWh, and is intended to promote fuels other than oil. The proceeds from this tax amounted to 416 billion yen in 1995 and were spent on efficiency improvement and development of alternative energy. More than half of this budget was in effect spent on the nuclear option. In addition to 93 billion yen allocated to nuclear safety, a large part of the funds allocated to science and technology, and grants to the regions are spent on nuclear power. An important expense item is cost of securing sites for nuclear power facilities. There is a growing public opposition to nuclear power. As a result, siting of nuclear plants has become increasingly difficult. The government attempts to gain public acceptance through information campaigns as well as by payment to the surrounding communities.
Although the pattern of the fuel mix has, in the past, changed
in accordance with the national energy policy, the recent market
development may reduce the ability of the public-private sector
cooperative system to adhere to a precise fuel mix target.
The amendment to the Electricity Law which took effect in January
1996 allows the entry of IPPs into power generation. In the first
six months of 1996 about 100 bids were submitted by industrial
firms to construct power plants and to sell the output to the
corresponding electricity company. These bids are all for fossil
fuel plants using coal, gas, and even oil. The present plan is
for the government to continue to guide the fuel mix and the 10
electric companies to build the needed nuclear, hydro or other
types of capacity to complement the IPP capacity and to bring
the overall generation mix in line with the national energy policy.
However, electric utilities will probably find it more difficult
to accommodate the national energy policy because they will be
operating under more stringent financial pressures imposed by
competitive forces. It is important to note that IPPs are permitted
to build plants of any type they wish. Therefore, they are likely
to build plants which have the lowest financial cost. Over time,
competition among potential IPPs would result in offering prices
which fall substantially below the ceiling prices declared by
the utilities. Eventually, these competitive prices would force
utilities to lower the cost of their own generation. This, in
turn, would shift the emphasis to minimizing financial costs rather
than accommodating national energy policy.
Although the new market structure will adversely affect nuclear
capacity expansion, the government is determined to continue aggressive
expansion of nuclear capacity. The government support is primarily
channeled through the R&D budget which amounts $4.7 billion/year
of which $3.5 billion is spent on nuclear technology.
The mix of generating facilities is determined within the framework of the national plan considering the viability and practicality of various options. The practicality consideration has led the power sector to a situation where 72 percent of electricity generation is based on coal, 18 percent on hydro; oil and gas contribute 8 percent and nuclear 2 percent. Coal-based power generation represents the country's cheapest option. Boilers and turbines are made in China where average cost is less than $500 per kW compared with international prices of $900-1000 per kW for conventional steam plants. Coal-based power generation is blamed for its local, regional and global environmental damages. However, it is generally accepted both in China and in the international community that the country has no choice but to continue to rely on coal for the foreseeable future. It is, however, hoped that there will be a serious attempt to (a) reduce the growth in electricity generation by improving the efficiency of power production, transmission and consumption; (b) expand the uses of alternative energy particularly renewables and natural gas; and (c) reduce the environmental damages of coal-based power generation by using clean-coal technologies. The shift to clean-coal technology is expected to increase the cost of coal-based power generation. Indeed, if international costs are used as the benchmark, the capital cost of coal-based plants will more than double. With such high capital costs, coal may not be the clear least-cost option, and some of the reliance may shift to other alternatives. However, the more likely event is that China will continue its heavy reliance on coal while manufacturing clean-coal technologies domestically at substantially lower than international costs. Efforts in this area have been already initiated. The use of FGD in China began in 1992 when the Luohuany power plant (2X360 MW) burning high sulfur coal in Sichuan Province was equipped with Japanese-made wet process FGD. In 1993 a domestically developed rotating and spraying dry process FGD was put into commercial operation in Baima power plant in Sichuan Province. Domestic production of clean-coal technologies is under intensive research. A joint project between the governments of China and Japan aims at developing a less expensive (compared with international costs) scrubber which is expected to be 80-85 percent effective in reducing SO2 emissions, compared with 95 percent effectiveness of the wet FGD. The cost of this new scrubber is expected to be 50 to 70 percent less than the wet FGD.
The main constraint to the expansion of coal-based power generation
is likely to be the transportation bottlenecks and costs. The
coal production base is concentrated in the northwest, more than
1500 km. away from load centers of central and east China. Some
substantial efforts are spent on dealing with the transportation
constraint. An expansion to the railway system is underway. An
800 km. coal-slurry pipeline running from Sanxi to Shandong is
being built (to be finished by the end of 1997) to transport 15
million tons per year of coal crushed and made into a 50:50 percent
coal/water slurry. Also, substantial reinforcement to the electricity
transmission system is planned to move power from the west to
east and central regions. Nevertheless, physical transportation
constraints will remain and will continue to affect the fuel mix
and even fuel supply decisions. In regard to the latter China
imported in 1996 some 200,000 tons of Austrian coal to fuel a
power plant in Guangdong Province. Importing the coal was economically
competitive with transporting coal from the north along congested
The impact of geographical location of resources on fuel mix decisions
is rather uniquely serious in China. For this reason the official
fuel mix strategy calls for building coal plants in the north,
hydro plants in the south and central regions, and nuclear plants
along the coast.
Both in regard to the past performance and the future plans, hydro
power remains the second largest option for the country. The country's
hydro potentials are huge but about two-thirds of these resources
are in the southwest, far from the large load centers along the
coast. Long-distance transmission lines will have to cross rugged
terrain before most of hydro potentials can be realized. However,
government is determined to develop as much of these resources
as possible. This determination is demonstrated by the fact that
currently there are about 80 hydro plants under construction,
and the fact that government has decided to proceed with the construction
of an extremely challenging project known as Three Gorges. The
Three Gorges project would involve building the world's largest
dam with an estimated cost of $28 billion and installation of
26 generating units with capacity of 700 MW each, for a total
of about 18,000 MW. Target date for completion is 2009. The project
has been criticized because it will displace about 1.3 million
people and threaten wildlife. In May 1996, the U.S. and Japanese
Eximbanks announced independently their decisions to deny financing
the American and Japanese companies bidding on the project, due
to concerns over the dam's environmental impact. Despite this
serious setback the Chinese government is still pursuing the project.
Also of some significance are small and mini-hydro projects which
account for 17,000 MW of present capacity. The new mini-hydro
plants would cost more than the coal option but are often suitable
to supplying power in some rural areas.
Nuclear power is of quite recent origin in China. In 1983 the
government approved a policy to establish nuclear capacity. The
pressurized water reactor was chosen as the targeted technology.
One domestically produced unit (300 MW) was commissioned in 1991
and two 900 MW generating units from France started operating
in 1993. The government accelerated in 1996 its plans for the
expansion of nuclear capacity. The previous target of achieving
22,000 MW of nuclear capacity which had been set for 2020 has
now been brought forward to 2010. The most immediate plants are
expected to consist of 1,800 MW using French technology at Lingao,
2,000 MW using Russian technology at Liaoning and 1,400 MW using
Canadian technology at Qinshan.
Natural gas is not used significantly in the power sector. There
is also substantial uncertainty about future gas-based plants.
There are tentative plans for importing gas in the form of LNG.
Although gas-based power generation would bring substantial efficiency
and environmental gains, gas import schemes are quite costly and
face serious financing difficulty.
Finally an important but almost untapped resource for power generation
is wind power. The potential is assessed at 250,000 MW but its
development has been prevented by the requirement of large up-front
investments. There is some limited domestic capacity for manufacturing
wind turbine equipment. This can be expanded fast but some key
parts such as blades and gears have to be imported. In 1993 the
government announced a plan to promote wind power. It also accepted
that in the medium term the development may depend on foreign
technology and capital, and provided tax incentives for importing
the equipment. There is nevertheless a need for substantial financial
support for expansion of domestic manufacturing capacity and importation
of turbines and parts.
The new developments in the power sector, i.e., commercialization
of existing enterprises and private sector construction of some
of the new plants, are likely to push the fuel mix towards coal
and oil-based plants where up-front costs are smaller and payback
periods shorter than other options. The government is concerned
that the new business environment may jeopardize the chances of
hydro and nuclear options. It has, therefore, stated that while
private investors are free to investment in any fuel option, the
government encourages private participation in nuclear and hydro
projects. There are at least two avenues through which government
will attempt to provide such encouragement. First, the government
has stated a policy of generally not providing government guarantees
for IPPs except in "special circumstances" where they
may be needed for sharing risks to the "mutual benefit and
convenience." Nuclear and hydro options could qualify for
these special circumstances. Second, the government may relax
its limitation on rate of return if projects achieve certain performance
standards. Although the main performance standard considered thus
far has been plant availability, the government has preserved
flexibility in using this instrument. Again, nuclear and hydro
power investments could be allowed higher rate of return.
The government will continue to push for a desirable fuel mix
both by encouraging IPPs to undertake projects which involve longer
payback periods, as well as directing provincial companies to
fill the gap in the energy mix. Its task, however, will become
more difficult as competitive pressures will force all the companies,
private and provincial, to operate under a more stringent financial
regime. The areas that are likely to fall short of targets are
nuclear, hydro, clean-coal technology, and renewables.
The above areas of shortfall represent also the potential areas
of significant influence by multilateral and bilateral assistance.
The French, Russian, Canadian and Japanese financial assistance
is likely to play an important role in the expansion of nuclear
capacity. The multilateral financiers-World Bank, ADB and GEF-are
likely to direct their assistance to hydro and other renewables.
In the area of clean coal technology, the U.S. and Japanese firms
lead the new developments. In both countries, government support
has been crucial in advancing R&D and commercialization of
new technologies. China offers the greatest opportunity for utilizing
these technologies, and support from Japan and the United States
can significantly improve the chances of widespread use of clean-coal
technologies. Finally, bilateral and multilateral assistance can
play an important role in implementing the government's plans
to import natural gas.
The fuel mix of the power generation has been occasionally, but
not consistently, guided by the government. In the 1960s and 1970s
the government's main concern was to ensure sufficient capacity.
While capacity did expand at remarkable rates (average 14.7 percent
per annum), the fuel mix became heavily dependent on oil. The
government's serious effort to influence the fuel mix was initiated
in mid 1970s and was aimed at developing nuclear power and introducing
imported coal and natural gas. As result the share of oil dropped
from 67 percent in 1975 to 9 percent in 1985. Instead, the share
of nuclear power increased from nil to 52 percent, and the share
of coal from 8 percent to 26 percent. The fuel mix further balanced
in the 1990s as natural gas took some 5 to 10 percent share in
The government's desire to keep a diversified fuel base is reflected
in the power sector's long-term plan where the fuel mix in 2005
is aimed at 22 percent nuclear, 24 percent coal, 21 percent LNG,
21 percent oil and 11 percent hydro. However, the government has
recently shown considerable flexibility by allowing private power
producers to choose the fuel underlying their bids. Private sector,
in turn, have made a large number of offers to build thermal plants
but no concrete bids for building hydro projects. The government
has taken a corrective action by offering a rate of up to 11/kWh
for (peaking) hydro power to encourage investment in this type
of plant. This compares with a rate of 3.5-4.0/kWh for thermal
power generation. Another aspect of the fuel which remains highly
uncertain is the share of nuclear power in the future power generation.
Private power producers are not allowed, and perhaps not interested,
to build nuclear plants. Taipower has the responsibility to expand
nuclear power generating capacity but has faced serious controversy
in regard to siting of the future plants. Thus, the overall trends
indicate that fuel mix will be seriously affected by the new methods
of funding, e.g. IPPs, and will result in an increasing share
of thermal power generation.
The mix of generating capacity has been decided based on least-cost
analysis and within the framework of the country's energy policy
with usually more weight to the latter. Energy policy is very
much concerned with supply security. It is aimed at reducing dependence
on imported oil and diversifying sources of energy supply. Since
domestic resources are limited, the fuel mix strategy has aimed
at developing nuclear capacity and construction of thermal plants
which use imported coal and natural gas. The emphasis among the
three desirable fuels has shifted over time. In the 1970s the
main emphasis was on nuclear which paid off very well in the early
1980s when international prices of fossil fuels increased drastically.
However, in the second half of the 1980s, the economic wisdom
of constructing nuclear plants was widely questioned and KEPCO
shifted in a substantial way to power plants which would use imported
coal. Also subject to question was a contract that Korea had signed
with Indonesia to import LNG. There was substantial doubt about
economic desirability of using LNG in the power sector.
The fuel mix strategy made a complete turnaround in the first
half of the 1990s to give much more weight to nuclear and natural
gas. This is based on some renewed concern over security of energy
supply but more importantly on concern over local, regional and
global environmental impacts of electricity generation and consumption.
Plans for future capacity expansion give almost equal weight to
nuclear, natural gas and imported coal.
Until very recently there was strong resistance to private sector
participation in the power sector partly based on the concern
that the fuel mix strategy might go out of control. Thus, the
eventual decision to open up the sector to IPPs has been accompanied
with a decision to reserve construction of nuclear (and large
coal-based) plants to KEPCO.
While the method of funding power sector investments has gone,
and will continue to go, through substantial and fundamental change,
the fuel mix of electricity generation is not likely to be affected
by the change. The main reasons are that MOTIE has full control
over fuel mix decisions, and also has under its control KEPCO
as a powerful executive arm to implement these decisions.
In North Korea, the power sector's generation mix is almost equally
split between coal and hydropower. The mix will shift to some
40 percent coal, 40 percent hydro and 20 percent nuclear when
and if the 2000 MW nuclear reactors are commissioned. Any attempt
to substantially change the fuel mix will face serious financial
constraints. Even if through some international efforts the country
can access external funds, investments in changing the fuel mix
will not take a high priority at least in the short and medium
terms. The main area of priority will be rehabilitation and retrofitting
of the existing power facilities.
In the longer term, investments in changing the fuel mix could
become viable but perhaps only at a marginal level. The marginal
change could be based on increasing the share of hydro power.
The main environmental improvement to the fuel mix is likely to
materialize through introduction of clean coal technologies and
improving the efficiency of power generation, transmission and
distribution. The mechanisms for financial support to such improvements
should be developed within the framework of the energy efficiency
program which is discussed later in this report.
Although there is no generally accepted and practical definition
for sustainable development, there is a clear framework for assessing
sustainability of finance. The framework encompasses income statements
and balance sheets which show whether an entity is likely to meet
its operating costs and finance its investments within a financial
structure which does not jeopardize its creditworthiness. These
are then translated into various measures such as rate of return,
debt-equity ratio, self-financing ratio, etc., which can be monitored
to ensure an entity's financial health. The bottom line of all
these measures is that in the long-term consumer prices should
be sufficient to cover all the capital and operating costs.
The concept of financial sustainability at the sector, or even
at the national level, are not far from the above concept. For
example, a country's power sector will remain financially sustainable
only if power tariffs would eventually pay for operating and capital
costs. As such, the power utility's internal cash should constitute
a significant component of investment financing. Borrowings should
remain within an acceptable range and should not lead to an accumulative
deterioration of debt/equity ratio.
The power utilities in the North East Asia operate under various
ownership and financial regimes. However, they have all moved
towards financial sustainability by increasing power tariffs,
and utilizing innovative methods of financing. Nevertheless, progress
varies from one country to another. Some countries have a long
way to go before reaching a sustainable state.
Power sector investment requirement of North East Asia for the
period 1996-2010 is estimated at $1.1 trillion, representing almost
30 percent of the worldwide investments in this sector. The figure
translates into an average annual requirement of about $72 billion
which by far exceeds average investments in the 1980s though not
drastically higher than the average for 1991-95. This indicates
that a new surge in power investment has started in the early
1990s and is expected to continue in the next 15 years.
None of the countries in the region are able to finance the power
sector investment requirements with conventional methods of financing.
The need to use more innovative methods of finance has been recognized
since the early 1990s and substantial shift from traditional to
the new methods is under way. The new methods of finance draw
upon a much wider source of funds for both equity and debt finance.
On the equity side, the major additional volumes come from private
sector through (a) allowing independent power producers to invest
in electricity-generating facilities, (b) providing opportunity
for industrial cogenerators to produce more power than their own
needs, and (c) floating the shares of public utilities on the
domestic or international stock markets. On the debt side, the
major additional volumes come from domestic and foreign bond markets,
and institutional investors.
Japan's power sector is in the hands of private monopolies. These
companies enjoy easy access to relatively inexpensive funds in
the domestic capital markets. Nevertheless, the government has
intended to introduce more competition into the power market but
has been cautious not to jeopardize the effectiveness of the national
energy policy. An amendment to the Electricity Law was passed
in 1995 which allows generation by IPPs. The change in the law
has been received well by potential investors, who have made efforts
to build almost as much as permitted by the government.
In China, the huge need for financing power investments has forced
the government to commercialize power enterprises and to open
the sector to private investors. Officially, the government is
seeking private investment for about 20 percent of the power sector's
financing needs. However, the willingness of private companies
to invest in the sector has exceeded the government target. The
enthusiasm has also resulted in intensive competition among the
bidders. The government is likely to increase reliance on private
power beyond the 20 percent target.
In South Korea and Taiwan, the corresponding national power companies
(KEPCO and Taipower) were until recently viewed as efficient and
competent public utilities which could also mobilize their financial
needs without much burden on the government. Therefore, the need
to introduce private power was not felt or justified. In the recent
years, however, there has been a sharp turn of events due to the
shortage of power-generating capacity to meet the rapidly growing
electricity demand. In both countries, the governments turned
to private sector to fill the gap. Nevertheless, the experience
of allowing private sector participation has been more rewarding
than initially expected. The governments of both countries are
likely to make private power an important and integral component
of electricity supply strategy.
Aside from the contribution of IPPs and private cogenerators,
the rest of investments in power generation, as well as all of
investments in power transmission and distribution, will be undertaken
by power utilities. The utilities will have to increasingly rely
on their own internal cash for equity injection and on their own
balance sheet for borrowing. The government's direct contributions
which in the past represented a major source of finance in China
will be minimal in the future. Instead, internal cash generation
will have to improve through additional revenue and cost saving
measures. Borrowing patterns indicate that Japan and Korea will
continue to rely on internal sources while China will be utilizing
both internal and foreign loans.
Dealing with Undesirable Impacts on the Mix of Generating Capacity
The emergence of the new methods of finance will have some potential impacts on the mix of generating capacity. First, the government control over the fuel mix strategy will be reduced because of gradual deregulations. Second, IPPs will have a tendency to undertake investments which are less risky and result in quick financial payback. Third, even if state companies continue to construct a major part of generating capacity, they will be under pressure to be as cost effective as IPPs. This would adversely affect their ability to pay attention to the fuel mix targets set in the national energy strategy.
With the new financial incentives, there will be a shift from
nuclear and hydro to thermal power. Within the thermal group,
natural gas would be developed if available. When reaching the
limit of gas availability, the emphasis would shift to coal and
perhaps oil fired plants. The plant technology would be chosen
to minimize the up-front investments while meeting the mandatory
emission standards. Thus, the main source of power would be by
default conventional coal plants while nuclear, hydro, imported
gas, and clean-coal technologies would receive insufficient attention.
With regard to Nuclear Power, private sector would not
be interested because of high capital intensity, long construction
time, uncertainty regarding the time of availability and concern
about public acceptance. It is particularly noted that these factors
also substantially increase interest during construction. Thus,
nuclear power program in each country will continue only with
government support. In Japan and South Korea, governments are
likely to remain in control of the nuclear program. In China,
the government will continue its own support and also its attempt
to mobilize support from bilateral agencies (Russia, France, Canada,
etc.) In Taiwan, nuclear program is likely to experience some
set back. In North Korea, there is a unique international arrangement
to assist in construction of 2000 MW of nuclear capacity.
With regard to Hydro Electricity, the conventional disincentives
are the high up-front investments, hydrological uncertainties
and frequent cost over-runs. In addition, the recent experience
in building hydro plants has proved to be much more difficult
because of environmental concerns and resettlement issues. Most
of the hydro candidates, particularly large ones, have continued
to be postponed because of those difficulties. Any attempt to
promote hydro power has to be project specific. It is generally
agreed that in order to encourage private sector to undertake
hydro electric projects, the government should carry out part
of the preparatory work and particularly the environmental impact
assessment. Among the countries in the region, China and North
Korea have significant hydro potentials. Development of hydro
resources in China has started to fall short of plans though still
it remains impressive compared with other parts of the world.
With regard to Imported Gas, the problem arises when the
existing gas supply capacity is accounted for and there is a need
for importing additional gas. An IPP bidder would be eager to
build gas-based power plants but would not be willing to invest
in gas import facilities unless additional incentives are in place.
Arranging incremental imports involves sourcing the gas supply
and building import terminals. Most of the present gas import
to the region is supplied by Indonesia, Malaysia, Brunei and Australia.
However, most of the new imports are likely to come from the Middle
East where financing liquification plants are quite complex and
gas buyers are expected to help in arranging the finance. Thus,
investments in gas import facilities can easily go beyond the
borders of importing country. The gas import option is likely
to receive sufficient attention in Japan and South Korea but is
likely to experience some set back in Taiwan. Also, China is now
in a clear need to import gas but is facing financial constraints.
To encourage gas imports to the region, a new financial system,
and correspondingly a modified bidding process, should be designed
to encourage private bidders to take account of environmental
benefits of natural gas and to invest in gas import and gas-based
With regard to Power Generation Clean Coal Technologies,
the combustion technologies such as FBC and FGD are commercial
though expensive at least in comparison to the capital cost of
conventional steam plants in China. A more promising technology-
integrated gasification combined cycle (IGCC) plant would provide
a more economic option due to its higher thermal efficiency. However,
there is not much of a track record about the performance of this
technology. Two demonstration plants are operating and five new
plants are under construction in the U.S. Although there is significant
potential benefit in establishing demonstration projects in Asia,
the Asian power utilities have resisted the idea because of the
potential risks of cost over-run or operational failure. To encourage
the use of clean-coal technology a financial support system either
in the form of guarantees or other forms of risk mitigation arrangements,
should be provided to encourage demonstration projects in the
region. The target country should be China, and perhaps later
Energy conservation is the only non-controversial solution to local, regional and global environmental concerns. It is also argued that there is substantial potential for energy conservation at least in some countries of the region, notably China and North Korea. Nevertheless, energy conservation is not easily achievable. Indeed, many economist have argued that conservation should be achieved only by appropriate energy pricing. The counter-argument, however is that:
a. energy prices are in some countries - largely subsidized and do not reflect the full cost of supply;
b. even if prices are raised to cover the cost, they still do not reflect the full social cost (including the cost of environmental externalities);
c. furthermore, imperfections in the capital market and deficiency in the availability of information result in under-investment in energy efficiency.
The countries in the North East Asia have taken energy conservation seriously. The extent of the seriousness and the strength of the program vary from one country to another.
In Japan, energy conservation has been by all accounts a success
story and can provide very useful lessons for other countries.
Energy conservation is an integrated part of the national energy
policy. It covers all industrial and commercial activities as
well as residential use of energy. Conservation efforts are supported
by an extensive Research & Development program. Economic and
financial incentives provided to promote energy conservation include
low interest loans from the Japan Development Bank, preferential
tax treatments, R & D subsidies, and low interest housing
loans for the residential sector. These measures have been quite
instrumental in improving the efficiency of production processes
and developing new more efficient technologies. However, the more
important factors are (a) a public conviction that energy conservation
is essential for the survival of the economy and the nation; (b)
genuine close cooperation between the government and private sector
in formulating and implementing the program; and (c) a well-disciplined
system of checks and balances which encompasses the national objectives
(economic progress and environmental safety) and monitors the
progress. It is also useful to consider that Japan has now adopted
a policy of assisting other countries in the design and implementation
of energy conservation programs. Assistance may be provided by
not only the Japanese government but also by private companies.
Keidanren (Japan's Federation of Economic Organizations) is discussing,
on behalf of major private companies, with the international organizations
the practical means of assisting in transferring energy conservation
technologies to the developing countries.
In China, energy conservation offers significant potential gains
in both economic and environmental terms. It is also evident that
the country has made great progress in improving energy efficiency
over the past 10 or 15 years. This progress has been largely based
on a strong government role and through physical quota systems,
financial support, R & D, information dissemination and staff
training. Also, economic reforms have encouraged energy conservation
by transmitting to the users more realistic and effective price
signals. Ironically, however, the same market reforms have caused
a gradual dismantling of a rather solid energy conservation program.
The physical monitoring system has become ineffective because
the government has lost its strong control over fuel allocation.
Financial incentives have been mostly eliminated in the new tax
code introduced in 1994. The government has reduced it R &
D support as part of reducing its role in energy supply. Training,
known to be a very effective program, receives less support, again
for the reason that government is leaving matters to the market.
At the same time, private companies do not pay much attention
to energy conservation because either energy does not represent
a large proportion of their operational cost, or because investments
in energy conservation do not pay back as quickly as other investments
in the country's economic activities. In short, the energy conservation
program in China is seriously threatened by the emerging trends.
It is generally recognized that the system has to be redesigned
to fit the market-based decision-making process of major energy
consumers . The challenge is to redirect the program before it
loses its powerful ingredients. A relatively large aspect of this
challenge translates into developing financial regimes which can
effectively encourage energy efficiency in the transitional state,
as well as in the eventual market-based economy. A promising start
for investigating the matter would be to try to combine the experiences
of Japan and the U.S. in this area. While the Japanese experience
allows for a close cooperation between public and private sector,
the U.S. experience provides examples of institutional set-ups
for financing energy efficiency in a free market environment.
In South Korea, energy conservation is addressed within the framework
of the national energy policy. The conservation program covers
a wide spectrum of activities including energy audits, support
of demonstration projects, R & D, information dissemination
and training. Although accomplishments at the micro level have
been quite impressive, the overall level of energy intensity in
the economy as a whole, and in the industrial sector in particular,
has not responded well. Energy intensities have not declined since
1980. Nevertheless, the energy conservation program continues
to receive public attention and government support.
In North Korea energy efficiency is quite low due to a host of institutional and technical factors. Opportunities for significant efficiency gains have been identified in almost all aspects of demand and supply of energy. It is in particular evident that energy efficiency can be significantly improved by rehabilitation and retrofitting of existing power equipment and industrial facilities. These improvements are expected to be very cost-effective. Nevertheless, the required investments are not undertaken because of institutional, technical and financial constraints. In all of these areas, international assistance can play a very effective role. The cooperation can be of mutual benefit because energy conservation fits into the philosophy of self-reliance to which North Korea adheres religiously, and offers significant potentials for reducing regional and global environmental damage which appeals to many countries in the international donor community.
There are excellent prospects for cooperation in dealing with
the financial matters in the energy sector of the region. These
prospects are all based on synergies which can be utilized to
benefit all sides. The most immediate and practical prospects
are in the areas of (a) encouraging natural gas imports; (b) commercializing
clean coal technologies; (c) improving financial systems for energy
conservation in China; and (d) assisting power sector rehabilitation
in North Korea.
Encouraging Natural Gas Imports. In this area Japanese
assistance can provide significant improvement. Japan has now
expanded its concerns for energy security, and environment beyond
its borders and to the whole of the region. Accordingly, it is
ready to provide financial support to projects which are beneficial
in either terms. Natural gas import projects have been recognized
as candidates which would serve both purposes. Thus, the Japanese
government is willing to extend support to such projects. The
support can be provided by the Japan Exim and Japan National Oil
Company, both of which have substantial financial resources to
allocate to this matter. The potential for cooperation in this
area is further strengthened by the fact that Japan dominates
the LNG market and has a considerable comparative advantage in
materializing gas import ideas.
There is need for additional research to develop financial incentives
to encourage gas imports. The research should cover (a) the possibilities
that Japanese assistance can lead to sustainable effects, and
(b) the changes to the IPP bidding procedures which would encourage
investments in gas imports.
Commercializing Clean-Coal Technologies. This is an area
of great interest to the U.S. and Japan. Both countries have spent
substantial resources on R & D and private sector support
for the development of the new technologies. However, the use
of these technologies has remained limited, particularly in developing
countries, due to uncertainties about construction schedules,
construction costs and operating performance. The power utilities
in the developing world have preferred to wait until a track record
is established. At the same time these countries, particularly
those in Asia offer the greatest market potential for using the
clean coal technologies. It would therefore be of significant
commercial interest to the U.S. and Japan to establish some type
of comfort in using these technologies. The comfort can be created
if some utilities start to utilize these technologies, perhaps
with an initial financial encouragement.
There is a need for additional research on structuring guarantee
instruments for reducing risk in adopting clean-coal technologies.
The research should cover (a) an exploration of the possibilities
of cooperation between the US and Japan in marketing the technologies,
(b) an assessment of the amount of risk which should be mitigated,
(c) development of a guarantee instrument to mitigate the risk;
and (d) the possibility of building a US sponsored demonstration
project in China.
Supporting Energy Conservation in China. Prospects for
international cooperation are in two areas. First, a combination
of the Japanese and U.S. experience in energy conservation can
provide a very effective approach to dealing with the situation
in China. Japan has established an exceptional track record in
achieving energy efficiency through close public-private sector
cooperation. U.S. is leading in the area of institutional innovations
for encouraging energy efficiency within a free market framework.
Secondly, the significant potential gains from energy conservation
in China offer perhaps the most cost-effective prospects for reducing
green-house gas emissions. In addition to their general appeal
to many countries in the world, these prospects can be utilized
within the framework of Joint Implementation to implement select
activities with clear CO2 reduction
advantage. Finally, another source of international assistance
is the Global Environmental Facility (GEF) which already provides
substantial support to certain conservation efforts in China.
There is a need for additional research on redesigning the financial
incentives for energy conservation in China. The research should
cover (a) an assessment of applicability of Japanese and US experience,
(b) development of a revised financial system which can function
in a free market environment, and (c) the interest of the donor
community to finance selected activities.
Supporting Power Sector Rehabilitation in North Korea. Potentials
for energy efficiency improvements in North Korea are widespread
in the power sector, industry, and household use of energy. Although
there is substantial room for international assistance in all
areas, it would be more effective to concentrate at the first
stage on the power sector because projects are more specific and
can be monitored more effectively. These projects would involve
rehabilitation and retrofitting of power plants and transmission
lines which would result in immediate economic and environmental
benefits. The international donor community could be receptive
to providing assistance on the grounds of regional and global
A program of international assistance is already in place for
the specific purpose of building 2000 MW of nuclear capacity.
This program is based on a 1994 framework agreement in which North
Korea agreed to freeze its nuclear program in exchange for two
new light-water reactors (which are considered less capable of
producing weapons-grade plutonium) and 500,000 tons/year of heavy
fuel oil to meet the country's energy needs until the new reactors
become operational. The Korean Peninsula Energy Development Organization
(KEDO) was established to implement the agreement. The founding
members of KEDO were U.S., Japan and South Korea. Some other countries
(including Canada, Finland, Indonesia, New Zealand, Argentina,
Chile and Australia) now have joined the membership and the European
Union is negotiating to join the Organization.
KEDO would be a candidate for providing further support to North
Korean power sector in a bit of more general framework than its
current mandate. The danger, however, would be that some of the
current focus may be lost. This is particularly important from
the point of view of the Organization's members who have joined
to support a very specific project.
Another option would be to create a new ad hoc international organization
(similar to KEDO) for the specific task of supporting power sector
rehabilitation in North Korea. The advantage of an ad hoc organization
over an established international institution is that the agenda
will be set and members will join if they wish to support the
There is a need for additional research on preparation for the
formulation of an ad hoc international financial agency to provide
assistance to rehabilitation needs of the energy sector in North
Korea. The research should cover (a) the interest of the donor
community to support the cause, (b) the option of expanding the
mandate of KEDO, and (c) the viability of creating a new ad hoc
agency to serve the function.
Agency of Natural Resources and Energy. 1995. Energy in Japan: Facts and Figures. Tokyo, May.
Besant-Jones, J. 1995. "Attracting Finance for Hydroelectric Power." Energy Notes. World Bank, June.
Byrne, J., and Y.D. Wang. 1991. Towards Sustainable Energy, Environment and Development. Newark: University of Delaware, August.
Fukasakse, Y. 1995. "Energy and Environment Policy Integration: The Case of Japan." Energy Policy. Vol. 23, #12 (p. 1063-76). December.
International Atomic Energy Agency. 1993. Financing Arrangements for Nuclear Power Projects in Developing Countries. Vienna, Austria.
International Energy Agency. 1994. The Clean and Efficient Use of Coal and Lignite: Its Role in Energy, Environment and Life. Paris.
International Energy Agency. 1994. Electricity Supply Industry: Structure, Ownership and Regulation in OECD Countries. Paris.
International Finance Corporation. 1996. Financing Private Infrastructure. Published by International Finance Corporation, Washington.
Labandira-Villot, X. 1996. "Market Instruments and the Control of Acid Rain Damage." Energy Policy. 23 (September): 841-854.
Levine, M., and others 1994. Energy Efficiency, Market Failures and Government Policy. Berkeley, California: Lawrence Berkeley Laboratory.
Mitchell, C. 1995. "The Renewables NFFU. A Review." Energy Policy. 23 (December): 1077-1092.
Razavi, H. 1996. Financing Energy Projects in Emerging Economies. Tulsa, Oklahoma: PennWell Books.
Razavi, H., and others 1996. Investment Requirements of Gas and Power Sectors of Developing countries. Tulsa, Oklahoma: PennWell Books.
Resource Dynamics Corporation. 1996. Financing Worldwide Electric Power: Can Capital Markets Do The Job? Report prepared for US Department of Energy, April.
Skinner, R. "The Need for Finance in Energy Efficiency." Presented at the World Energy Efficiency Seminar, Istanbul, Turkey, April 11, 1995.
U.S. Agency for International Development. 1996. Strategies for Financing Energy Efficiency. Washington.
World Bank. 1996. Rural Energy and Development. World Bank
Report. Washington, July.