Should Communities be Allowed to Generate Their Own Power?

Oct 27


Sam Vaknin

Sam Vaknin

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Self-sufficiency goes well with green technologies.


Until well into the 1930s local communities in the West produced their own energy,Should Communities be Allowed to Generate Their Own Power? Articles drilled their own water and hauled it, and, in general, were self-sufficient as far as the consumption of utilities was concerned. The New Deal and the Depression brought this to a halt: governments monopolized both the generation and distribution of electrical power and water (as well as other public utilities, education, health, telecommunications, and transportation). This shift had its positive sides in that it encouraged economies of scale and firmly established the public goods nature of energy and water.

A few historic developments have reversed this etatist trend:

1. The advent of diffuse, democratic (or anarchic) "new utilities" (such as the Internet);

2. Privatization and deregulation;

3. Technological innovation (allowing, for instance, to feasibly micro-generate electricity);

4. The rise of global, efficient marketplaces;

5. The emergence of environmentalism and the emphasis on sustainable development and green technologies.

Consequently, communities and even households have been re-empowered. Individuals generate content - why not electricity? Governments should maintain their ability to deliver energy to faraway, isolated places and to the indigent and disenfranchised. The well-to-do middle-class in mainstream habitations should be allowed to generate electricity for self-consumption and for resale. Prices, quality, distribution pipes, and overall grid management should still be overseen and actively directed by governments. The rest should be left to private initiative and the marketplace.

The Example of Eastern and Central Europe 

Russia's lower house, the Duma, debated, in November 29, 2002 a far reaching reform in the bloated and inefficient electricity generation sector. Worried by resurging inflation, the Russian government scrapped its plan to allow the Federal Energy Commission to fix tariffs for gas, power, and railways. A Commission spokesman complained to Moscow Times that government officials have overridden its authority to regulate the prices of natural monopolies. It threatened to take the matter to court.

Electricity throughout the former Soviet bloc is heavily subsidized. Governments are reluctant to raise prices to realistic levels lest they incur the wrath of their impoverished subjects and reignite dormant inflation. Fuel prices, government taxes, and variable costs, such as labor, have been rising steeply in the last decade but the electricity behemoths' ability to amend their tariffs to reflect these is politically curbed.

The Russian Unified Energy Systems electricity monopoly was allowed to up its prices in 2002 by a mere 14 percent - barely the rate of Russian inflation. Its chances to attract the $50 billion in investments it says it needs in the forthcoming 10 years are slim as long as it continues to charge its customers - both wholesale and retail - a fraction of the cost of electricity its West European counterparts charge theirs. A restructuring plan, approved by the government in May 2001, is going nowhere. The sale of loss making generating plants - even at bargain basement prices and to insiders - is impossible without a massive - and massively unpopular - boost to electricity prices.

Vociferous protests in Croatia in October 2002 forced the government to shelf a scheduled 9 percent hike in the price of electricity for domestic consumption. The IMF is displeased with the government's stranglehold over the energy sector and is pushing for liberalization. Slovakia's news agency, TASR, reported in November 2002 that thousands of members of the Trade Unions Confederation demonstrated in Bratislava against proposed budget cuts and increases in regulated prices, including electricity's.

Still, consumers will not be able to buck the trend forever. Even the rich countries of the region are facing already unsustainable electricity subsidy bills. The Slovenian news agency, STA, reported on November 14, 2002 that Slovenian producers of electricity and natural gas warned that - once the domestic market opens to foreign competition in January 2003 - they will be at a disadvantage due to the unrealistic electricity "price model". In hindsight, this proved to be wrong.

Yet, liberalization and privatization have acquired a bad name after the debacles in California and elsewhere in the world. Moreover, electricity generation depends on a free market in fuels - a rarity in central and eastern Europe. Prices cannot rise above the increase in net disposable income.

As infrastructure crumbles, replacement costs soar. The Albanian Daily News reported that in the 12 months to September 2002, Albania's electricity self-sufficiency decreased from 66 percent to 46 percent. Power cuts of up to 18 hours a day are not rare. The same applies to Kosovo, where an electric storm demolished the local generation plant in July 2002, and to Montenegro.

The dependence of many countries in transition on decrepit and antiquated nuclear power plants causes friction with the European Union. Austria and the Czech Republic have clashed over the much-disputed Temelin facility. Croatia and Slovenia are locked in a bitter dispute over their shared ownership of the Krsko nuclear plant.

Lithuania derives 78 percent of its power the atomic way. Slovakia gets 53 percent of its electricity from its reactors, Ukraine - 46 percent, Bulgaria, in the throes of a controversial plan to modernize its nuclear works in Kozloduy, 42 percent, Hungary and Slovenia - 39 percent.

Nor can pure market mechanisms solve the problem. Late in 2001, hundreds of Romas, having been cut off the grid for unpaid bills, demonstrated in Plovdiv and in Lom, Bulgaria. Remote and rural areas are poorly catered to even by state-owned utilities, let alone by privatized ones.In December 2001, the Romanian government restructured Electrica, an electricity utility, but wisely retained ownership of the long-distance distribution network.

Bulgaria is emerging as an energy hub. The cabinet is drafting a bill which calls for far-reaching liberalization. Subsidies for both electricity and heating would be phased out by 2006. The country is refurbishing its thermal power generation plants with an aim to reduce its dependence on oil, gas and coal imports from Russia and Ukraine.

Bulgaria is slated to establish a regional energy distribution coordination centre under the auspices of the Stability Pact. Bulgaria covers 40-50 percent of southeast Europe's entire electricity deficit every winter. It also exports electricity to Turkey and even to Romania. Italy and Greece are negotiating a transit agreement which will permit the former to import Bulgarian electricity through the latter's territory.

Bulgaria is not the only exporter. Romania, Croatia and even Bosnia sell power. In local terms, the market is sizable. Serbia's annual electricity import bill amounts to $100 million. In 2001, Bulgaria's exports to Turkey, Greece and Yugoslavia reached $150 million. The annual figure is much higher since 2002. Romania doubled its electricity exports - mostly to Yugoslavia and Greece - during the first half of 2002 to $48 million.

Aware of this, the World Bank has recently increased the amount of money allocated to energy projects. In Albania alone, it has earmarked $16m to reconstruct three hydropower plants and another $1 million to install electricity meters in Shkoder, in the north. Even the pariah Republika Srpska, the Serb part of Bosnia-Herzegovina, stands to get $90 million to construct an electricity grid.

Multilateral funds will not be enough, though. Private capital is essential. In mid-2002, Macedonia has retained Austria's Meinl Bank to act as consultant and prepare within 11 months a sales strategy for the its national electricity company ESM. That wasn't easy. The utility was in horrendous shape having served as the outgoing coalition's agency of patronage and cash cow. The country was reduced to importing more than one ninth of its consumption from Bulgaria. Indeed, real no progress was made by July 2005. The utility was sold to EVN of Austria a year later, but the government has been at loggerheads with the new owners ever since and locked into long and costly international litigation.

The more venal and xenophobic the political class, the less welcome are foreign investors. The Moldovan government seeks to annul the sale, in 2000, of three electricity distribution companies to Union Fenosa, a Spanish energy group. The World Bank is furious. Moldovan announcements of massive exports of electricity to Romania were greeted with derision by the alleged client.

Private investors, though, seem to have lost their appetite for bloated state monopolies. According to Albania's Ministry of Industry and Energy, even a giant like General Electric prefers to build 10 small thermal power plants in the country's larger cities. Other investors are interested in 23 hydropower plants about to be privatized.

Some utilities choose to tap the capital markets. Romania's Hidroelectrica launched a Eurobond issue of more than 120 million euros to improve hydropower equipment. Parex Bank and the Baltic investment company, Suprema, organized a consortium to lend $25 million to reconstruct one of Riga's thermoelectric power stations.

Electricity is no longer merely a national affair, but, rather, a regional one. A memorandum regarding the establishment of a southeast European energy market and its ultimate integration with the European Union's was signed In mid-November 2002 in Athens by ministers from Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Greece, Macedonia, Romania and Yugoslavia. These represent a market with more than 55 million consumers who will be able to buy power directly from generating utilities by 2005, pledged the document. As it turned out, another pipe dream.

But this touches upon a second conundrum. Households and firms don't pay their bills. The threat of widespread social unrest prevents the utilities from cutting them off. Better metering is one solution. The InvestRomania business daily reports that the national electricity company, Transelectrica, backed by the European Bank for Reconstruction and Development, signed a $20 million contract with the Swiss firm Landis&Gyr to install remote counters of wholesale electricity. The hope is that with resumed growth and rising incomes this problem will vanish together with the currently common blackouts and brownouts.