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ELECTRICITY SECTOR

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					ELECTRICITY SECTOR
EXECUTIVE SUMMARY
This case study proceeds from the premise that a sustainable global electricity will require some radical changes from the structure seen today. In particular, the share of renewable generation will need to increase greatly, while the use of fossil fuels will need to be curtailed and made much more efficient. The study has two main sections. Part A: Analytical Reference describes the production methods currently in use in the electricity sector along with the major trade flows, and examines the environmental implications of both production methods and trade. Part B: Policy Issues and Options summarises the main policy issues which are of significance in the interface between trade and the electricity sector. The paper concludes by attempting to bring together the key policy issues of trade in electric power and technology transfer into an integrated policy package.

PART A: ANALYTICAL REFERENCE

1.

PRODUCTION METHODS

Electricity can be produced by an extremely broad range of methods, each having unique technical, economic and environmental characteristics. Each production method has its own set of environmental effects which are determined primarily by the set of intrinsic attributes of the technology used. However, power plants using identical core technologies will often have very different environmental characteristics due to differing local circumstances. The overall environmental impact of a particular electricity production technology is characterised not only by great uncertainty surrounding the physical magnitude of primary, secondary and even tertiary effects but also no subjective agreement on their relative importance. 1.1 Coal-fired Thermal

Approximately 37% of all electricity generated world-wide is produced from coal, making it by far the most important primary energy source in power production. The high cost per kW of installed capacity (in the order of $1,200 - 1,700) combined with large minimum economic scale means that investment in a coal-fired plant involves a very large capital outlay. Conversely, the running costs of coal-fired plant are low - of the order of 3.54 per kWh. Coal is the most carbon-intensive of all electricity generation methods. Indirect emissions of greenhouse gases also result from mining operations and from transporting coal over large distances. Coal combustion also gives rise to acid emissions - SO2 and NOX - along with particulates. 1.2 Large Hydro

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Hydro power is the second most important source of electricity in the world, accounting for 19% of the world's electricity. All but about 4% of the installed capacity is in the form of large installations (greater than 10MW) which have a high capital cost of about $1,500 - 4,000 per reliable KW generated. Large hydro plants have very low running costs. Perhaps more than any other electricity production method, the environmental impacts of large hydro plant are highly subjective. Their ability to supply much-needed power to developing countries with almost no additional greenhouse gas emissions contrasts with the disruption to displaced communities and the destruction of ecosystems. The environmental impacts of large hydro are almost entirely a result of the initial construction. 1.3 Nuclear

Nuclear power accounts for about 17% of global electricity generation, making it the third most important electricity production method. Nuclear plant is characterised by high capital costs, usually betweeen $1,200 - 1,800 per kW. The minimum technical and economic scale is also very large. The environmental impacts of nuclear power are characterised by risks and uncertainties. The primary one is the risk of a major accident. Uncertainties surround the safe disposal of highly hazardous wastes, the long-term health effects of low-level radioactivity. The mining of uranium also gives rise to further environmental hazards. 1.4 Fossil-fuelled Gas Turbine

The most rapidly growing technology for power generation at present is the gas turbine. The capital cost is low, of the order of $600 - 800 per kW. Natural gas is the most commonly used fuel in gas turbine based generating plant. About 15% of the total global production of electricity derives from natural gas. While natural gas is a CO2-emitting fossil fuel, it is far less carbon-intensive than coal or oil which it often displaces. And while it is a finite resource, it is much more widespread than was previously thought. The SO2 emissions from natural gas are negligible. NOX emissions may still be significant, although it is easier to reduce these than is the case for coal. Many in the environmental community are coming to regard natural gas as the least bad of several evils in electricity generation - a useful stop-gap fuel in the transition to a fully sustainable energy future. 1.5 Biomass

An annual total of 32 TWh of electricity generated from biomass worldwide makes it the most important of all the 'new renewable' power generating technologies, ahead of wind. At only about 0.3% of total world electricity consumption, its current contribution is minimal. However, in certain regions there is considerable scope for significant amounts of power to be generated from biomass sources in the medium to long term. The environmental impact of biomass-based power generation depends crucially on whether the feedstock used is waste material or specially-grown energy crop. In both circumstances, the net CO2 emission is zero, as any carbon released in

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combustion will have been sequestered from the atmosphere during growth. The sulphur content of most biomass is very low, so SO2 emissions are not significant.

1.6

Wind

Of all the 'new renewable' power generation technologies, wind power seems to have the most promising future in the short to medium term. The capital cost of any installation is typically about $1000 per installed kW, but since average availability is likely to be of the order of only 20%, the cost per unit of reliable capacity is effectively very high. Running costs are negligible, leading to a levelised cost of supply of about 54 per kWh. The primary environmental characteristic of wind power is the visual impact. Other environmental issues are bird-kills and noise. 1.7 Small-scale Hydro

Capital costs of small hydro plant are highly variable, but tend to be somewhat higher per kW than for large hydro. Small hydro power is potentially the most environmentally benign of all generating technologies. This type of plant is generally run-of-river or, if a dam is used, it is usually a low construction which results in only a very small flooded area. Direct greenhouse gas emissions are zero. The most likely environmental impact from small hydro is the possible loss of rare wildlife habitats due to changes in the flow patterns of rivers. 1.8 Solar Photovoltaic (Pv)

Perhaps the most striking characteristic of solar PV technology is the rate at which cost per installed kW has fallen over the last two decades. Price per kW are now in the range of $4000, resulting in a supply cost of about 254 per kWh. The direct environmental impacts of solar PV are limited to visual disamenity and land-use. However the disposal of old PV modules fabricated from a variety of toxic metals and semi-metals represent an environmental hazard.

2.

TRADE IN ELECTRICITY

While it remains true that the bulk of the world's electricity is consumed in the same country as it is generated, the degree of international interconnection between grids is increasing steadily, and cross-border exchanges of electricity are becoming increasingly common. For some regions, the physical infrastructure for international trade in electric power is already in place. However, for very large areas of the globe, connections to an international grid are unlikely ever to be cost-effective and international trade in electric power will remain inaccessible. 2.1 Major Trade Flows

There are two types of international trade in electricity. Co-operative trade is where two or more

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countries with complementary systems trade electricity in order to optimise use of installed capacity, usually sharing the economic benefits which result from cooperation. Competitive trade is where generators and consumers participate in a power market which encompasses more than one country, trading power according to either short-term or long-term contracts. The greatest volume of co-operative trade is found in the countries of the IEA. It currently accounts for about 7% of the total power supplied in Europe and about 1% in the US. Southern African countries have also negotiated a power pool which due to become operative in 1998. Until recently, there had been virtually no competitive international trade, but that situation change in January 1996 with the creation of the Norway-Sweden spot market. Competitive trade in power will become more significant as the European Single Electricity Market opens up.

2.2

Environmental Impacts

2.2.1 Changes in the utilisation of existing capacity The most direct environmental impact of trade in electricity is on the way in which existing generating capacity is utilised, which therefore affects the mix of fuels used. An interconnected system would consist of different power plants which use different types of fuels. 2.2.2 Changes in stock of generating equipment A longer-term consequence of trade in electric power is the impact it has on the stock of generating equipment. This influence may affect both the patterns of retirement of older equipment and the patterns of commissioning of new equipment. 2.2.3 Impact on environmental regulation and charges The consequences of cross-border trade of electricity on environmental regulations (both their existence and their enforcement) is ambiguous. Co-operative trade in power may allow existing environmental standards to be met in a more cost-effective manner. However, competitive trade may lead to difficulties if environmental regulations are not harmonised across the countries within the trading system. 2.2.4 Development impact An important source of second-order environmental effects of trade in power occurs via the impact on the economy of the country supplying the power. Increased foreign exchange revenues could be used in poverty-alleviation efforts or in lessening the need to engage in environmentally unsustainable activities. 2.2.5 Impact of improved system reliability

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Co-operative trade in power should enable interconnected systems to achieve greater reliability, as it would increase the reserve capacity and so reduce the consequences of plant failure. Improved reliability is likely to have positive environmental impacts.

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TRADE IN GENERATING EQUIPMENT

The great majority of countries are dependent on foreign sources for electrical generating equipment. Despite the dominance of a small number of firms in the supply of major components of power plants, the industry is fiercely competitive. 3.1 Major Trade Flows

Since there is a very small number of suppliers, analysis of trade flows necessarily focuses on the purchasers of equipment and on the nature of the technology purchased. There has been very rapid rate of growth in orders for electricity generating equipment since the mid-1980s. China and the rest of Asia play a dominant role in this rapid rise. There has been a huge increase in the rate of purchase of gas turbines

3.2

Environmental Impacts

Trade flows of generating equipment impact upon the environment in two ways. The most obvious and direct factor is what is traded, i.e. the nature of the equipment purchased. An indirect, but nevertheless potentially important factor is how the equipment is traded, in particular, the nature of any technology transfer package accompanying the hardware itself. The most important determinant of technology choice is the local resource availability, hence the continued dominance of hydro plant orders in Latin America and coal-fired plant in China. Technology transfer could raise the level of efficiency and reliability of power plants, thus lowering negative environmental consequences.

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INVESTMENT FLOWS

The World Bank has estimated that developing countries need $100 billion per year during the 1990s to meeting their growing electricity demand. These sums are beyond the means of governments and MDBs (multilateral development banks), so a large proportion of the capital will need to be sought from private sources. 4.1 Major Flows

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It is estimated that the total net flow of resources for energy investments from OECD to non-OECD countries in 1993 and 1994 was $233 billion, of which $6 billion was to the economies in transition. Private sector investments flows accounted for over 75% of the total. 4.2 Environmental Impacts

The overall environmental impact of the shift towards private sector investment is likely to be positive in most countries, for two reasons. First, private investors tend to shun the 'mega-projects' with long construction times, high risks and low rates of return, which have also tended to be among the least environmentally sustainable energy projects. Second, the need to attract private finance acts as a strong incentive for state-owned utilities to undertake reform and restructuring, which generally result in overall improvements in operating efficiency.

PART B: POLICY ISSUES AND OPTIONS 5 5.1 POLICY ISSUES RELATING TO TRADE IN ELECTRIC POWER Co2 Emissions Limits

Where trade in power is significant, it makes sense to introduce a mechanism whereby countries can formally engage in the joint meeting of greenhouse gas limits. Such a mechanism could be the first step in introducing a system of fully traded permits. Joint action can result in cost-effective ways to reduce CO2 emissions. 5.2 Carbon Taxes And Other Charges

There can be problems in trying to reconcile competitive trade in power with the unilateral internalisation of global environmental costs. Border tax adjustments may be need to take into account the unilateral internalisation. However, it is unresolved whether the GATT/WTO rules allow for such border tax adjustments on the basis of the generating technology used. The UK's Non-Fossil Fuels Obligation (NFFO) is another example of a system which charges for the use of fossil fuels in power generation and uses the revenues to support renewables. 5.3 Promoting Demand-side Management Programmes

In virtually all countries of the world, there exists a significant untapped potential for more efficient use of electricity. Important components of demand-side management programmes often include efficiency standards and energy labelling of appliances and measures to transform markets (e.g. subsidies on compact flourescent lights). These types of measure might lead to possible conflicts with WTO rules on non-tariff barriers.

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5.4

Exploiting Green Consumerism

The environmental impacts caused by production, delivery and use of good and services is, for many individuals, growing as a significant consideration in making choices as the more usual factors such as price and quality. The opening up of some electricity sectors to competition may give consumers the means to express these preferences. To exploit green consumerism to the full, a well-publicised and independently verified environmental labelling system of electricity is needed. A likely difficulty with eco-labelling of electricity in the context of international trade is that it might be considered as a discriminatory non-tariff barrier.

6PROMOTING THE TRANSFER OF ENVIRONMENTALLY SOUND TECHNOLOGIES 6.1 REMOVING OBSTACLES TO TRADE

6.1.1 Trade-related Policies Tariffs on imported technologies may inhibit trade in general, and where an imported clean technology is pitched in competition with a conventional locally produced alternative, the existence of tariffs could be sufficient to shift the balance in favour of the more polluting option. 6.1.2 Lack of finance One of the most frequently cited obstacles to trade is the lack of access to finance in the potential purchasing firm. Funds such as the Global Environmental Fund already exist to address this situation, but the fact that there is a considerable unsatisfied demand for clean technologies suggests that additional sources of concessionary finance are needed. 6.1.3 Weak local environmental regulations A common obstacle to trade in environmentally sound technologies is the weakness of environmental regulation in the potential recipient country. This may be due to a lack of standards, or due to inadequate enforcement. A clean technology will often cost more than its conventional counterpart and, without the price signal provided by the obligation to comply with environmental standards, is unlikely to be chosen. There is a need for capacity-building to create and strengthen institutional structures to enforce environmental standards.

6.2

ENHANCING ASSIMILATION OF NEW TECHNOLOGIES

Transfer of clean technologies will be truly effective only if the technology is fully assimilated by the recipient. At its most basic level, assimilation involves developing the necessary knowledge,

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expertise and management structures within the purchasing firm to correctly operate and maintain equipment. In the longer term, assimilation entails the recipient country developing the capabilities to adapt the technology to local conditions and possibly to create a local manufacturing capacity. 6.3 IMPROVING ACCESS TO TECHNOLOGIES

Firms need access to information about the range of technologies available for them to respond effectively to regulatory signals towards environmentally beneficial technologies. Proposals have been made to create 'technology intermediaries' to assist potential purchases in the identification of appropriate technologies. 6.4 INDEPENDENT POWER PRODUCERS

The increasing importance of IPPs in many countries has brought about something of a shift in the nature of technology transactions in the power plant market. Many IPPs have little or no previous experience in operating power plant and therefore rely on continuing close ties with equipment suppliers or with specialist servicing companies. This trend will have consequences on the degree to which technological skills are transferred.

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REDIRECTING INVESTMENT FLOWS Redirecting Mdb Investments

The amounts which MDB lends are capable of leveraging investment flows from elsewhere, while their loan guarantee services help to catalyse the flow of private investment into countries which would otherwise be regarded as too risky. There are various ways by which MDBs can redirect investment flows: screening all loans for energy impact and internalisation of external costs during the appraisal process.

7.2

Joint Implementation

The mechanism of JI would redirect investment into projects which result in lower greenhouse gas emissions than would normally be the case, but which are more expensive than their more carbon-intensive alternatives. JI provides a means whereby countries with few low-cost greenhouse gas mitigation options could invest in other countries in projects which are less greenhouse gas-intensive than the alternatives but which would not otherwise go ahead. The investing country would then receive part of the credit for the greenhouse gas reductions which occur, using the credit to help it to meet its commitments to reduce greenhouse gas emissions.

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7.3

Export Credit Agencies

Nearly all developed countries have ECAs which provide government support for export of goods or projects. This export credit support can be through direct loans to buyers of domestic goods; or guarantees/insurance to the exporters against non-repayment. A number of proposals have been brought seeking agreement that official export credit support would not be provided unless certain environmentally friendly technology was used.

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