Power Market Structure: Revisiting Policy Options

The current distribution of power markets around intermediate structures between full integration and unbundling suggests that there has not been a linear path to reform in practice. Instead, many developing countries may retain intermediate structures in the foreseeable future. This possibility exposes a large gap in understanding about power market structures, since most theoretical work has focused on the two extreme structures and there is limited evidence on the impact of unbundling for developing countries. The study reports the evidence from statistical analysis and a representative sample of twenty case studies selected based on the initial conditions, such as income and power system size. It proposes a novel analytical approach to model market structure, together with ownership and regulation, controlling for several variables, as a key determinant of performance across several indicators, including access, operational and financial performance and environmental sustainability. The results of the analysis provide the following conclusions for policy guidance on power market restructuring for developing countries:

• There seems to be credible empirical basis for selecting a threshold power system size and per capita income level below which unbundling of the power supply chain is not expected to be worthwhile. Indeed a dichotomy emerges between high income countries characterized by a large system size for which unbundling and other reforms are significantly linked to better performance and low income countries characterized by small system power size for which there is no strong evidence that unbundling and other reforms delivered improvements in performance.
• Unbundling deliver consistently superior results across the board of performance indicators when used as an entry point to implement broader reforms, particularly introducing a sound regulatory framework, reducing the degree of concentration of the generation and distribution segments of the market by attracting additional number of both public and private players and encouraging private sector participation.
• Partial forms of vertical unbundling do not appear to drive improvements, probably because the owner was able to continue exercising control over the affairs of the sector and hinder the development of competitive pressure within the power market.

Although the quest for growth remains as elusive as it was more than a decade ago, there is now much greater consensus on the policies and institutional changes that are needed to foster growth and economic development. But debate continues on the timing, sequencing, and local adaptation of these reforms. Furthermore, although the benefits of reform are well documented--the reasons as to why and when reforms occur still remain somewhat unclear. Many countries go through long periods of stagnation or even decline, without being able to create an environment for change, while others seem able to break the hold of vested interests and start following paths of reform. In October 2004, the Operations Evaluation Department (OED) of the World Bank held a conference on the Effectiveness of Policies and Reform. This event provided a forum at which participants--over 500 government officials, civil society representatives, and World Bank staff--could discuss how to improve the effectiveness of World Bank support for development policies and reform programs. Included in this volume are the contributions of distinguished development practitioners on issues such as: the links between good performance and policy change; how windows of opportunity can best be used to promote reform; how ownership of policies and reform programs can be encouraged; and how developed country policies can be improved to create a better global environment for development. Ajay Chhibber is director of the Operations Evaluation Department of the World Bank and was World Bank country director for Turkey from 1997 to 2003. R. Kyle Peters is senior manager, Country Evaluation and Regional Relations, in the Operations Evaluation Department of the World Bank. Barbara J. Yale is a consultant with the Operations Evaluation Department of the World Bank. See more