Market Conditions, Barriers and Outlook for Small and Mini-hydro in SEA

1. Market Conditions, Barriers and Outlook for Small and Mini-hydro in SEA Dr. CHEN Shengshui (Director of HRC) Hangzhou Regional Center (Asia-pacific) for Small Hydro Power Hangzhou, China

2. Contents in this presentation • 1. Brief description of SHP development in SEA • 2. Market conditions • 3. Project/institutional structure and financing approaches • 4. Barriers of SHP in SEA countries • 5. Policy measures and regulations • 6. Sharing experience of SHP development in China • 7. Bright future prospect

3. 1. Brief Description of SHP Development in SEA Table 1 General Profile of SHP Development in SEA Countries

4. Sources of statistical data in this paper: (1) Country report delivered by trainees of relevant countries in the Training Workshops held in HRC during 2000-2001. (2) AESIEAP Goldbook-2001 (Association of Electrical Supply Industry of East Asia and Western Pacific) Due to lack of information, data in the table does not include all the SEA countries. *Only a few in operation. 35 out of 42 have to be rehabilitated. **19 of which are not in operation.

5. Table 1 shows that: • (1) Hydropower resources including SHP resources are rich in all the SEA countries; • (2) All the resources are under-developed, and only less than 10% tapped among the exploitable amount; • (3) Quite a number of existing SHP stations are not in operation at present, which need to be rehabilitated or refurbished; • (4) Most of SEA countries have paid much attention to SHP development as to promote the rural electrification and economic development during past 2-3 decades.

6. 2. Market Conditions of SHP Development in SEA Table 2 Present Status & Need of Electricity Supply in SEA Rural Areas

7. Table 2 shows that: • (1) The market condition of SHP development in SEA countries was flourishing during the past 2 decades. • (2) the annual electricity consumption in SEA countries is in general much lower than that of developed countries, especially in rural area. There are large space for development of SHP in rural areas. • (3) The current percentage of household accessibility to electricity varies in a wide range in the SEA countries. The lowest one in Cambodia is 13%. It shows that increase of popularization of electricity supply is an urgent necessity for competing with the fast growing of economy and critical needs for improvement of life of peoples in rural area. • (4) In SEA, Malaysia & Thailand are well electrified countries; • (5) The actual continuity and reliability of electricity supply in rural areas can not be guaranteed;

8. 3. Project/Institutional Structure &Financing approaches • The institutional structure for SHP development varies in different SEA countries; Examples. • In the early 1980s, the institutional structure for SHP development is mostly initiated and controlled by the national electric authorities; • During the recent 2 decades, liberalization and privatization of SHP development took place in most countries; • The common trend in SEA countries is to utilize a government-enabled and market-based approach for rural energy development.

9. Examples: Indonesia --- PLN (State Electricity Corporation), the government electricity agency has focused on rural electricity in terms of rural electrification technology, including SHP.  --- Supported by the World Bank, PLN has appointed a rural electrification division to coordinate rural electrification development, which provides PLN with the capacity not only to identify, prepare and develop its own project, but also to coordinate and integrate relevant private sector development.

10. Examples: Malaysia ---Three state-owned utilities dominate power generation and distribution in Malaysia, i.e. TNB, SEB and SESCO. The market was opened to Independent Power Producers (IPPs) in 1994 and while initial rates of return on capital were good for IPPs, the Asian financial crisis came as a major blow to IPP profits.  --- Eventually, Malaysia expects to achieve a fully competitive power market, but reform is still at an early stage and exact process of transition has not been decided.

11. Financial Approaches • --Government allocation; • --Private investment (local) with government subsidies; • --Bank loan, such as ADB, World Bank etc.; • --Grant from donor countries and organizations; • --UN assistance.

12. 4. Barriers of SHP in SEA Countries • --Economic factors; • --Technical issues; • --Socio-economic factors; • --Funding shortage in the electric program of rural areas; • --Replacement of SHP plants by extension of national grid.

13. (1) Economic factors • The high initial capital cost of SHP schemes is one of impediment to the SHP development ,because the funding problems are most acute for most of SEA countries. • Further, the pre-investment work -- site survey and feasibility study -- is higher for SHP in percentage of the ultimate investment than the large hydro. Usually, the cost of pre-investment work for SHP could be higher than the acceptable 10-15% of the total investment, even if they are supported by government or foreign aid. • The specific investment cost per kW of SHP project varies greatly from country to country, from the lowest of USD600/kW to highest of USD 4000~6000/kW.

14. (2) Technology issues • At present , some SEA countries still need to rely • to a great extent on technical support from abroad. • This fact, added to the costs of importing foreign • expertise, materials and equipment , has greatly • impeded the faster development and more • widespread introduction of SHP project.

15. (3) socio-economic factors • Compared with the large hydropower and thermal power, the environmental impact of small hydropower is usually very slight. in conventional economic evaluation, this socio-economic merit which could bring considerable advantages , but still not to be quantified , is not paid much attention sometimes.

16. (4 ) Other barriers • ---The concentration of national development in urban and central areas in some SEA countries also causes the difficulties of funding electric programs in rural areas. • --- Replacement of SHP plants by extension of national grid. It is common that the existing SHP plants would be dismissed and replaced by the grid once the grid is extended to the area .

17. 5. Policy Measures and Regulations • A series of government-enabled market-based approaches for accelerating the rural electrification have been adopted, such as: • --Creation of an enabling policy framework; • --Indicated planning at the national level to guide decentralized, area-based planning; • --Market potential assessment and market creation; • --Support measures to develop and sustain market; • --Market regulation to protect the interests of the poor and low-income group.

18. Malaysia’s Four-Fuel Diversification Policy was designed to reduce country’s over dependence on oil as the energy source. Hydro, including SHP, together with oil, gas and coal are the 4 main sources • --- The Philippine Republic Act 7156 offers investment incentives to SHP development (some items are also adopted in other SEA countries): • * A special privilege tax of 2% of gross sales of electricity • * Duty free import of machinery, equipment and materials within 7 years of the contract award. • * 100% tax credit on domestic capital equipment for 7 years • * 2.5% special realty tax rates on equipment and machinery • * Value-added tax exemption • * Income tax holiday for 7 years • A lot of policy instruments have thus been stipulated in many SEA countries.

19. 6. Sharing Experience of SHP Development in China (I) • Since early 1950s, SHP stations and local grids in China have been developing rapidly, and by the end of 2000: • --There are about 50,000 SHP/mini stations in operation; • --The installed capacity totals 25,000MW; • --Annual generation amounts to 80,000GWh; • --300 million rural population can access to electricity; • --For the past 3-4 decades, the annual increase of SHP capacity in China averaged at 7-13% ; • --In China , 1/2 of land, 1/3 of counties, 1/4 of population mainly depend on SHP.

20. Sharing Experience of SHP Development in China (II) • During this next 10 years • Addition of SHP installation 20GW • Percentage of farmers access to electricity 98% • This is because: • 1) Rich resources; • exploitable SHP resources 87GW • % of exploitation of SHP resources 30% • 2) Development of suitable technology and indigenous manufacturing capability.

21. Sharing Experience of SHP Development in China (III) • 3) Effective policies and measures • “self-construction, self-management and self-consumption”, and setting up concessional electricity supply area for SHP; • Profit of state-owned (including local) SHP • stations reserved for further expansion of SHP development in stead of hand-over;

22. 6% value added tax (from 1994) for SHP plants versus 17% for large hydro; • Half of income tax (33%) from SHP plants returned back to the plants in some provinces; • Market-oriented electricity tariff for SHP could be set up on the basis of production cost, tax and reasonable profit ; • Favorable loan; • Collection of funds from farmers, partly by labor input;

23. Sharing Experience of SHP Development in China (IV) • 4) Establishment of primarily electrified counties based on SHP • --During past 15 years, 600 of total 2,400 China’s counties were successively electrified primarily; • --During 2001-2005, another 400 counties is to be primarily electrified; • --In the most hilly counties, all villages will have access to electricity, 98% household is to be electrified, and the per capita consumption will reach 500kWh.

24. Sharing Experience of SHP Development in China (V) • 4. HRC strengthening the exchange of experience and economic-technical cooperation with Asia-pacific countries • --Technical training for SHP professionals (30 training workshops for 600 professionals already held so far); • --Exchange of information through our SHP-internet homepage; • --Cooperative R+D projects especially cost-effective, microcomputer-based facilities for automating SHP plants; • --Consulting services for engineering projects including pre-investment work.

25. 7. Bright future Prospect • Based on the following reasons, in our opinion, SHP has a bright prospect: • (1) SHP has the following advantages : • --- there are many areas especially in the developing countries where electrification has to depend on local generation on a small scale; • --- the environmental impact of small hydropower is usually very slight, so, SHP not only is renewable and clean energy, also is sustainable energy; • --- exploitable together with irrigation and water supply

26. (2) Macro international environment is favorable to the SHP development -- Kyoto Protocol has set green energy, including SHP into a very favorable condition. (3)As stated in above sections, all SEA countries’ government paid importance to development of SHP for rural electrification. (4)The ever-increasing importance and effectiveness of South-South Cooperation is playing more important role to the development of SHP in developing countries.

27. In a word, with these favorable conditions, SHP in SEA countries will most hopefully be forwarded in a faster pace in the future after recovery from the financial crisis, and let’s joint our hands to promote SHP development in all the SEA countries.

28. Welcome to Hangzhou --“the finest and most magnificent city in the world “ (Marco Polo) Spring view of West Lake, Hangzhou

29. Welcome to HRC --the family of SHP in the world Fax: 0086 571 88062934 Phone: 0086 571 88086586 Address: 122 Xueyuan Road, Hangzhou, China Postalcode:310012 http://www.hrcshp.org

30. Thank You for your attention!