Emerging markets need the security and reliability of well-planned power transmission networks. Private sector investment in the transmission network, already proven in developed countries, is becoming more common in emerging markets.
The past is not prologue when it comes to models for the transmission of power; fresh technologies and growing needs are driving a new way of doing business. Although many developing countries fervently believed that the transmission sector needed to remain public throughout the 1980s and 1990s, a model that could accommodate private investment started to take hold after 2000. Once investment needs were evaluated—and understood to be higher than the government could handle on its own—officials started thinking more about ways to include the private sector.
The transmission network has always been seen as a natural monopoly, but it’s been misinterpreted as requiring monopoly ownership. Transmission networks need to be operated independently to ensure non-discriminatory access, but investment needs can be achieved with the involvement of many actors, public and private. The success of private investment in transmission in the U.S. led countries like Brazil—a shining example of tremendous investment need—to adapt this approach to its own requirements. In Brazil’s case, the country needed to expand and reinforce its network to connect its system and facilitate the creation of new renewable energy sources. Officials there found that incorporating private investment in transmission was not only feasible, but beneficial to all parties. The operation of the network remains a monopoly, and is organized as one entity, but private investment in transmission has been a success.
More than the sum of its parts
This approach works because although there is just one network, it has many discrete components, and these components can be independently developed by the private sector. The same is true for other emerging markets. Once you identify those pieces of the network, you can engage the private sector to build them. Once a private sector entity does that, it has the right to receive regulated revenue—but only in return for satisfying its obligations for maintenance of the assets and ensuring needed performance. This assures that the transmission lines or substations will always operate according to technical standards determined by system operations rules, which continue to be managed centrally, in a monopolistic manner.
More developing markets should consider this route. This is especially important as investment requirements in transmission grow alongside peoples’ demands and the need to integrate into grids more renewable sources of energy.
There are three elements critical to successful private investment in transmission. These include:
A good planning process, coordinated by an agency that is independent from all the other actors. Because the network is a monopoly, someone has to plan for it; this responsibility typically falls to a government agency, a planning agency, or a system operator. A comprehensive plan will proactively identify transmission needs and requirements to meet demand in the most reliable, cost effective manner. The agency that creates and executes this plan must do so in an integrated fashion by sensing the demands of all actors in the industry—including generators, demand centers, and renewable energy plants.
A mechanism to engage the private sector on supporting this investment. This could be a public-private partnership (PPP), whereby, the private sector develops one of those investments identified in the plan on a concession. These arrangements mean that a private participant becomes a transmission-owning entity. They are in charge of developing and maintaining the asset—and that in turn guarantees them revenue. That revenue gives them the opportunity to recoup their investment and a fair return on their investments.
This mechanism makes participation in the sector attractive because they are selling a transmission service that is regulated, with a regulated rate of return. It’s important to note, however, that transmission-owning entities do not decide which energy flows through the network; that’s decided by the system operator. This way, the key principles of the network are maintained—especially transparency and open access.
A clear and stable regulatory framework that defines how these investments are going to receive revenue. This regulatory framework is, at its core, transmission pricing: very clear transmission, cost recovery, and pricing rules. In this context, cost recovery defines how an investor is going to earn revenue and how transmission pricing regulations will collect such revenue from all the users of the network.
Awarding projects to investors follows competitive rules, which makes possible the awarding of the project to those who require the lowest revenue to develop and maintain the projects. In this way, regulators will feel more confident that the costs passed to consumers are efficient and reasonable.
A powerful draw
Private investment in transmission for developing countries will become more attractive as demand for transmission grows and a clear and stable institutional and regulatory framework for the transmission sector is developed. India is already considering mechanisms for private participation in transmission; Mexico recently approved a very ambitious reform plan that opens the possibility of complementing public resources with private participation. Brazil’s experience has resulted in a lower cost of capital in transmission. Those are the kind of model results that other developing economies pay attention to, and more countries will move in this direction.
It’s especially critical for those developing markets with high investment needs in transmission driven by renewable energy programs and the need to improve the capacity and reliability of the grids required by economic growth. Strong planning abilities in the transmission sector; clear arrangements to engage the private sector through PPP models; and regulations that already take into account transmission and pricing will help pave the path to success.
As populations grow, so will demand for energy. The expanded requirements for transmission are not far behind. Private investment, done right, can meet this need.