Guidance Note

Electricity Sector Risk Assessment

,

• Publisher: Asian Development Bank
• Year: 2009
• Print ISBN: 9789290923169
• eBook ISBN: 9789290921684
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

The electricity sector is vulnerable to a broad range of risks that can threaten development effectiveness. Risks can spring from the magnitude of the sector's capital investments, opportunities for discretionary decision making and rent seeking by stakeholders, weak policy and regulatory frameworks, capacity weaknesses of sector entities, and inefficient systems. Governance risk vulnerabilities can cut across policy formulation, regulation, planning, financial management, procurement, and sector operations. This guidance note aims to explain key features of the electricity sector and identify entry points for mapping governance risks.

Sector Risks

Understanding the Risk Environment and Identifying Risks. The electricity sector’s vulnerability to risks springs from the magnitude of its capital investments, potential for regulatory capture, and opportunities for discretionary decision making and rent seeking by stakeholders. Risk vulnerabilities exist in policy making, regulation, organizational management, and operations. The extent of risk and where these risks lie will differ under different sector structures.

The electricity sector is an interlocking system. Reducing risks from poor governance, institutional weaknesses, and lack of technical and managerial capacity in the sector requires an understanding of where the risks occur, what arrangements sustain them, and which systems and stakeholders can be strengthened to create an effective, systemic movement toward accountability and integrity in the sector.

Sector performance indicators provide first-order signals on sector risks. These include (i) electricity coverage, (ii) system losses, (iii) reserve margin and brownouts, (iv) reliability, (v) cross subsidies, (vi) collection ratio, and (vii) cost recovery (please refer to the glossary for a description of these terms).¹² These indicators may point to lack of investment in new capacity, a weak financial management system, inefficient business processes, poor sector oversight, and/or corruption. Low collection ratios can indicate a problem with the utility’s commercial systems, or an absence of electric meters. The risk may be linked to capacity, or reluctance to use computerized systems, or it may be associated with corruption (for example, writing off debts, recording false payments, or failure to enforce collection, in exchange for side payments from customers). An adequate analysis of the situation is vital. Risks tend to be relatively more serious where lack of transparency is prevalent, accountability is absent, and decision making is discretionary. Risks can be identified at various stages. They need to be prioritized in terms of likelihood and seriousness. For details of a risk-based approach to governance assessment, please refer to www.adb.org/Documents/Guidelines/GACAP-II-Guidelines.pdf.

Risks tend to be relatively more serious where lack of transparency is prevalent, accountability is weak, and decision making is discretionary

Sector Risks. The table below illustrates generic sector risks. It is intended to provide a framework for a systematic assessment of risks. Some of these risks may exist in the DMC sector being assessed; others may not. For GACAP II purposes, the actual risk assessment and the risk management plan will follow Appendix 8 in the GACAP II guidelines. If a corruption risk, for example, is identified in regulation (institutional dimension) and another corruption risk is identified in staff appointments (organizational dimension), both would be reported as corruption risks in the risk assessment.

Table 1 Electricity Sector—Examples of Generic Risks

Dimension	Risks
1. Institutional Risks
1.1 Policy	Policies emphasize capital investment without regard for necessary improvements in the governance framework or the environment in which the electric utility operates. This can undermine sustainability of sector investments. Large capital projects entail large-scale procurement, which can create vulnerability to leakages when transparent processes are not used. Privatizing power utilities can create vulnerability to risks of a lack of public acceptance, undervaluation of publicly owned assets, higher cost of services to customers, and labor issues. Poorly informed DMC policies on renewable energy can pose risks of nonsustainability and inability of DMCs to provide subsidies.
1.2 Laws	Noncompliance with the legal framework can undermine sector efficiency and predictability.
1.3 Regulation	Politicized regulation can create an imbalance between the needs of customers (desire to pay the lowest rate possible) and the industry (desire of investors to earn a return). This can undermine the sector’s financial viability. The lack of autonomy of the regulator (e.g., staff are appointed and paid by the government, the regulator’s budget is part of the budget of another government entity, etc.) can undermine independent regulation. Issuance by the sector regulator of licensing criteria for power plants is ad hoc. Altering the licensing criteria to suit particular interests can compromise sector performance. Repetitive procedures for obtaining clearances have no time limit for the final decision. These can work against efficiency and provide opportunities for staff to ask for bribes. Civil society orga...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Contents
• List of Table and Figure
• Foreword
• Abbreviations
• Introduction
• Key Features of the Sector
• Sector Risks
• Glossary
• Back Cover