103332 POLIC IES F OR SH ENERGIZING MYANMAR AR Enhancing access to E D sustainable energy for all P R O SP ER ITY IN YANM ARM ALL ABOARD Policies for shared prosperity in Myanmar This Policy Note was prepared by: Dejan Ostojic (Team Leader and Lead Energy Specialist); Rome Chavapricha (Senior Energy Specialist); Xiaoping Wang (Senior Energy Specialist); Alan David Lee (Energy Specialist) and Myoe Myint (Energy Specialist) under the guidance of Julia Fraser (Practice Manager, Energy) ALL ABOARD Policies for shared prosperity in Myanmar Energizing Myanmar Enhancing Access to Sustainable Energy for All ENERGIZING MYANMAR Enhancing access to Myanmar has the sustainable energy opportunity to significantly enhance energy access, starting from a situation where energy con- for all sumption per capita is among the lowest in the world. Two-thirds of the population is not connected to the national electricity grid, and 84 percent of rural households lack access to electricity. The lack of affordable and reliable power is a key constraint to the delivery of vital services such as health, education and finance for rural populations, and for private sector development and job creation more broadly. Also, access to modern fuels for cooking (such as liquefied petroleum gas) is limited to urban areas. Consequently, traditional biomass (wood and animal dung) is widely used and accounts for about 70 percent of primary energy consumption. The Government’s National Electrification Plan aims to electrify more than 7 million households and achieve access to electricity for 36 million people by 2030. Achieving this objective (which is also the UN SDG7 in Myanmar) is vital to poverty reduction and shared prosperity. Context and opportunities for reform The power sector in Myanmar has the opportunity to scale-up access to affordable, reliable and sustainable electricity. In 2013, Myanmar’s electricity utilities connected about 200,000 residential customers to the power grid. At this rate, it would take nearly 40 years to achieve universal access and connect 7.2 million households presently without access to affordable and reliable electricity. To achieve universal access by 2030, as stated in the National Electrification Plan (NEP), the electrification rate should increase to 500,000 new connections per year by 2020, and stay at least at that level for another ten years. Investments in the power sector will need to more than double. The total cost of NEP, including invest- ments in power generation, transmission and distri- bution required to meet new demand, is estimated at Tariffs below cost recovery should be reviewed about $10 billion over the next 15 years. Furthermore, to overcome barriers to investment in the energy during this period, another $20 billion of investments in sector and disincentives to improving efficiency and power generation will be required to meet the rapidly productivity in the economy. Chronic underinvestment growing electricity demand, assuming an average real in energy infrastructure over the past decades led to GDP growth of 7.1 percent per year. The main challenge shortages and deteriorating reliability of energy supply to mobilize and finance these investments (in the order which, in turn, slowed down economic development of $2 billion per year) will be the financial viability of the and crippled social services including healthcare and power sector, which critically depends on the pricing education. Therefore, a sound energy pricing policy policy. is not just a cornerstone of a financially viable energy sector, but a catalyst for wider economic and social development. 1 Ensuring that financial viability is improved and Addressing the current fragmented institutional sustained over time requires a transparent, con- and regulatory framework, and low institutional sistent and stable energy pricing policy. The main capacity, should help speed up decision making and principle underpinning the pricing policy should be the remove bottlenecks for sector development. Seven full recovery of the economic cost of gas and electricity ministries are responsible for activities in the energy supply. This requires a regular review of underlying sector, with the Ministry of Energy (MOE) serving as the costs of gas and electricity supply and transparent focal point for overall energy policy, and the Ministry of adjustment of tariffs taking into consideration other Electric Power (MOEP) as the lead agency for power policy objectives such as protection of the poor and sector development. Overlapping responsibilities for vulnerable consumers. If meeting these objectives policy-making, regulation, planning and supervision requires subsidies to consumers (direct or cross-sub- across ministries hamper the operations of eight sidy) the subsidy should be explicit, well targeted, ade- state economic enterprises (SEEs), which are directly quately budgeted and fiscally affordable. responsible for implementation of sector activities. Furthermore, the low number of staff dedicated to Public resources – including concessional and energy policy, planning and regulation places severe donor support – will not be able to meet all the limits on the institutional capacity of the sector. financing needs in the power sector. Therefore, increasing private sector participation will be essential, Strategic planning and comprehensive assessment as well as improving sector efficiency. Myanmar already of all energy choices should help to adequately has significant experience in public private partnerships assess the significant and long-lasting economic, (PPPs) and direct private investments in the energy environmental and social impacts. Myanmar has sector, such as the Independent Power Producers abundant energy resources, including natural gas, (IPPs). Going forward, policy makers should review hydropower, solar and other renewable energy. It is also this experience and study approaches used in other well positioned to be a regional trading hub in natural countries to enhance private sector participation in gas and electric power. Unlocking this potential in an power sector development. Clearly, both the PPP and economically effective and environmentally and socially IPP models will be relevant in Myanmar. The PPP model sustainable manner will require careful analysis of all (where the private sector enters into a joint ownership alternatives and rigorous planning to chart a sustainable arrangement with the state) will be applicable across development path which will generate best economic the power sector, whilst the IPP model (where a private/ and social results for the country and affected popu- independent developer enters into a commercial lation. Given a difficult history of several large energy contract with a state entity, backed by government projects which caused deep grievances and impacts guarantees) will be more likely in power generation. on affected communities, there is a need to enhance transparency and encourage public participation in formulation of energy sector development plans and preparation of specific investment projects. 2 Recent developments Several reforms have been initiated to improve the distribution losses through private sector participation institutional and policy environment in the energy in billing and collections. As a result, distribution losses sector. To improve coordination and policy making, were reduced from around 23 percent (in FY2009) to the National Energy Management Committee (NEMC) 14 percent in Mandalay and 16 percent in Yangon chaired by the Minister of Energy and co-chaired by (in FY2014). To continue the loss reduction program Minister of Electric Power was established in 2013. will require substantial investments in expansion and MOE formulated a National Energy Policy (NEP) and modernization of overloaded and outdated distribution prepared an Energy Master Plan (EMP). The NEP networks. adopted in January 2014 a broad framework and strategic directions for electrification and sector Private sector participation has significantly development. MOEP developed a new Electricity Law, increased in power generation. The opening up which established the legal basis for IPPs and PPPs and of the sector to private developers (under the new stipulated the introduction of an independent Electricity Electricity Law) created a surge of unsolicited IPP and Regulatory Commission (ERC). Associated secondary PPP proposals. It is estimated that MOEP entered into legislation (rules and regulations) have not yet been Memoranda of Understanding for several thousand adopted and the ERC has not been established yet. Mega Watts (MW) of gas, coal and hydropower projects over the last couple of years. However, moving these Electricity tariff reforms have enabled power proposals towards the MOA stage and signing bank- generators and suppliers to cover the cost of able Power Purchase Agreements (PPAs) proved much service. The devaluation of the Myanmar kyat in 2012 more difficult. By 2015, the total installed capacity of significantly increased the cost of electricity supply IPPs reached about 440 MW (270 MW in gas-fired and due to the higher cost of US-denominated natural gas 170 MW in hydropower plants) or about 10 percent of for power generation. The Government responded the total installed capacity in Myanmar. Around 260 MW by increasing electricity tariffs in 2012 and in April of rental power plants were connected to the power grid 2014. The new electricity tariff structure for end-users to help alleviate acute power shortages. In April 2015, (effective from April 2014) provides three tariff blocks MOEP completed the first competitive bidding for the for residential and small consumers, and six tariff 240 MW Myingyan IPP, which resulted in a significantly blocks for industrial and large consumers. Effectively, lower price and better plant performance compared to the residential consumers are cross-subsidized by unsolicited bids received earlier. large commercial customers. Despite the cross- subsidies, the overall tariffs have covered the cost of Myanmar joined the UN Sustainable Energy for service (short-run marginal cost), while the investment All (SEFA) initiative and adopted the National cost remains subsidized by the Government. Electrification Plan aiming to achieve universal access to electricity by 2030. After joining the UN Restructuring and corporatization have been ini- SEFA initiative in 2014, Myanmar became one of the tiated in the power distribution sector. To improve first countries in the world to develop and adopt a performance and overall efficiency in power distribu- comprehensive NEP for universal access to electricity tion, the Government initiated corporatization of the (UN SDG7) by 2030. To achieve this, the NEP calls for Yangon Electricity Supply Board (YESB accounts for investments of $5.8 billion in grid and off-grid solutions about half of the electricity market in Myanmar) and to connect 7.2 million households. The NEEC, chaired created the Mandalay Electricity Supply Corporation by the Vice President, will oversee the electrification pro- (MESC) through the restructuring of the Electricity gram. The NEEC Secretariat and Program Management Supply Enterprise (ESE serves all states and regions Offices (PMOs) were established in MOEP (for the grid outside Yangon and Mandalay). Short-term conces- extension) and the Ministry of Livestock, Fisheries and sions for low-voltage distribution grid in urban areas Rural Development (for off-grid electrification). Program (e.g. Yangon and Mandalay) were also piloted to reduce implementation started in September 2015 with the World Bank Group support, including a $400 million IDA credit for the National Electrification Project. 3 Regional experiences and lessons With sustained government commitment, a tran- Residential tariffs in many countries in the region sition from low access (as in Myanmar today) to remain subsidized (e.g. Indonesia, Malaysia, and high or universal access can be made within two Vietnam) (Figure 1). This can easily undermine the decades, as Lao PDR and Vietnam have recently financial viability of the power sector if the subsidies are accomplished. Lao PDR and Vietnam have increased not fiscally affordable and/or are not adequate to cover the access to electricity from less than 20 percent in the revenue shortfall from tariffs below cost recovery. the mid-1990s to more than 90 percent (Lao PDR) and On the other hand, high electricity prices in Cambodia close to universal access (Vietnam) over the last two and the Philippines, which do not include subsidies, decades (Figure 1). The key element of success in clearly represent a major barrier for universal access to both countries was long-term national commitment to electricity in these countries. electrification which was broad-based and not unduly affected by political and economic changes. Thailand, Adequate institutional capacity is essential for a which achieved near universal access to electricity timely and sustainable electrification program. a decade earlier, consistently included rural electri- Planning and implementation of a national electrification fication in its 5-year National Economic and Social program need to be comprehensive and synchronized Development Plans. A similar approach was taken in across the country, and need to bring development Malaysia throughout 1980s and 1990s following the partners together on a sector-wide platform of “many establishment of the Rural Electrification Department partners, one team and one plan”. This requires a in 1978. designated implementation agency to be responsible for achieving electrification targets. For example, Sustained funding for upfront investments, the Thailand created the Office of Rural Electrification financial viability of the power sector, and afforda- (ORE) under PEA, and dissolved ORE after the grid bility, are closely linked to successful electrifica- reached most villages, at which point PEA resumed tion programs. Funds for capital investments in rural responsibility for serving villages. Furthermore, building electrification should be available on a stable basis institutional capacity throughout the value chain, because a lack of predictability makes it difficult for including the utilities and sector institutions, as well as implementing agencies to implement the program and local contractors, is critical to organize the work teams scale-up access in a sustainable manner. In Thailand, all the way to the regional, district and village levels. PEA received low-cost, long-term loans for grid roll-out. These loans significantly reduced the costs and enabled PEA to build its revenue base before the loan repayment began. In Vietnam, the electrification program has involved a major public investment effort, matched by significant local contributions. The power utility (EVN) was able to self-finance a large portion of the capital costs necessary for rural electrification, and, in the early years, local governments and consumers also contributed significantly. In Indonesia, the 1997 Asian Financial Crisis badly damaged financial health of the power company (PLN) and made it difficult for the government to provide funds. As a result, the electrification program in Indonesia slowed down and it only recently regained the speed after the government secured financial viability of PLN through a subsidy scheme. 4 Figure 1: Electricity access and price of electricity vs GDP per capita in select countries, 1990-2014 Source: “One Goal, Two Paths” The World Bank Flagship Report on Energy Access, 2011 Under the service agent model in Vietnam, local Establishing appropriate technical codes and intro- community maintained Low Voltage distribution lines, ducing recent technical innovations can lower the carried out simple repairs and handled collections, until cost and accelerate the implementation of the elec- EVN took over these functions after the electrification trification program. In setting up their networks, all phase was completed. power utilities must follow a technical code. However, codes which are designed for densely populated urban Creating an independent regulatory agency is areas may not be optimal for rural electrification. In essential for balancing viability of the electrification China, for example, costs were kept under control by program and protection of vulnerable consumers. developing two compatible national technical codes: Many countries around the world, including Thailand one for high demand regions; and the other for low and Vietnam, established independent energy regula- demand areas, with provisions for gradual transition tors to design tariffs and subsidy schemes that secure to the more stringent code with future growth. Many financial viability of service providers and affordability countries, including Lao PDR, adopted low cost for consumers. A well designed and stable regulatory options for low demand areas, such as “single-phase framework is essential for private sector participa- supply and single-wire earth return” (SWER). Lao PDR tion, protection of consumers, and management of also deployed shield wire technology with significant boundaries between grid and off-grid options for rural savings in the mountainous regions. electrification. Recent rapid technological advances and perfor- mance improvements, particularly in renewable energy for off-grid areas, will enable Myanmar to leapfrog certain stages of electrification. One example is a synergy between the electricity and tele- communication services which can be combined in off- grid areas where standalone generator powering cell towers can provide surplus electricity to nearby villages at a relatively low cost. 5 ENERGIZING MYANMAR Enhancing access to sustainable energy for all Policy options The establishment of NEEC and the adoption of and electrification rate outside Yangon and Mandalay. NEP demonstrates strong commitment and creates The Myanmar Transmission System Operator (MTSO) a sound basis for scaling-up access to electricity in should be established as an independent transmission both grid and off-grid areas: Maintaining NEEC and company. adequately staffed PMOs in MOEP and MLFRD, as well as building institutional capacity throughout the value Strengthen planning capacity and develop Gas chain (including in power distribution utilities and sector Sector Master Plan and Hydropower Development institutions at the regional/ state and district levels), Plan: Myanmar has abundant energy resources, will go a long way to ensure sustained government including natural gas, hydropower, solar and other commitment and strengthened implementation of the renewable energy. It is also well positioned to be a electrification program. regional trading hub in natural gas and electric power. Unlocking this potential in an economically effective and Establishing a sound policy and transparent regu- environmentally and socially sustainable manner will latory framework: The new Government should, as require careful analysis of all alternatives and rigorous a matter of priority, adopt secondary legislation (rules planning to chart a sustainable development path which and regulations) which is necessary to operationalize will generate best economic and social results for the the 2014 Electricity Law. The new policy and regula- country and affected population. This will require insti- tory framework should focus on the establishment of a tutional development and capacity building for system transparent and efficient electricity market, particularly planning, particularly in the natural gas and hydropower related to competitive bidding for new generation on sectors, as well as strengthening of environmental and IPP/ PPP basis. This will require adopting and main- social safeguards and including public consultations in taining a transparent pricing policy, consistent with the planning process and project preparation activities. the principles of full cost recovery, and establishing an independent Electricity Regulatory Commission, as The table on the right proposes short-term (within 1 envisaged under the 2014 Electricity Law. year) and long-term (within 3-5 years) policy options for the next five years (2016-2020) to help deliver on the Complete corporatization and foster commerciali- above objectives of increasing the rate of electrification; zation in power generation and distribution sectors: improving transparency and competition in the elec- Effective corporatization of YSEB and the creation of tricity market, and mobilize private sector investments, Mandalay Electricity Supply Corporation (MESC), as while protecting vulnerable consumers; increasing well as establishment of Electric Power Generation efficiency through corporatization and commerciali- Enterprise (combining all state-owned generation zation of enterprises in the energy and power sector; assets), are essential for improvement of sector perfor- improving strategic planning capacity and mainstream mance and scaling-up access to sustainable electricity principles of environmental and social sustainability in supply. Further restructuring of ESE may be a medi- the energy and power sector planning. um-term objective subject to the future market growth 6 Objectives Short-term options Long-term options Maintain the National Electrification Improve institutional capacity throughout Executive Committee (NEEC) account- the value chain. Increase the rate able for the implementation of NEP to the Provide support for institutional capacity of electrification country’s Vice President. building to the utilities (ESE, YESC, and reach at least Ensure that Project Management Offices MESC), local contractors, and sector 500,000 in MOEP and MLFRD are adequately institutions at the regional/ state and connections per year staffed and equipped for effective coor- district level. by 2020 dination of electrification program across Adopt grid codes and introduce modern the country. technologies and low cost solutions for rural electrification. Adopt secondary legislation (rules and Consolidate and strengthen institutional Improve regulations) for operationalization of the capacity for strategic planning and policy transparency and 2014 Electricity Law. making by merger of Ministry of Electric competition in the Establish the Electricity Regulatory Power and Ministry of Energy. Commission. Increase private sector participation and electricity market, Adopt and start implementing pricing leverage public resources through trans- and policy based on full cost recovery of parent and competitive IPPs/ PPPs. mobilize private the economic cost of gas and electricity Mobilize private resources and commer- sector investments, supply. cial financing to leverage public while protecting Ensure that subsidies to vulnerable resources and donors funding (including vulnerable consumers (direct or cross-subsidies) IDA) through a competitive selection of consumers are explicit, well targeted, adequately private developers for priority invest- budgeted and fiscally affordable. ments on IPP/ PPP basis. Complete corporatization of YESC and Develop and start implementing divest- MESC and foster their commerciali- ment program in the power sector zation by (in the first year): appointing focusing on YESC and MESC. CEOs, adopting bylaws, and setting Key Develop and start implementing restruc- Performance Indicators for the newly turing program for ESE focusing on Increase efficiency established corporations. corporatization of regional distribu- through Complete restructuring of MEPE and tion companies and creation of Rural corporatization hydropower enterprises and establish Electrification Agency under ESE. and Electric Power Generation Enterprise Establish Myanmar Transmission commercialization of (EPGE) System Operator (MTSO) responsible for enterprises in Transform YESC, MESC and MEPGC the high voltage transmission system. into financially viable companies with the energy and power sound corporate governance, clear sector development objectives and perfor- mance indicators (KPIs) by developing a Financial Viability Action Plan in the first year. Introduce financial auditing in line with international accounting standards. Create a joint task force led by MOE for Improve resource mapping and develop Improve strategic the review of gas sector development GIS based maps of renewable energy planning capacity plans and initiate preparation of gas resources and mainstream sector master plan. Carry out system studies for integration principles of Create a joint task force led by MOEP of renewable energy in the power grid environmental for the review of hydropower plans and Develop an integrated generation and and social initiate preparation of hydropower devel- transmission expansion plan to meet sustainability in opment program. future electricity demand in affordable, the energy and power Establish guidelines for environmental reliable and sustainable manner based sector and social safeguards and encourage on master plans for gas, hydropower and public consultations in formulation of renewable energy development. planning. energy master plans . 7 ENERGIZING MYANMAR Enhancing access to sustainable energy for all References Castalia Strategic Advisors and Columbia University (Earth Institute, Sustainable Engineering Lab) for the Government of the Republic of the Union of Myanmar and WBG, “Myanmar National Electrification Plan.” (August, 2014) WBG, “One goal, two paths: achieving universal access to modern energy in East Asia and the Pacific,” (2011) 8 ALL ABOARD Policies for shared prosperity in Myanmar GROWING TOGETHER FINANCING THE FUTURE BREAKING BUSINESS AS USUAL ENERGIZING MYANMAR CLOSING THE GAP PARTICIPATING IN CHANGE Reducing rural poverty Building an open, modern and Fostering competitiveness and a dynamic Enhancing access to Expanding access to Promoting public sector in Myanmar inclusive financial system environment for private sector growth sustainable energy for all social services accountability to all “This Policy Note is part of a series entitled All Aboard! Policies for shared prosperity in Myanmar” CLOSING THE GAP GROWING TOGETHER BREAKING BUSINESS AS USUAL Expanding access to Reducing rural poverty Fostering competitiveness and a dynamic social services in Myanmar environment for private sector growth FINANCING THE FUTURE ENERGIZING MYANMAR PARTICIPATING IN CHANGE Building an open, modern and Enhancing access to Promoting public sector inclusive financial system sustainable energy for all accountability to all ENERGIZING MYANMAR Enhancing access to sustainable energy for all ALL ABOARD Policies for shared prosperity in Myanmar The World Bank Myanmar No.57, Pyay Road 61/2 Mile, Hlaing Township, Yangon, Republic of the Union of Myanmar. www.worldbank.org/myanmar www.facebook.com/WorldBankMyanmar myanmar@worldbank.org