Volatility in energy prices is both a scary and wonderful thing. It brings risks that must be managed under uncertain future conditions. It also brings opportunities to profit from price movement...
Global Power Projects: Evaluating Market Potential
The Geneva summit between Ronald Reagan and Mikhail Gorbachev signaled the beginning of the end of the Cold War. With a diminished threat of East-West confrontation, countries throughout the world gradually reoriented their priorities (em away from politico-military security and toward economic development. To paraphrase Woodrow Wilson, the end of the Cold War had made the world "safe for capitalism."Now, 10 years later, with a few notable exceptions in the Balkans and elsewhere, evidence abounds to support that appraisal, from Argentina to Prague to Manila. And in no industrial sector is this new "liberation theology" more evident than in infrastructure development (em especially power generation.
In Asia for example, more power has been generated and consumed in the past five years than in the previous 15. Still, as power developers from Bombay to Budapest to Beijing will attest, the introduction of free-market principles in the power sectors of the world remains more a goal than a reality. The learning curve is steep (em both for governments and independent power (IPP) developers (em and success by no means assured. In this article I will try (em as one who entered this fray as a developer seven years ago (em to assess the future of the global IPP market, comment on the factors that account for the success of a few IPP developers and the failure of others, and identify countries with sensible policies that equitably share risks and rewards with investors, and thus present the most attractive climate for independent power projects in the years ahead.
Good Corporate CitizenshipIn a perfect world, governments would liberalize their energy sectors on purely intellectual grounds (em because it makes sense to establish a private, competitive power sector that will produce least-cost power in the shortest period of time. Unfortunately, governments are run by politicians who do not always see the situation that way.
The following questions were posed to me four or five years ago by the prime minister of a large country in South Asia: "Why should I privatize a government power plant that is one of the few assets that actually brings money into the treasury? Why should I incur the public criticism that I am selling the 'patrimony of the country' to some foreign cartel that will reap all the profit and do nothing to improve the plant's output or performance? Why should I (em through privatization (em stimulate massive personnel layoffs and labor unrest? In short, this sounds like political suicide; what's in this for me?" Of course, there are obvious answers to these questions. If a country faces power blackouts for several hours each day (em as most emerging markets do (em and has no money in the treasury to build new capacity, the president's political half-life will be short anyway. So why shouldn't he try to make matters better? A properly executed project will provide more power, at a lower price, faster than the state-owned company can produce it, and if the government holds on to shares in the privatized company, it can use the shares for capital formation when