Doha, Qatar 9th of January 2013

The General Conference of the Arab Electricity Union in Doha on January 7-9 marks the organization's 25th anniversary, but the real agenda centers on preparations for the future. Based on even cursory examination of the industry and its customers, it is only natural that emphasis will be placed on areas like renewables, smart grids (both of which figure in the official rubric for the event), and ways in which intelligent restructuring can serve the interests of all parties.

Electricity affects all our lives, and yet when it comes to many of the specifics, public perceptions of the power industry are often distorted. With demand in the Arab region expected to rise strongly and steadily for at least the next two decades, and with environmental concerns ever closer to the top of the agenda, it has never been more important to ensure broader understanding of how the sector can and should become leaner, keener and cleaner as it expands over the next quarter-century. Restructuring has been proving its worth in some of the most highly developed societies since the 1970s, and now some middle-income countries are beginning to derive the benefits as well. Smarts grids are a far newer concept but give every sign of being just as revolutionary, if not more so. The combination of smart grids and restructuring can be our most effective tools if we are to meet the challenges of the future in anything like a responsible and timely fashion.

For these reasons, and because the trust and support of the public will be helpful - and in some cases essential - for the adoption and implementation of forward-looking power policies, it is important to start by understanding what a grid is and how it becomes a "smart" one. Simply put, a grid is the network structure linking the source of power generation to points where that power is used, such as homes, offices or factories. This system become a smart grid as a result of the integration of advanced information and communications technology (ICT) into all aspects of the utility's operations, from the point of generation to the point where the power is used. Smart grids provide utilities with a whole new level of visibility and control over applications and devices, significantly improving reliability and overall efficiency. The concept involves the adoption of newer technologies toupgrade the typical electricity grid, fitted largely with 20th century infrastructure, to 21st century standards, which also allows smoother integration of renewable energy resources. The backbone of the smart grid is the introduction of two-way communications between a utility and its consumers through advanced metering infrastructure and sensors that provide real or near real-time information regarding where and to what degree electricity is being consumed.

The idea for smart grids is quite new, but one of its major components has been in operation with power suppliers in both developed and emerging middle-income countries for several years. I refer to Energy Management Systems that use advanced ICT to coordinate the operations of generating stations and high voltage transmission networks, allowing for more efficient power generation and superior load management. Constant advances in ICT over time have led to progressively more extensive integration of generation and transmission, and eventually smart grids will enable the flow of information to extend to industrial machinery and even household appliances.

It is important to note, too, that smart grids should not be confused with "smart metering". The latter is an application for measuring the consumption of a utility's customers, providing accurate accounting of energy use. The information it provides is crucial for billing and other purposes, making it a small but essential component of an electricity network. Smart grids, on the other hand, encompass far more than just metering: each smart grid is tailor-made to provide solutions for a given utility's specific needs, and once installed with flexible platforms open to multiple communication technologies, it constantly fine-tunes those solutions as it processes an unending flow of updated data.

By providing fully detailed information across the entire system in real time, smart grids impart a long list of benefits. These include increased reliability for the grid itself and for other elements of the system, better management of the load on the system, clearer understating of use patterns, and lower operating costs for the utility. In addition, smart grids boost energy efficiency by, for instance, lowering overall demand, reducing end-end system losses, and enhancing peak demand shifting. The gains also assist in the integration of renewables, whether via intermittent bulk generation or distributed renewable generation. Last but not least, the efficiency improvements lead directly to a reduction of both conventional pollutants and emissions of greenhouse gases, bringing about improvements in environmental quality and reducing the power supply system's climate change impacts.

Of course, not all existing grids are equipped to derive maximum benefit from being transformed into smart ones because certain conditions must be in place. First, the existing system - from generation through transmission to distribution - must be in a technically sound operating state. The distribution system must be fully automated, and the tariff structure has to be unbundled to reflect the cost of supply at different times of day and year. Utilities need flexible and scalable platforms with two-way digital communication infrastructure and applications platforms to achieve end-to-end smart grid benefits. Finally, there should be large numbers of consumer appliances with the ability to automatically switch on or off in response to the tariff structure. If one or more of these conditions are not in place, a smart grid will not reach peak performance. It is important, therefore, that each system undergo a diagnostic assessment to identify and correct weaknesses, and to determine feasible smart grid results prior to the transition.

Another requirement relates to security, especially for utilities in large cities and grid systems that supply critical loads, cases in which where prolonged electricity outages could result in very high economic costs from production losses, interruptions in essential services, and blacked out security systems. If smart grid has a vulnerability, it stems from the fact that its communication system is Internet Protocol (IP)based . IP confers several advantages, including greater ability to share information across systems boundaries, simplified communications and control, and improved end-to-end visibility.  Unfortunately, this means of communication also is potentially open to hackers in spite of any fire-wall systems that may be installed. Since the grid more than qualifies as critical infrastructure and is increasingly central to the daily lives of people and businesses, it is important to ensure that cyber-security is in place to protect against malicious attacks. Unlike traditional power system failures that can be modeled probabilistically, cyber-security requires a shift in thinking to accommodate the possibility of a coordinated attack on multiple facilities by an intelligent assailant operating over a network. In identifying critical assets, a rule-out approach (assuming every asset is critical until proven otherwise) might be more appropriate than the add-in approach (starting with assumption that no asset is critical).

We are still very much at the dawn of the smart grid era, mainly because of the aforementioned prerequisites. Accordingly, no utility has fully installed a smart grid. Most of those in the developed countries and some in the middle-income developing ones have achieved full automation or are very close to doing so, but this is a far cry from a genuine smart grid system. Nonetheless, real progress is continuing, and technological advances make the prospects every day.

By contrast, when it comes to the restructuring of electricity sectors, we have a long history of past experience to guide us. What is more, some of the changes involved have considerable cause/effect overlaps with the aforementioned prerequisites for smart grids. To understand why this is the case, we need to recall what restructuring entails.

An electricity sector is network infrastructure, comprising, comprising points of generation and a network that transports the power produced to users and consumers. Such a structure would be regarded as vertically integrated under a single owner. For example, the Qatar Electricity Corporation is a vertically integrated utility, as are virtually all of the electric utilities in the Mashreq, Maghreb, and Gulf regions. Restructuring is about unbundling such vertically integrated structures into independent entities engaged in production, transportation/transmission, supply, and distribution, and establishing the requisite legal and regulatory regimes to oversee activities in the new sector. Jordan is the only example in the region with a fully unbundled electricity sector.

One very common question among laypeople is why power sectors should be restructured when most utilities seem to be operating satisfactorily, both quality and reliability of the service is good, and tariffs are relatively reasonable. The answer is that however adequate a traditional electricity sector is (or appears to be) by traditional measures, restructuring opens the way for a new level of performance that can serve the interests of all stakeholders. Time and again, the competition engendered by having multiple players in a restructured electricity sector include greater efficiency as a result of cost reductions, lower tariffs, and improvements in both quality and reliability - not to mention enhanced productivity and competitiveness for myriad industries, as well as more discretionary spending power in the hands of households, businesses and governments.

Having said all that, it also is important to acknowledge that there is no "one-size-fits-all" formula guaranteed to work in every electricity market and every part thereof. For example, while restructuring in Arab countries would bring about competition in generation and supply, the wires business (i.e. transmission and distribution) should be tightly regulated. Many factors have had a hand in making restructuring a viable alternative, not least advances in economic theory came to view utilities as comprising two distinct components, "network" and "product market", in which the latter (in this case generation and supply) can potentially be competitive. We also have to credit technological advancements in power generation whereby small and highly efficient combined-cycle plants have pre-empted the argument of large plants for economies of scale, ideological and practical needs in support of privatization, and the need for private capital to free public funds for social uses. All of these have converged and combined in various ways to convince numerous countries to go down the path(s) toward restructuring, liberalizing and/or encouraging private sector participation in their power sectors, so the reasons and approaches to restructuring have differed from case to case.

Not surprisingly, while the effects of restructuring have been overwhelmingly positive, the different methods applied to different situations have produced a wide variety of specific experiences. The most radical and well-known example of restructuring and privatization was that in the United Kingdom, a relatively straightforward process which started with the introduction of competition in generation before also including supply. Despite the inevitable ideological controversies, the UK's experience since the beginning of the 1990s has been a success story of how to plan and implement restructuring. 

In the United States, by contrast, restructuring has largely been an accident. Most electric utilities in that country have traditionally been private sector-owned, and the primary objective of the Public Utility Regulatory Policies Act passed in 1978 was the promotion of alternative forms of energy in the wake of the oil shock. Instead, PURPA had the unintended effect of unleashing the competitive entry of non-utility generators alongside the hitherto vertically integrated monopolies. Private generation continues to grow in the US, and the interconnections across states with regional power pools, driven by major players like PJM and California ISO, have only added to the momentum.

Although not as well-known as the UK's, Chile's experiment actually pioneered the practice of radical restructuring, in 1987, albeit at a slower pace. Argentina also has undertaken significant restructuring, and most Latin American countries have followed this lead, instituting deregulated privatized electricity industries. Some of the major Asian economies, including Malaysia and the Philippines, have been frontrunners in terms of revenue gains from asset sales that followed restructuring. China, on the other hand, has seen some restructuring, but not much progress on privatization.

Among the affluent countries of the Organization for Economic Cooperation and Development, significant asset sales have occurred in Australia, Canada, Germany, Spain, and the UK, while substantial liberalization has occurred in Ireland, New Zealand, Norway, Sweden and the US. France is the only major country with no sign of radical restructuring of its monopoly, EDF. Keen on being part of the European Union, most countries in Central and Eastern Europe have either followed or are in the process of following the EU Electricity Directive by restructuring and extensively privatizing their power industries.

The situation in our region is still very much at the beginning. As mentioned earlier: from the Atlantic to the Gulf, only one country - Jordan - has undertaken significant restructuring of its electricity industry as well as sales of generation, distribution and supply assets to the private sector. Jordan's actions have been driven by a practical need for private sector investment in order to free up public resources to address socioeconomic challenges, in addition to the efficiency improvements that restructuring has brought.

All other Arab countries are characterized by vertically integrated power industries. In general, the main reasons for this have been the abundance of energy resources and, to varying degrees, the availability of public funds for operational subsidies and/or capacity increases. The inducements that have compelled countries in other parts of the world to embark on restructuring do not seem to have the same impact in the Arab region. The flip side of this phenomenon is that electricity use is excessive and inefficient, and the under pricing and subsidies are putting significant pressures on national budgets. Even for the energy-rich countries, restructuring power sectors and introducing private sector involvement would relieve pressure on budgets, and free up resources for social spending.

The message for the region is clear: even for energy-rich countries, Jordan's example is worth emulating. The resources are not inexhaustible, and the efficiency gains from restructuring and allowing private sector involvement in power sectors would lead to improvements in environmental quality, as well as reductions in climate change impacts. Above all, getting this process sooner rather than later just makes sense: an early start is bound to make restructuring more orderly and more cost-effective than if we wait for a crisis to force our hand, and if and when the technical conditions are ripe for smart grid, our markets will be ready for it.

-Ends-

For media inquiries, please contact:
Krikor Khatchikian
Group Account Director
Grey Doha / Cohn & Wolfe
Telephone:      +974 4428 3177
Email: krikor.khatchikian@cohnwolfeqatar.com 

© Press Release 2013