Improving efficiency in energy conversion and use
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One of the legacies of central planning is the inefficient use of energy in the transition countries. This chapter examines the reasons for this and looks at ways to address the problem. It concentrates, in particular, on the generation and supply of heat and power for households and industry.
At the start of transition, the power industries were monolithic enterprises operating according to objectives set by central government. This resulted in a variety of undesirable features. In the first place, there were high levels of energy consumption compared with industrialised market economies alongside low operational efficiency in generation and large losses in transmission and distribution. Second, tariffs were set well below supply costs while there was also persistently low revenue collection. There was substantial de facto subsidisation from large users to residential customers and small businesses. In addition, none of the regulatory or institutional arrangements necessary for operation along commercial lines were in place. The energy sector had a history of poor environmental, health and safety standards. Unsafe and ageing Soviet-designed nuclear power plants have continued to operate throughout the region.
Since the start of transition energy consumption has fallen, largely as a result of the severe decline in output in the early 1990s. However, energy intensity– energy use relative to GDP– remains high by OECD standards. Some piecemeal changes have been made, but there remains an urgent need for further institutional reforms as well as price adjustments, improvements in payments collection and direct measures to improve efficiency and safety. Many countries have passed legislation facilitating industry restructuring, and a small number of countries have privatised power companies. However, there has been considerable variation across countries in the extent of reform. Furthermore, the performance of ageing plants has generally declined following the failure to invest in new equipment. The result has been deteriorating efficiency and system security.
A combination of price reform, measures to raise collection rates and the introduction of new institutions designed to provide appropriate regulatory supervision is crucial if the secondary energy sector is to advance. However, the introduction of price reform must be accompanied by measures that provide social protection for the vulnerable. Tariff reform will need to occur in tandem with the introduction of new subsidy mechanisms. A second requirement is that price reform needs to be complemented by institutional reform. Privatisation of power and heat distribution is required if the problem of low collection is to be successfully tackled. More generally, private sector participation– within a framework of effective regulation and liberalisation– can bring substantial efficiency gains.
The chapter is organised into four sections. Section 5.1 outlines recent findings on energy intensity. Section 5.2 examines the link between high energy intensity and low prices, and argues that price increases would yield substantial economic benefits. The potentially adverse consequences of price increases for poorergroups within the population are covered in Section 5.3, which assesses the magnitude of the power and heat affordability problem and proposes appropriate subsidy mechanisms. Section 5.4 argues that institutional reform is essential and discusses the best arrangements for increasing private participation in the sector.
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