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The 2008 global financial crisis opened a window of opportunity for critical power sector investments in five countries in Eastern Europe and Central Asia. It highlighted the importance of policy and regulatory reform in attracting financing for investments, says a new report released by the World Bank, the Energy Sector Management Assistance Program (ESMAP) and Public-Private Infrastructure Advisory Facility (PPIAF), Crisis within a Crisis? How the Financial Crisis Highlights Power Sector Vulnerabilities in Europe and Central Asia Region.

Before the financial crisis, demand for electricity was growing steadily. A major investment gap existed as power sector companies struggled to mobilize financing for under-maintained, aging infrastructure. The financial crisis offered both a reprieve and a warning to the power sectors in Armenia, Kyrgyz Republic, Romania, Serbia and Ukraine. It slowed demand for electricity by a few years. But the same factors that slowed demand have further limited the funds that public and private electricity companies have for new investment, and restricted the availability of financing. An energy crisis has been postponed, but not avoided, says the report.

Electricity consumption dropped in all of the countries covered by this report between 2008 and 2009, ranging from 0.6 percent in the Kyrgyz Republic to 8.7 percent in Ukraine. This hurt the financial performance of power sector companies, reduced their ability to attract financing, and in turn delayed the need for developing new power plants to meet emerging supply gaps in most countries said Ranjit Lamech, the Energy Sector Manager of the World Bank. “It is imperative for governments in these five countries to prioritize investments in the power sector to ensure that electricity is affordable and reliable, for their populations,” Lamech added.

The report was prepared under the World Bank’s Infrastructure Recovery and Assets (INFRA) Platform launched in 2009 to support counter-cyclical spending on infrastructure and protecting existing assets and priority projects of developing countries with the intention of providing the foundation for rapid recovery and job creation. Under the INFRA platform ESMAP funded power sector vulnerability assessments in 19 countries, including five countries in the Europe and Central Asia region.

Prioritize Public Spending

The report emphasizes that, with smaller public budgets and scarcer commercial lending, Governments will need to prioritize power sector investments. Governments will also need to carefully balance capital expenditures with operating and maintenance expenditures as some operating expenditures, particularly fuel costs, continue to grow. This includes considering tradeoffs between new investment and expenditure on operation maintenance needed to preserve existing infrastructure. In Romania, Serbia and Ukraine, the governments will also need to prioritize the investments required for compliance with certain EU regulations. The report proposes a prioritization framework based on the objectives of affordability, supply reliability, and energy security. In all of the countries studied, the report identifies energy efficiency as a least cost investment to address the emerging supply-demand gap. Some of the case study countries require immediate investment. Kyrgyz Republic, for example, currently faces a winter energy shortage because of insufficient baseload capacity. Others should begin making investments incrementally now to avoid severe consequences in several years. For example, Romania will need to shut down a significant portion of its existing capacity, or pay large fines to keep it operational, if it does not invest in environmental upgrade of its thermal power plants.

Create a Favorable Environment for Investment

The report stresses the need to create a favorable environment for investments in the power sector in all five countries, and recommends reforms to attract private sector investment in the power sector. The findings of this study support earlier World Bank studies in the region—that it is important to have a policy, legal and regulatory environment which supports a financially viable sector in order to attract investment. Of particular importance is the need to support regulatory frameworks that allow for full recovery of costs through tariffs, including predictable recovery of capital expenditure and financing costs. The report also shows that countries that have a better record of good governance, including rule of law, regulation, control of corruption, government effectiveness, and transparency, have had more success in attracting private investment.

The Role of the World Bank

The World Bank can help Eastern Europe and Central Asia countries emerge from the financial crisis by supporting public spending on critical investments, and supporting Government efforts to create an attractive environment for investment. The report says the World Bank can do this by providing:

• Loans for power sector infrastructure,
• Advisory services and technical support to improve public sector investment planning and enact regulatory and market reform, such as least cost development plans for Ukraine and Kyrgyz Republic, regulatory reforms to enhance the financial viability of power sector entities in Kyrgyz Republic, Serbia and Ukraine.
   
• Loan guarantee instruments to lower the borrowing costs of private investors in the power sector, and leverage private sector financing that otherwise might not be available.

The report stresses the importance of policy and regulatory reform in attracting financing for investments in the power sectors of Armenia, the Kyrgyz Republic, Romania, Serbia and Ukraine. It includes examples of successful implementation of various World Bank programs in the Eastern Europe and Central Asia region.