The convergence of water, electricity and gas industries: Implications for PPP design and regulation

In several countries that have privatised their utilities, power and water are separate industries regulated by sector-specific regulators. In a parallel development, desalination has become an important source of water supply in countries where there is a shortage of cheap and clean freshwater. Whe...

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Main Author: PHANG, Sock Yong
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2020
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Online Access:https://ink.library.smu.edu.sg/soe_research/2419
https://ink.library.smu.edu.sg/context/soe_research/article/3418/viewcontent/Phang_2020_Sep_Infrastructureconvergence_av.pdf
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spelling sg-smu-ink.soe_research-34182020-12-11T06:09:35Z The convergence of water, electricity and gas industries: Implications for PPP design and regulation PHANG, Sock Yong In several countries that have privatised their utilities, power and water are separate industries regulated by sector-specific regulators. In a parallel development, desalination has become an important source of water supply in countries where there is a shortage of cheap and clean freshwater. Where the energy source is gas, the use of gas-fired power plants to supply electricity for desalination links the water, electricity and gas industries. We use the case of the financial collapse of an integrated water and power project to illustrate the problems that can arise from such convergence, and to draw lessons for firms, Public-Private Partnerships (PPPs) and regulators. A water company had successfully tendered to build a desalination plant for a water agency that would deliver an agreed volume of water per day for a 25-year period. The technology proposed was an integrated on-site power plant to supply electricity to the desalination plant as well as to the electricity grid. The business model was for profits from electricity sales to cross-subsidise water desalination costs. However, a combination of take-or-pay LNG contracts and low spot prices in a competitive electricity market led to deep operating losses. The reasons for the collapse of the business were neither technological nor operational but arose from failure to adequately manage the market risks arising from infrastructure convergence, competition, long-term rigid contractual arrangements and missing markets. The case highlights the importance of risk assessment at bidding stage and, in particular, the risks that a cross-subsidy can create. Viewed in this context, our recommendations are for regulatory convergence for converging infrastructure sectors, multi-sector risk assessments for PPP contracts, crafting flexible PPP contracts in anticipation of future adjustments, development of more liquid hedging markets and promoting competition where feasible in infrastructure sectors. 2020-12-01T08:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/2419 info:doi/10.1177/1783591720970340 https://ink.library.smu.edu.sg/context/soe_research/article/3418/viewcontent/Phang_2020_Sep_Infrastructureconvergence_av.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University electricity sector liberalisation Infrastructure convergence infrastructure regulation market risks missing markets public-private partnerships Industrial Organization
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic electricity sector liberalisation
Infrastructure convergence
infrastructure regulation
market risks
missing markets
public-private partnerships
Industrial Organization
spellingShingle electricity sector liberalisation
Infrastructure convergence
infrastructure regulation
market risks
missing markets
public-private partnerships
Industrial Organization
PHANG, Sock Yong
The convergence of water, electricity and gas industries: Implications for PPP design and regulation
description In several countries that have privatised their utilities, power and water are separate industries regulated by sector-specific regulators. In a parallel development, desalination has become an important source of water supply in countries where there is a shortage of cheap and clean freshwater. Where the energy source is gas, the use of gas-fired power plants to supply electricity for desalination links the water, electricity and gas industries. We use the case of the financial collapse of an integrated water and power project to illustrate the problems that can arise from such convergence, and to draw lessons for firms, Public-Private Partnerships (PPPs) and regulators. A water company had successfully tendered to build a desalination plant for a water agency that would deliver an agreed volume of water per day for a 25-year period. The technology proposed was an integrated on-site power plant to supply electricity to the desalination plant as well as to the electricity grid. The business model was for profits from electricity sales to cross-subsidise water desalination costs. However, a combination of take-or-pay LNG contracts and low spot prices in a competitive electricity market led to deep operating losses. The reasons for the collapse of the business were neither technological nor operational but arose from failure to adequately manage the market risks arising from infrastructure convergence, competition, long-term rigid contractual arrangements and missing markets. The case highlights the importance of risk assessment at bidding stage and, in particular, the risks that a cross-subsidy can create. Viewed in this context, our recommendations are for regulatory convergence for converging infrastructure sectors, multi-sector risk assessments for PPP contracts, crafting flexible PPP contracts in anticipation of future adjustments, development of more liquid hedging markets and promoting competition where feasible in infrastructure sectors.
format text
author PHANG, Sock Yong
author_facet PHANG, Sock Yong
author_sort PHANG, Sock Yong
title The convergence of water, electricity and gas industries: Implications for PPP design and regulation
title_short The convergence of water, electricity and gas industries: Implications for PPP design and regulation
title_full The convergence of water, electricity and gas industries: Implications for PPP design and regulation
title_fullStr The convergence of water, electricity and gas industries: Implications for PPP design and regulation
title_full_unstemmed The convergence of water, electricity and gas industries: Implications for PPP design and regulation
title_sort convergence of water, electricity and gas industries: implications for ppp design and regulation
publisher Institutional Knowledge at Singapore Management University
publishDate 2020
url https://ink.library.smu.edu.sg/soe_research/2419
https://ink.library.smu.edu.sg/context/soe_research/article/3418/viewcontent/Phang_2020_Sep_Infrastructureconvergence_av.pdf
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