The convergence of water, electricity and gas industries: Implications for PPP design and regulation
The paper “The convergence of water, electricity and gas industries: Implications for PPP design and regulation” (Phang, S.Y. ) will be presented at the 9th Conference on the Regulation of Infrastructures (25-26 June, 2020).
In several countries that have privatised their utilities sectors, gas, power and water are separated industries regulated by sector-specific regulators. In a parallel development, in jurisdictions where there is a shortage of cheap and clean freshwater, desalination is becoming an important source of water supply. Where the primary energy source is gas, the use of combined cycle gas turbine power plants to supply electricity for desalination links the gas, electricity and water industries. We use the case of the financial collapse of an integrated water and power Public Private Partnership project to illustrate the problems that can arise from such convergence, and to draw lessons for businesses, market design and regulators. A water solutions company had successfully tendered (based on lowest bid price per cubic metre of water) to build a desalination plant for a public sector water agency that would deliver an agreed volume of desalinated water per day for a 25-year period. The technology proposed and used was an integrated on-site CCGT power plant to supply electricity to the desalination plant as well as to the electricity grid. The business strategy was for proﬁts from electricity sales to subsidise the desalination plant’s operation costs. However, as energy prices fell, the combination of take-or-pay high price LNG contracts and low electricity prices in a competitive electricity wholesale market led to operating losses that sent the company deep into debt. The reasons for the collapse of the business were not technological or operational but failure to understand the market risks arising from infrastructure convergence, long-term contractual arrangements and missing markets. The solution is neither regulatory convergence nor regulating the interfaces of converging sectors. Instead, we make a case for dynamic regulation, hedging markets and shorter term contracts to mitigate the business risks for firms in increasingly integrated and converging sectors.
ABOUT THE AUTHOR
Sock-Yong Phang is Professor of Economics at the Singapore Management University. She researches in the areas of urban economics and regulatory economics, focusing on housing, infrastructure and Public-Private Partnerships. Her recent publications include the book “Policy Innovations for Affordable Housing in Singapore”, and journal articles “A general framework for price regulation of airports”, and “Urban rail transit PPPs: Lessons from East Asian Cities”. She has previously served as board member of Singapore’s Urban Redevelopment Authority, the Land Transport Authority, and the Public Transport Council. She was a Commission Member of the Competition and Consumer Commission of Singapore from 2005 to 2016 and has been a board member of the Energy Market Authority since 2015.