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Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized In the Dark SOUTH ASIA DEVELOPMENT FORUM In the Dark How Much Do Power Sector Distortions Cost South Asia? FAN ZHANG © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 21 20 19 18 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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South Asia Development Forum ome to a fifth of mankind, and to almost half of the people living in poverty, HSouth Asia is also a region of marked contrasts: from conflict-affected areas to vibrant democracies, from demographic bulges to aging societies, from energy crises to global companies. This series explores the challenges faced by a region whose fate is critical to the success of global development in the early 21st century, and that can also make a difference for global peace. The volumes in it organize in an acces- sible way findings from recent research and lessons of experience, across a range of development topics. The series is intended to present new ideas and to stimulate debate among practitioners, researchers, and all those interested in public policies. In doing so, it exposes the options faced by decision makers in the region and highlights the enor- mous potential of this fast-changing part of the world. v Contents Foreword xvii Acknowledgments xix About the Author xxi Abbreviations xxiii Overview .......................................... 1 What This Study Adds ............................................4 Beyond Fiscal Costs ..........................................5 Beyond the Core: Upstream and Downstream .....................6 Massive Electricity Shortages .......................................7 Low Access and Low Quality of Supply ...........................7 Dire Environmental and Health Concerns .........................8 Three Types of Distortions ........................................10 Institutional: No Market ......................................10 Regulatory: Market but Distorted. .13 Social: Market but with Externalities ............................18 Conclusion ....................................................22 Policy Recommendations .....................................22 Outline of the Report ........................................25 References ....................................................25 1. What Are the Distortions? .............................. 29 Institutional Distortions ..........................................30 Upstream: Unproductive Mines, Leaking Pipelines, and Privileged Access ......................................31 Core: Inefficient Generation, High Losses, and Favoritism in Dispatch .............................................33 Downstream: Lower Living Standards and Slower Business Growth ....37 vii viii l CONTENTS Regulatory Distortions ...........................................39 Upstream: Underpriced Coal and Gas ...........................40 Core: Underpriced Electricity and Inefficient Transmission Pricing .....42 Downstream: Cross-Subsidies Penalizing Competitiveness ...........44 Social Distortions ...............................................45 Upstream: Unpriced Externalities of Fossil Fuel Combustion and Coal Mining ...........................................45 Core: Groundwater Depletion .................................47 Downstream: Dependence on Kerosene Lamps and Inefficient Captive Generators ......................................48 References ....................................................50 2. Assessing the Cost of Distortions ........................ 55 Decomposing the Cost of Distortions ...............................56 Institutional Cost ............................................59 Regulatory Cost ............................................60 Social Cost ................................................61 Estimating the Cost of Distortions ..................................62 Estimating Supply and Demand ................................63 Constructing a Production Possibility Frontier .....................64 Simulating the Increase in Output ..............................64 Estimating the Welfare Effects on Households and Firms 65 Partial Equilibrium Analysis .......................................66 Data on Utilities, Households, Firms, and More .......................66 Utilities ..................................................67 Households ................................................67 Firms .....................................................68 Other Data ................................................69 References ....................................................69 3. Bangladesh ......................................... 71 Upstream .....................................................73 Institutional: Rental Power Plants Favored in Gas Allocation ..........75 Regulatory: Underpriced Gas .................................79 Social: Emissions from the Use of Gas and Oil .....................84 Core .........................................................85 Institutional: Inefficient Government-Owned Power Plants ...........86 Institutional: Dispatch Not Based on Merit Order ..................94 Regulatory: Underpriced Electricity .............................96 Social: Gas Waste Leading to Pollution from Oil Use ................98 Downstream ...................................................99 Institutional: Welfare Loss for Households ........................99 Institutional: Productivity Loss for Firms .........................103 Social: Emissions from Kerosene Lighting and Self-Generation .......106 CONTENTS l ix Summarizing the Costs .........................................106 References ...................................................108 4. India ............................................ 111 Upstream ....................................................113 Institutional: Unproductive Mining and Privileged Access ...........115 Regulatory: Underpriced Coal for Power Generation ..............121 Regulatory: Coal Shortages from Mispriced Rail Freight ............125 Social: Emissions, Disease, and Accidents from Coal ...............129 Core ........................................................132 Institutional: Inefficient State Government–Owned Power Plants .....132 Institutional: Underinvestment in Transmission ...................140 Institutional: High Losses of Distribution Utilities ..................141 Regulatory: Underpriced