Future challenges of energy pricing

One challenging issue in energy policy is pricing energy utilities. Price is a key variable of energy demand and supply in Mekong river countries. Selling energy utilities is dependent on marketing activities of energy. Marketing is a discipline of four coequal elements: the product, its promotion, its distribution and its pricings.

Marketing consists of 4 ps. Pricing is the company´s attempt to capture some of the value in the profits it earns. If effective product development, promotion and distribution sow the seeds of energy business, effective pricing is the harvest.

It is quite interesting and puzzling why many energy companies fail to price effectively even when they otherwise employ very effective marketing strategies. Price is of primary importance to energy companies. Energy companies must cover costs, to maintain cash flow and to achieve a target rate of return.

On the other hand, they must think how customers response to the prices of energy utilities. If prices are too high, demand for energy utilities will be weak. If prices are too low, demand for energy utilities is too strong and some customers are left without energy utilities. In real life markets are not in the equilibrium as conventional micro economic theories assume.

The customers´ goal is to obtain the most value for their money. For commodities, that often means buying the cheapest offering. For differentiated energy product, that may mean paying a little more for the perceived superiority of a particular brand.

A few pennies´ differences in price may be of great importance to a energy company selling millions of units, while being of little consequence to a customer who buys just one unit. Yet that will not stop potential customers from rejecting any price that is a few pennies more than they are willing to pay. It is important to understand that customers are not concerned with the seller´s need to cover production costs, to improve cash flow or to meet a target rate of return. Their concern is to get their money´s worth.

In the Mekong River countries one key future challenge will be intelligent pricing of energy utilities. Intelligent pricing strategy of energy utilities depends on production costs, price sensitivity and energy market competition. These three factors determine an energy product´s pricing environment. Energy companies can adopt product-driven focus or customer-driven focus in their pricing decisions.

Intelligent pricing begins starts with a better understanding of the economic underpinnings of cost and value of energy utilities. There should be more analytical research in this field because the success of energy sector investments depends critically on price intelligence of energy products and services.

Risk intelligence challenges in the Mekong River countries

Risk is the possibility of loss or reversal – or gain or advance. The risks that matter are the ones that pose a problem in our decision-making. We are surrounded with risks either with financial or non-financial. One of the biggest challenges in environmental decision-making is to develop better tools for risk intelligence.

In the Mekong River countries a very big challenge is to manage many risks associated with river basin management. Many production activities and markets depend on the Mekong River. Agriculture, hydropower supply and fishery are such activities. There are many business risks associated with natural resource management. Typically we can talk about production (or supply side risks) and marketing risks (demand-side risks).

In risk management it is important to identify different kinds of risks. For example, typical production risks are operating risks, supply chain risks, technology risks, workforce risks and asset risks.

Operation risks are happening when there are control or compliance failures or partner coordination failures. Supply chain risks are like supplier failure or political rapture. Supply chain risk is also key cost volatility. Technological risks include infrastructure breakdown and information security breaches. Workforce risks are capacity losses or disruption. Also key staff loss or defections are workforce risks. Very considerable risks are asset risks like counterparty credit loss, fraud or theft.

Typical marketing risks are security and political risks, end-market and customer risks, competitive risks, regulatory or legal risks or financial or economic risks. Security and political risks include market-disruption events and geopolitical volatility. End-market or customer risks are brand or reputation erosion and customer consolidation.

In markets competitive risks are always present. Disruptive technology and new entrants to the market are typical competitive risks. The government can create regulatory or legal risks like new legislation and litigation. Also official corruption can be categorized in this risk category. Financial market volatility and economic recession are typical financial or economic risks.

If better risk intelligence is wanted, just listing big risks is not enough. Only our imagination limits the conjectures, models, assumptions and guesses we advance to explain a risk.

The formulation of possible solutions is needed. It is necessary to invest in risk management systems and associated competences. Experienced staff to analyze and handle different risks is needed.

A lot of money and capital can be saved to better aims if the Mekong river countries manage their risks in a better way. Risk intelligence is about making choices bearing risks that our natural run of experience can really penetrate.

All this is easier said than done, but it is worth of trying.

Solar Home Systems in Laos

Solar energy is part of the Lao government’s and the World Bank’s off-grid electrification scheme. In total 15.000 households in 380 villages around Laos get their electricity from solar home systems (SHS). The panel users pay monthly fee that depends on the size of the solar panel and pay-back time. The usual monthly fee is 30.000 kip (about 3 USD) for 10 years. After the payment scheme is completed the user owns the panel.

DREAM research project team from Finland Futures Research Centre conducted interviews in six villages in two provinces which have been electrified by solar home systems. In order to get variation in the collected data, half of the visited villages were in very remote areas, whereas the other half situated close to the roads. There was also variation in terms of how long SHS had been used. In some villages the panels had been installed very recently, and in others they had been already more than seven years in operation. In the villages both users of SHS and those who did not use solar energy were interviewed to find out what positive and negative – expected and unexpected - impacts SHS had on users’ lives, and whether or not the program had any impact on those villagers who did not have a solar panel.

In the visited remote areas, the panels had been very recently installed. The villagers had poor access to services and markets, and mostly people lived in a subsistence economy. The users said they were happy with the quality of light, smokeless house and the possibility to work and study during the evening. The panels were working fine, but there were problems related to finance, maintenance and received information. The installation of SHS did not have significant positive impacts on income generation, because electricity was not used for income generation activities. Some SHS users had difficulties to pay the monthly fee because they lived in subsistence economy with little cash income. They often had to sell a chicken or a pig to pay the SHS monthly fee. As a result, even though the SHS made the life easier, it did not ameliorate livelihood. As the family wealth depends on the livestock, selling animals to pay the monthly fee is not sustainable in the long run. Unless they can develop other cash sources, paradoxically the electrification can lead to deterioration of their livelihood.

Another problem in remote villages was that many users had the impression that the battery change and other maintenance costs would be covered by the monthly fee, at least as long as they are in the paying scheme. This is not the case, and as the batteries can be very expensive, (700.000-800.000 kip, about 70-80 USD) many low income families will probably have problems in finding money for the new battery every two to five years.

In the so called easy access villages, i.e. villages which have some kind of road connection and are relatively close to markets and services, the situation was different. The households had more cash income and therefore usually less problems to pay the monthly fee. In some villages the light was used for making handicrafts in the evenings. The handicrafts were sold in the market nearby.

The challenge in the easy access villages related to the quality of the panels, not so much to the payment scheme as in the very remote areas. In one village the panels were no longer working properly after seven years’ use. The users could get only about an hour of light per day, despite of the new battery. They still had to pay the monthly fee and were worried that in three years time, when the payment scheme would end, the panels would be completely useless. The promoters of SHS had said that the panels would work for 50 years, but now it seemed that they wouldn’t last even for ten years when the payment would be completed. Villagers said that they had believed the promoters as they were officials and should know about these things. The villagers also told that they did not have a chance even to read the contract before signing it.

Besides the economic and quality difficulties that seem to relate to the SHS scheme, another challenge is that very often SHS are first installed to areas were the electricity grid will likely come within few years. For Provincial Energy Service Companies (PESCOs) that are making the panel installations, it is less profitable to install them in the very remote areas. It takes more time and money to install and collect the monthly fee from the very remote areas than in the areas with good road connections. Therefore, the main goal of the whole off-grid program, i.e. to provide electricity to areas which are not likely to get grid connection for the next 5-10 years, is not achieved.

According to the preliminary results of the DREAM project’s fieldwork, most solar panel users felt that the solar energy had made their life more comfortable. The energy was used mainly for lighting, but also for television and stereos. The challenges related to payments, quality of the panels and information flow. In the poorer areas, where people were living in subsistence economies with very little cash income, the users felt that the monthly fee was expensive and the payment scheme long. Especially battery replacement is expensive. In some cases the panels will not last even for the whole payment scheme, even though they have been said to last for as long as 50 years.

In order to improve the SHS program, it would be necessary to guarantee the quality of the solar panels and to make sure the information provided about the maintenance and the replacement of the batteries is accurate. Furthermore, the installation should start from the remote areas where the electricity grid is not likely to come, at least not for a long time. At the moment, the panels easily spread to areas where installation and fee collection is easy and economically feasible.

Impact of Micro Hydropower Based (MHP) electrification on rural livelihoods: Case study Nam Mong in Luang Prabang Province, Lao PDR. M.Sc Thesis

Fieldwork carried out for DREAM-project is now available through mekong.fi pages under publications 2009

Impact of Micro Hydropower Based (MHP) electrification on rural livelihoods: Case study Nam Mong in Luang Prabang Province, Lao PDR. M.Sc Thesis now available at mekong.fi -pages

https://jyx.jyu.fi/dspace/bitstream/handle/123456789/22636/URN_NBN_fi_jyu-200912144518.pdf?sequence=1

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The third FREPLA2020 Workshop held in Thakhek on the 10th and 11th of March

The third Workshop of the FREPLA2020 Project organised by the Ministry of Energy and Mines (MEM) and University of Turku, Finland Future Resource Centre (FFRC) was held in Thakhek in Nakai district on the 10th and 11th of March. The workshop was attended altogether by 30 participants from the different GOL ministries and departments. The two day workshop focused on the concrete planning issues and challenges of different economic sectors in Lao PDR. Several presentations were held on economic and energy related development scenarios on different levels and regions (national, Mekong Region and China) by using scenario development models, like LEAP, LaoLinda and IFs. Senior Technical Advisor of the UNDP Poverty Environment Initiative Ms. Grace Wong gave also an interesting presentation on mainstreaming poverty environment and MDGs in Lao PDR.

The FFRC team (Research Director Jari Kaivo-oja, Prof. Jyrki Luukkanen and Researcher Sari Jusi) organized tutored scenario development in small groups, where the participants discussed on drivers and uncertainties related to economic development of different sectors and built different scenario developments. Policy implications of scenarios were widely discussed by using the TEPSELV analysis among the participants. In TEPSEL analysis the participants discussed about the different changes (technological, economic, policy, social, environmental, legal and value) needed for different scenario developments.

The workshop turned out to be again a very successful arena for information exchange and creating of different economic and energy related development paths and scenarios composed by different GOL ministries and organisations. In the workshop the participants discussed and revealed challenges, potential risks and problems the country may face and need to take into account developing its’ economy and energy sector in the future.

Biogas fieldvisit in Nongphouvieng

Nongphouvieng village in Vientiane province is famous for its pigs. It is an ideal site for biogas projects, as the pig dung could be used for biogas production. Twenty per cent of the households in Nongphouvieng has domestic biogas digesters installed either by Chinese pilot project implemented in 2005, or by Netherlands development organisation SNV in 2007.
Finland Futures Research Centre's DREAM project team visited the village in November 2009. Domestic biogas is one of the case studies. In Nongphouvieng we discussed both with the households that have a biogas digester, and those who don’t, as well as with the village head, vice-head, and one of the masons.

Nongphouvieng village is connected to national electricity grid, and thus biogas is mainly used only for cooking. and the slurry as organic fertilizer. The interviewees thought the biogas projects have been successful, mainly because the biogas has reduced the use of charcoal and fuel wood by 50-80 %, which saves both money and time. Charcoal is still used for grilling but otherwise cooking is done with biogas. The gas is considered more convenient cooking fuel than charcoal or wood because it is quicker and cleaner. Interviewees also mentioned that the smell from the pig dung, as well as flies, had reduced in the village.

Before biogas programme the pigs ate mainly rice husk but now they are fed with industrially made food that is imported from Thailand. Probably due to hormones in the food, pigs grow faster.

The respondents told that they had first had doubts about the biogas. They wondered how pig dung could be used for cooking, whether the food would smell, and could the house be blown up if gas was not used. They said that it took about a month to get used to biogas, but now they were very satisfied about it.

When asked what could be improved in biogas projects, some biogas users replied that the stoves had already broken, and some that spare parts are not available. Those who did not have a biogas digester said either that they would like to get one if they were available and they could afford it. There were also those who were not interested in getting a biogas digester.

In brief, the overall impression was that the biogas users were satisfied with the gas. However, the poorest households cannot take part of the biogas projects because they cannot afford the digester, even though it is subsidised. The poor households usually don’t have enough animals for the biogas production, but in some cases they could get dung elsewhere. The interviewed households who didn’t have a biogas digester said that also they had benefitted from the programme, because of the reduced smell and dung in the village area.

The main part of the biogas fieldwork in Laos will be done in in Savannakhet province in January-February 2010.

Nam Mong revisited

The master´s thesis "Impact of micro hydropower (MHP) based rural electrification on rural livelihoods: Case study Nam Mong in Luang Prabang province, Lao PDR" is completed. Many changes having direct effects to villagers´lives were identified after electrification . The obtained changes seen in the villages were grouped according to sustainable livelihoods approach (SLA) to asset, activity and access changes. The full version of the study will be available shortly on mekong.fi webpages. The gathered material was provided back to the head villager of Pak Mong/Phonhome Mr. Khamkong Sengmong during a visit in early November and also it was briefly discussed whether the grid connection to national grid had brought any concerns or advantages so far. It was also agreed that further visit to the villages will take place after a year or two in order to gather some comparative views on Nam Mong micro hydropower and grid based electrification.

Vientiane Times refer to upcoming Master´s Programmes in Engineering

In its interview with the National University of Laos (NUOL) Engineering Faculty Dean Prof. Dr Boualinh Soysouvanh, Vientiane Times reports on the plans of having new master programmes in the near future offered at the university. There are currently 14 undergraduate programmes offered on bachelor and higher diploma programmes in civil, mechanical, electrical, electronic, transportation and water resource engineering. One of the planned master programmes is the energy management which has been formulated in collaboration with Finland Futures Research Centre.

First week of ICI trainings in Cambodia and Laos

The ICI capacity building trainings are currently carried out at the Institute of Technology of Cambodia (ITC) and at the National University of Laos (NUOL). The trainings are primarily directed at the teaching staff and are carried out in two phases. The first week of training was already held at ITC during the 12th and the 15th of October, and is currently going on at NUOL (19th-22nd October 2009). The second phase training will start in Vientiane on the 16th of November and in Phnom Penh on the 1st of December and will end on the 4th of December.

Topics that were covered include climate change, renewable energy and biomass utilization and management, modeling and economics of energy projects and project management. During the second week the objective is to get acquainted with UNFCCC, climate policy options, climate change adaptation and mitigation strategies for developing countries. The trainings include also field trips to a Clean Development Mechanism (CDM) site and to other renewable energy project sites both in Laos and Cambodia and include workshops where lessons learned and feedback will be collected. Furthermore teachings of energy planning models and project management will continue during the second week.