Sustainable Energy in Developing Countries: Policy Analysis and Case Studies.

Sustainable Energy in Developing Countries: Policy Analysis and Case Studies by peter Meier and Mohan Munasinghe, (Edward Elgar, 2005), 283 pages, ISBN 1-84376-753-8.

This book addresses the energy situation in Sri Lanka rather than what the title promises. More precisely, the book

is a collection of (World Bank and other) papers by the two authors and covers inter alia the following topics: a review of the present situation in Sri Lanka, health damages that are caused by energy use, the economics of imported fuels, fuel choice for power generation, traffic (congestion, price distortions between LPG, diesel, and gasoline, leaded versus unleaded gasoline, and public transport), greenhouse-gas-emission reductions, renewable energy and, as a digression, real options to cover uncertainty associated with carbon trading. Finally, the book includes a flattering foreword by Karu Jayasuriya, Minister of Power and Energy in Sri Lanka.

The topics are, by and large, addressed only as they arise in Sri Lanka. The book rarely reaches beyond this narrow focus, and when it does, e.g. by using boxes, it is confined to very elementary economics or international statistics. To get a flavor, consider Box 3.1 on p. 41 on the economically optimal level of renewable-energy supply: Renewable-energy supply is described by an upward sloping supply curve and the optimal volume is given where this curve cuts the social costs of fossil fuels (out of pocket plus external costs, or value in case of carbon trading). The background material on transport is slightly more advanced but borrows heavily from a nice, but not recent, paper of Newbery (1990).

The health recommendations, including the subsequent suggestion of phasing out leaded gasoline, are based on reviews of international studies and their major findings are tabulated (as well as the short time series on Sri Lanka). In the case of leaded gasoline, the authors debunk some myths and mention the absurdity that costs must occur to remove the catalytic converters from imported and used cars from Japan (about three quarters of imported cars are used cars and on average 2-3 years old) to allow utilization of Sri Lanka's leaded gasoline. Also, the prices distortions for LPG (a most expensive fuel just making it on a tax advantage) and diesel are criticized for leading to the absurdity that Sri Lanka has to re-export gasoline from the refinery yields. Moreover, not surprising (since price manipulations are always inferior to income policies, see e.g. Ng (1984)), but important to mention is that subsidizing fuels does not reach the poor despite all the lip services by politicians.

The analyses of the economics of imported fuels and of the fuel choice for power generation boil down to elementary net present value calculations. However, the authors aim for consistency, i.e., they support the observation that other fuel prices including coal prices increase and fall with oil prices by using statistical correlations. Yet, these feedbacks are ignored for renewables as the above discussion of Box 3.1 documents: The profitability of large volumes of renewables at present prices can be misleading, because this may simply signal that future fossil-fuel costs will come down. Another highly policy relevant but not really surprising conclusion is the economic inefficiency of using LNG for power generation (coal is cheapest). Electricity is covered in the penultimate chapter on rural electrification studying the different options (grid expansion, diesels, photo-voltaic (PV), and village hydro).

According to the authors, private providers of power ask for much higher rates of return; this applies probably worldwide. Given the huge capital requirements, this division of labor between government and private sector may not be optimal (compare Hart 2003) unless either investment and operation cannot be separated yet more efficient private management makes up for the higher capital costs, or a country (Sri Lanka or another developing country) is severely capital constrained. Yet these interesting points are not addressed.

Greenhouse-gas-mitigation strategies are motivated by trading carbon certificates, and the analysis considers the options of mini-hydro, wind, solar, and dendro-thermal plants. Demand-side management (DSM) gets also a short note but without addressing either the familiar problems (Wirl 1997, 2000) or special problems that are of particular relevance to developing countries. In any case, the major target of such a mitigation strategy should be the losses in power distribution.

One chapter, more of a digression and written by a guest author (Chitru Fernando), presents a real-option framework for carbon trading eschewing all the mathematics. I doubt that this short chapter convinces readers of the true importance and crucial insights of this approach (it is better to start right away with Dixit and Pindyck 1994).

Summary: As a rather un-initiated reader about the field of sustainable energy in developing countries, I expected to learn something about a new and important field, but was quickly disappointed. The key problem is that the book deals only with the situation in Sri Lanka. While it is unfamiliar to me and probably to most readers of the journal, the book, therefore, in many ways falls short of its promise in the title.

In addition, the book unfortunately lacks coherence. In particular, it is not an academic book since advanced methods are not used. Thus, it ignores co-integration techniques and the related literature when estimating price and income elasticities for transport fuels. In the real option case, all analytics are left out, as already mentioned. A similar critique applies to DSM. Moreover, it also is not a textbook. In fact, the book looks like a compendium of various consultant studies undertaken by the authors. This suspicion is also documented by the vast number of tables and figures (more than hundred tables and figures of a similar order of magnitude) on the particular situation in Sri Lanka.

This is not to say that the book is of no value but it is of much less scope of what is suggested by the title. This rather narrow focus may offer some insights, first of all to people interested in Sri Lanka's energy industry but also to people involved in the energy supply of other developing countries although analogies should be careful drawn. The book may also help aspiring energy consultants to write reports for governments and the World Bank. Finally there are some policy relevant recommendations, e.g., the inefficiency of LPG in transport and of LNG for electricity generation and debunking some myths about leaded gasoline. However, I expected more, even after recognizing the limited scope (Sri Lanka). Some examples of neglected issues need note. Is not sustainability much easier to achieve when half of a country's primary energy requirements are renewable? Does sponsoring PV delay grid expansion and is this beneficial (carbon credits) or harmful? Also missed was a thorough discussion about the governance of utilities, a satisfactory explanation of the losses (e.g. why can stealing not be better avoided? For political reasons?), public-choice explanations of the misallocations in the energy industry. Covering such questions might have violated the constraints of consultant work but could be added to the book version.

Franz Wirl

University of Vienna, e-mail: franz.wirl@univie.ac.at

REFERENCES

Dixit, Avinash K. and Robert S. Pindyck (1994). Investment Under Uncertainty, Princeton University Press, Princeton.

Hart, Oliver (2003). Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships, Economic Journal 113: C69-C76.

Newbery, David (1990). Pricing and Congestion: Economic Principles Relevant to Pricing Roads, Oxford Review of Economic Policy 6/2: 22-38.

Ng, Yew-Kwang (1984). Quasi-Pareto Social Improvements, American Economic Review 74: 1033-1050.

Wirl, Franz (1997). The Economics of Conservation Programs, Kluwer, Boston-Dordrecht-London.

Wirl, Franz (2000). Lessons from the Utility Conservation Programmes in the United States, The Energy Journal 21/1: 101--122.