State Sector and

Economic Growth
for Energy Case
Team 8
Team Member
Team Member
Heng Chiveon (2018280857)
Huang Xiangmei (2018212608)
Tommaso Pellegrini (2018403429)
Zufrial Aristama (2018280818)
 01 Background

02 Case study

CONTENT • China
• Italy
• Indonesia

03 Conclusion
 How to define economic growth

 Economic growth means the increase of Real Gross Domestic Production (GDP)。

 Real GDP mean a calculated on economic out put which evaluated with
inflation rate or deflation rate. It show us more realistic calculation of
economic growth than nominal GDP.

 Without real GDP, it could seem like a country is producing more when it‘s
only that prices have gone up. Inflation rate mean the rate of increasing
of a price index or decrease of purchasing power of currency. Deflation
rate means the opposite of inflation rate.

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 New definition of economic growth

 World Economic Forum’s Annual Meeting in Davos have given a new definition
of economic growth based on Inclusive Development Index (IDI) which
doesn’t only evaluate on the amount of goods and services produced in
economy (GDP) but by household’s standard of living.

 In conclusion, economic growth means increase of real GDP and increase of

household’s living standard.

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 Why energy is a matter for economic growth

 There are two reasons why energy is important for economic growth:

1、Energy is considered as the primary mean for production and service

beside capital,
labor and land.
2. Energy is crucial variable associated with inflation or deflation,
because increase or
decrease of energy price influence customer price index.

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 What are the roles of state sector toward energy?

 As we know that energy is a matter to determine whether economic grows or

not, therefore, state sector needs to involve with this issue by:
1. To insure enough energy for household and industrial,
company/firm usage.
2. To insure the allocation of energy in the right way in term of
price and quality.
3. External Economic Cost ( environmental impact such as air
pollution) are associated with economic growth that’s why state needs to
minimize this cost by providing renewable clean energy and environmentally-
friendly means for product and services such as high technology machines
that consume less energy with less pollution.

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 01 Power Industry in China:
Dominated by SOEs

Historical Background
Power Industry in China:
Dominated by SOEs
Industry chain

Pros and cons

 Historical background

 Before 1978, power industry was vertically monopolized by government

under central planning. The Chinese government took power industry as the
backbone of the national economy and gradually developed the electricity
production system.
 In 1978, government started a reform to separate government administration
and enterprise management. The State Power Company was founded
subsequently.
 In December 2002, the State Power Company split, which marked the
separation of power generation and power distribution. State Power Company
was divided into two major power grid companies and five power generation
companies.
 In 2014, private companies were allowed to enter the fields of power
selling. 10
 Industry chain

Electricity Generation Electricity transportElectricity selling

and distribution

State-owned
power
suppliers

Private power
suppliers

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 Power industry and economic growth

 Industrial development requires

sustained electricity supply,
and the electricity consumption
reflects economical growth.
 20% of profit made by state-
owned power companies belongs to
the government of China.

Q=electricity consumption
Z=Installed compacity
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 Pros

01 Price of electricity is stable and relatively low.

According to a survey conducted in 2010 about 26

countries:
 In average, the price of electricity increase by 6.53%
every year in European countries, while in China the
rate is only 3%. 01
 The price of electricity in China is about 40% lower 02
04
The
than equality
that of redistribution
in European countries and 70%is taken
lower asthat
than a
02 in Japan.
consideration
03

Cross Subsidies
 Developed areas give subsidies to less developed areas
 High voltage users give subsidies to low voltage users
 Large industries give subsidies to residents and
agricultural uses

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 Cons

01 Unsustainable industrial structure

 Overcapacity of coal-fired electricity

 Inadequate incentives to use renewable
energy
01
02 Less profitability
04
02
03
 In 2016, the profits of coal-fired power
enterprises fell dramatically, and the
profits of the five major power generation
corporations dropped by 68.6%.
 In the first half of 2017, the five major
power generation corporations lost 7.46
million yuan.

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 Conclusion
Positive
The power industry in China
is developing rapidly
during last several decades.
It provides industries and
citizens with high
accessibility to
electricity and contributes
a lot to economic growth.
Negative
The industrial structure of
china’s power industry is
unsustainable, which results
in less profitability and
environmental pollution. In
order to furtherly facilitate
economic development, China
needs to readjust the
industrial structure.
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 the percentage of different types of power in total power generation

120.00%
2010 2011 2012 2013 2014 2015 2016
100.00%
hydropower 16.24% 14.12% 17.16% 16.61% 18.91% 19.88% 19.71%
80.00%
thermal
80.81% 82.45% 78.72% 78.58% 75.43% 73.11% 71.60%
power 60.00%

nuclear 40.00%
1.77% 1.84% 1.97% 2.08% 2.38% 3.02% 3.56%
power
20.00%

wind power 1.17% 1.57% 2.07% 2.57% 2.85% 3.30% 4.02%

0.00%
2010 2011 2012 2013 2014 2015 2016
Solar power 0.00% 0.01% 0.07% 0.16% 0.42% 0.68% 1.11%
hydropower thermal power nuclear power wind power solar power

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 Overcapacity of coal electricity

 Because of the overcapacity of

coal power and the enthusiasm
for local government to invest
coal power industry, many wind
power stations and hydropower
stations are abandoned.
 Government tries to use
financial incentives to
encourage the investment in
renewable power. However, the
government is short of
subsidized funds. By the end
of 2017, the funding gap for
renewable energy in China has
reached 100 billion yuan.

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 The price of electricity

The price of electricity for residents

18
The price of electricity in different regions
for industries

19
The price of electricity in different regions
for residents

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 Electricity Market in Italy
02 Completely Liberalized

Historical background

Electricity Meaning of liberalized

Market in Italy
Renewables

Drawbacks and
Risks
Electricity Price
 Historical background

• From the beginning of its history, the production of electricity in Italy had always been
entrusted to private enterprises.
• In 1962 the Parliament approved the law on the nationalization of the electricity system
and the establishment of ENEL (National Agency for Electricity), which were delegated "all
the activities of production, import and export, transport, transformation, distribution and
sale of electricity from any source produced ".
• in 1987, after the strong impression created of the nuclear disaster in the Soviet Union
(Chernobyl disaster), Italy, by a referendum vote, effectively abandoned the development
of the nuclear source.
• In 1999 is approved the legislative decree of liberalization of the electricity market, also
called the “Bersani decree”, which transposes a European directive to this effect.

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 What does it mean liberalized?

• Different economic subjects divided in the 3 different sectors: generation, distribution and sailing.
• Contracts in the free energy market can be signed and canceled at any time, to move easily to
another supplier.
• The electric energy price come from a fix part (sets by AEEG) and a variable one sets by the supplier.
• Companies sailing electricity usually buy energy from other producers and rely on distribution
companies that deal with energy transport to the final consumer.
• In the free market the user is given the opportunity to change the energy supplier but he cannot
choose the producer or the distributor.
• Any operator (also citizens) can produce electric energy and resell it.
• A series of public authorities, independent from the government, play the role of control and
supervision of the market and of the electricity grid.

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 The players

• The Government ‐ Draws the legislative framework, fixes guidelines for the sector at
national level and provides incentives.
• AEEG (Authority for Electric Energy and Gas) ‐ Task: periodically defining the price of energy,

independent public authorities

ensure advertising and transparency of service conditions, ensure conditions of equality in
access to energy networks, supervise the energy suppliers.
• TERNA (TSO) ‐ Runs the national transmission grid and manages the dispatching service.
• GSE (Energy Services Manager) ‐ Responsible for managing RES support schemes (apply
incentives).
• GME (Energy Market Manager) ‐ Task of promoting competition among the producers of
the electricity market, according to criteria of neutrality, transparency and objectivity.
• Regional and Local Institutions ‐ Apply legislation at local level and issue authorizations

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The players

25
 Electricity Flow

The electricity flows in Italy have changed in recent years thanks to the liberalization, a
lot of new societies providing electric energy by RES are born in the south.
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 Generation by Fuel

 Clean and diversified electric grid

 Huge penetration of renewables
 Small share of coal

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 Drawbacks and Risks
Difficulty for the costumer to understand all the
01 informations provide by the electric energy suppliers.
Over 25,000 Italians asked for complaints and requested for
assistance in 2012
The spread of non‐programmable renewable sources is leading
02 to a reduction in the hours of operation of thermal power
plants that, among other things, are increasingly being
used to cover
More flexibility the peak
is then load.to thermoelectric power plants,
required
efficiency decrease.
Investment costs for new thermal power plants are required.
03 Plants using renewable sources are often located in areas
with low load.
Change the electricity flows in the network, resulting in
congestion and making necessary new infrastructure or upgrades of
networks.
This asset would lead to an increase in the distribution
cost.
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 The price of electricity

% Price for Families

Contribution
to the final
price

Price for Industries

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 GDP per capita

 5% of GDP derives from electricity market

 No stable increase of the GDP after financial crisis
 Excessive taxation hinders the economic growth

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 03
Perusahaan Listrik Negara (PLN)
(Indonesia State Owned Electricity
Indonesia: Company)
Perusahaan Listrik Negara (PLN)
 Historical Overview

PLN is an Indonesian Started as: Indonesian youth

state-owned corporation Nederlandche Indische took control of the
which has a monopoly on Electriciteit electrical
electricity distribution Maatschappij (1897)。 companies in
in Indonesia and September 1945 and
generates the majority handed them over to
of the country's the government of
electrical power the Republic of
。 Indonesia

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 Time Periode

1945-2002 一 The electric power industry covers:

Since 1945 to 2002, PLN was the only

electric power industry in Indonesia

2002-2009 二
1. 2. 3.
New electricity law, Law No 20/2002一
Generating Supplying Distributing
required an end to PLN's monopoly on electrical electrical electrical
electricity (IMF Role) power power power

2009-Now三
A new electricity law, Law No 30/2009
which provide a legal basis for national and local
government funding of electrification
infrastructure and the designation of the non-PLN
electricity business areas 33
 Electricity Power Supply in
Indonesia
Year PLN Non-PLN (IPP) Electrification Rasio

1995 100% 0% 43%

2004 80.1% 19.9% 53%

2009 77.8% 22.2% 65%

2014 75% 25% 84%

2018 69% 31% 97%

Source: Indonesia Central Bureau of Statistics

Using I-O Model, Adam (2012) shows that

electricity
in Indonesia has a relatively high output
multiplier
(1,93) to other economic sectors.

IPP = Independent Power

Producer
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Indonesia Electrification
Ratio 2016

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Distribution of Amount and Capacity of Generator, Transmission, Substation and
Estimation of Funding Needs

Note: Proyek= projects in english

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 PLN’s Dilemma
Company Government
Profit VS Goals
Purchasing electricity
PLN Customers= 66,63 from the IPP at market
million, price but selling to
Costumers Subsidized by the customers at the
government= 27.3 million price that is decided
(40%), by government.
it cost 45.7 trillion (Political problem)
rupiah (3.32 billion USD)
in 2017.

Source: IEEFA (Institue for Energi Economic and Finansial Analys

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 Can PLN Shake Its Reliance on Subsidies?

Source: IEEFA (Institue for Energi Economic and Finansial Analy

Privatization of the electricity sector encourages increasing

electrification ratio, but on the other hand makes PLN's finances
burdened. Meanwhile subsidies from the government are always
lacking due to changes in the prices of coal and petroleum.
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 Development of fuel mix for power generation

New and Renewables

Hydro, Geothermal, Other NRE.
Nuclear can be considered to be
developed as the last option if
NRE’s target by 2025 can not be
achieved
Coal 一
It is expected to reduce to a
slightly lower share of 50.4% in
2026
Natural Gas
二Natural gas power generation is
expected to double by 2026. Being
relatively low-carbon compared to
coal, gas is likely to remain a
favoured fuel for at least the next
decade, especially given Indonesia’s
extensive gas reserves
Oil 三
It is planned to be all but phased
out (0.4%) by 2026.

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Comparison of electric energy consumption (kWh per capita)
Source: World Bank Data

high population
with low income,
and consequently
low electrical
energy demand per
person, thus we
can measure
economic growth
with the
electrical
consumption

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 Conclusion

Criteria China Italy Indonesia

Ownership State dominated Private company State dominated
Renewable 25% 44% 12%
Price of electricity 0.07USD/KWH 0.25USD/KWH 0.10USD/KWH
Electricity consumption/capita 3927KWH 5002KWH 811KWH
Accesibility to electricity 100% 100% 97%

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 References

Kimerly Amaadeo “Real GDP, How to Calculate It, Comparison to Nominal” the
balance October 25, 2018.

Ceyda Oner “What Is Inflation?” IMF’s Asia and Pacific Department March
2010
Kenneth Rogoff “Deflation: Determinants, Risks, and Policy Options—Findings
of an Interdepartmental Task Force” International Monetary Fund April 30,
2003

DAVID I. STERN “Economic Growth and Energy” Elsevier 2004.

Marc Labonte “Inflation: Causes, Costs, and Current Status” Congressional
Research Service July 26, 2011.

Tom Biegler THE HIDDEN COSTS OF ELECTRICITY: Externalities of Power

Generation in Australia” The Australian Academy of Technological Sciences
and Engineering (ATSE) March 2009.

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 2018
The ideas of economists and
THANK YOU political philosophers, both

THANK YOU
when they are right and when
they are wrong are more
powerful than commonly
谢谢
understood (John Maynard
Keyness)
Team 8

Economic and Development

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