How Effective Power Market Reform Depends upon Gas Market Reform in The Asia Pacific Region

Many of the twenty-one economies in the Asia Pacific region have considered or undertaken reforms to boost competition in their natural gas and power markets. Many are also using gas for a significant and growing share of electric power production. Thus, the success of power market reforms in reducing electricity costs often depends on reforms to boost competition and lower costs in markets for gas. This paper summarises relevant conclusions from a recent study by the Asia Pacific Energy Research Centre (APERC) on Natural Gas Market Reform in the Asia Pacific Region [1]. Even in economies where independent power producers account for a major share of electricity generation, competition in the power market may be severely limited by a lack of competition in the gas market. If there is only a single gas producer, offering gas at about the same price to all generators, then generators can compete only on the basis of capital costs and operating efficiency. Since combined cycle gas turbines are produced by only a few manufacturers, again with similar costs likely for all buyers, productive efficiency gains may be further limited to operational efficiencies only. And if gas is offered at a subsidized price, even incentives for operational efficiency may be limited. But where gas and power market reforms are joined, efficiency improvements and cost reductions are more likely. If there are many competing gas producers, then generators can reduce costs by shopping for the gas that is cheapest. If power market competition is limited to wholesale transactions, with all independent power producers selling their production to a single buyer, regulators will have to be vigilant if they wish the single buyer to pass on the resulting cost savings to consumers. But if there is also retail competition in the power sector, with customers eligible to choose the least-cost power supplier, there is greater certainty that the cost savings will be passed on.