The Obsolescing Bargain Redux: Foreign Investment in the Electric Power Sector in Developing Countries
As part of PESD's ongoing research on power sector reform, the program has focused on the special role of independent power projects (IPPs). Many countries institute reform with the goal of attracting private (usually foreign) investors in new generating capacity. IPPs, rather than across-the-board reform, are usually the mechanism employed; yet the IPP market has been highly volatile in the last decade and has evaporated in most countries in recent years.
Private investment in electricity generation in developing countries grew dramatically during the 1990s, only to decline equally dramatically in the wake of the Asian financial crisis and other troubles in the late 1990s. The Program on Energy and Sustainable Development at Stanford University has undertaken a detailed review of the IPP experience in developing countries. The study has sought to identify the principal factors that explain the wide variation in outcomes for IPP investors and hosts. It also aims to identify lessons for the next wave in private investment in electricity generation.
This article presents the conclusions and analysis of the study of the experience of investment in greenfield IPPs in developing countries. The term "independent power producer" has been used to refer to several types of enterprises, but for this paper, "IPP" refers to a privately developed power plant that sells electricity to a public electricity grid, often under long term contract with a state utility. For this study and report, the lead actors in every IPP are private investors usually foreign, but often with local partners. The classic foreign-sponsored, project-financed IPP has taken root in more than fifty emerging countries that display wide variation in economic, political and social environments. The wide variation in settings for IPPs affords a special opportunity for researchers to probe systematically the critical factors that contribute to outcomes for host countries and for investors.