A new currency is emerging in world markets. Unlike the dollars, ruros and yen that trade for tangible goods and human services, money exchanges hands for pollution - particularly emissions of carbon dioxide, which are caused by burning fossil fuels and are the leading cause of global climate change. Carbon credits, as they are called, are poised to transform the world energy system and thus the world economy.

Starting in the late 1980s many nations began to reform their electric power markets away from state-dominated systems to those with a greater role for market forces. In developing countries, especially, these reforms have proved challenging. Successful reform requires a complex set of institutions and complementary reforms, such as in public finance and corporate governance. State-dominated systems typically create their own powerful constituencies that block or redirect the reform process. In an earlier detailed study of reform in five key developing countries, the Program on Energy and Sustainable Development (PESD) found that the result of these pressures, in most cases, is a “hybrid” outcome—an electric power system that is partly reformed and partly dominated by the state 2. Almost always the first step in hybrid reform is the encouragement of private investors to build independent power projects (IPPs)—generators that are hooked to the main power system and, typically, supply electricity according to long-term power purchase agreements (PPAs).

When the People's Republic was founded in 1949, the Chinese electricity industry, with only 1.85 GW installed capacity, was primitive. It has since grown into the second largest in the world, with installed capacity rising to 353 GW in 2002. The number of people who have no access to electricity has been reduced to less than 2 percent of a population of 1.26 billion. On a per capita basis, installed capacity has edged up to one half of the world's average. Development has been particularly impressive since the 1980s thanks to increased investment in the sector. According to industry accounts, an estimated RMB 1,107 billion ($US 134 billion) was invested between 1981 and 2001 in new generation and delivery capacity. Additional investment was also made in retrofitting and upgrading the system, reaching over RMB 100 billion ($12 - 15 billion) per annum in the past seven years. Three quarters of this sectoral capital came from domestic sources, with foreign investment making up the rest. This remarkable power sector growth and financing have been achieved through an ongoing, unsystematic process of electricity industry reforms initiated in the mid 1980s. Further system expansion, projected at about 25 GW per year for the next two decades, challenges the Chinese government to continue and deepen this reform process.

This chapter, by PESD fellow Thomas Heller and PESD affiliate P.R. Shukla, was published by the Pew Center on Global Climate Change in 2003 as part of their "Beyond Kyoto" series.

This chapter aims to explain the motivations and strategies for reform in the Mexican electricity sector. Our focus is on the effects of politically organized interests, such as unions and parties, on the process of reform. We show how particular forms of institutions-notably, the state-owned enterprises (SOEs) within the power sector as well as the state firm that supplies most fuels for electricity generation-shape the possibilities and pace of reform. The tight integration of these SOEs with the political elite, opaque systems for cost accounting, and various schemes for siphoning state resources explain why these institutions have survived and the actual progress of reform has been so slow. Where private investors have been allowed into the market it has been only at the margin through the "independent power producer (IPP)" scheme, an oxymoron since the purchase agreements and dispatch rules that determine payment to these IPPs are dominated by the State.