July 18, 2023

UOW economist calls for urgent overhaul of Papua New Guinea’s struggling electricity sector

New research paper says market-based reforms needed to attract private investments in PNG power system

A new research paper co-authored by a University of Wollongong (UOW) economist is calling for urgent market-based reforms to overhaul Papua New Guinea’s (PNG) struggling electricity sector.

Papua New Guinea is one of the least electrified countries in the world. Daily blackouts and unreliable power supplies impact households, businesses and the delivery of critical services in the economy.

Associate Professor Rabindra Nepal from UOW’s School of Business said it’s critical for PNG to attract private investments in its power system and the best way to do this is through market-based reforms.

“The PNG electricity sector currently operates a single buyer model with the objective of attracting new investments in power generation from the private sector through Independent Power Producers to alleviate ongoing electricity shortages,” Associate Professor Nepal said.

“However, the inability to fulfil commitments and rigidity of the contractual arrangements in the power purchase agreement under the current model is concerning.”

Independent Power Producers (IPPs) are private entities that own or operate electricity generation facilities and sell electricity to a utility, central government buyer and end users, depending on the underlying business models.

The new discussion paper published by The Papua New Guinea National Research Institute reviews the prospect of electricity sector reform and the development of IPPs. The authors found a widening gap between theory and practice in the PNG power sector.

“Cost reflective pricing is implemented but cost recovery is never achieved by the vertically integrated state-owned utility, while the insolvency of this state-owned single-buyer poses the greatest perceived revenue risk to IPPs,” Associate Professor Nepal said.

“This lack of revenue reimbursement to the IPPs by the single buyer is a barrier towards attracting private capital into electricity generation, even though IPPs are satisfied with the role of the regulator and negotiation of the power purchase agreements in terms of being cost reflective.”

Only an estimated 13 per cent of PNG’s 8.6 million people have access to grid-connected electricity that is primarily urban-centred. Associate Professor Nepal said low levels of national electrification and the lack of reliable access is detrimental to achieving the objectives of the PNG Development Strategic Plan 2010-2030, which aims for a high quality of life for all and economic prosperity by 2030.

“Access to reliable and affordable electricity supply is one of the prerequisites to spur socio-economic development since electricity is an essential factor input in economic production,” Associate Professor Nepal said.

“PNG is the largest economy in the Pacific and they desperately need to overhaul the power sector, however doing so will be challenging.”

The research paper looks at lessons learned during reform experiences and the integration of IPPs in other small power systems in Nepal, Nicaragua and Australia’s Northern Territory (NT).

“We used the Northern Territory as an example because the Northern Territory also operates a small but isolated power system as in PNG,” Associate Professor Nepal said.

“However, the NT has a wholesale electricity market that is supported well by the underlying regulatory institution.

“We believe the PNG power sector needs to devote resources to creating and establishing appropriate regulatory institutions evolving the power sector to attract private investments in the power sector while the establishment of wholesale electricity markets can wait.”

Associate Professor Nepal said international experiences with power sector reforms and IPPs integration in smaller power systems suggest that reforms do not impede the development and integration of IPPs.

The report says the need for adequate supply is greater in PNG’s power system because the market is not interconnected and hydroelectricity generation is prone to seasonal fluctuations.

The report recommends that strong “political will” and the strengthening of institutional arrangements are the urgent reform measures that are needed in the PNG power sector to attract private sector investments in power generation.

UOW is committed to addressing the United Nations Sustainable Development Goals (SDG), which provide a shared blueprint to achieve a better and more sustainable future for everyone. This research addresses SDG 7, Ensure access to affordable, reliable, sustainable and modern energy for all; SDG 9, Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation; and SDG 10, Reduce inequality within and among countries.

About the research

Independent power producers and deregulation in an island-based small electricity system: the case of Papua New Guinea is published by The National Research Institute of Papua New Guinea.

This research was funded by the National Research Institute of Papua New Guinea which was administered by UOW.