The Bank's Policy Initiatives for the Energy Sector - Energy Policy Issues

Table of Contents

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Introduction

Regional Energy Context

Energy Policy Issues

Structural Reform

Energy Efficiency

Energy Pricing

Background

Power Subsector

Hydrocarbon Subsector

Rural Energy

Energy and Environment

Rural Energy Development

Regional Cooperation and Energy Development

Conclusions and Recommendations

Bank Policy Initiatives for the Energy Sector : Energy Policy Issues : Energy Pricing

Power Subsector

50. In most DMCs the power subsector has a monopolistic structure and electricity prices are set or approved by governments. The monopolies are government-owned, the roles of the government as owner and as a regulator of prices are blurred, and the price fixing process is motivated by considerations other than financial and economic. The Bank's approach had been to encourage DMCs to recover the full costs of supply (including the cost of capital) while simultaneously focusing on optimal efficiency of supply by stipulating both tariff covenants (such as rates of return on asset base, debt service ratios and self-financing ratios) and efficiency covenants (such as those relating to least-cost planning, efficient O&M, system loss reduction, and billing and collection improvement). To improve allocative efficiency, utilities were also encouraged to periodically calculate long-run marginal costs (LRMC) of supply and relate tariff structures and levels to LRMC. Success in this regard had been somewhat mixed. In many DMCs tariffs still lag behind LRMC of supply, and in some DMCs tariffs are inadequate to meet financial targets. Cross subsidies within the subsector (such as industrial and commercial consumers subsidizing domestic and agricultural consumers) are also prevalent. The subsector as a whole is subsidized in a number of DMCs by excessive government equity contributions, low interest loans, and exemptions from corporate taxes and taxes on imports and fuel.

Box 3 : Electric Power Tariffs

Electric power is not a merit good or a public good. It is a service provided to clearly identifiable consumers for a charge that must cover the full cost of supply. In the absence of competition as in the United Kingdom (see Box 1), tariffs will have to be set to cover all operating costs, depreciation and interest, and to produce an adequate return on equity. For public utilities, which have the responsibility to undertake system expansions, the tariffs should enable the utility to generate internal cash adequate to service the debt and meet at least 40 per cent of the capital cost of system expansion. Such returns on earnings should be predicated on the utility achieving certain minimum efficiency norms relating to capital investment, O&M, plant availability, heat rates, system losses and the like. Tariffs should also provide for automatic and timely adjustments for variations in fuel prices and exchange rates. The structure of the tariff should not be on the basis of the use to which the power is put, but on the basis of (i) voltage and quantum of supply, (ii) long-run marginal capacity costs, and (iii) marginal energy costs. Tariff structures should also promote energy conservation and penalize peak hour and peak season consumption, and consumption with poor power factor and load factor. Cross subsidies from one class of consumers to another should be minimized. Life-line rates to consumers with very low monthly consumption (such as 50 kWh) could be an acceptable compromise in low-income countries. Subsidies to the power sector as a whole through arrangements such as subsidized interest rates; excessive equity from government budgetary resources; exemption from interest rates and foreign exchange risks; exemption from corporate taxes, property taxes, import duties and sales taxes; as well as direct subsidy payments should be avoided. Such subsidies, if any, should be made transparent, quantifiable and capable of being phased out within the medium-term.

51. The Bank will continue to encourage DMCs to phase out gradually the subsidies to the subsector, minimize the internal cross subsidies and adjust tariffs at regular intervals to cover the costs of supply and generate internal cash to meet a reasonable proportion of the system expansion costs (see Box 3). Another major focus will be to encourage DMCs to carry out the tariff adjustments by independent regulatory bodies on the basis of a set of transparently promulgated tariff principles (such as rates of return, etc.). Such tariff decisions will be based on a review of the applications by utilities and on public hearing. The Bank will also encourage periodic automatic adjustments of tariffs for changes in exchange rates and fuel prices. The existence of such a transparent and predictable regulatory mechanism is essential for inducing private capital to enter the electric power subsector. As subsector restructuring proceeds to enable competition in generation and to reduce monopolistic elements (see para. 20), prices will be increasingly determined through competitive markets. Regulation in this context will focus on maintaining and reinforcing a fair and competitive environment.

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Background

Hydrocarbon Subsector

Catalog

Power Subsector

Box 3 : Electric Power Tariffs