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p. 18 of 30 BACK | NEXT 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

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Background

49. Price is a major determinant of energy demand, supply and end-use efficiency. The energy pricing policies adopted by the DMCs vary widely. On the whole, there is an inadequate appreciation of the fact that prices below the true opportunity costs invariably lead to wasteful use of energy. Many DMC governments tend to use energy price as a public policy instrument to carry out welfare transfers across groups. The Bank's approach to energy pricing is that wherever possible, prices should be market-driven or market-related. In the case of a readily tradeable energy source such as oil, this is clearly possible and necessary. Where the form of energy is nontradeable (such as electricity) and is being provided by monopolistic producers (whether private or government-owned), the prices should be regulated transparently to ensure fairness to both the producers and the consumers. In the case of natural gas, which under the circumstances of many countries is non-tradeable, such a market-oriented approach is still possible by relating natural gas prices to the market prices of tradeable substitutes such as fuel oil. The specific approaches in respect of each major subsector are discussed below.

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