Transcript The Impact of Electricity Tariff Reforms and Alternative

The Impact of Electricity Tariff Reforms
and Alternative Mitigating Measures
David Coady
PSIA Group
Fiscal Affairs Department
International Monetary Fund

Based on background paper for an IMF
Selected Issues chapter 2005

“The welfare impacts of electricity tariff
reforms and alternative compensating
mechanisms: Evidence from Tajikistan”
(with Franziska Gassmann and Irina
Klytchnikova)
Background I

Tariff subsidies common in transition and
developing countries




>10% GDP in Kazakhstan, Tajikistan, Uzbekistan
3-4% GDP in Bulgaria, Georgia
Adverse implications for financial position of
state-owned enterprises and investments in
capacity and distribution systems
Increase in tariffs viewed as key component
of sector reform strategy
Background II



Price increases can have substantial adverse
impact on low-income households
Often viewed as an important political
barrier to reform agenda
Emphasis put on alternative approaches to
mitigating adverse impacts of reform


Use of lifeline tariffs
Use of targeted safety net programs
Structure of Presentation

Policy background in Tajikistan 2004




Methodology used in the analysis
Magnitude and distribution of impact of tariff
reforms on households
Targeted social protection programs


Tariff structure, energy patterns, reforms
Existing and potential
Comparison of cost-effectiveness of lifeline tariffs
with mitigation through targeted transfers
Policy Background in Tajikistan 2004





Single state-owned enterprise dominating generation
and distribution (Barki Tajik)
Universal household access to network but supply
problems common
Cross-subsidization of residential consumers by
industry
Large subsidies to “privileged groups” and nonpayment of bills
Average tariffs substantially below cost-recovery tariffs


WB estimated subsidy at 19% GDP 2003
Average tariff only 25% of cost-recovery level (6.125dr/kWh)
Methodology


Identify existing tariff structure and reforms
Use household survey data to analyze electricity
expenditures and tariff patterns





Tajikistan Living Standards Survey 2003
Energy Household Survey 2004
Apply existing tariff structure to “back out”
electricity quantities
Apply “new” tariff to identify impact on households
Impact on low-income groups and alternative
mitigating measures
Evolution of Tariff Structure
2002
2003 (pre-June)
2003 (post-June)
2004
Lifeline Limit
(household/month)
150
250
250
250
Lifeline Rates
- Summer
- Winter
0.5
0.5
1.6
1.6
0.8
1.6
0.8
1.6
Above-Lifeline
- Summer
- Winter
1.1
1.1
2.7
2.7
1.35
2.7
1.35
2.7
Electricity Consumption Patterns 2003
Electricity
Consumption
(kWh/month)
Bottom
Quintile
2nd
Quintile
3rd
Quintile
4th
Quintile
Proportion of Households
0.821
0.790
0.882
0.859
>0 Summer
>0 Winter
0.854
0.891
0.832
0.880
>50 Summer
>50 Winter
0.839
0.876
0.822
0.869
0.817
0.878
>100 Summer
>100 Winter
0.774
0.860
0.776
0.866
>250 Summer
>250 Winter
0.562
0.658
Monthly
Consumption
Electricity
Budget Share
Top
Quintile
All
Households
0.766
0.854
0.812
0.873
0.782
0.853
0.764
0.853
0.804
0.866
0.757
0.857
0.739
0.844
0.718
0.843
0.753
0.854
0.535
0.644
0.498
0.620
0.460
0.598
0.476
0.643
0.506
0.632
344
334
328
314
330
330
0.040
0.035
0.032
0.031
0.031
0.034
Alternative Tariff Levels and Structures
Baseline
Scenario 1
Scenario 2
(Lower lifeline
threshold)
Scenario 3
(Equalizing
summer and
winter rates)
Scenario 4
(Greater
differentiation in
rates)
250
50
50
50
Lifeline Rates
- Summer
- Winter
0.8
1.6
0.8
1.6
1.6
1.6
0.5
0.5
Above-Lifeline
- Summer
- Winter
1.35
2.70
1.35
2.70
2.70
2.70
4.51
4.51
Lifeline Limit
(household/month)
Impact of Alternative Tariff Structures
Consumption
Quintiles
Scenario 1
(Existing
Structure)
Scenario 2
(Lower lifeline
thresholds)
Scenario 3
(Equalizing
seasonal rates)
Scenario 4
(Greater rate
differentiation)
Implicit subsidy as percent of income
Bottom
0.086
nd
2 quintile
0.076
rd
3 quintile
0.070
th
4 quintile
0.069
Top
0.067
0.079
0.070
0.063
0.062
0.061
0.069
0.061
0.056
0.055
0.054
0.041
0.037
0.034
0.034
0.032
All
0.073
0.067
0.059
0.035
Average tariff
(dr/kWh)
Ratio to costrecovery tariff
1.67
2.05
2.56
4.00
0.273
0.335
0.418
0.653
Distribution of Implicit Subsidy
Consumption
Quintiles
Scenario 1
(Existing
Structure)
Scenario 2
(Lower lifeline
thresholds)
Share of total implicit subsidy (in percent)
Bottom
0.203
2nd quintile
0.200
3rd quintile
0.201
4th quintile
0.194
Top
0.210
0.204
0.200
0.201
0.193
0.201
Scenario 3
(Equalizing
seasonal rates)
0.202
0.200
0.201
0.194
0.202
Scenario 4
(Greater rate
differentiation)
0.202
0.200
0.202
0.195
0.201
Existing Social Protection Programs

Social Pensions


Cash Compensation Program (CCP)



Paid to those unable to work and not entitled to social insurance
pension (pensioners, disabled, deceased earner)
Reformed program introduced in 2000 targeted to poorest 20%
children aged 6-15 years in each school (sharing, national 2002)
School committees chose eligible students and deliver transfers
without explicit criteria
Energy Compensation Mechanism (ECM)



Introduced in Jan2003 with tariff increases
In principle in-kind means tested but in practice qualitative
assessment by village committee
Discount for consumption up to 100-150 kWh per month given to
electricity company based on village-level records
Alternative Compensation Mechanisms

Identify alternatives in household survey data
(TLSS2003)



Evaluate targeting performance


Cash Compensation Program
Hypothetical Proxy-Means Program
Ability to transfer benefits to large proportion of
low-income households (coverage) without high
leakage to others
Choose “poorest” 20% based on predicted
probability of receiving program
Coverage and Leakage Rates
Participation Rates
CCP
PMP
Benefit Shares
CCP
PMP
Bottom
2nd Quintile
3rd Quintile
4th Quintile
Top
0.250
0.211
0.191
0.183
0.148
0.444
0.291
0.148
0.083
0.044
0.249
0.209
0.194
0.188
0.157
0.433
0.287
0.149
0.084
0.045
All
0.200
0.200
1.000
1.000
Alternative Mitigation Strategies

Comparing three reform alternatives




Instead of moving to cost-recovery tariffs for all
households, move to structure of Scenario 4
Move to cost-recovery tariffs and compensate households
using budgetary savings relative to Scenario 4 via CCP
Move to cost-recovery tariffs and compensate households
using budgetary savings relative to Scenario 4 via PMP
All alternatives have same fiscal impact


Under Scenario 4, government finances subsidies from
budget
Under transfer programs, government covers transfer bill
Net Impact of Alternative Measures
Income Impact of Reform
CCP
PMP
Scenario 4
Bottom
2nd Quintile
3rd Quintile
4th Quintile
Top
-0.011
-0.034
-0.035
-0.025
-0.013
0.015
-0.021
-0.042
-0.053
-0.057
-0.045
-0.040
-0.036
-0.035
-0.035
All
-0.023
-0.032
-0.038
Policy Implications




Electricity tariff subsidies are not likely to be a cost effective
approach to protecting low-income households
Developing more targeted compensation mechanisms will
substantially reduce the fiscal cost of mitigation (for all
structural reforms)
Targeted transfers can be focused on different populations
(infants, children, adults, elderly etc) and conditioned to
both generate physical/human capital accumulation and
improve targeting
Measures should be integrated into a comprehensive social
protection strategy to ensure consistent targeting, avoid
duplication and decrease administrative costs