Monday, February 23, 2015

Electricity rates in 2015: Rebalance>> do not hike.

The government’s plan to increase electricity rates across the board in 2015 does not help its credibility and damages the economy.

Oil prices rapid drop _by over 45% in the past two months_ is a game changer for Jordan’s electricity sector. In mid 2013, Jordan’s supplies of natural gas from Egypt stopped completely. This forced the kingdom to rely on diesel and fuel oil for generating the bulk of its electricity. When oil prices ranged from 100 to 110 $ throughout 2014, the cost of generating and delivering electricity to end users across Jordan ranged from 180 to 190 fils per KWH.

The drop in fuel costs of 45% reduces Jordan’s electricity cost by around 30%. Currently, the cost of generating and delivering electricity to end users across Jordan stands at around 130 fils per KWH. This is due to the fact the cost of transmission to end users remains fairly constant regardless of generating costs.

Reducing electricity cost is not just tied to the price of oil. Jordan can further reduce its electricity costs by tackling the expanding problem of grid losses and electricity theft. Whereas global standards suggest grid losses should not exceed 5% of total power, in Jordan the losses are 14% in the center governorates and 11% in the northern governorates and have been increasing annually. Grid losses total cost exceeded 300 million US$ in 2014. Enhancing grid efficiency and cracking down on grid theft would substantially reduce the cost of electricity in the country.

The drop in the cost of energy saves Jordan’s economy close to two billion US$ a year. The government should not distort the savings by setting electricity rates at a much higher price than actual cost or by having rates that increase costs on some sectors by wide margins while offering other sectors a subsidy. At a cost of 130 fils per KWH, the electricity rates in 2015, as well as the rates in 2014, reveal massive distortions and market distorting cross subsidies between sectors. For example, hospitals, schools, mosques and churches (which are billed on the residential rate) pay electricity charges far higher than hotels, malls and other commercial entities. This is an absurd situation by all counts. The two graphs give further details.

2015 and its low oil prices should be the year in which the Government finally restructures the energy sector in Jordan. Start with pricing electricity in a fair and cost-based manner. Selling electricity at cost to all sectors (except low consumption households) with a reasonable surcharge on high users in residential and commercial sectors is the better approach. With the clear understanding that any future increase or decrease in electricity generating costs will be also passed through to the end user rates (rising or falling).

To sum up, the government ought to rebalance the electricity tariff in 2015 not raise it across the board. Some sectors will have good reductions and others will have moderate rises counter balanced by a lower total fuel bill given the reduced gasoline and diesel rates in 2015. The rebalancing and the ability to raise or reduce rates based on actual costs will _for good_ end the problem of losses in the electricity sector funded by public debt as well as start paying down the electrical sector past debts. The lower energy bill in 2015 would also spur economic growth and increase government collections of sales taxes and income taxes. This would also enhance the ability to pay down past electrical sector debts.

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