* - St/0ST/0 t- v INDUSTRY AND ENERGY DEPARTMENT WORKING PAPER FILE o ENERGY SERIES PAPER No. 32 r Review of ELecTriciTy Tariffs in Developing Countries During the 1980's Novembe,1990 X The World Bark Industry and Energy Department, PRE Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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* - St/0ST/0 t- v
INDUSTRY AND ENERGY DEPARTMENT WORKING PAPER FILE oENERGY SERIES PAPER No. 32 r
Review of ELecTriciTy Tariffs inDeveloping Countries During the 1980's
Novembe, 1990 X
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REVIEW OF ELECTRICITY TARIFFS
IN DEVELOPING COUNTRIES DURING THE 1980s
November 1990
Prepared by:
Energy Deve'opment DivisionIndustry and Eitergy Department, PRE
Copyright (c) 1990The World Bank1818 H Street, N.W.Washington, DC 20433U.SA.
This report is one of a series issued by the Industry and Energy Department for theinformation and guidance of Bank staff. The report may not be published or quoted asrepresenting the views of the Bank Group, nor does the Bank Group accept responsibilityfor its accuracy or completeness.
ABSTRACT
This report summarizes the results of a survey of electricity tariffs indeveloping countries to determine: (a) the extent to which the tariffs reflected economicefficiency prices; (b) how tariff levels changed in constant price terms during the 1980s;and (c) how these tariff levels compare to levels in OECD countries and the averageincremental economic cost of power system expansion during the 1990s in developingcountries.
The results of the research show that tariff levels in constant US$ terms indeveloping countries, as a group, remained relatively stable between 1979 and 1983, butdetericrated markedly thereafter. Between 1983 and 1987, tariffs fell by around 35%.
(.The average level of tariffs in the late 1980s was only about half the average incrementaleconomic cost of power system expansion during the 1990s. The average level indeveloping countries was also just over half the average level in OECD countries in thelate 1980s. Thus, electricity consumers in developing countries generally faced tariff levelsthat were too low to encourage efficient use of electricity, while power utilities wereunable to raise sufficient funds from revenues to finance their expansion needs. Therelative movements in tariffs, expressed in constant local price terms, show that electricityconsumers in developing countries faced greater fluctuations in tariffs than theircounterparts in OECD countries. The results of the survey indicate that most governmentsand power utilities had not adopted efficiency pricing for their electricity tariffs in the late1980s, even though the marginal costs of supplying electricity had been studied in mostcountries. The study also reports the results of research into empirical correlationsbetween trends in average tariffs and factors reflecting macroeconomic and power systemcharacteristics.
Tariff Trends and Macroeconomic and Power System Factors .... ........ 18
ANNEXES
1. Electricity Tariff Policies in Developing Countries in 1987 .... ........ 25
2. Trends in Average Electricity Tariffs of Developing Countriesand OECD Countries for 1979 - 1983 ....................... 26
3. Distribution of Electricity Tariff Growth Rate by Country: 1979-1988 .... 27
4. Relationship of Average Electricity Tariffs to Economic Costs ofSupply for Developing Countries in 1987 ...................... 28
5. Relationship of Electricity Tariff Structures to Economic Costsof Supply for Developing Countries in 1987 .................... 29
6. Relationship of Average Electricity Tariffs to Supply Voltagefor OECD Countries in 1987 .............................. 30
7. Relationship of Average Electrici.y Tariffs to Supply Voltagefor Developing Countries in 1987 ........................... 31
8. Comparison of Average Electricity Tariffs in 1987 with the IncrementalCost of System Expansion for 60 Developing Countries ..... ...... 32
9. Computation of Average Incremental Cost of Electricityfor Developing Countries as a Group ........................ 34
This paper was prepared by John Besant-Jones, Peter Cordukes and Melody Mason(consultant). Arun Sanghvi and Robert Vernstrom of RCG/Hagler, Bailly, Inc. undertookmuch of the analysis. Jamshid Heidarian assisted with the basic data research, and ChiekoCook prepared the paper for publication.
REVIEW OF ELECTRICITY TARIFFS IN DEVELOPING COUNTRIES
DURING THE 1980s
Introduction
1. According to World Bank policy - as stated in OMS 2.25 of March 1977 -the determination of electricity tariffs should be based on two major principles. The firstis that tariffs should reflect economic efficiency prices, in terms of the structure and levelsof costs for supplying electric power. In practice, this principle has been taken to meanthat consumers should pay the long run marginal costs of meeting their demand. Thesecond major consideration is that tariffs should be set so as to make power utilitiesfinancially viable with an acceptable financial rate of return. There has been concernwithin the Bank about the effectiveness of these two princinles, especially when the resultsof an earlier study on Bank lending in the power sector' indicated that the economic andfinancial performance of utilities borrowing from the Bank was declining.
2. As a result of this concern, the Industry and Energy Department (IEN) hascarried out an extensive survey of tariffs during the 1980s to determine the extent towhich they reflected economic efficiency prices. This report summarizes the results ofthis survey, in terms of: (a) whether tariffs in developing countries have been based onlong run marginal costs and, if not, what the prospects are for these countries adoptingeconomic pricing; (b) how tariff levels in developing countries have changed in constantprice terms during the 1980s;2 and (c) how these tariff levels compare to levels in OECDcountries and the average incremental economic cost of power system expansion duringthe 1990s in developing countries. The report focuses on global trends and is not intendedto deal with country-specific tariff issues. Nor does it examine national pricing policies,and thus pricing objectives, that explain these results. However, it is worth noting that theresults of the survey indicate that many developing countries do not appear to share thesame pricing objectives as the World Bank.
A Review of World Bank Lending for Electric Power. Industry and EnergyDepartment, Energy Series Paper No. 2. March 1988.
2 Trends in taiiff levels are analyzed in terms of an index in local price termsadjusted by GDP deflators, and an index in US$ terms adjusted by the UN-MUVindex.
2 -
3. This report is based on a survey by IEN of data for over 60 developingcountries in World Bank files on tariff policies in 1987 and on average tariffs for theyears 1979 through 1988.3 The data on tariff levels in developing countries were obtainedmostly from Bank staff appraisal and audit reports. There are minor differences in thetime series for data between countries, and variations occur in the composition of countrysamples used in the analysis of various tariff issues. Unfortunately, the collection ofinformation from other sources to supplement Bank sources was beyond the scope ofthis study, as was information on economic costs of power supply during the 1980s.However, data on incremental costs of power expansion in the 1990s could be estimatedfor each country from a recently completed study,4 and compared with 1987 averagetariffs.5 Despite the problems with obtaining a complete and accurate set of data, thefindings of this analysis provide some insights on various tariff issues. Information onaverage tariffs in OECD countries during the 1980s was taken from the InternationalEnergy Agency's quarterly publication "Energy Prices and Taxes", to provide a comparatorfor tariffs in developing countries. The data were analyzed by consultants RCG/Hagler,Bailly, Inc.6
3 The countries surveyed account for over 90% of electricity sales in all developingcountries. The data were collected to analyze broad trends across these countriesand to derive time series, rather than provide the basis for comments on tariffs inspecific countries. Any discrepancies between these data and those from othersources are unlikely to affect the conclusions of the analysis in this report.
4 Capital Expenditures for Electric Power in the Developing Countries in the 1990s.Industry and Energy Department, Energy Paper Series No. 21, February 1990.
5 The term "average tariff' is used as a single indicator of the various rates that existin a tariff schedule, solely for the purpose of analyzing broad cross-country andtime-series trends. It is computed as the ratio of total annual revenues to totalannual sales volume for a utility or a group of utilities in a country. In some partsof this report, this term is also applied to the ratio of revenues to sales forparticular customer groups defined by supply voltage level.
6 Trends in Electricity Tariffs in Developing Countries. Draft Report. RCG/Hagler,Bailly, Inc. October 1989.
3-
Summary of Findings
4. The results of the IEN survey for the period 1979-1988 show that tariff levelsin developing countries, as a group, remained around UScents 5.5/kWh up to 1983 inconstant 1986 US$ terms. However, these tariffs deteriorated markedly after 1983 tobelow the levels required for economic efficiency. In constant 1986 US$ terms, in 1988they averaged UScents 3.8/kWh. The average level of tariffs in developing countries wasthen only about 55% of the average level in OECD countries, and was also only abouthalf the level required to cover the average incremental economic costs of the plannedexpansion of power systems during the 1990s in developing countries. Thus, electricityconsumers in developing countries generally faced tariff levels that were too low toencourage efficient use of electricity.
5. Average tariffs expressed in constant local price terms were far more volatilein developix'g countries than in OECD countries. Consequently, electricity consumersfaced greater uncertainty over their power costs in developing countries, tc the detrimentof economic performance and their financial strength.
6. The results of ,he survey also indicate that electricity tariffs in 1987 werenot based on the marginal costs of supplying electricity in nearly 80% of developingcountries, even though the marginal costs had been studied in most countries.Governments and power utilities had ;hus generally not adopted efficiency pricing.
7. The developing cour;tries with the best tariff structures had adopted tariffpolicies based on marginal costs. Most had tariffs with consumer categories (by voltagelevel) and energy and capacity charges that vartially reflected the economic cost of supply,and two thirds had "time-of-use" rates. Surprisingly, about half of the countries which hadnot based their tariffs on marginal costs also had tariff consumer categories and energyand capacity charges thai reflected somewhat economic costs. Only one third of them had"time-of-use" rates, and thus consumers in about two-thirds of countries were not receivingthe correct pricing signals for electricity with respect to "time-of-use". Furthermore, about40% of countries had one or more categories of consumer paying disproportionate ratescompared to the economic cost of supply.
8. The prospects were poor for implementing efficiency pricing. Over 60% ofdeveloping countries had no intention of basing tariffs on marginal costs in the nearfuture. Many countries would have had to raise tariffs to cover economic costs by morethan most governments would probably accept in a reasonable period. Sixty percent ofcountries hi 1987 had tariffs that did not cover the incremental costs of expanding theirpower systems. To cover economic costs, one quarter of the countries would have had
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to more than double their tariffs, and an additional quarter would have had to increasetariffs by more than a third.
9. A number of interesting empirical correlatvons were identified between trendsin average tariffs for 1979 and 1987 and factors which reflected the macroeconomicenvironment and power system characteristics. The factors investigated covered GDP percapita, GDP growth rate, inflation rate, exchange rate movement, Primary energy source(petroleum dependence), system size, electricity sales growth rate aiid geographic region.For example, the analysis indicated that real increases in tariffs, in constant US$ terms,occurred generally in the countries with the most stable local prices and exchange rates.Thu analysis also indicates that tariff levels were inversely related to per capita incomein 1986 and 1987, and that tariffs increased most in the lowest income group during the1980s in constant local price terms.
Electricity Tariff 1rends, 1979-1988
10. The results of IEN's research into trends in electricity tariff levels during the1980s are summarized in Annex 1. Average tariffs for developing countries,7 expressedin constant 1986 US dollar terms (using the UN-MUV Index5), reflect the general lackof sound power pricing policies. Whereas in 1979 the average of tariffs in developingcountries was within half a US cent/kWh of the OECD average, by 1988 the gap hadwidened to almost UScents 4/kWh, and the developing country average had slipped tohalf the OECD average (Figure 1). Furthermore, average tariffs of OECD countriesincreased by 1.4% per annum, but the average for developing countries decreased by3.5% per ann..m. Positive and negative rates of growth in average tariffs (in constantUS$ terms) from 1979 to 1988 were fairly evenly spread with about 70% of developingcountries in the +5% to -5% annual growth rate range (Annex 2). The decline in tariffsexpressed in constant US$ terms is serious for developing countries since their costscontain a high proportion in foreign exchange, and electricity consumers in developingcountries generally faced tariff levels .hat were too low to encourage efficient use ofelectricity.
O Overall average tariffs for the two country groupings - developing and OECD - arecomputed from national average tariffs weighted by national electricity sales.
8 Unit Value Index of Manufactured Exports from the five major industrial marketeconomies to developing countries on a CIF basis, which is published in the UNMonthly Bulletin of Statistics.
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Figure 1
Trends in Electricity Tariffs of OECD and Developing Countriesfor 1979-1988 in Constant US$ Terms
(MUV Indexed 1986 USS)
US oents/kWh10
_ OECD Countries
Developing Coun-ri** .* v6 / EsoEding 4 Largest
All Developing Countries
Developing COuntfies
s *_ - 40*
O I § -I I _ 1~~~- . 1 1
0
1979 1980 1S81 1992 1983 1.84 198S 19S6 1987 1980
Year
6-
11. The above trend masks a substantial variation of tariffs (in 1986 constantUS$ terms) among developing countries, and in particular the low tariffs in many of them.In nearly 25% of countries tariffs averaged less than UScents 4/kWh in both 1979 and1988 (Figure 2). Similarly, about 50% of the countries had an average tariff belowUScents 6/kWh in these two years. In particular, the four developing countries with thelargest power sales9 had among the lowest tariffs, averaging about UScents 3/kWh, oraround 45% if the average tariffs in OECD countries, in 1988.
12. Considerable caution has to be used when interpreting this data, given theunreliability of official exchange rates. For example, a few countries had highly over-valued exchange rates in 1979 (such as Ghana and Mozambique) but made substantialdevaluations of the currency during the study period, thereby making tariffs far lower in1988 when expressed in US$ terms. On the other hand, the currency of the francophonecountries became increasingly over-valued during the 1980s. Distorted exchange rateswere not confined to African countries, since socialist countries (such as China andPoland), some Latin American and other countries also had highly distorted exchangerates during the period under review.
13. Overall, it is clear from Annex 1 that much larger increases in tariffs wererequired to keep up with inflation in developing countries than in OECD countries. Forinstance, the increase in the index of local GDP deflators from 1979 to 1988 was ove:four times greater for developing countries than for OECD countries. In two-thirds ofthe developing countries surveyed, growth rates in average tariffs in constant local priceterms were positive, and in one quarter the annual rate of growth was above 5% (Annex2).
14. The index of average tariffs for developing countries expressed in constantlocal price terms (based on local GDP deflators)"0 fluctuated considerably during the
[ These four countries - China, India, Brazil and Mexico - were the only countrieswith sales of over 100,000 GWh in 1988, and together they accounted for 68% ofthe combined sales in that year for all the dzveloping countries surveyed.
"This index excludes three developing countries - Argentina, Brazil and Mexico --that experienced hyperinflation during the 1980s w1iich rendered their tariff indexesin loca' price terms highly unreliable. Since their electricity sales were large, theinclusion of these countries would distort the movements in the tariff index in localprice terms for developing countries as a group.
Figure 2
Distributions of Average Tariffs In Developing Countriesfor 1979 and 1988 In Constant US$ Terms
1980s. The index increased by 9% between 1979 and 1988, declined by 10% from 1983to 1986, and then increased to 5% above the 1983 peak in 1988. By comparison, therewas little overall change in the coiTesponding index for OECD countries between 1982and 1988, following a 16% rise from 1979 to 1982 (Figure 3).
15. A number of developing countries registered much higher tariff increases inconstant local price terms than even OECD countries, as shown in Figure 4. In virtuallyall the OECD countries, the ratio of 1988 tariffs to 1979 tariffs (constant prices) lay inthe range 0.75 to 1.25. For about 40% of the developing countries surveyed, this ratiowas above 1.25. Conversely, the ratio was below 0.75 for about 7% of developingcountries.
16. The country by country analysis of average tariffs, expressed in constant localprices, also shows that tariffs were more volatile in developing countries than in OECDcountries during the 1980s. This conclusion is illustrated in Figure 5 by the distributionsof the ratio of the maximum average tariff level to the minimum level by country forthese two groups of countries. Whereas this ratio for most (85%) OECD countries wasless than 2, in about 35% of the developing countries this ratio was greater than 2.Another indicator of tariff volatility in developing countries is the large number thatexperienced a year-on-year change in average tariff of greater than 25% in constant prices(20 from 1987 to 1988, 13 and 15 in the previous two years, in the 60 countries surveyed).Thus, electricity consumers faced greater uncertainty over their tariffs than theircounterparts in OECD countries, to the detriment of economic performance and theirfinancial strength.
Present Electricity Pricing Policies
17. The results of IEN's research into the tariff policies of developing countriesin 1987, which are summarized in Annex 3, show that a low proportion of countriesfollowed economic pricing, since only 22% had actually based their tariffs on marginalcosts. This by no means, though, indicated that they actually had tariffs equal to marginalcosts (para. 20). The low implementation rate is particularly striking because studies intothe marginal costs of supplying power are often undertaken with Bank/IDA assistance asa step towards implementing economic pricing in the power sector.
18. The low implementation rate of tariffs based on marginal costs appliedconsistently across the various country classifications studied, namely by region, size andnational income per capita. Countries with small systems and those classified as lowincome -- many fall into both categories -- were the least committed to this policy, interms of both actual and planned implementation. Yet, paradoxically, their record onaverage tariff levels during the 1980s was as good as those of other developing countries
1 9 1
Figure 3Trends In Electricity Tariffs of OECD and Developing Countries
for 1979 and 1988 (in 1986 Local Constant Prices)
Index (1988 100)two
120
Developing Countries
100 s4W^ ( 8 ~~~OECD Countrles
so
60 . , . ,p _ ,
i979 1980 1961 1902 1983 Ig' 1998 1986 1"? 1s9
Year
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Figure 4Distribution of Ratio of 1988 to 1979 Average Tariffs
for OECD and Developing Countries(In 1 9g6 Local Constant Prioes)
Percent of Countries70
60
60
SO
30
20
10
20
.61-76 .7-1 1.01-1.O6 1.26-1.6 1.61-1.76 1.76-2
Ratio of Average Tariffs (1 988 to 1979)
- OECD Countries Developing Countries
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Figure 5
Distribution of Ratio of Maximum Tariff to Minimum Tariffbetween 1979 and 1988 for OECD and Developing Countries
(In 1986 Local Constant Prioss)
Percent of Countries
80
60
40
20
01-1.60 1.61-2 2.01-2.5 2.51-3 13
Ratio of Maximum Tariff to Minimum Tariff
OECD Countries m Developing Countries
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(para. 31), possibly driven by financial considerations rather than economic principles.The results also indicate that some low income countries with large systems were amongthe least committed to sound economic policies for power pricing.
19. Although marginal costs had been studied in at least 70% of the developingcountries surveyed, less than 20% of those not following economic pricing planned tointroduce it. Furthermore, about one third of countries did not make tariff decisionsbased on a sound least-cost development program. Thus, even the basis for makingreliable estimates of marginal costs was not available for these countries.
Electricity Tariffs and Economic Costs
20. Tariffs Levels and Economic Costs. Estimates of the economic cost of supply(long run marginal cost) for the system as a whole and by voltage level were available foronly about a third of the developing countries (26) surveyed. The evidence from thissample suggests that average tariffs for over 70% of these countries did not cover the longrun marginal cost of supply (Annex 4), including six of the seven countries which claimedto have marginal cost-based tariffs. Paradoxically, six of the seven countries which hadaverage system tariffs above marginal costs did not have a tariff system based on marginalcosts. Further analysis on tariff levels and economic costs is reported in paras. 27-30 ofthis report.
21. Wien tariffs levels are compared to the economic costs by su.pply voltagelevel (Annex 4), the tariffs of developing countries which followed economic pricingmatched the relative economic supply costs better than the tariffs for the other countries.However, tariffs did not cover the economic costs of supplying low and medium voltageconsumers for most countries. Tariffs did cover economic bulk supply cost for about halfthe countries. Consequently, generally there was cross-subsidization from industrial usersto consumers supplied at low voltage, which was quite substantial for about 30% of thecountries in the sample.
22. Tariff Structures and Economic Costs. Survey data were analyzed toevaluate how well the structure of tariffs reflected the marginal costs of service indeveloping countries, including whether (i) tariff classes represented users with similarmarginal costs; (ii) the tariffs charged reflected major differences in the cost of deliveringelectricity at different times of day and year; (iii) tariffs reflected the real costs ofsupplying energy and capacity; and (iv) average tariffs at least reflected the different costsof supplying electricity at each voltage level, even if not covering the full economic cost.The results of the analysis are summarized in Annex 5.
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23. About one third of countries did not even have consumer categories thatrepresented users with similar marginal costs of service. Countries whose tariff policy wasbased on marginal costs did have tariff classes that represented to some extent users withsimilar marginal costs of service. Their tariffs also reflected somewhat the economic costof supplying both energy and capacity. However, nearly one third of these countries didnot implement time-of-use rates that were even close to marginal costs. Surprisingly, overhalf of those countries that did not have this tariff policy had a tariff structure that wasjudged as good or fair according to the above two criteria. However, over two-thirds ofthese countries were judged to have "time-of-use" rates that were not close to marginalcosts. The limited use of such rates indicates their unpopularity in developing countries.
24. From a regional perspective, a greater proportion of countries in the Africaand the Europe, Middle East and North Africa regions had tariff structures close tomarginal costs than countries in the Asia and Latin America regions. With respect tosystem size, tariff structures in large systems reflected least their marginal costs, with two-thirds judoed not at all close. There appears to be no significant difference in therelationship between tariff structure and marginal supply costs for countries in differentincome groups.
25. The question of whether tariffs at least reflected the differences in costs ofsupplying electricity at various voltage levels was addressed by looking at simple ratios ofaverage tariffs. When tariffs are in the line with economic costs, then tariffs for bulksupply are lower than tariffs for low voltage supply, and the latter are above the averagesystem tariff, reflecting the higher supply costs at low voltages resulting from greater linelosses, distribution system investment and unit administration costs. A broad indicationof an appropriate range of the ratio of bulk to low voltage tariffs is provided by OECDcountries. None of these countries set bulk tariffs at more than 81% of low voltage rates,and the majority had bulk rates at 50-75% of low voltage rates (Annex 6).
26. Analysis of average tariffs by supply voltage level for the 21 developingcountries for which tariff yield data were available at all voltage levels (Annex 7) showsthat: (a) the ratio of bulk to low voltage tariffs fell outside the 50-75% range in aboutthree-quarters of the countries surveyed; (b) the ratio of bulk to low voltage tariffs forabout one quarter of the countries surveyed was greater than unity; and (c) in a quarterof the countries, bulk tariffs were below 50% of the low voltage rates, indicatingsubstantial subsidies to bulk power users (Figure 6). This indicates that tariffs in thesecountries do not generally reflect the costs of supply at different voltage levels, and that*here are major cross-subsidies between industrial and residential consumers. Otherindications of subsidies to domestic consumers in developing countries are: (a) the onethird of countries that charged medium voltage consumers more than the average system
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Figure 6
Distribution of Ratio of Electricity Tariffs for Bulk Supplyand Low Voltage Supply for OECD and Developing Countries In 1987
Percent of Countriesso
60
.76-1.00.26-.60
20 -
1.26-1.50
n 0 ~~~1.76-2.000-26 .61-.76 1.01-1.25 1.61-1.76 >2.00
Ratio of Bulk Tariff to Low Voltage Tariff
- Developing Countries OECD Countries
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tariff; (b) the one quarter of countries that charged bulk consumers more than the averagesystem tariff; and (c) the 20% of countries that had low voltage tariffs below the averagesystem tariff.
Future Electricity Pricing Policies
27. In view of the conclusion that power tariffs in developing countries were notgenerally based on marginal costs during the 1980s, the question arises about prospectsfor implementing economic pricing in the 1990s. According to the survey, over 60% ofcountries did not plan to base their tariffs on marginal costs in the near future, includingjust over 80% of the countries in the Europe, Middle East and North Africa region, twothirds in Africa, and just under half in the Asian and Latin American regions (Annex 3).Even if these countries started soon to adopt pricing policies based on marginal costs,there is still the issue of the time to implement the necessary tariff changes.
28. In order to gain more insight into this issue, average tariffs have beencompared with estimates of long run average incremental costs of power system expansionin the 1990s for 60 developing countries (Annex 8). The average tariffs were taken fromthe survey of World Bank data (para. 3) and internal records." Estimates of the averageincremental costs of power system expansion in the 1990s were derived from a recentlycompleted study."2 The latter estimates are highly approximiate since they are based onplans by developing countries to expand their systems without regard to possible financialconstraints. Also, several broad assumptions have had to be made, including: (i) servicelife for generation, transmission and distribution works; (ii) fuel, operating andmaintenance costs; and (iii) system energy losses."3 Furthermore, the use of these plansin this report does not necessarily endorse them as the least cost means to meet projecteddemand. The cost estimates exhibit substantial variation in costs between countries,indicating possible scope for cost reduction in some of them. Nevertheless, they give at
"Summarv Data Sheets of 1987 Power and Commercial Energy Statistics for 100Developing Countries. Industry and Energy Department, Energy Paper Series No.23. March 1990.
12 See footnote 4.
13 The computation of the average incremental cost of power system expansion foreach country to meet the planned increase in power demand in the 1990s isillustrated in Annex 9, using global data for developing countries.
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least an indication of the relationship between average tariffs and incremental costs, aswell as the proportion of countries whose tariffs are substantially below these costs.Combined with other information, this relationship provides an indication of the increasein average tariffs needed to cover incremental costs. Of course, this analysis does notconsider issues for tariff structure.
29. Tariff Levels and Cost of Power Expansion. The average incremental costof meeting power demand in the 1990s for the 60 developing countries surveyed wasabout UScents 7/kWh in 1987 prices."4 The 1987 average tariff of UScents 4.3/kWh forthis group of countries1" was thus about 60% of the incremental cost.
30. As can be seen from the distribution of developing countries by averagetariff and average incremental cost shown in Figure 7, average tariffs in about 25% ofcountries surveyed were less than half the average incremental costs, and in nearly halfof the countries were less than three-quarters of incremental costs. On the other hand,about one third of the countries had tariffs higher than incremental costs. The gapbetween average tariffs and incremental costs demonstrates that tariffs need to be morethan doubled in constant price terms in a quarter of the countries and increased by aboutone third in a further quarter of the countries to meet economic pricing objectives. Forsuch increases to be implemented even within the next ten years, a major change frompast tariff trends (para. 10) would be required. The greatest change would be neededin those countries with the lowest relative tariffs (less than 75% of incremental costs),since tariffs in most of them either did not increase or actually decreased in constantUS$ terms during the 1980s. The problem is particularly acute for the 60% of countrieswith average tariffs below UScents 6/kWh, given that about half of them would have toat least double their average tariffs.
31. Cost Recovery and System Characteristics. The relationships were analyzedbetween the extent to which average tariffs covered the future average cost of powerexpansion and size of system, system load factor and predominant source of
14 This estimate is based on country costs (weighted by volumes of national electricitysales), that average UScents 7.6/kWh in 1989 price terms, at a 10% opportunitycost of capital, adjusted to equivalent 1987 price terms by the change in the UNMUV Index between 1987 and 1989.
IS This average differs slightly from the estimate given in Annex 2 because it is basedon a slightly different group of countries.
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Figure 7
Distribution of Average Tariff & Incremental Cost
In Developing Countries
Average Tariffs Average Incremental Cost
(1987) for 1 990's ( 1987 prices)Percent of Countries Percent of Countries
40 (.0
30 4.1-8 30
'8
20 20 8.1-10
10. 1-1 61 0 1 0
16.1-202 0
0 0<4 6.1-10 16.1-20 6.1-8 10.1-16 320
Average Tariff (US cents/kWh) Average Incremental Cost (US cents/kWh)
Average Tar!ff as Percent of Incremental Cost
(1987)Percent of Countries
40
306 1-75
20101-126 6
1 0
t60 76-100 126-160
Average Tariff as Percent of Incremental Cost
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primary energy for power generation. The first hypothesis was that tariffs in smallsystems would cover a lower proportion of incremental costs of power expansion than inlarge systems because of diseconornies of scale, but it was not substantiated. Indeed,average tariffs for half of the smallest systems (less than 2,000 GWh annual supply) weremore than 25% higher than incremental costs of expansion, while average tariffs for twothirds of the largest systems (more than 10,000 GWh annual supply) were less than 75%of incremental costs.
32. The second hypothesis was that a higher proportion of the averageincremental costs of power expansion would be covered by average tariffs for systemswith high load factors, but this was also not supported by analysis of the data. Similarly,the third hypothesis was that average tariffs would cover a higher proportion of the futurecosts of power expansion for systems supplied largely from renewable energy sources,particularly hydroelectric and geothermal generation, but it was not substantiated byanalysis of available data. A low ratio of tariffs to costs (average tariffs covering lessthan 75% of incremental costs) was not only true for half the systems with littlehydroelectric or geothermal generation (less than 20% of total supply), but also for twothirds of those with substantial hydroelectric and geothermal generation (more than 80%of supply).
Tariff Trends and Macroeconomic and Power System Factors
33. The relationships were also analyzed between trends in average tariffs16 andfactors which reflected the macroeconomic environment and power system characteristics.The factors analyzed were GDP per capita, GDP growth, inflation rate, exchange ratemovement, fuel type (to reflect petroleum dependence), size of system, sales growth rateand geographic region. Since econometric analysis was beyond the scope of this study,observed patterns are not statistically robust correlations and, of course, causality is in noway implied in those cases where some correlation is found.
34. GDP per Capita. After stratifying countries into three groups by annualper capita income - low income, lower-middle income, and upper-middle income'7 - the
'6Average tariffs for the various country groups used in this analysis were calculatedon an unweighted basis (by electricity sales volume).
17Stratified according to World Bank definition of upper-middle income = more thanUS$1700 per capita, lower-middle income = US$400-1700 per capita, and lowincome = less than US$400 per capita.
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analysis shows that low income countries had tariffs which on average experienced quitesteady growth in constant local prices and remained steady in constant US$ terms (Figure8A). On the other hand, average tariffs in middle to upper income countries experiencedquite volatile changes in constant local prices, and in 1987 they fell to slightly below their1979 levels. When expressed in constant US$ terms, tariffs in both the middle to upperincome group and the lower to middle income group declined steadily from 1981 to 1987,and were well below the leverage tariff for the low income group in 1986 and 1987.These trends indicate that generally tariff levels are not related to ability to pay byconsumers. Instead, they may reflect the higher average costs of supply in small systems.
35. GDP Growth. Countries were grouped according to average annual growthrate of Gross Domestic Product from 1979 to 1987, to determine if there was anyrelationship between rate of growth of GDP and average tariffs. In constant local prices,countries with the lowest GDP growth (less than 1% per annum) experienced extremelyvolatile average tariffs, rising by nearly 50% from 1979 to 1984 and then falling rapidlyuntil 1987 when they started to rise again (Figure 8B). In 1986 US$ terms, thesecountries experienced a sharp increase in tariffs between 1979 and 1981 with a steadydecline thereafter, so that the average tariff of just below UScents 8/kWh in 1987 wasmore than 10% lower than in 1979. Tariffs in countries with higher rates of GDP growthtended to have much less volatility, although remaining at lower levels than in slow-growth countries, ending the period at or just below the 1979 average tariff level ofUScents 6/kWh.
36. Inflation and Foreign Exchange. Tariffs in countries with high inflation(greater than 20% per annum) exhibited the greatest volatility expressed in constant localprices (Figure 8C), and had the lowest tariffs in constant US$ terms that declined overthe period to UScents 4/kWh in 1987. The lowest inflation countries (less than 10% perannum) was the only group in which average tariffs increased throughout the period inboth constant local prices and US$ terms, rising to UScents 11/kWh in 1987. Thispattern for inflation rates was repeated for movements in foreign exchange rates (Figure8D). Tariffs were most volatile and declined most sharply to the lowest level in thegroup of countries experiencing the greatest movements in exchange rates. The groupof countries with relatively stable exchange rates steadily increased their tariffs.
37. Fuel Type. Average tariffs were stratified according to national use ofpetroleum fuels for power generation as a proportion of total power generation, basedon the UN Energy Yearbook data on national shares of non-coal thermal generation andhydroelectric generation to total generation in 1986. Countries which were more than60% dependent on hydro electricity had lower tariffs and relatively stable average tariffsover the period. Countries with over 60% dependence on non-coal thermal generationhad changes in average tariffs that at least broadly followed the trends in international
- 20 -
petroleum prices (Figure 8E) i.e. rising to 1983 then declining substantially thereafter(from 11 to 7 UScents/kWh on average).
38. S ize. In general, countries witi: the largest systems (greater than10000 GWh annual supply) experienced the greatest price volatility in constant local pricesand the lowest levels in constant US$ terms (Figure SF), averaging 4.5/kWh in 1987,compared with UScents 10/kWh for the smallest syster.s (less than 2000 GWh annualsupply)."8 Both medium and large systems experienced declining average tariffs (inconstant US$ terms) over the period and had lower tariffs in 1987 than 1979.
39. System Sales Growth. "Slow growth" systems (with less than 4% sales growthper year) had the greatest volatility in tariffs in both constant local and TS$ terms (Figure8G). They also experienced the most dramatic decrease in average tariffs over the studyperiod from UScents 7.6/kWh in 1979 to UScents 4/kWh in 1987, with most of thedecrease taking place from 1985 to 1987. On the other hand, systems with annual salesgrowth of 4% and over had steady growth in average tariffs expressed in constant localprices, and fairly stable tariffs when expressed in constant US$ terms. Thus, counter-intuitively, it appears that declining and relatively low tariffs did not stimulate growth insales and thus demand, where system supply capacity was not constrained.
40. Geographic Region. There were pronounced regional differences in tariffgrowth rates (Figure 8H). Most countries in the Europe, Middle East and North Africa(EMENA) region and the Latin America and Caribbean (LAC) region had negative ratesof tariff growth expressed in constant US$ terms, while most Asian countries had positiverates. Growth rates in African cointries were roughly equally divided between positiveand negative trends. Even when expressed in constant local prices, several countries inthe EMENA and LAC regions still had negative rates of tariff growth. In the case ofLAC, average tariffs (in constant local prices) soared during the early 1980s but fellsharply after 1983 to just below 1979 levels. Average tariffs in EMENA were steady from1979 to 1986 but then fell to below 1979 levels in 1987. Tariffs in the African and Asianregions grew steadily up to 1984 and then remained constant except for a sharp increasein 1987 in the case of Africa.
18 The high average tariff level for the small systems arises partly from the high tariffsin US$ terms in the West African francophone countries, which averaged aroundUScents 11/kWh for 1979 to 1985, and rose to UScents. 18/kWh in 1987 for theeight countries from this group covered by the survey. These levels reflect the highvalue of the CFA franc relative to the US dollar in the 1980s.
- 21 -
ds in AveryeeEectricitv Tariffs in Developing Countries 1979-1987
Figure 8A - in GDP ver Capita Figure 8B - by GDP Growvth Rate
X Averages weighted by volume of country electricity sales published in the U.N. Annual Energy Statistics Yearbooks.2 60 countries surveyed from World Bank records.3 Index of average tariffs (1986 = 100) using GDP denators published in the World Bank's "World Tables" for constant price index; andexcluding 3 large countries with hyperinflation during 1980s - Argentina, Brazil and Mexico.4 Annual average exchange rates taken from IMF "International Financial S:. tistics".S Constant MUV - indexed 1986 US dollar terms.6 Compriss China, India, Brazil and Mexico.7 Based on data published in IEA's "Energy Prices and Taxes".8 IEA index of retail tariffs (1986=100)9 Mean of Household and Industry average tariffs.
- 26 - ANNEX 2
Distribution of Electricity Tariff Growth Rate
by Country: 1979-1988
Local Currency (GDP Deflator for 1986)
15%
(- 5%
-15%
AFRICA ASIA EMENA LAC OECD/ OECD/- - - - Bank Region - - - - Household Industry
MUV-lndexed US$ (1986)
15%
-j 5%
,.N,~~~~-00 i-cld l0<
-15% A ASIA .............
AFRICA ASIA EMENA LAC OECD
ELECTRICITY TARIFF POUCIES IN DEVELOPING COUNTRIES IN 1987
AU Surveyed By Region By Utility Siwl By National IncomelCapita2Utilities Africa Asia EMENA3 IAC4 Small Medium Larfe Low Low-Mid UpMid
1 System size groupings are based on consumption data from the U.N. 1986 Energy Yearbook:Small is less than 2000 GWh, Medium is 2000 - 10000 GWh, and Large is greater than 10000 GWh annualy.
2 Per capita income (GNP) groupings are taken from the 1985 World Development Report:Low income is less S400, Lower-Middle imcome $400 - $1700, and Upper-Middle imcome is greater than $1700 per year.
3 Europe, Midle East and North Africa.
4 Latin America and the Caribbean
RELATnONSHIP OF AVERAGE ELBIWCrIY TARIFFS m ECONOMIC COMS OF SUPPLYFOR DEVELOPING COUNTIRES IN 1987
Relationship of AD Surveyed Utilities MC-based Tariff in Use MC-based Tariffs Not is UseAverage Tariff to Sample Sample SampleMarginal Cost Size % of Sample Size % of Sample Size % of Samole
REIA'nONSHIP OF EIECIRICrTY TARIFF S¶RUCTKRS TO ECOBONOMIC COSIS OF SUPPLYFOR DEVEOPING COUNTREES IN 1987
All Surveyed MC-based Tariff Policy By Region By Utility Size, By National meCaIpita2Utilities In Use Not in Use Africa Asia EMENA [AC Smal1 Medium LarJr Law Low-Mid UV-Mid
t System size groupings are based on consumption tata from the U.N. Energy Yearbook:Small is less than 2000 GWh, Medium is 2000. 10000 U Wh, and Large is greater than 10000 GWh annually.
2 Per capita income (GNP) groupings are taken from ihe 1985 World Development Report:Low income is iess than $400, Lower-Middle income $40n - $1700, and Upper-Middle income is greater than $1700 per year.
- 30 -
ANNEX 6
RELATIONSHIP OF AVERAGEI RLECIMRrY TARIFFS TO SUPPLY VOLTAGE FOROEMCD COUNTRIES IN 19q71
Average (Unweighted) 7.33 8.17 -0.84Average (Weighted) 4.30 6.90 -2.10
ANNEX 9
COMPUTATION OF AVERAGE INCREMETAL COST OF ELECTR[CrTYFOR DEVELOPING COUNTRJS AS A GROUP
Capacity CostTotal cost of power expansion programs 1989-1999, in 1989 prices = US$745 billionTotal capacity added 1989-1999 = 384 GWPlanned additional system peak demand to be served by programs = 353 GWCost per GW additional peak demand = US$745 billion/353 GW = US$21101kWAverage life of new supply facilities = 25 yearsCapital recovery factor for 10% over 25 years = 0.110168Annual cost/kW peak demand = US$2110 x 0.110168 = US$232/kW/yearAt an average system load factor of 70% (6130 hours/year):Average capacity cost/kWh = US$23216130 hours = 3.8 US cents/kWh
Fuel cost
Average system fuel mnix:hydro, geothermal, nuclear = 38%coal = 46%gas =9%oil = 7%Weighted average fuel cost = 1.7 US cents/kWh
Operations and Maintenance cost = 1.0 US cents/kWh
Average incremental cost of electricity psoduced = 6.5 US cents/kWh
Average System technical losses(% of energy supplied) = 15%
Average incremental cost of electricity sold = 7.65 US cents/kWh= (3.8 + 1.7 + 1.0)/0.85
- 35 -
ENERGY SERIES PAPERS
No. 1 Energy Issues in the Developing World, February 1988.
No. 2 Review of World Bank Lending for Electric Power, March 1988.
No. 3 Some Considerations in Collecting Data on Household Energy Consumption,March 1988.
No. 4 Improving Power System Efficiency in the Developing Countries throughPerformance Contracting, May 1988.
No. S Impact of Lower Oil Prices on Renewable Energy Technologies, May 1988.
No. 6 A Comparison of Lamps for Domestic Lighting in Developing Countries, June1988.
No. 7 Recent World Bank Activities in Energy (Revised October 1989).
No. 8 A Visual Overview of the World Oil Markets, July 1988.
No. 9 Current International Gas Trades and Prices, November 1988.
No. 10 Promoting Investment for Natural Gas Exploration and Production inDeveloping Countries, January 1988.
No. 11 Technology Survey Report on Electiic Power Systems, February 1989.
No. 12 Recent Developments in the U.S. Power Sector and Their Relevance for theDeveloping Countries, February 1989.
No. 13 Domestic Energy Pricing Policies, April 1989.
No. 14 Financing of the Energy Sector in Developing Countries, April 1989.
No. 15 The Future Role of Hydropower in Developing Countries, April 1989.
No. 16 Fuelwood Stumpage: Considerations for Developing Country Energy Planning,June 1989.
No. 17 Incorporating Risk and Uncertainty in Power System Planning, June 1989.
No. 18 Review and Evaluation of Historic Electricity Forecasting Experience, (1960-1985), June 1989.
- 36 -
ENERGY SERIES PAPERS cont'd
No. 19 Woodfuel Supply and Environmental Management, July 1989.
No. 20 The Malawi Charcoal Project - Experience and Lessons, January 1990.
No. 21 Capital Expenditures for Electric Power in the Developing Countries in the1990s, February, 1990.
No. 22 A Review of Regulation of the Power Sectors in Developing Countries,February 1990.
No. 23 Summary Data Sheets of 1987 Power and Commercial Energy Statistics for100 Developing Countries, March 1990.
No. 24 A Review of the Treatment of Environmental Aspects of Bank Energy Projects,March 1990.
No. 25 The Status of Liquified Natural Gas Worldwide, March 1990.
No. 26 Population Growth, Wood Fuels, and Resource Problems in Sub-SaharanAfrica, March 1990.
No. 27 The Status of Nuclear Power Technology - An Update, April 1990.
No. 28 Decommissioning of Nuclear Power Facilities, April 1990.
No. 29 Interfuel Substitution and Changes in the Way Households Use Energy:lTe Case of Cooking and lighting Behavior in Urban Java, June 1990.
No. 30 Regulation, Deregulation, or Reregulation-What is Needed in LDCs PowerSector? July 1990.
No. 31 Understanding the Costs and Schedules of World Bank Supported HydroelectricProjects, July 1990.
No. 32 Review of Electricity Tariffs in Developing Countries During the 1980s,November 1990.
Note: For extra copies of these papers please call Ms. Mary Fernandez on extension33637 in the morning between 10 am and 11 am and in the afternoon between1:30 to 2:30 pm. From outside the country call: Area Code (202) 473-3637.FAX No. (202) 477-0547.
- 37 -
INDUSTRY SERIES PAPERS
No. 1 Japanese Direct Foreign Investment: Patterns and Implications forDeveloping Countries, February 1989.
No. 2 Emerging Patterns of International Competition in Selected IndustrialProduct Groups, February 1989.
No. 3 Changing Firm Boundaries: Analysis of Technology-Sharing Alliances,February 1989.
No. 4 Technological Advance and Organizational Innovation in theEngineering Industry, March 1989.
No. S Export Catalyst in Low-Income Countries, November 1989.
No. 6 Overview of Japanese Industrial Technology Development, March 1989.
No. 7 Reform of Ownership and Control Mechanisms in Hungary and China,April 1989.
No. 8 The Computer Industry in Industrialized Economies: Lessons for theNewly Industrializing, February 1989.
No. 9 Institutions and Dynamic Comparative Advantage Electronics Industryin South Korea and Taiwan, June 1989.
No. 10 New Environments for Intellectual Property, June 1989.
No. 11 Managing Entry Into International Markets: Lessons From the EastAsian Experience, June 1989.
No. 12 Impact of Technological Change on Industrial Prospects for the LDCs,June 1989.
No. 13 The Protection of Intellectual Property Rights and IndustrialTechnology Development in Brazil, September 1989.
No. 14 Regional Integration and Economic Development, November 1989.
No. 15 Specialization, Technical Change and Competitiveness in the BrazilianElectronics Industry, November 1989.
- 38 -
INDUSTRY SERIES PAPERS cont'd
No. 16 Small Trading Companies and a Successful Export Response: LessonsFrom Hong Kong, December 1989.
No. 17 Flowers: Global Subsector Study, December 1989.
No. 18 The Shrimp Industry: Global Subsector Study, December 1989.
No. 19 Garments: Global Subsector Study, December 1989.
No. 20 World Bank Lending for Small and Medium Enterprises: Fifteen Yearsof Experience, December 1989.
No. 21 Reputation in Manufactured Goods Trade, December 1989.
No. 22 Foreign Direct Investment From the Newly Industrialized Economies,December 1989.
No. 23 Buyer-Seller Links for Export Development, March 1990.
No. 24 Technology Strategy & Policy for Industrial Competitiveness: ACase Study of Thailand, February 1990.
No. 25 Investment, Productivity and Comparative Advantage, April 1990.
No. 26 Cost Reduction, Product Development and the Real Exchange Rate,April 1990.
No. 27 Overcoming Policy Endogeneity: Strategic Role for DomesticCompetition in Industrial Policy Reform, April 1990.
No. 28 Conditionality in Adjustment Lending FY80-89: The ALCID Database,May 1990.
No. 29 International Competitiveness: Determinants and Indicators,March 1990.
No. 30 FY89 Sector Review Industry, Trade and Finance, November 1989.
No. 31 The Design of Adjustment Lending for Industry: Review of Current Practice,June 1990.
- 39 -
INDUSTRY SERIES PAPERS cont 'd
No. 32 National Systems Supporting Technical Advance in Industry: The BrazilianExperience, June 26, 1990.
No. 33 Ghana's Small Enterprise Sector: Survey of Adjustment Response andConstraints, June 1990.
No. 34 Footwear: Global Subsector Study, June 1990.
No. 35 Tightening the Soft Budget Constraint in Reforming Socialist Economies,May 1990.
No. 36 Free Trade Zones in Export Stiategies, June 1990.
No. 37 Electronics Development Strategy: The Role of Government, June 1990
No. 38 Export Finance in the Philippines: Opportunities and Constraints forDeveloping Country Suppliers, June 1990.
No. 39 The U.S. Automotive Aftermarket: Opportunities and Constraints forDeveloping Country Suppliers, June 1990
No. 40 Investment As A Determinant of Industrial Competitiveness and ComparativeAdvantage: Evidence from Six Countries, August 1990
No. 41 Adjustment and Constrained Response: Malawi at the Threshold ofSustained Growth, October 1990.
Note: For extra copies of these papers please contact Miss Wendy Young onextension 33618, Room S-4101
