World Energy Transition
4th Roundtable Meeting for Power Trading
Abu Dhabi (17th December 2015)
Jomar Eldoy
M-co (the Marketplace Company) Pte Ltd
Reforming Subsidies for Electricity Markets in GCC
2
Global electricity markets have evolved, with increased efforts to undertake reform in the last 20 years.
3
The evolution and reform of these markets usually operate within a greater energy policy framework.
Affordability
SustainabilitySecurity
Fiscal (subsidies& taxes)
Regulatory
(legislations, mandates)
Structural (Market reform)
Policy Objectives
Policy Tools
• Trade-offs insimultaneously meetingenergy policy objectivesof affordability, securityand sustainability
• Emphasis on objectiveevolves as an economydevelops; Emergingeconomies often focuson affordability andsecurity
• Combination of toolsused to achieve policyobjectives
4
Developing economies tend to prioritise electricity affordability and accessibility as a policy objective under which subsidies is a common tool.
IranLibya
Russia
Argentina
Algeria
Egypt
Iraq
Indonesia
Mexico
Vietnam
Taipei
China
India
Thailand
Malaysia
Luxembourg
Norway
Switzerland
Australia
Sweden
Singapore
United StatesGermany
United Kingdom
Hong Kong
Japan
Korea
0
20,000
40,000
60,000
80,000
100,000
120,000
0 50 100 150 200
GDP per Capita versus Electricity Subsidies per Capita
Bahrain
Kuwait
Qatar
UAE
Saudi
Arabia
Trinidad
and
Tobago
350 850 1350
Electricity Subsidy per Capita (USD)
GD
P p
er
Ca
pit
a (
US
D)
Advanced
economies
Resource-rich
countries
Developing
economies
Note: Subsidy = (Reference price - End-user price) × Units consumed
Source: IEA, IMF for GDP numbers
5
These subsidies tend to decrease as markets advance
Market Structure
Vertically Integrated Utility
Vertically Integrated Utility
Single Buyer Structure
Single Buyer Structure
Wholesale CompetitionWholesale
CompetitionRetail
CompetitionRetail
Competition
Pri
cin
g R
eg
ime
Administered
Pricing (often
subsidized)
Market-based
Long-term
Contracts
(e.g. PPA)
Hybrid
6
These subsidies tend to decrease as markets advance
Market Structure
Vertically Integrated Utility
Vertically Integrated Utility
Single Buyer Structure
Single Buyer Structure
Wholesale CompetitionWholesale
CompetitionRetail
CompetitionRetail
Competition
Pri
cin
g R
eg
ime
Administered
Pricing (often
subsidized)
Market-based
Long-term
Contracts
(e.g. PPA)
HybridUAE (Abu
Dhabi)
UAE (Other Emirates)
Kuwait
Oman
Qatar
Bahrain
Saudi Arabia
7
Overall, subsidies and taxes distort market pricing
Price/Cost
Producer
1
Producer
2
Producer
3
Producer
4
Producer
5
Producer
6
Subsidised
Sales Price
International
Market Price
Taxed Sales
Price
Subsidy bill
Tax revenue
• Subsidies artificially lower prices
that consumers pay below actual
supply costs or prevailing market
value.
• Taxes create the converse effect
by increasing prices consumers
pay above the prevailing market
value.
• In the context of cross-border
trade, such government policies
create unintended distortionary
effects – subsidized product
given artificial comparative
advantage.
8
Beyond political and social issues, subsidies create impediments to trade flows.
• Inefficient consumption in
subsidized sectors
• Environmental issues in
subsidized fossil fuel
sectors
• Although often set-out to promote energy accessibility for poorer households, energy subsidies often benefit the more affluent socio-economic population due to the relatively larger share of energy consumption
• Distorts trade flows
• Under-investment in infrastructure (particularly with subsidized utilities)
• Diverts resource from other potentially more profitable (and less energy-intensive) sectors.
• Mounting government subsidy bills
• Political opposition during subsidy removal
Political Economic
SustainabilitySocial
9
These distortionary trade flows occur in the energy value chain
Subsidised
Fuel Source
Fuel Source at
Market Prices
Taxed Fuel
Source
Lower wholesale
prices
Higher wholesale
prices
Country
Boundary
Trade flows
Fuel Source at
Market Prices
Taxed or
subsidized
sectors
International
trade
10
But subsidies still take up an significant component of GDP in many developing countries
Source: 2013 IEA Fossil-fuel Subsidy Database
< 1% of GDP
1%-5% of GDP
5%-10% of GDP
>10% of GDP
No subsidies
Data unavailable
11
Governments need to consider a proper framework as they undertake energy reform plans.
Affordability Sustainability Security
Ob
ject
ive
sG
uid
ing
Pri
nci
ple
s
Transparency
Efficiency
Practicality
Enforceability
Achieved by
• Timing and
communication (e.g. low
oil price environment,
elections, educating
public on price increases)
• Target group (subsidy
removal should not
result in lower welfare
for poorer households)
• Must be harmonized
with other longer-term
energy policies (fuel-mix
targets, market reform)
Implementation
Considerations
Po
ssib
le T
oo
ls
Market-based pricing
(ensures tariffs keep
pace with fuel price
trends)
Targeted Cash
Subsidies, Grants
(lifeline rates,
vouchers to lower
income groups)
Promote fuel
switching/alternate
fuel sources
Supported by
12
International Experience in Energy Subsidy Programs
Germany
Renewables subsidies support
programs have led to
mounting power bills and
impacted competitiveness
IndonesiaFuel subsidies resulted in Indonesia moving
from an oil-export country to a net import
country in 2004. Government has since
made efforts to increase fuel prices
gradually
PhilippinesPoorer households
supported with lifeline
subsidies during reform
process
Vietnam
Electricity price reform still
underway, but has undertaken
a gradual approach, coupled
with longer-term energy plans
to move to cheaper alternative
fuel sources e.g. coal, nuclear
13
Regional Electricity Trade and Integration
Source: Asean Power Grid
Red Electric De Espana (REE)
Internal Electricity Market in Europe
• On-going efforts to
integrate 6 European
regional electricity markets
into a single market.
• Beyond infrastructure,
regulations and operations
must be developed
together and harmonized
to ensure successful
integration
• Relatively easier given that
most of these regional
markets are in similar
stages of market
development
Asean Power Grid
• Initiative that begun
in 1997 with the end
goal of achieving
supply security and
availability.
• While infrastructure
efforts have
accelerated, but the
differing market
structures,
regulations and policy
frameworks among
member states
remain impediments
for complete
integration e.g.
Singapore and
Philippines are the
only non-subsidized
countries.