Electricity Subsidies and Household Welfare in Jordan - Can households afford to pay for the budget crisis?


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Executive Summary

·   The disruption of gas supply from Egypt has led to increases in the cost of electricity production in Jordan

·   The most evident measure for Jordan to face the current financial crisis in the electricity sector is increasing electricity tariffs in the country

·   Various options exist for electricity tariff reforms in Jordan. These options are assessed based on distributional implications (effect of increase on household welfare) and cost recovery potential of electricity tariffs reforms

·   This document is a background paper for the Jordan Poverty Reduction Strategy

Key Findings

·   Two electricity tariff reform options have been examined

o   Increasing tariffs with the current tariffs structure

o   Changing tariffs structure

·   The electricity consumption is highly related to households and any reform on tariffs will have an impact on households (positive and significant relationship) 

·   The level of impact on household welfare depends on several factors:

o   Tariff structure

o   Assumptions about household behavioral reactions to changes in tariffs (elasticity)

o   Inflation assumptions

o   Assumptions about cross-substitution of products

 

Increasing tariffs with the current structure

·   Increases with zero elasticity and no inflation

o   High percentage increases in tariffs simply increase the cost for households proportionally

o   Under the most optimistic assumptions from a revenues perspective (no inflation, zero elasticity and high tariffs increases), households would be able to cover a small percentage of the current deficit

o   As such, sharp increases in tariffs are unlikely to solve the deficit problem

·   Increases with varying elasticity and inflation (negative elasticity)

o   Households respond to increases in tariffs by reducing electricity consumption

o   The combination of higher prices and lower quantity results in smaller additional revenues for the electricity system as compared to previous case of zero elasticity

o   Decrease in household electricity due to increase in prices will not have a major impact on total electricity consumption while gains in revenue are small

·   Both options for increasing tariffs with the current structure are not very promising in the effort to solve the deficit problem

Changing tariffs structure

·   Changing the current tariff structure was simulated as a tariff reform option for consideration

·   Changing the current tariff structure involves increasing the number of tariff brackets which would consequently reduce consumer’s surplus and increase revenues for the electricity system

·   Changing the tariffs within each tariffs bracket implies household expenditure on electricity increases significantly (more than double in some cases)

·   This option is more equitable than just increasing tariffs with the current structure

·   Changes affect different deciles by different proportions therefore changes are more progressive, equitable and efficient in terms of revenues for the system  

Recommended Actions and Initiatives

·   The Government needs to consider a multi-tiered approach to address the debt crisis and look beyond the electricity system to find financial resources to pay for the deficit generated by the electricity system

·   Three sets of measures are identified:

o   Restructure and increase tariffs to make them more equitable from a welfare perspective and more efficient from a cost recovery perspective

o   Reconsider the electricity sector as a whole by considering options to diversify sources of energy and reducing the risk associated with shortages of one supply

o   Consider the debt problem to be a national finance issue, instead of an electricity system issue only

 

Report Name

Date

Timeline

Electricity Subsidies and Household Welfare in Jordan - Can households afford to pay for the budget crisis?

December 2011

Not Applicable

Author

Supporting Donor

The World Bank

The World Bank

Sector

Lead Ministry

Monetary Policy

Ministry of Planning & International Cooperation (MoPIC)

Key Topics

Debt crisis – Elasticity – Electricity – Households – Inflation – Reform – Tariff increase – Tariff structure

 

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