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| | <p style="text-align: center;"><span style="color:#cb3300ff;">'''Price/Tariff Regulation: The basis on which the price of electricity (or of standalone systems) are regulated'''</span></p> | | <p style="text-align: center;"><span style="color:#cb3300ff;">'''Price/Tariff Regulation: The basis on which the price of electricity (or of standalone systems) are regulated'''</span></p> |
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| | *Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/> | | *Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/> |
| − | *<span>Encompass a set of prices/tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of solar home system) </span><br/> | + | *<span>Encompass a set of prices/tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of [[Solar_Home_Systems_(SHS)|solar home system]]) </span><br/> |
| − | *<span><span>Relate to one, several, or all technologies. Thus it may cover just electricity from solar home systems, or just from wind-powered mini-grids, or require that isolated mini-grids supply electricity at the same prices as the grid (a grid-parity price/tariff)</span></span><br/> | + | *<span><span>Relate to one, several, or all technologies. Thus it may cover just electricity from solar home systems, or just from [[Portal:Wind|wind]]-powered [[Portal:Mini-grid|mini-grids]], or require that isolated mini-grids supply electricity at the same prices as the [[Portal:Grid|grid]](a grid-parity price/tariff)</span></span><br/> |
| | *<span><span><span>Be based on an assessment of the average cost of provision, on existing grid prices, or on estimates of the avoided cost of grid extension. </span><span></span></span></span> | | *<span><span><span>Be based on an assessment of the average cost of provision, on existing grid prices, or on estimates of the avoided cost of grid extension. </span><span></span></span></span> |
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| | | style="width: 616px;" | | | | style="width: 616px;" | |
| − | <span style="color:#FFFFFF;"></span>It is usual for grid systems to use a uniform price/tariff structure, relying on the cross-subsidies inherent in a single unitary system with a single owner to balance differences in cost of provision in different areas. However, even in a grid context a uniform price/tariff structure can dis-incentivize the electricity provider from extending access to more remote, low demand areas, where the cost of provision is higher and they may be unable to recover costs or will have to raise prices for all customers.<br/> | + | <span style="color:#FFFFFF;"></span>It is usual for [[Portal:Grid|grid]] systems to use a uniform price/tariff structure, relying on the cross-subsidies inherent in a single unitary system with a single owner to balance differences in cost of provision in different areas. However, even in a grid context a uniform price/tariff structure can dis-incentivize the electricity provider from extending access to more remote, low demand areas, where the cost of provision is higher and they may be unable to recover costs or will have to raise prices for all customers.<br/> |
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| − | If a uniform tariff is imposed on grid-connected mini-grids, distribution systems or isolated mini-grids, which are separately owned, it will be necessary to establish a system of subsidies or cross-subsidies between providers. Without this, providers in areas where costs are lower may make excess profits while in areas where costs are higher providers become insolvent or users remain unserved. For this reason individual price/tariff regulation is often applied to larger mini-grids, though for small mini-grids the costs may out-balance the benefits of individual price/tariff regulation, and a uniform tariff may be applied.<br/> | + | If a uniform tariff is imposed on grid-connected [[Portal:Mini-grid|mini-grids]], distribution systems or isolated mini-grids, which are separately owned, it will be necessary to establish a system of subsidies or cross-subsidies between providers. Without this, providers in areas where costs are lower may make excess profits while in areas where costs are higher providers become insolvent or users remain unserved. For this reason individual price/tariff regulation is often applied to larger mini-grids, though for small mini-grids the costs may out-balance the benefits of individual price/tariff regulation, and a uniform tariff may be applied.<br/> |
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| − | For standalone systems, prices are frequently unregulated. If prices are regulated, it’s more likely to be on a uniform than an individual basis, since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or financing structure rather than any fundamental factors outside the businesses control. (Within any uniform price regulation of standalone systems it will be necessary to consider how to incentivize system providers to move into more remote areas where distribution costs are higher). | + | For standalone systems, prices are frequently unregulated. If prices are regulated, it’s more likely to be on a uniform than an individual basis, since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or [[Portal:Financing_and_Funding|financing]] structure rather than any fundamental factors outside the businesses control. (Within any uniform price regulation of standalone systems it will be necessary to consider how to incentivize system providers to move into more remote areas where distribution costs are higher). |
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| | The issues inherent in a uniform price/tariff regulatory structure will be all the greater if it is extended across more than one technology, for instance if isolated mini-grids or standalone systems are expected to supply electricity at the same prices as the grid system. | | The issues inherent in a uniform price/tariff regulatory structure will be all the greater if it is extended across more than one technology, for instance if isolated mini-grids or standalone systems are expected to supply electricity at the same prices as the grid system. |
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| | | style="width: 10px; background-color: rgb(248, 101, 0);" | <br/> | | | style="width: 10px; background-color: rgb(248, 101, 0);" | <br/> |
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| − | The main advantage of a uniform price or tariff arrangement is that of equity – allowing all users to access electricity at the same cost, preventing those in remote, low demand areas from being penalised by having to pay more for electricity and so enabling them to use it to improve their livelihoods and compete on a more level playing field. It thereby avoids “tariff envy” and smooths the transition from one form of electricity access to another for the user. The comparative simplicity of uniform prices/tariffs may also seem attractive, avoiding the need for appropriate prices/tariffs to be calculated and agreed for each scheme or business. This is a particularly relevant consideration for small-scale technologies (standalone systems and very small mini-grids), where the burden and cost of setting individual prices/tariffs will be disproportionately high and the differentials between costs of provision relatively low. The main disadvantage is that, in the absence of cost-reflective subsidies, grants or cross-subsidies, they will inevitably benefit those providers operating in areas where costs of provision are lower, while effectively excluding provision to higher cost areas (or causing those operating in these areas to become insolvent). This issue is greatly exacerbated if uniform prices/tariffs are extended across multiple technologies, typically by requiring grid-parity tariffs from other forms of electricity provision (which are, almost axiomatically, used in areas where grid extension is uneconomic at these price levels). Subsidies, grants or cross-subsidies can be used to overcome this disadvantage while retaining equity for users, though these will inevitably either limit extension of provision to that which can be sustained from public funding or cause prices for other users (the customers of the providers from whom cross-subsidies are drawn) to rise. The sustainability of these arrangements must be seriously considered. | + | The main advantage of a uniform price or tariff arrangement is that of equity – allowing all users to access electricity at the same cost, preventing those in remote, low demand areas from being penalised by having to pay more for electricity and so enabling them to use it to improve their livelihoods and compete on a more level playing field. It thereby avoids “tariff envy” and smooths the transition from one form of electricity access to another for the user. The comparative simplicity of uniform prices/tariffs may also seem attractive, avoiding the need for appropriate prices/tariffs to be calculated and agreed for each scheme or business. This is a particularly relevant consideration for small-scale technologies (standalone systems and very small [[Portal:Mini-grid|mini-grids]]), where the burden and cost of setting individual prices/tariffs will be disproportionately high and the differentials between costs of provision relatively low. The main disadvantage is that, in the absence of cost-reflective subsidies, grants or cross-subsidies, they will inevitably benefit those providers operating in areas where costs of provision are lower, while effectively excluding provision to higher cost areas (or causing those operating in these areas to become insolvent). This issue is greatly exacerbated if uniform prices/tariffs are extended across multiple technologies, typically by requiring grid-parity tariffs from other forms of electricity provision (which are, almost axiomatically, used in areas where [[Portal:Grid|grid]] extension is uneconomic at these price levels). Subsidies, grants or cross-subsidies can be used to overcome this disadvantage while retaining equity for users, though these will inevitably either limit extension of provision to that which can be sustained from public funding or cause prices for other users (the customers of the providers from whom cross-subsidies are drawn) to rise. The sustainability of these arrangements must be seriously considered. |
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| | *Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/> | | *Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/> |
| − | *Encompass a set of prices or tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of solar home system) <br/> | + | *Encompass a set of prices or tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of [[Market_for_Solar_Home_Systems_(SHS)|solar home system]]) <br/> |
| | *Relate to electricity from one or more technologies and/or standalone systems as long as these are all provided by a single entity<br/> | | *Relate to electricity from one or more technologies and/or standalone systems as long as these are all provided by a single entity<br/> |
| − | *Cover a single unit within the provider’s operation (eg a single mini-grid) or the entirety of the provider’s operation<br/> | + | *Cover a single unit within the provider’s operation (eg a single [[Portal:Mini-grid|mini-grid]]) or the entirety of the provider’s operation<br/> |
| − | *Be based (most usually) on the provider’s average or incremental costs, net of any grant or subsidy (cost-recovery tariffs) or on estimates of the avoided cost of grid extension to the area, or some other basis | + | *Be based (most usually) on the provider’s average or incremental costs, net of any grant or subsidy (cost-recovery tariffs) or on estimates of the avoided cost of [[Portal:Grid|grid]] extension to the area, or some other basis |
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| | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> | | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> |
| − | It is in principle possible to set individual prices/tariffs for different areas within a grid system. This could have the advantage of incentivizing the grid company to extend into more remote areas where costs are higher, but is often politically unacceptable and a uniform price/tariff structure is therefore most often used. Grid connected mini-grids and distribution systems rely on the sale of electricity to the grid, and import of electricity from the grid and its sale to users, as well as sale of own-generated electricity to users. Clarity on how each of these tariffs is set and regulated is vital. Tariffs for import of electricity from and export to the grid will usually be on a uniform price/tariff basis. Tariffs for users of grid- connected mini-grids as well as isolated mini-grids are usually set individually for each mini-grid or distribution area (or mini-grid company) to reflect their specific costs and any subsidies or grants they may have received. For larger, particularly grid-connected, systems, these factors may be overcome by political considerations and attempts to achieve equal treatment of users considerations (but cost-reflective grants or subsidies, or cross-subsidies, will then be needed to maintain economic sustainability). At the other end of the scale it may be concluded that the costs and bureaucracy of agreeing individual tariff levels for single small mini-grids may be unjustified. It is most usual to leave tariffs for mini-grids below a certain size unregulated (on the basis that they do not create an effective monopoly and so purchase decisions can be left to users), though use of a uniform price/tariff is also an option. | + | It is in principle possible to set individual prices/tariffs for different areas within a [[Portal:Grid|grid]] system. This could have the advantage of incentivizing the grid company to extend into more remote areas where costs are higher, but is often politically unacceptable and a uniform price/tariff structure is therefore most often used. Grid connected [[Portal:Mini-grid|mini-grids]] and distribution systems rely on the sale of electricity to the grid, and import of electricity from the grid and its sale to users, as well as sale of own-generated electricity to users. Clarity on how each of these tariffs is set and regulated is vital. Tariffs for import of electricity from and export to the grid will usually be on a uniform price/tariff basis. Tariffs for users of grid- connected mini-grids as well as isolated mini-grids are usually set individually for each mini-grid or distribution area (or mini-grid company) to reflect their specific costs and any subsidies or grants they may have received. For larger, particularly grid-connected, systems, these factors may be overcome by political considerations and attempts to achieve equal treatment of users considerations (but cost-reflective grants or subsidies, or cross-subsidies, will then be needed to maintain economic sustainability). At the other end of the scale it may be concluded that the costs and bureaucracy of agreeing individual tariff levels for single small mini-grids may be unjustified. It is most usual to leave tariffs for mini-grids below a certain size unregulated (on the basis that they do not create an effective monopoly and so purchase decisions can be left to users), though use of a uniform price/tariff is also an option. |
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| − | Prices for standalone systems are also generally unregulated, though where public funding is used to support provision of standalone systems, it may (as with the [[NAE Case Study: Bangladesh, IDCOL Solar Home Systems|NAE Case Study of the Bangladesh IDCOL programme]]) be regarded as appropriate to regulate prices. If the move towards pay-as-you-go, with users paying for electricity as they do from grid or mini-grids, while suppliers retain ownership of the capital equipment, continues or accelerates, regulation of electricity prices may become more relevant. If they are regulated it’s more likely to be on a uniform than an individual basis (since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or financing structure rather than any fundamental factors outside the businesses control). | + | Prices for standalone systems are also generally unregulated, though where public funding is used to support provision of standalone systems, it may (as with the [[NAE Case Study: Bangladesh, IDCOL Solar Home Systems|NAE Case Study of the Bangladesh IDCOL programme]]) be regarded as appropriate to regulate prices. If the move towards pay-as-you-go, with users paying for electricity as they do from grid or mini-grids, while suppliers retain ownership of the capital equipment, continues or accelerates, regulation of electricity prices may become more relevant. If they are regulated it’s more likely to be on a uniform than an individual basis (since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or [[Portal:Financing_and_Funding|financing]] structure rather than any fundamental factors outside the businesses control). |
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| | One disadvantage is that, if not well designed and rigorously applied by an expert and knowledgeable regulator, it may fail to incentivize energy businesses to work efficiently and control costs. Another is that, calculation and agreement of prices or tariffs for multiple providers on an individual basis is costly and resource intensive. This may be ameliorated by establishing a standard framework for price/tariff calculation, but some cost will remain. When deciding on an individual price/tariff calculation arrangement, consideration should therefore be given to materiality and the balance of costs and benefits.<br/> | | One disadvantage is that, if not well designed and rigorously applied by an expert and knowledgeable regulator, it may fail to incentivize energy businesses to work efficiently and control costs. Another is that, calculation and agreement of prices or tariffs for multiple providers on an individual basis is costly and resource intensive. This may be ameliorated by establishing a standard framework for price/tariff calculation, but some cost will remain. When deciding on an individual price/tariff calculation arrangement, consideration should therefore be given to materiality and the balance of costs and benefits.<br/> |
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| − | A greater issue is that, relative to a uniform price/tariff system, it discriminates between users, allowing those who can be supplied with electricity at lower cost (particularly in urban areas and within reach of the grid system) to access electricity at a lower price and to benefit from the cross-subsidies inherent in a grid system, while requiring those in more remote areas to pay the full cost of their access. While grants and subsidies may partially off-set these differences they are unlikely to eliminate them entirely. Not only is this inequitable, but it constrains those receiving more expensive forms of electricity from using it economically, improving their livelihoods and increasing demand to levels at which electricity would become cheaper. It thus acts as a constraint on economic development in higher cost areas and holds people back from moving up the energy access ladder. As a result an individual price/tariff regulatory system may lead to “tariff envy”, as those who initially welcomed modern electricity as providing them with better energy at lower cost than traditional sources, see neighbouring communities receiving it at still lower cost – and hence to political pressures to move away from individual towards uniform prices/tariffs. Thought should therefore be given when setting up an individual price/tariff regulation system to the future, how the system may need to be amended as the national electricity access context changes, and how this can be achieved on a basis which maintains both users acceptability and investor confidence.<br/> | + | A greater issue is that, relative to a uniform price/tariff system, it discriminates between users, allowing those who can be supplied with electricity at lower cost (particularly in urban areas and within reach of the [[Portal:Grid|grid]] system) to access electricity at a lower price and to benefit from the cross-subsidies inherent in a grid system, while requiring those in more remote areas to pay the full cost of their access. While grants and subsidies may partially off-set these differences they are unlikely to eliminate them entirely. Not only is this inequitable, but it constrains those receiving more expensive forms of electricity from using it economically, improving their livelihoods and increasing demand to levels at which electricity would become cheaper. It thus acts as a constraint on economic development in higher cost areas and holds people back from moving up the energy access ladder. As a result an individual price/tariff regulatory system may lead to “tariff envy”, as those who initially welcomed modern electricity as providing them with better energy at lower cost than traditional sources, see neighbouring communities receiving it at still lower cost – and hence to political pressures to move away from individual towards uniform prices/tariffs. Thought should therefore be given when setting up an individual price/tariff regulation system to the future, how the system may need to be amended as the national electricity access context changes, and how this can be achieved on a basis which maintains both users acceptability and investor confidence.<br/> |
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| | {{NAE Acknowledgements}} | | {{NAE Acknowledgements}} |
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| | + | [[Category:Energy_Access]] |
| | [[Category:NAE]] | | [[Category:NAE]] |
| | + | [[Category:Mini-grid]] |
| | + | [[Category:Grid]] |
The Review was prepared by Mary Willcox and Dean Cooper of Practical Action Consulting working with Hadley Taylor, Silvia Cabriolu-Poddu and Christina Stuart of the EU Energy Initiative Partnership Dialogue Facility (EUEIPDF) and Michael Koeberlein and Caspar Priesemann of the Energising Development Programme (EnDev). It is based on a literature review, stakeholder consultations. The categorization framework in the review tool is based on the EUEI/PDF / Practical Action publication "Building Energy Access Markets - A Value Chain Analysis of Key Energy Market Systems".
A wider range of stakeholders were consulted during its preparation and we would particularly like to thank the following for their valuable contributions and insights:
- Jeff Felten, AfDB - Marcus Wiemann and other members, ARE - Guilherme Collares Pereira, EdP - David Otieno Ochieng, EUEI-PDF - Silvia Luisa Escudero Santos Ascarza, EUEI-PDF - Nico Peterschmidt, Inensus - John Tkacik, REEEP - Khorommbi Bongwe, South Africa: Department of Energy - Rashid Ali Abdallah, African Union Commission - Nicola Bugatti, ECREEE - Getahun Moges Kifle, Ethiopian Energy Authority - Mario Merchan Andres, EUEI-PDF - Tatjana Walter-Breidenstein, EUEI-PDF - Rebecca Symington, Mlinda Foundation - Marcel Raats, RVO.NL - Nico Tyabji, Sunfunder -
