National Approaches to Electrification – Price/Tariff Regulation
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Price/Tariff Regulation: The basis on which the price of electricity (or of standalone systems) are regulated
Uniform Price/Tariff:
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Definition: |
A regime under which all providers within a given category are required to sell electricity (or standalone systems) at the same price or tariff (or set of prices/tariffs). A uniform price/tariff arrangement may:
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Internactions wiht other NAE Categories:
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Technology
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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. 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). 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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Delivery Models
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A uniform regulated price/tariff structure is consistent with a public delivery model, with cross-subsidy between publically-owned entities and subsidy from wider public resources being relatively straightforward. Combining uniform prices/tariffs with a private delivery model is problematic, since this model precludes public financial support, leaving cross-subsidies between providers as the only option for balancing differences in costs. The need for subsidy to support a uniform price/tariff structure is thus likely to result in a public-private partnership model rather than pure private sector delivery. | |
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Legual Basis
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Uniform prices or tariffs may be established through either concessions or a licensing system. In principle uniform prices/tariffs may be set through general legislation without licensing electricity providers. Enforcement will then rely on prosecution of any providers who exceed set prices or tariffs. | |
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Finance
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A uniform price/tariff regime will give private financiers clarity. Whether this attracts finance will depend critically on whether the prices or tariffs set enable them to make adequate return on investment. Given variations in costs of provision it is likely to attract investment into easier to access areas and lower cost electricity technologies, and potentially enable businesses providing these to make high profits, while excluding from electricity access those living in smaller communities in more remote areas. In addition private financiers may see uniform prices/tariffs as arbitrary, inflexible and non-cost reflective, thus presenting a risk to future revenues and so discourage investment. Grants and subsidies may, of course, be used to attract private finance in the context of a uniform price or tariff system, as may tax exemptions or guarantees. However if they, too, are set on a uniform basis, while they may extend the group of users to whom electricity can be economically provided, they are also likely to create additional excess profits for those elements of electricity provision which could anyway have been delivered economically, while leaving others outside this envelope. If grants or subsidies are structured to reflect costs of provision, they may counterbalance the rigidity of uniform prices/tariffs, by transferring cost –reflectivity from tariffs to grants/subsidies. Cross-subsidies are also used to transfer income from those providers who face lower delivery cost to those with higher costs. Establishment of uniform prices or tariffs will obviously directly affect finance derived from users through these charges and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element of these costs. | |
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Non-Financial Interventions
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Establishing (or amending or removing) a uniform price/tariff regime will require regulatory reform and capacity building or technical assistance may be required if the key actors lack the capacity to undertake this reform. Direct provision by implementing authorities is an alternative route to achieving uniform prices/tariffs. Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users and service providers, provision of market information and training (capacity building) for businesses and workers, may be beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the form of price/tariff regulation employed. |
Advantages and Disadvantages
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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. |
Further Informaiton and Guidance
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Relevante Case Studies:
Private Delivery Model
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Definition: |
Delivery of electricity access by an entity or entities none of which are owned and managed by the state, using purely private finance. In this model all of the organisations engaged in provision of electricity access (whether through supply of electricity itself or provision of electricity systems), as part of the National Electrification Approach being considered, are non-state-owned. This implies that all the actors along the market chain1 (Project Development, Manufacture/Generation, Distribution and Retail) are non-state entities such as private companies, cooperatives, social enterprises, community organisations or NGOs (all characterised for this purpose as “private” organisations). |
Internactions wiht other NAE Categories:
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Technology
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Few, if any, national grid systems have been established through a private delivery model (though in many countries privatisation has been used to transfer them into private ownership and bring in private investment). Grid-connected mini-grids and distribution systems have frequently been developed by private (non-state-owned) organisations. Where the grid system is also privately-owned, this constitutes a private model. (However, if the grid system is publically owned, and the mini-grid or distribution system uses electricity from the grid system, or the development draws on public grants, subsidies, loans, tax exemptions or guarantees, it constitutes a public-private partnership). The most frequently used models for delivery of standalone systems are private, though involvement of state-organisations along the market chain, or use of funding from grants or subsidies provided by the state, donors or international agencies, may result in private-public partnerships. | |
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Legual Basis
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A private delivery model calls for an explicit legal framework for any form of electrification which involves significant long-term capital investment (grid, mini-grids and potentially standalone systems which are charged for on a pay-as-you-go basis) in order to attract private finance and allow for price regulation to protect users. A concession, which offers protection from competition, will provide the greatest attraction for private financiers. Where no long-term capital investment is involved, as with standalone systems sold directly to users, it’s generally considered that no legal control (beyond that for any business) is necessary. | |
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Price/Tariff Regulation
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Where electricity is delivered by the private sector, using purely private finance, in a competitive market with no legal or effective monopoly (eg where several solar lanterns providers are operating) price regulation may be regarded as unnecessary. However, where any form of concession has been granted (or exists in practice), price regulation would be expected to protect users. On the other side, where significant capital investment is involved private financiers are likely to require a transparent framework for price/tariff regulation, to reduce the risk of price controls being introduced in the future at below cost-recovery levels and preventing full recovery of and return on investment. | |
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Finance
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As discussed above a private delivery model must be purely privately financed (since inclusion of any public finance would cause the delivery model to be categorized as a public-private partnership). Ultimately private delivery models will rely on connection and ongoing charges, and standalone system purchases from users. For multi-user systems (grids and mini-grids) there is also likely to be some element of cross-subsidy between users. | |
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Non-Financial Interventions
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National energy planning is key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the delivery model employed. Institutional restructuring and capacity building or technical assistance may be needed where the key actors lack the capacity to undertake regulatory reform in order to establish the legal and regulatory framework for private electrification, or to set and implement technical and quality standards (needed where the private sector is delivering access through mini-grids or distribution systems to ensure safety and compatibility between systems, and to support user confidence). Awareness raising amongst users and other potential market actors and service providers, as well as training (capacity building) to develop the skilled workforce needed by new energy access businesses are likely to be particularly relevant under a private delivery model, and demand promotion may be needed to increase revenues and make electricity access economically sustainable. Private delivery models are often a means of introducing new technologies, with private sector players bringing in technologies which they believe will have advantages over existing options which will allow them to grow their businesses. (Such new technology introduction, however, brings risks, and the private sector will expect to reap additional returns to balance these risks). |
Advantages and Disadvantages
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The private sector is widely seen as being more efficient, innovative flexible and nimble that the public sector and it is these virtues that it brings to energy access provision. Use of a private delivery model can be a way of bringing private sector skills and finance (both national and international), and the benefits of competition into the energy sector. Where public institutions are weak and ineffective, private delivery models may seem attractive, but it must be recognised that successful private delivery relies (particularly for grids and mini-grids) on effective public management including strong regulatory frameworks and this calls for capabilities within public institutions which they may lack. There are also elements needed for the private sector to deliver, such as workforce skills and user awareness, which individual businesses may be reluctant to provide, because of the costs involved and because in a competitive market they will be unsure that they (rather than competitors) will capture the benefits and secure a return on their investment. In addition, where modern energy access is not affordable on a purely private financed basis or public financial input is needed to support the costs of early market development, a public-private partnership delivery model will be needed. Grid-connected mini-grids can, in theory, provide any level of electricity supply, but in most cases if the investment is made for grid connection and associated standards are met, they provide a grid-equivalent service, meeting all household, commercial, industrial and community requirements (Tier 5). (If the grid system itself is over-stretched with inadequate generation; or insufficiently robust or poorly maintained transmission and distribution systems reliability and quality of supply may deteriorate so that while users have a physical connection, they may not in fact have reliable access to electricity (bringing the supply Tier 3 or lower). To the extent that a grid-connected mini-grid draws on electricity from the grid its construction should be coupled with development of additional centralized generation capacity to support the resulting additional demand. |
Further Informaiton and Guidance
Relevante Case Studies:
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None of the examples examined have had a purely private sector delivery models (ie no public involvement in either ownership or funding). |
Public-Private Partnership Delivery Model
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Definition: |
Delivery of electricity access by an entity which is part publically and part privately owned or by a mix of publically and privately owned entities or using a combination of public and private finance This includes cases where:
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Internactions wiht other NAE Categories:
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Technology
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Public-private models for grid systems might include:
For grid connected mini-grids and distribution systems:
For isolated mini-grids:
Use of public finance (grants, subsidies and loans) to enhance affordability and support market growth often results in a public-private model for standalone systems, even when there is a purely private-sector chain of manufacturers, importers, distributors and retailers. There could also be benefits in some circumstances from government energy agencies becoming directly involved in the standalone system market, by forming a joint entity to supply systems or by taking on one of the roles along the value chain (eg providing a distribution service for all system providers), as a means of supporting market development. | |
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Legual Basis
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Because a public-private model involves private ownership and investment, an explicit legal framework will be required for any form of electrification which involves significant long-term capital investment in order to attract private finance and allow for price regulation to protect users. A concession, which offers protection from competition, will provide the greatest attraction for private financiers. Where no long-term capital investment is involved, as with standalone systems sold directly to users, no legal control (beyond that for any business) may be necessary – however if there is partial public sector ownership, a transparent legal framework may be required to convince private market participants that they are not facing unfair competition, and also to ensure that any public finance is not being misused. | |
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Price/Tariff Regulation
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Where significant capital investment is involved, a transparent framework for price/tariff regulation is likely to be required to attract the private element into any public-private partnership. Tariff regulation will also protect users and provide a means of ensuring that public finance is not being misused or exploited by the private sector. It may also demonstrate to private market participants that they are not facing unfair competition from partially publically-owned market participants. | |
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Finance
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All public-private partnerships will involve a combination of private and public finance. Private finance will come through ownership and investment in, and loans to electricity providers. Public finance may come through these routes, but may also be through various forms of grant, subsidy, tax exemption or guarantee. Ultimately public-private models, like other forms of electricity provision, will rely on connection and ongoing charges, and standalone system purchases from users. For multi-user systems (grids and mini-grids) there is also likely to be some element of cross-subsidy between users. | |
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Non-Financial Interventions
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National energy planning is key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the delivery model employed. Institutional restructuring may be needed to establish public-private partnerships and capacity building or technical assistance may be required if the key actors lack the capacity to undertake regulatory reform or design arrangements for public financial support. Awareness raising amongst users and other potential market actors and service providers, as well as training (capacity building) to develop the skilled workforce needed by new energy access businesses can be beneficial alongside financial forms of public support. Public-private partnership may also provide the means to bring in new technology, with the private sector providing the technology know-how while the public sector bears the risk inherent in new technology which private investors may be reluctant to take on. |
Advantages and Disadvantages (Including Level of Electricity Provided)
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Public-Private partnerships offer the potential to combine the benefits of both models, with public security being combined with private efficiency, innovation and flexibility. Bringing in private finance can extend the capacity for electricity provision beyond that which the public sector alone can offer, while public financial support can be used to attract private finance and make electricity affordable for users. Combining public and private inputs is not, however, simple. Significant expertise is required to ensure that private investment is attracted while making optimum use of public resources. Moreover the appropriate form of public-private partnership will change as markets develop and levels of electricity access increase – and this must be recognised while at the same time creating regimes which can give the private sector the confidence in the future they require to invest. |
Further Informaiton and Guidance
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Relevante Case Studies:
Unregulated
For more information on this topic please see the 'Unregulated' Sub-Section on the Legal Basis Page.
References
Authors
Authors: Mary Willcox, Dean Cooper
Acknowledgements
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 -
Any feedback would be very welcome. If you have any comments or enquires please contact: mary.willcox@practicalaction.org.uk, benjamin.attigah@euei-pdf.org, or caspar.priesemann@giz.de.
Download the Tool as a Power Point: https://energypedia.info/images/a/aa/National_Approaches_to_Electrification_-_Review_of_Options.pptx
