international experience with energy pricing policy masami kojima november 2015 mexico city
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International experience with energy pricing policy
Masami Kojima
November 2015
Mexico City
Outline
2
• Drivers of price controls and consequences• Alternatives to pricing to achieve comparable goals• Recent developments in response to oil price collapse
– Reform announcements and implementation– Taxes
• Lessons from price smoothing• Special case of household fuels
Why are we here?
3
Numerous problems have arisen around the world from government control of energy prices and sector to• Combat adverse effects of global price volatility and
inflationary pressure • Make energy more affordable
– Reduce reliance on traditional biomass by promoting switch to modern energy
• Encourage development of indigenous resources through producer support
• Lower input energy prices to increase competitiveness
Network energy vs. solid and liquid fuels
4
Targeted price subsidies for liquid fuels have largely failed• Financial incentives for diversion too powerful
Targeted price subsidies for network energy (electricity, natural gas, district heating) are easier to implement• Rural consumers are cross-subsidized by urban
consumers worldwide• Lifeline rates with restrictions can target the poor if
everyone is metered• Cross-subsidies act as taxes and subsidies• Cross-subsidies for certain sectors are distorting
Unintended consequences
5
Market concentration with little or no competition• Price subsidies channeled through national oil companyEnergy shortages with substantial economic damage• Blackouts, reliance on expensive diesel power generation• Fuel shortagesOpaque sector with flourishing corruption• Black marketing of liquid fuels • Fuel smuggling (Algeria, Iran, Malaysia, Nigeria, Venezuela)• Subsidies based on “self-reporting” by companiesDeclining investment in the energy sector• Net exporters becoming net importers (Argentina)• Major crude oil exporters importing petroleum products
(Angola, Iran, Iraq, Nigeria)
Ultimate goal
6
• Efficient economic regulation of natural monopolies (power transmission and distribution, pipeline transportation) by an independent regulator– Open access regime
• Price deregulation in a market with fair and healthy competition and enforcement of sound regulations– Level playing field irrespective of ownership– Efficiency gains passed on to consumers as low prices
• Comprehensive, integrated social protection program meeting the basic needs of the vulnerable– Not sector-specific interventions, but meeting needs arising
from any shock (food, oil, hurricanes, financial crisis, …)
Externalities and social safety nets
7
Externalities• Tax to achieve social optimum• Subsidizing “clean” energy is not as efficient as taxing
“harmful” energy• Fuel taxation is not necessarily an efficient instrument
Examples: Ideal for CO2 emissions, but not for road damage, which is proportional to 4th power of axle weight
Social safety nets• Untargeted price subsidies → inefficient and regressive • Targeted price subsidies for liquid fuels → large leakage • Conditional cash transfers or equivalent• Integrated intervention: unconditional cash transfers
Different ways of providing social protection
8
Approach Pros Cons
1 Universal price subsidy Politically popular, easy to implement
Regressive and costly, requires government price control, difficult to dismantle, energy shortages, smuggling
2 Price subsidies reserved for certain consumers
Restrict budgetary layout for subsidy
Administratively challenging with potentially large leakage
3 Targeted cash transfers conditional on energy purchase
Same as 2 + possibly no interference with market pricing
Administratively challenging with errors of inclusion and exclusion, diversion of cash
4 Expanding existing programs (work, education, pension)
Same as 3 + no need to wait for a strengthened program
May be difficult to match those in need with program participants
5 Targeted unconditional cash transfers
Same as 3 + preserve incentives for efficiency improvement
Same as 3 + cash transferred may be used for nonessential purchases
Opportunity afforded by low fuel prices
9
Jan-1
4
Mar-1
4
May-
14
Jul-1
4
Sep-14
Nov-14
Jan-1
5
Mar-1
5
May-
15
Jul-1
5
Sep-15
Nov-15
0
2
4
6
8
10
12Regular gasoline per literDiesel per liter
MX
N/li
ter
or
kg
The dramatic drop in the price of oil to Jan 2015, followed by rise and fall, have tested the resolve of governments announcing subsidy reforms.
• Seeing subsidies slashed, many announced pricing reforms.
• Some have adhered to regular price adjustments.
• Some have sharply increased fuel taxes.
• Some announced subsidy removal at the time of minimum oil price, but failed to follow up with price adjustments.
U.S. Gulf Coast spot prices for gasoline and diesel, Mont Belvieu spot propane prices for LPG
Emerging lessons
10
How Examples Implementation
Law Mexico 2014 Implemented
Iran 2010 for all forms of energy Law amended in 2012
Presidential decree
Kerosene in Nigeria in June 2009 Decree has not been gazetted
Gasoline and diesel in 2014 in Indonesia Decrees not implemented because of political factors and socioeconomic considerations Ministerial
decreeGasoline and diesel in 2014 and 2015 in Indonesia
Announcement by regulatory authority
China Implemented in recent years
Deregulation in Ghana in June 2015 Implemented so far
Automatic adjustment in Malawi in June 2012 Not systematic
Announcement to reporters
Gas price increase in Nigeria announced in late 2014 to take effect in Jan 2015
Not implemented
The more formal the way in which the decision to reform pricing is communicated, the less likely is policy reversal
Frequency of adjustments
11
Getting used to frequent and regular price adjustments is important.• Morocco has been adjusting fuel prices regularly twice a
month, no matter how small the price change.• Gabon, Indonesia, and Malawi announced subsidy removal
but have not been adjusting prices at the intervals required.• The longer the time interval between price changes, the
greater the public and government resistance to change, and the larger the potential price shock when prices are finally adjusted (Egypt, Iran, Ukraine gas for households).
Political challenge of implicit policy reversal
12
• Official position of the government of Brazil: all oil product prices were deregulated in 2001.
• In practice: pressure on Petrobras to keep domestic prices artificially low, with no official mechanism to
change “policy”.Evidence:
Static producer prices independent of world price movement
Large losses suffered by the refining segment of Petrobras in recent years Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Gasoline, R$/literDiesel, R$/literLPG in 13-kg cylinders, R$/kgP
rod
uce
r p
rice
s in
R$
/lite
r o
r kg
Price smoothing to manage price volatility
13
• Price smoothing schemes are seldom, if ever, self-financing– Budgetary transfer of US$0.7 billion to Chile’s second
stabilization fund– Cameroon’s fund deficit = 3% of GDP in mid-2014
• Self-financing depends critically on frequent price reversion to the mean, not seen since the early 2000s
• Political pressure to withdraw in times of high fund balance can amplify, rather than reduce, price volatility– Example: Vietnam in 2013–14 vs. 2015
• A successful alternative is adjustable tax in Chile
Political economy of Vietnam stabilization fund
14
• There is a levy, base rate at VND 300 (MXN 0.35)/liter but as high as VND 800/liter at the end of 2014.
• The fund was exhausted in 2013 and could not be used to lower retail fuel prices.
• The record balance in Dec 2014 prompted use of VND 3.3 trillion (MXN 2.3 billion) in 1Q2015 to subsidize fuelprices when world oilprices were already low.
Jun
-13
Se
p-1
3
De
c-1
3
Ma
r-1
4
Jun
-14
Se
p-1
4
De
c-1
4
Ma
r-1
5
Jun
-15
Se
p-1
50
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500Fund balance
VND billion
MXN million
Mecanismo de Estabilización de Precios de los Combustibles (MEPCO)
15
Implemented since Aug 2014 for small consumers and small/medium-size enterprises.• Automotive fuels only (gasoline, diesel, LPG, CNG)• Specific fuel tax = fixed component + variable component• Fixed component defined in UTM, automatically adjusted
for inflation by Central Bank of Chile every month• Fixed component = gasoline 6 UTM/m3 (MXN 6.5/liter),
diesel 1.5 UTM/m3 (MXN 1.6/liter)• Variable component can become negative, with deficit
limited to US$500 million, with rules for bringing down the deficit if the limit is breached
Price stabilization in Chile
16
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15600
650
700
750
800
850
900
950Retail price of gasoline
With stabilization Without stabilization
Pe
sos
pe
r lit
er
MEPCO →
MEPCO, which came into effect in August 2014, smoothing prices more than the previous regime.
← SIPCO
Subsidy and tax reform in times of low prices
17
Several governments have taken advantage of low world oil prices to increase specific fuel taxes• China increased the excise tax on gasoline and diesel
three times between Nov 2014 and Jan 2015.• Ghana introduced a special petroleum levy (17.5% of ex-
depot price) in Nov 2014 for all fuels except pre-mix and heavy fuel oil.
• India increased the excise tax on gasoline and diesel three times in Oct, Nov, and Dec 2014, nearly tripling diesel tax.
• Vietnam tripled the environmental protection tax in May 2015.
Ghana
18
Ghana introduced a 17.5% tax in Nov 2014 with minimal effects, thanks to rapidly falling world oil prices.
Jan
-14
Ma
r-1
4
Ma
y-1
4
Jul-
14
Se
p-1
4
No
v-1
4
Jan
-15
Ma
r-1
5
Ma
y-1
5
Jul-
15
0
2
4
6
8
10
12
14
16
18
Gasoline Diesel KeroseneLPG
Co
nve
rte
d t
o M
XN
pe
r lit
er
or
kg
Imposition of 17.5% fuel tax
Challenge of subsidy reform for cooking fuels
19
Subsidy removal is easier for gasoline than diesel, and easier for diesel than for cooking and home heating fuels. • Household fuel price subsidies remain in India
(kerosene), Indonesia (kerosene and LPG), Malaysia (LPG), Morocco (LPG), Tunisia (LPG), Ukraine (natural gas)
• Conditional cash transfers enable price deregulation– Deregulate price if there is sufficient competition, and
compensate poor fuel purchasers• Conditional cash transfers are easier for LPG than
kerosene – Register each customer who has to hand in cylinder for
refill
Targeted conditional cash transfer: FISE in Peru
20
• A 2012 law established Fondo de Inclusión Social Energético, one use of which is to subsidize LPG purchase by the poor
• Financed by surcharges on consumption of various forms of energy by other consumers
• Stringent eligibility criteria: – Electricity consumption in previous 12 months < 360 kWh– Possession of national identity document and LPG cylinder– Information verified by home visit
• FISE provides S/. 16 (MXN 82) for refill of 10-kg cylinder once a month– Digital voucher distributed by the power utility
Determinants of household use of LPG
21
Findings from econometric analysis of household surveys:• Income and LPG prices affect the decision to use LPG (selection)
and how much to use (quantity)• Selection increases with rising (highest) levels of education
attained by men and women, with women’s education being more important than men’s → awareness about LPG
• Gender of household head not statistically significant• Proxies for infrastructure (selection), availability of cheap or
free biomass (selection and quantity) significant• Very low cross-price elasticity with respect to firewood →
firewood prices would have to rise sharply before households consider purchasing more LPG
Reducing spending on LPG by households
22
Decrease barrier to entry and increase price competition
Hospitality arrangements; third-party access; competition policy; posting of prices by firm, location, and cylinder size on government website
Minimize short-selling Clear marking of tare weight, enforcement of scale calibration, industry association’s seal of quality certification, publication of names of companies caught short-selling
Target financial assistance
Spread or reduce upfront adoption cost via dealer incentives or dealer-financed installment plan
Improve auxiliary infrastructure
Road conditions, port infrastructure
Minimize shortages Ensure reasonable returns to efficient operators to build capital for construction of storage facility; encourage hospitality and third-party access
Enforce safety regulations
Clearly mark last date of cylinder recertification; set up registries of certified installers and of certified private inspectors operating under government supervision
Household fuel subsidies
23
• Subsidizing one’s way out of this problem is not financially sustainable
• Price deregulation coupled with targeted cash transfers distorts the market the least and can still help the poor– Adequate market competition is a pre-requisite– In remote areas, could consider competition for the
market followed by exclusive license to serve• Unconditional cash transfers in integrated social protection
program may be the long-term goal, but given a choice, the poor may not spend extra cash on household fuel – Top spending choice was rice, not kerosene, in
Indonesia in 2005
How will governments respond to next price shock?
24
• Ghana, Jordan, and several others suspended automatic pricing mechanism in 2008
• Although price increases starting in 2009 were gradual, subsidy reforms stalled
• Pass-through of fuel price and exchange rate increases in the power sector were frequently not implemented
• Many countries today are not in markedly better position to replace price subsidies with targeted social protection measures than in 2008
Concluding observations
25
• There is ample global evidence that pricing is usually not the right instrument to achieve policy goals price controls are intended for
• There is no substitute for fundamental reform and strengthening of– Power, oil, gas, and other energy sectors: strengthening
competition where appropriate; reducing technical, commercial, and collection losses as much as possible
– Social protection: work steadily to put an administrative system in place to identify beneficiaries and deliver benefits efficiently, and make social protection integrated and comprehensive
Publications cited
26
Fossil fuel subsidy and pricing policies: Recent developing country experienceForthcoming as a World Bank Policy Research Working Paper
Petroleum product pricing and complementary policies: experience of 65 developing countries since 2009
http://documents.worldbank.org/curated/en/2013/04/17513782/petroleum-product-pricing-complementary-policies-experience-65-developing-countries-2009
Reforming fuel pricing in an age of $100 oil (English)http://documents.worldbank.org/curated/en/2013/01/18019602/
Who uses bottled gas? Evidence from households in developing countrieshttp://documents.worldbank.org/curated/en/2011/07/14612680/uses-bottled-gas-evidence-households-developing-countries
The role of LPG in reducing energy povertyhttp://siteresources.worldbank.org/INTOGMC/Resources/LPGReportWeb-Masami1.pdf
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