Ethiopian Electric Utility announced a revised electricity tariff enforceable since December 2018 scraping the old one. “The electricity revision was made based on the outcome of a study that hints the need to rehabilitate the electricity infrastructure, boost rural electric access coverage and improve service delivery supported by technology and taking in to account the current electricity price hike on regional and global levels as the utility could not be able to meet the societies’ energy demand with the current tariff it charges to consumers’’, reads the utility’s statement.
The utility made the tariff change at an increasing rate to all categories except for the lower energy consumers (<=50kwh) who are allowed to continue paying with the old tariff scale. As per the utility,” the consumers are expected to cover 25 percent of the cost of energy production (equivalent to the cost of energy production 12 years ago), the government covering 75 percent of the cost of the current energy production”. From the tariff scheme announced, however, one could note that the tariff is set at an increasing rate (non-flat) depending on the energy consumption levels. It is clearly visible that higher energy consumers are charged higher rates (against the fair tariff setting principles) that seems to cross subsidize the lower energy consumers.
It is too early to make a complete analysis of the tariff implications as the whole tariff scheme is not yet publicized. What is apparent right now is that the revised tariff will not still reflect the true cost of energy production, transmission, distribution and sales.
- How much is the cross subsidy? And how much is the government subsidy?
- What impact would the new tariff play on the investment decisions of the energy and power sectors?
- What impact would the new tariff play on the overall none energy sectors’ investment decisions?
- How much would the revenue gained from the new tariff help the utility meet its objectives?
- How do consumers see the tariff revision?
- Who should set electricity tariffs in Ethiopia?
Theoretically, tariff setting is guided by objectives and desirable characteristics (highlighted below). In the upcoming analysis, I will dive deep and come up with answers to the questions posed here and provide additional insights. Keep visiting the site!
Objectives of a tariff
Like other commodities, electrical energy is also sold at such a rate so that it not only returns the cost but also earns reasonable profit. Therefore, a tariff should include the following items.
- Recovery of cost of producing electrical energy at the power station.
- Recovery of cost on the capital investment in transmission and distribution systems.
- Recovery of cost of operation and maintenance of supply of electrical energy e.g., metering equipment, billing etc.
- A suitable profit on the capital investment.
Desirable Characteristics of a Tariff:
- The tariff should be such that it ensures the proper return from each consumer. In other words, the total receipts from the consumers must be equal to the cost of producing and supplying electrical energy plus reasonable profit. This will enable the electric supply company to ensure continuous and reliable service to the consumers.
- The tariff must be fair so that different types of consumers are satisfied with the rate of charge of electrical energy. Thus a big consumer should be charged at a lower rate than a small consumer. It is because increased energy consumption spreads the fixed charges over a greater number of units, thus reducing the overall cost of producing electrical energy. Similarly, a consumer whose load conditions do not deviate much from the ideal (i.e., nonvariable) should be charged at a lower rate than the one whose load conditions change appreciably from the ideal. In a country like Ethiopia, the tariff should also be designed in a way that protects the lower income groups/lower energy consumers with a direct subsidy from the government or cross subsidizing them by the higher electricity consumers
- The tariff should be simple so that an ordinary consumer can easily understand it. A complicated tariff may cause an opposition from the public which is generally distrustful of supply companies.
- The profit element in the tariff should be reasonable. An electric supply company like the case in Ethiopia is a public utility company and generally enjoys the benefits of monopoly. Therefore, the investment is relatively safe due to non-competition in the market. This calls for the profit to be restricted to less than10% or so per annum.
- The tariff should be attractive so that a large number of consumers are encouraged to use electrical energy. Efforts should be made to fix the tariff in such a way so that consumers can pay easily.
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