Electricity subsidies and oil prices

If the recent surge in oil prices persists it will subject the National Electricity Power Company (NEPCO) to new financial losses unless the government adjusts electricity tariffs upwards, to reflect higher production costs.

According to the Ministry of Finance figures, NEPCO purchased JD1,567 million worth of generated electricity in 2015. This would roughly imply that a 10 per cent increase in average oil prices (equivalent to only a $6 increase at current prices) will likely add around JD157 million to NEPCO’s annual operational costs, almost double the net savings expected from removing untargeted bread subsidies.

Such additional costs will be translated into financial losses and a new pile of public debt, unless the burden is transferred to the end customers.

In this regard, the government committed, on several occasions, to adjusting electricity tariffs according to oil price movements.

It also designated an explicit item in the electricity bill to display and reflect the extra costs resulting from higher oil prices.

However, increasing electricity tariffs to absorb higher oil prices may prove far more challenging than many would expect.

On the one hand, this increase would coincide with other austerity measures the government intends to take in the near future, including the removal of sales tax exemptions and bread subsidies.

On the other, it is most likely that households will bear the biggest share of the extra costs due to higher oil prices, as most businesses already pay high premiums over electricity production costs to offset the mounting bill of subsidising small retail customers.

Even among retail customers, it is expected that a potential increase in tariffs will mostly target lower consumption tranches in order to avoid losing profitable well-off customers, who will have an additional incentive to switch to renewable energy solutions if tariffs on higher consumption tranches continue to go up.

This means that a persistent increase in oil prices will have an amplified corresponding financial effect on the electricity bills of limited-income Jordanians, adding to other weight on their finances and their contribution to economic growth.

Notwithstanding the aforementioned effects, the government should stick to its commitment to transfer the effect of higher oil prices to end customers, while, at the same time, seriously considering measures that could assist in reforming the distorted electricity tariff structure and minimising the adverse effect on the poor and limited-income segments of population.

Emulating the targeted cash subsidies model implemented during the floating fuel prices in 2012 is one choice to be considered. This model will gain more credibility and public support if successfully implemented to replace bread subsidies.

The government should also start applying a special unsubsidised tariff for non-Jordanians, while making the unsubsidised electricity bill a key prerequisite for residency renewals and refugee benefits.

One other area the government should revisit is the generous terms granted to customers switching to renewable energy solutions.

On this front, there is an available room to increase the metering system tariff so that customers pay a premium to assist NEPCO in meeting growing subsidies.

In addition, the government should optimise the utilisation of the Renewable Energy Fund, mainly by allocating financial resources to help subsidised customers apply renewable energy solutions.

Lastly, it should designate an explicit item to reflect changes of oil prices in the water bill, given that water pumping operations consume around 15 per cent of the electricity generated in the country.

The current electricity tariff structure is unsustainable by all means. Delaying needed reforms is just like praying to win the lottery without buying a ticket.

The government is doing really well by working on long-term energy solutions, like the nuclear project and competitive gas contracts signed with neighbouring countries. The same should apply in the short and medium terms.

The writer, an economist and columnist, contributed this article to The Jordan Times.