International experience with energy
pricing policy
Masami Kojima
November 2015
Mexico City
Outline
• 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
2
Why are we here?
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
3
Network energy vs. solid and liquid fuels
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
4
Unintended consequences
Market concentration with little or no competition
• Price subsidies channeled through national oil company
Energy shortages with substantial economic damage
• Blackouts, reliance on expensive diesel power generation
• Fuel shortages
Opaque sector with flourishing corruption
• Black marketing of liquid fuels
• Fuel smuggling (Algeria, Iran, Malaysia, Nigeria, Venezuela)
• Subsidies based on “self-reporting” by companies
Declining investment in the energy sector
• Net exporters becoming net importers (Argentina)
• Major crude oil exporters importing petroleum products
(Angola, Iran, Iraq, Nigeria)
5
Ultimate goal
• 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, …)
6
Externalities and social safety nets
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
7
Different ways of providing social protection
Approach
1 Universal price subsidy
Pros
Cons
Politically popular, easy to Regressive and costly, requires
implement
government price control,
difficult to dismantle, energy
shortages, smuggling
2 Price subsidies reserved Restrict budgetary layout
for certain consumers
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
8
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
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
12
Regular gasoline per liter
announced pricing reforms.
Diesel per liter
10
LPG per kg
• Some have adhered to regular
price adjustments.
8
• Some have sharply increased
6
fuel taxes.
• Some announced subsidy
4
removal at the time of
U.S. Gulf Coast spot prices for gasoline
2
minimum oil price, but failed
and diesel, Mont Belvieu spot propane
to follow up with price
prices for LPG
0
adjustments.
Jan-14
MXN/liter or kg
Opportunity afforded by low fuel prices
9
Emerging lessons
The more formal the way in which the decision to reform
pricing is communicated, the less likely is policy reversal
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
Ministerial
decree
Gasoline and diesel in 2014 and 2015 in
Indonesia
Decrees not implemented
because of political factors and
socioeconomic considerations
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
Gas price increase in Nigeria announced in
late 2014 to take effect in Jan 2015
Not implemented
Announcement
to reporters
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Frequency of adjustments
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).
11
Political challenge of implicit policy reversal
Producer prices in R$/liter or kg
• Official position of the government of Brazil: all oil
product prices were deregulated in 2001.
• In practice: pressure on Petrobras to keep domestic
prices artificially low, with no official mechanism to
2.0
change
“policy”.
1.8
1.6
1.4
1.2
1.0
0.8
0.6
Gasoline, R$/liter
Diesel, R$/liter
LPG in 13-kg cylinders, R$/kg
0.4
0.2
0.0
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Evidence:
Static producer prices
independent of world price
movement
Large losses suffered by the
refining segment of
Petrobras in recent years
12
Price smoothing to manage price volatility
•
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
13
Jun-15
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
• 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
Fund balance
to lower retail fuel prices.
4,500
• The record balance in
4,000
VND billion
3,500
Dec 2014 prompted
MXN million
3,000
use of VND 3.3 trillion
2,500
(MXN 2.3 billion) in 1Q 2,000
1,500
2015 to subsidize fuel
1,000
prices when world oil
500
0
prices were already low.
14
Sep-15
Political economy of Vietnam stabilization fund
Mecanismo de Estabilización de Precios de los
Combustibles (MEPCO)
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
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Price stabilization in Chile
MEPCO, which came into effect in August 2014, smoothing
prices more than the previous regime.
Retail price of gasoline
950
← SIPCO
Pesos per liter
900
MEPCO →
850
800
750
700
650
With stabilization
Without stabilization
600
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
16
Subsidy and tax reform in times of low prices
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 exdepot 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.
17
Ghana
Ghana introduced a 17.5% tax in Nov 2014 with minimal
effects, thanks to rapidly falling world oil prices.
16
14
12
10
8
Imposition of 17.5% fuel tax
6
4
Gasoline
2
Diesel
Kerosene
LPG
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
0
Jan-14
Converted to MXN per liter or kg
18
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Challenge of subsidy reform for cooking fuels
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
19
Targeted conditional cash transfer: FISE in Peru
• 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
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Determinants of household use of LPG
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
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Reducing spending on LPG by households
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
22
Household fuel subsidies
•
•
•
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
23
How will governments respond to next price shock?
• 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
24
Concluding observations
• 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
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Publications cited
Fossil fuel subsidy and pricing policies: Recent developing country experience
Forthcoming 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-productpricing-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 countries
http://documents.worldbank.org/curated/en/2011/07/14612680/uses-bottled-gasevidence-households-developing-countries
The role of LPG in reducing energy poverty
http://siteresources.worldbank.org/INTOGMC/Resources/LPGReportWeb-Masami1.pdf
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