Electricity tariff reforms, welfare impacts, and energy poverty implications

Abstract

Like other energy-exporting countries, Brunei Darussalam has pursued an energy pricing policy that sets energy prices below market rates. The country introduced tariff reforms replacing the declining block tariff (DBT) scheme by an increasing block tariff (IBT) structure in 2012. The reform, however, was a rate structure change and not a subsidy removal, and electricity tariffs in the country remained lower than the long-run marginal cost. The study investigated a subsidy removal scenario, setting the tariff rate at the short-run marginal cost which is around 200% higher than the current average tariff rate. The results show that with IBT, welfare losses and the increase in electricity expenditures would be high for non-poor households; for those living in urban areas and for those engaged in white-collar jobs, and it would have been the reverse had the government not introduced tariff rate structure reforms. Under price elasticity scenarios, welfare losses would be high under inelastic than elastic demand case for both IBT and DBT cases. Electricity expenditures, however, would remain below 5% level – far lower than the energy poverty threshold level of 10% of household income. The tariff structure reform, therefore, shielded the lowest-income households from potential impacts of subsidy removal.