Ex-post analysis of energy subsidy removal through integrated energy systems modelling

Abstract

Energy subsidies can incentivise the overconsumption of energy resources and contribute to other economic or social distortions. In this paper, an ex-post analysis is presented that explores the extent to which electricity subsidy reform could have reduced Iran's energy demand during the period 1984–2017. It also quantifies the techno-economic and environmental benefits that could have been achieved through such reforms. A time-varying econometric model is linked to an energy systems optimisation model. The former estimates electricity demand under different subsidy removal scenarios, and the latter identifies the cost-optimal generation mix to meet the demand. The results of cost-optimal transition pathways under subsidy removal scenarios are compared with the real-world energy system development during the study horizon. The comparison reveals that the subsidy reform could have reduced the total cumulative electricity consumption by 22%. Renewable share in power generation could have increased from 5% to 15%. Moreover, the reform combined with a cost-optimal generation pathway would have saved $69 billion and avoided 944 million tons of CO2 emissions. The analysis also shows that every five-year delay in subsidy removal causes about 100 million tons of additional CO2 emissions. Finally, the paper presents lessons learnt for future energy modelling.