Abstract
Abstract: This paper presents arguments for and against cost reflectivity and pro-poor tariff policy in South African electricity supply from a regulatory perspective. This debate has been ongoing for decades in developing countries; however, there is still no clear direction on how countries should approach these two important competing policy positions. There are those that argue that achieving cost-reflective tariffs will attract private sector investment into the electricity supply industry (ESI) that will lead to much needed competition and reduced electricity tariffs. However, there are also those who argue that cost-reflective tariffs will make it difficult to achieve government social objectives of universal access through pro-poor tariffs, as cost-reflective tariffs will be unaffordable to the majority of the population. The fundamental question is what should come first, between cost-reflective tariffs and pro-poor tariffs in a developing country context, specifically in South Africa. This paper therefore attempts to examine the real trade-offs between pro-poor tariff policies and cost-reflective tariffs. The study attempts to answer one critical question: How can the electricity sector attract local and foreign investors, without necessarily affecting government social objectives such as universal access to electricity? The study finds that electricity consumers, and in particular poor households, have historically benefited from relatively cheap electricity and that tariffs have not been cost reflective. In other words, there is a mismatch between tariffs and the underlying costs of supplying electricity in South Africa. It also finds competing expectations between poor consumers and utilities. Consumers expect to receive electricity at an affordable price, while utilities argue that a good, reliable electricity supply’s tariffs must be matched with costs. Lastly, the study finds that it is difficult to achieve cost reflective tariffs in the short run, in an environment characterised by a high number of consumers dependent on government social grants and cross-subsidies. The study therefore recommends a gradual movement towards cost-reflective tariffs, together with the introduction of competition and energy efficiency and demand side management (EEDSM), in order to minimise the impact on the poor.Keywords: Tariffs, pro-poor, cost reflectivity, electricity, consumers
Highlights
The trade-offs between cost-reflective and pro-poor tariff policy has received emphasis from a number of policy makers and regulatory authorities around the world
There are currently strong signs that South African electricity utilities are facing serious challenges, as falling energy consumption has resulted in declining revenues, and this hinders the achievement of pro-poor tariffs/universal access, as utilities have to increase tariffs and introduce innovative tariff structures that will align tariffs with the actual costs of rendering electricity to end-users, in order to match the increasing production costs
The remainder of the paper is organised as follows: Section 2 looks at the South African Electricity Supply Industry; Section 3 presents the arguments for and against pro-poor and cost-reflective tariffs; while section 4 looks at the role of the regulator in relation to tariffs; Section 5 discusses the possible ways of protecting low-income households; and Sections 6 and 7 provide the recommendations and conclusions respectively
Summary
The trade-offs between cost-reflective and pro-poor tariff policy has received emphasis from a number of policy makers and regulatory authorities around the world. There is still no clear direction on how developing countries should approach these two important competing policy positions Those in support of cost-reflective tariffs argue that implementing cost-reflective tariffs in the electricity supply industry (ESI) will assist government achieve universal access through increased generation capacity, which will result in lower costs in the long run. Propoor tariff policy advocates assert that achieving cost-reflective tariffs first may delay the achievement of universal access to affordable electricity, especially in a developing country context characterised by high unemployment, low growth and high dependence on government social grants. The remainder of the paper is organised as follows: Section 2 looks at the South African Electricity Supply Industry; Section 3 presents the arguments for and against pro-poor and cost-reflective tariffs; while section 4 looks at the role of the regulator in relation to tariffs; Section 5 discusses the possible ways of protecting low-income households; and Sections 6 and 7 provide the recommendations and conclusions respectively
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