Electricity pricing reform

Executive summary

The current electricity pricing policy in Gulf Cooperation Council (GCC) countries is unsustainable. It is characterized by significant subsidies to end users and growing demand. The region needs reform to achieve its ambitious industrialization agenda and have an economically viable electricity sector. However, there is an objection to pricing reform: that it will put large industrial companies at a competitive disadvantage.

Counterintuitive though it may appear, properly structured electricity pricing reforms can actually make electrical systems economically viable while also helping grow the region’s industrial base. To achieve these dual goals, tariffs must closely reflect the underlying costs that different types of users put on electrical systems.

Specifically, large end users — industries that consume significant electricity at steady base loads with little or no variability throughout the year — have a very low cost to serve and should thus pay a lower tariff. In contrast, companies that consume less power but have large spikes in demand should pay a higher tariff, to cover their correspondingly large share of the costs from expensive peaking and cycling power generation assets. Electricity makes up a much smaller share of the overall costs for this second group of customers. They have various options for mitigating the increase, such as becoming more energy-efficient, reducing costs in other areas, or passing on modest increases to their consumers.

Such reforms could lead to opposition, but governments can use targeted support for affected groups, giving them time to adjust to higher tariffs. Electricity tariff reform will spread the cost of power generation, transmission, and distribution infrastructure and operation more equitably among the full range of users, while ensuring that large industrial companies remain competitive.

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Conclusion

Current electric power tariffs in the GCC are unsustainable, in light of growing demand, but any reforms need to be crafted in such a way as to support the ambitious industrialization plans that many governments have in place. Simply charging all users a higher tariff will not work. Rather, governments should charge tariffs that more accurately reflect customers’ actual cost to serve. Proper policy reforms should actually lower the tariff that key industries pay, making them more competitive and boosting countries’ industrialization agenda. Governments can smooth the implementation process by anticipating possible opposition and proactively taking steps to mitigate the economic shock non-industrial users face; for example, by offering financial support during a transition period. Overall, cost-reflective tariffs will lead to an electricity sector that is financially self-sufficient and will boost the industrialization of GCC economies — a policy reform from which all sides will benefit.