Energy Efficiency Policy to Save Consumers' Money

By Bhutto, Abdul Waheed | Economic Review, January-February 2009 | Go to article overview

Energy Efficiency Policy to Save Consumers' Money


Bhutto, Abdul Waheed, Economic Review


The government has decided to phase out the entire subsidy of Rs 110 billion on electricity by June 2009. But in addition to state subsidy, a high degree of a cross-subsidisation between sectors exists within the system.

Eliminating subsidies and raising prices is a major political challenge. Privileges and benefits, once given, are not easy to withdraw. Consumers develop vested interests in the associated benefits and resist elimination or reduction of subsidies.

The efficient use of electricity requires that its price covers the cost of production. The price cannot be set on the basis of the average cost of cheap plants constructed in the past. The increasing demand of electricity requires new plants. Thus the price should cover the cost of a unit of electricity from the next power plant, i.e., the long-run marginal cost of production, which tends to be much higher. If the input is administratively priced at less than this marginal cost, it is being subsidised. Literature has shown that electricity has cornered a significant share of subsidies in the developing countries.

Opponents of subsidies argue that these are harmful, inefficient, and in some cases detrimental to the poor. There is no justification for subsidies to the large commercial businesses that dominate the energy sector or to industries and commercial sector that provide services mostly to better-off households in developing countries.

The significant differences in duration of electricity availability during both peak time and the off-peak time indicate that the urban and posh area receive priority over the backward one in having a longer duration of electricity availability. In our country, however there is a block structure, by which the marginal cost increases with consumption.

Both rural and urban, domestic and commercial consumers suffer from voltage fluctuation that bum out their electric appliances, or decrease their performance.

Consumers have to spend extra money on the repair of electric motors. It also adds to unnecessary cost burden by forcing consumers to use voltage stabilisers while the rural areas suffer more due to voltage fluctuation.

Unreliable electricity supply has increasingly induced industry to opt for captive power generation while domestic and commercial consumers are increasingly using gas generators and highly inefficient and cost standby UPS.

Electricity is often a small part of household budget or total cost of production. Nevertheless, the consumers, are bound to reject unsubsidised, high-tariff and unreliable electricity supplies.

Literature shows that domestic consumers are more concerned about their total expenditure on an input like electricity than its unit price. So, if their expenditure stays the same, they will not mind paying more per unit consumed. A higher tariff for the same expenditure means a lower consumption. But this lower consumption must not lead to a decrease in the energy service (lighting, heating, etc) that they obtain.

To achieve the same energy service with a lower consumption requires efficiency improvements, both from electric industry as well as costumer's side and energy conservation from customers side as well, so that electricity is produced and consumed more efficiently.

Thus, conservation efficiency improvements must be used to ensure that the resulting reduction of electricity consumption offsets tariff increases so that there are no net increases in consumers' expenditures on electricity. Thus, the reduction of subsidies and tariff increases must come after implementation of efficiency improvements programme from producers, distributors as well as consumers so as to offset expenditure increases. Both Wapda and KESC have to improve their performance.

The government has carried out numerous campaigns for conservation of energy by domestic users but it is difficult to make people change their routine when electricity charges are marginal due to heavy subsidy. …

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