Power subsidy to cost GCC $150b

Issac John /Dubai
Filed on February 1, 2020


Electricity subsidy regime in the GCC will cost an additional $150 billion for governments in the current decade as demand increases, a study has warned,

The current electricity pricing policy in the GCC, that has cost member countries more than $120 billion over the past 20 years, is unsustainable in the current fiscal environment, argue analysts at Strategy&.

"Keeping existing policies in place until 2030 would cost an additional $150 billion as demand increases," says a new study titled 'Electricity pricing reform: A bitter pill for GCC industries' published by Strategy& Middle East, part of the PwC network.

Decades of subsidies have led to high consumption rates and wasted power, costing billions of dollars, the study said.

"The region needs reform to achieve its ambitious industrialisation agenda and have an economically viable electricity sector. However, there is an erroneous perception among large industrial companies that pricing reforms will put them at a competitive disadvantage thus creating a large resistance to them," it said.

Dr Shihab Elborai, partner with Strategy& Middle East, said that 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, said the study.

"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 modest increases on to their consumers," said the report.

"It is natural that these reforms could lead to opposition and pushback, but governments can use targeted support for affected groups, giving them time to adjust to higher tariffs", said Elborai.

"Such electricity tariff reforms 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," he said.

The recent developments in the region have made the problem starker. The push to industrialize GCC economies and to bring manufacturing supply chains to the region, along with increasing electrification of industrial processes, is creating soaring industrial demand for electricity, said the study.

At the same time, population growth and quality of life improvements in the context of the GCC region's hot and harsh climate have translated into an ever-rising residential demand for electrically powered cooling and refrigeration.

The study also argued that although residential tariffs are important, the focus should be on policies for commercial and industrial tariffs that need to be reassessed as they have a different political and social calculus as well as significant impact on the cost reflectiveness of the system.

"Cost-reflective tariffs pose a social challenge to GCC countries. They could create a perception that the policy unfairly favors a few large industrial interests at the expense of many smaller interests. To succeed, any cost-reflective policy needs to consider the perspective of smaller non-energy intensive industrial and commercial users, and incorporate several measures to mitigate the impact on users who face higher tariffs," said the study.

Any new policy framework for electric power pricing in the GCC needs to meet two broad criteria: It must ensure that the electricity sector is financially sustainable, in that aggregate revenue for the system needs to cover the full cost of current operations and fund future growth. Second, tariffs charged to individual users should reflect the cost that they each impose on the system, the study pointed out.

"In light of growing demand, 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," said Ramzi Hage, principal with Strategy&, Middle East.



Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.

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