By Sam Bridge
New research says decades of subsidies have led to high consumption rates and wasted power, costing billions of dollars
The current electricity pricing policy in the Gulf Cooperation Council (GCC) countries is unsustainable as decades of subsidies have led to high consumption rates and wasted power, costing billions of dollars, according to a new study.
The report by Strategy& Middle East, part of the PwC network, said the region needs reform to achieve its ambitious industrialisation agenda and have an economically viable electricity sector.
It highlighted an "erroneous perception" among large industrial companies that pricing reforms will put them at a competitive disadvantage thus creating a large resistance to them.
The research estimates that the electricity subsidies have cost GCC countries more than $120 billion over the past 20 years, and leaving these policies in place until 2030 would cost an additional $150 billion as demand increases.
Dr Shihab Elborai, partner with Strategy& Middle East, said: “The current electricity pricing structure in the region cannot be sustained. 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."
The report said 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.
It added that 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.
“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.
But he added that 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.
Recent developments in the region have made the problem starker, said Strategy& Middle East, as the push to industrialise 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.
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 report said 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.
* Tariffs charged to individual users should reflect the cost that they each impose on the system.
“In light of growing demand, any reforms need to be crafted in such a way as to support the ambitious industrialisation 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.