PSIA for Electricity Tariff Reform How to implement the analysis. Nobuo Yoshida Chris Trimble Faizuddin Ahmed June 28, 2012
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1 PSIA for Electricity Tariff Reform How to implement the analysis Nobuo Yoshida Chris Trimble Faizuddin Ahmed June 28, 2012
2 Goals of the analysis Benefit incidence of electricity subsidies Who receives electricity subsidies the most? Fiscal implication Effects of tariff changes on both benefit incidence and fiscal burden
3 Goal of this presentation Using Pakistan s data (PSLM 2007/08), learn how to measure the impact of tariff adjustments on benefit incidence and fiscal implications For this practice, an Excel file was created Analysis was simplified so that you can get a big picture For more details, please see our paper, Trimble, Yoshida, and Saqib (2011)
4 What will you get? Benefit incidence (%) quintile1 quintile2 quintile3 quintile4 quintile5 Consumption Quintile Original New
5 Budgetary implication (Original=100) Original New 43
6 How to measure subsidies The formula is simple S=T(Q)-AC*Q Where S - Subsidy; T(Q) - Tariff schedule; AC Average Cost; Q Electricity Consumption But We don t have Q (data of electricity consumption)
7 Two major problems due to lack of data on electricity consumption (Q) 1. We cannot estimate the cost of electricity production Cost=AC*Q 2. We cannot estimate the effects of changing the tariff schedule on subsidies S0=T0(Q0)-AC*Q0 S1=T1(Q0)-AC*Q0 Effects of changes in the tariff schedule: comparison between S0 and S1
8 A simplified version of Pakistan tariff schedule Slabs Monthly consumption (Q) (kwh) Tariff schedule as of March 2008 Rate T(Q) *Q *Q *(Q-100) *(Q-300) *(Q-700)
9 Estimating electricity consumption (Q) Electricity consumption is estimated from the following formula E=T(Q) Where E: Electricity Expenditure T(Q): tariff schedule A problem is the formula of tariff schedule changes on Q, which is again unobserved
10 slabs Exp range (Rs) min max More details From Tariff schedule and the range of Q, we can link ranges of E and slabs: First, determine what slab this household belongs to Second, solve the equation of T(Q)=E for Q Range of consumption (kwh) Tariff rate Formula for Q Q=E/ Q=E/ Q=100+(E-308)/ Q=300+(E-1124)/ Q=700+(E-3736)/7.79
11 An example Suppose you want to estimate electricity consumption if a household s electricity expenditure is Rs First, from the table, we know this household belongs to slab 3 From the formula, we can get Q=100+( )/4.08= kwh slabs Exp range (Rs) min max Range of consumption (kwh) Tariff rate Formula for Q Q=E/ Q=E/ Q=100+(E-308)/ Q=300+(E-1124)/ Q=700+(E-3736)/7.79
12 Estimating subsidies in two different scenarios (scenarios 0 and 1) slabs Range of consumption (kwh) Tariff rate (T0) Tariff rate (T1) Average cost for period 0 (AC0) Average cost for period 1 (AC1) Subsidy in period 0 (S0) Subsidy in period 1 (S1) *Q -8.21*Q 1.26*Q-6.36*Q *Q -8.21*Q 2.93*Q-6.36*Q *(Q-100)-8.21*Q *(Q-100)-6.36*Q *(Q-300)-8.21*Q *(Q-300)-6.36*Q *(Q-700)-8.21*Q *(Q-700)-6.36*Q
13 Practice with an Excel data Part of PSLM 2007/08 data E: Monthly expenditure for electricity use weight: sampling weight quintile: Quintile based on household expenditure per adult equivalent
14 Create a variable for slabs slab: a variable represents Slabs 1 if Rs. 0 <=E<= Rs. 70; 2 if Rs. 71<= E <= Rs. 308; 3 if Rs. 309 <= E <= Rs. 1124; 4 if Rs <= E <= Rs. 3736; 5 if Rs <=E; Excel command =IF(B2<=70,A2/1.4,IF(B2<=308,A2/3.08,IF(B2<=1124,(A2-308)/ ,IF(B2<=3736,(A2-1124)/ ,IF(B2>3736,(A2-3736)/ )))))
15 Calculate electricity consumption (Q) slabs Exp range (Rs) min max Formula for Q Q=E/ Q=E/ Q=100+(E-308)/ Q=300+(E-1124)/ Q=700+(E-3736)/7.79
16 Estimate subsidies for two scenarios slabs Range of consumption (kwh) Tariff rate (T0) Tariff rate (T1) Average cost for period 0 (AC0) Average cost for period 1 (AC1) Subsidy in period 0 (S0) Subsidy in period 1 (S1) *Q -8.21*Q 1.26*Q-6.36*Q *Q -8.21*Q 2.93*Q-6.36*Q *(Q-100)-8.21*Q *(Q-100)-6.36*Q *(Q-300)-8.21*Q *(Q-300)-6.36*Q *(Q-700)-8.21*Q *(Q-700)-6.36*Q
17 Calculate sums of subsidies for all quintiles Quintile1=subsidy*weight* IF(quintile=1,1,0) Quintile2=subsidy*weight* IF(quintile=2,1,0) Quintile3=subsidy*weight* IF(quintile=3,1,0) Quintile4=subsidy*weight* IF(quintile=4,1,0) Quintile5=subsidy*weight* IF(quintile=5,1,0) For each slab, sum quintile# for all households Then, sum them across slabs (see an excel file)
18 Key assumptions Electricity consumption does not change even if tariff rates change There is no second round effect Both assumptions suggest this analysis can show only short-term effects (before the second round effects emerge and consumers start to change consumption)
19 A case of Bangladesh There are many slightly different tariff schedules but less slabs (only three)
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