Criteria for Energy Pricing Policy

253 Pages·1986·4.842 MB·English

by  Mohan Munasinghe (auth.), Corazón Morales Siddayao (eds.)

GR/TER/A FOR
ENERGY PR/G/NG POL/GY
CRITERIA FOR
ENERGY PRICING POLICY
A collection of papers commissioned for theEnergy Pricing Poliey Workshop
organized under the Regional Energy Development Programme (RAS/84/001),
Bangkok, 8-11 May 1984.
Sponsored by the United Nations Development Programme (UNDP), the Economic and
Social Commission for Asia and the Pacific (ESCAP), the International Labour
Organization (ILO), the Commission for European Communities (CEC), the East-West
Center (EWC), and the International Development Research Centre (IDRC)
Editedby
Coraz6n Mora/es Siddayao
Published by
Graham & Ti-otman
The opinions expressed herein are those of the authors and do not necessarily reflect the
views of the United Nations.
First published in 1985 by
Graham & Trotman Ltd Graham & Trotman Inc.
Sterling House 13 Park Avenue
66 Wilton Road Gaithersburg
London SW1V 1DE MD 20877
UK USA
© The East-West Center, Honolulu, and the United Nations, New York 1985
Softcover reprint of the hardcover 1s t edition 1985
Copyright: Readers requiring copies may purchase directly from the publisher, or obtain
permission to copy from the publisher at the address given.
British Library Cataloguing in Publication Data
Energy Policy Pricing Workshop (1984: BangkokJ
Criteria for energy pricing policy: a collection of papers commissioned
for the Energy Pricing Policy Workshop organised under the Regional
Energy Development Programme (RAS/84/001). Bangkok, 8-11 May
1984.
1. Power resources - Prices - Government policy - Developing
countries
I. Title 11. Siddayao, Coraz6n Morales 333.79'17 HD9502.D/
ISBN 978-94-011-9812-7 ISBN 978-94-011-9810-3 (eBook)
DOI 10.1007/978-94-011-9810-3
Typeset in Great Britain by Electronic Village Ltd, Richmond
CONTENTS
Preface
Chapter 1 ENERGY PRICING POLICY FRAMEWORK AND
EXPERIENCE IN DEVELOPING COUNTRIES
Mohan Munasinghe
Introduetion 1
Pricing poliey and integrated national energy planning (lNEP) 1
Seope and objeetives of pricing poliey 4
Adjustments to efficient prices to meet other objeetives 17
Reeent experienee in Asia and the Pacific 20
Energy eonservation and pricing 21
Case Study: Co-ordinated use of pricing and related tools for energy
eonservation 23
Figures 28
Tables 32
Referenees 33
Chapter 2 SOCIO-ECONOMIC GOALS IN ENERGY PRICING POLlCY:
A FRAMEWORK FOR ANALYSIS
Manmohan S. Kumar
Introduetion 35
Energy and the eeonomy 36
Cost of energy 37
Pricing and equity 40
Employment 46
Growth and other goals 52
Energy pricing in rural areas 55
Limitations of energy pricing 58
Concluding eomments 59
Figure 60
Notes 61
Referenees 61
Chapter 3 EFFICIENCY AND EaUITY CRITERIA IN ENERGY PRICING
WITH PRACTICAL APPLICATION TO LDCs IN ASIA
David M. G. Newbery
Producer and consumer prices of energy 65
Setting the producer price of energy 68
The difficulty of separating producer and consumer prices 73
Equity and efficiency conflicts in electricity pricing 77
Conclusions 78
Tables 80
ANNEX 3.1
ESTIMATING THE IMPACT OF FUEL PRICE
CHANGES IN THAILAND 81
Annex figures 85
Annex tables 86
Notes 87
References 87
Chapter 4 OPERATIONALIZING EFFICIENCY CRITERIA IN
ENERGY PRICING POLICY
Gunter Schramm
Introduction 89
Pricing, a tool of demand management 90
Basic pricing objectives 90
Short-run versus long-run marginal cost pricing 96
Efficiency pricing with declining long-run marginal costs 99
The economics of discriminatory pricing 100
Promotional pricing 101
Estimating depletion costs 102
The economic value of domestic petroleum resources 105
The economic value of imported petroleum fuels 106
The economic opportunity cost of funds: a digression 106
Reconciling economic and financial costs 107
Dealing with inflation and relative price changes 109
Figures 111
Tables 113
ANNEX 4.1
THE ECONOMIC OPPORTUNITY COSTS OF DOMESTIC CRUDE
CONSUMPTION FOR AN OlL EXPORTING COUNTRY SUBJECT TO
EXPORT QUOTAS 114
ANNEX 4.2
THE ECONOMIC COSTS OF UNRELIABlE POWER SUPPLIES 115
Notes 118
References 119
Chapter 5 ENERGY PRICING IN DEVElOPING COUNTRIES: ROlE OF
PRICES IN INVESTMENT AllOCATION AND CONSUMER
CHOICES
Ramesh Bhatia
Introduction 121
Components of an integrated framework for energy pricing 122
Product prices, output and investment 123
Role of energy prices in consumer choices 135
Energy prices and considerations of equity and efficiency 141
Reconciling objectives of equity and efficiency 144
Summary and conclusions 147
Figure 149
Tables 150
Notes 153
References 155
Chapter 6 SHADOW-PRICING INDIGENOUS ENERGY:
ITS COMPlEXITY AND IMPLICATIONS
Coraz6n Morales Siddayao
Introduction 157
üpportunity cost, shadow prices, and the theory of resources 158
Should fossil fuel resources be shadow-priced and pegged? 163
Summary 172
Figure 173
Tables 174
Notes 176
References 177
APPENDIXES
APPENDIX I FINAL REPORT OF THE WORKSHOP 179
I. Organization of the Meeting 179
11. Proceedings 180
APPENDIX 11 ANALYSIS OF THE ENERGY PRICE
PROBLEM IN CHINA
Huang Zhi-jie 199
APPENDIX 111 ENERGY PRICING IN NEPAL
S. N. Sharma 207
LIST OF PARTICIPANTS 223
ABOUT THE AUTHORS 225
INDEX 229
PREFACE
The main part of this volume is composed of papers commissioned for the
Energy Pricing Policy Workshop held at Bangkok from 8 to 11 May 1984,
co-ordinated by the U nited Nations Economic and Social Commission for
Asia and the Pacific (ESCAP) and the Resource Systems Institute of the
East-West Center. The Workshop, which involved high-level policy planners
from several Asian developing countries, was financially sponsored by several
organizations: the ESCAP Regional Energy Development Programme
funded by the United Nations Development Programme; the European
Economic Community; the International Labour Organisation; and the
International Development Research Centre. Publication of these papers
has been supported by funds from the European Economic Community and
the United States Agency for International Development. Preparation of
the manuscripts for publication was undertaken at the East-West Center,
through contribution in kind at the professional, editorial, and support staff
levels.
The Workshop developed out of discussions at the Eighth Session of the
ESCAP Committee on Natural Resources, 27 October to 2 November 1981,
where questions on resource pricing in general (as related to energy resources)
and sectoral pricing policies for end-users were discussed in the context of
demand management. It was recognized that, although much work had been
done in the area, policy makers could seldorn obtain analytically supported,
yet realistic, guidance concerning energy pricing questions. The emphasis
of the Workshop was, therefore, on policy decision-making, and the
application of theory to policy formulation in the energy pricing area.
Detailed foIlow-up studies to be done in some ofthe countries represented
were planned, as the report in Appendix I indicates.
The papers in this collection are concise revisions of the original documents
presented at the Workshop. In some instances, revisions have been
substantive. The collection is intended to serve policy makers interested in
understanding the role of pricing policy. Economic policy, while ideally
applying economic theory, involves the choices of policy makers to intervene
directly in the wor kings of the economy to improve its performance, as weIl
as the choice not to make that direct intervention to allow the different
economic factors to respond to economic forces freely. It also involves how
that intervention - if chosen as an approach - should take place, or the
choice of the instrument variables to be employed. Energy policy is apart
of economic policy insofar as it affects the production, supply, and use of
energy; hence, it cannot be designed independently of economic policy,
although some aspects of it may be related to other non-economic policies.
Thus, appropriate energy policy has the following characteristics:
(a) It must be integrated with a country's other goals, e.g. its balance of
payments position, energy security to assure the achievement of
economic development targets, the achievement of macro-economic
goals (investment, income, and employment), as weIl as goals related
to science and technology, the environment, and socio-economic
development.
(b) In light of the first characteristic, energy policy must be evaluated in
the context of efficiencyin the allocation of resources to increase overall
welfare as weIl as equity in sharing that welfare increase.
(c) Incorporating efficiency and equity objectives in attempting to achieve
the overall objectives of energy policy cannot be evaluated without
linking such objectives to the individual factors that would respond
to such policy.
This collection is not intended to be a cookbook, for while all authors are
in agreement with the above starting points, the complexity of the subject
is reflected in some divergence of opinions in some aspects of pricing policy.
Of necessity, some repetition of ideas may occur where certain issues are
critical to the arguments presented.
This volume caps the first stage of a joint effort by the organizations
involved.1t would,however, not have been possible without the outstanding
co-operation of everyone involved. Thanks are also due the support staff
involved in this effort, both at ESCAP and at the East' :"'West Center. Editing
and preparation of the manuscripts for publication required the careful
attention of and timely co-ordination by Dorothy Izumi, Helen Takeuchi,
Jennifer Cramer, and Sonya Ho. Our many thanks to all who helped expedite
preparation of this volume.
Corazon M. Siddayao
Honolulu
May 1985
Chapter 1
ENERGY PRICING POLICY
FRAMEWORK AND
EXPERIENCE IN DEVELOPING
COUNTRIES
Mohan Munasinghe
INTRODUCTION
Today's societies require increasing amounts of energy for domestic,
industrial, commercial, agricultural, and transport uses. These energy needs
are met by the commercial energy sources including the short-term,
depletable fossil fuel supplies - petroleum, coal, and natural gas - as
weIl as the long term, renewable sources - hydroelectric, biomass, solar,
geothermal, wind, and tidal power (Munasinghe and Schramm, 1983).
This paper sets out a consistent generalized framework for energy pric
ing in developing countries. The methodology seeks to maintain a com
promise between analyiical rigour and practicality. Because energy pricing
is only one aspect of demand management and overall energy planning
for national development, it is useful to first examine the role of pricing
policy within this wider perspective.
PRICING POLICY AND INTEGRATED NATIONAL ENERGY
PLANNING
Because of the many interactions and nonmarket forces that shape and affect
the energy sectors of every economy, decision makers in an increasing
number of countries have realized that energy sector investment planning,
pricing, and management should be carried out on an integrated basis, e.g.,
within anational planning framework which helps analyse energy policy
options ranging from a short-run supply-demand management to a long
run natural energy strategy (Munasinghe, 1983). However, in practice, most