World Energy Transition

4th Roundtable Meeting for Power Trading

Abu Dhabi (17th December 2015)

Jomar Eldoy

M-co (the Marketplace Company) Pte Ltd

Reforming Subsidies for Electricity Markets in GCC

2

Global electricity markets have evolved, with increased efforts to undertake reform in the last 20 years.

3

The evolution and reform of these markets usually operate within a greater energy policy framework.

Affordability

SustainabilitySecurity

Fiscal (subsidies& taxes)

Regulatory

(legislations, mandates)

Structural (Market reform)

Policy Objectives

Policy Tools

• Trade-offs insimultaneously meetingenergy policy objectivesof affordability, securityand sustainability

• Emphasis on objectiveevolves as an economydevelops; Emergingeconomies often focuson affordability andsecurity

• Combination of toolsused to achieve policyobjectives

4

Developing economies tend to prioritise electricity affordability and accessibility as a policy objective under which subsidies is a common tool.

IranLibya

Russia

Argentina

Algeria

Egypt

Iraq

Indonesia

Mexico

Vietnam

Taipei

China

India

Thailand

Malaysia

Luxembourg

Norway

Switzerland

Australia

Sweden

Singapore

United StatesGermany

United Kingdom

Hong Kong

Japan

Korea

0

20,000

40,000

60,000

80,000

100,000

120,000

0 50 100 150 200

GDP per Capita versus Electricity Subsidies per Capita

Bahrain

Kuwait

Qatar

UAE

Saudi

Arabia

Trinidad

and

Tobago

350 850 1350

Electricity Subsidy per Capita (USD)

GD

P p

er

Ca

pit

a (

US

D)

Advanced

economies

Resource-rich

countries

Developing

economies

Note: Subsidy = (Reference price - End-user price) × Units consumed

Source: IEA, IMF for GDP numbers

5

These subsidies tend to decrease as markets advance

Market Structure

Vertically Integrated Utility

Vertically Integrated Utility

Single Buyer Structure

Single Buyer Structure

Wholesale CompetitionWholesale

CompetitionRetail

CompetitionRetail

Competition

Pri

cin

g R

eg

ime

Administered

Pricing (often

subsidized)

Market-based

Long-term

Contracts

(e.g. PPA)

Hybrid

6

These subsidies tend to decrease as markets advance

Market Structure

Vertically Integrated Utility

Vertically Integrated Utility

Single Buyer Structure

Single Buyer Structure

Wholesale CompetitionWholesale

CompetitionRetail

CompetitionRetail

Competition

Pri

cin

g R

eg

ime

Administered

Pricing (often

subsidized)

Market-based

Long-term

Contracts

(e.g. PPA)

HybridUAE (Abu

Dhabi)

UAE (Other Emirates)

Kuwait

Oman

Qatar

Bahrain

Saudi Arabia

7

Overall, subsidies and taxes distort market pricing

Price/Cost

Producer

1

Producer

2

Producer

3

Producer

4

Producer

5

Producer

6

Subsidised

Sales Price

International

Market Price

Taxed Sales

Price

Subsidy bill

Tax revenue

• Subsidies artificially lower prices

that consumers pay below actual

supply costs or prevailing market

value.

• Taxes create the converse effect

by increasing prices consumers

pay above the prevailing market

value.

• In the context of cross-border

trade, such government policies

create unintended distortionary

effects – subsidized product

given artificial comparative

advantage.

8

Beyond political and social issues, subsidies create impediments to trade flows.

• Inefficient consumption in

subsidized sectors

• Environmental issues in

subsidized fossil fuel

sectors

• Although often set-out to promote energy accessibility for poorer households, energy subsidies often benefit the more affluent socio-economic population due to the relatively larger share of energy consumption

• Distorts trade flows

• Under-investment in infrastructure (particularly with subsidized utilities)

• Diverts resource from other potentially more profitable (and less energy-intensive) sectors.

• Mounting government subsidy bills

• Political opposition during subsidy removal

Political Economic

SustainabilitySocial

9

These distortionary trade flows occur in the energy value chain

Subsidised

Fuel Source

Fuel Source at

Market Prices

Taxed Fuel

Source

Lower wholesale

prices

Higher wholesale

prices

Country

Boundary

Trade flows

Fuel Source at

Market Prices

Taxed or

subsidized

sectors

International

trade

10

But subsidies still take up an significant component of GDP in many developing countries

Source: 2013 IEA Fossil-fuel Subsidy Database

< 1% of GDP

1%-5% of GDP

5%-10% of GDP

>10% of GDP

No subsidies

Data unavailable

11

Governments need to consider a proper framework as they undertake energy reform plans.

Affordability Sustainability Security

Ob

ject

ive

sG

uid

ing

Pri

nci

ple

s

Transparency

Efficiency

Practicality

Enforceability

Achieved by

• Timing and

communication (e.g. low

oil price environment,

elections, educating

public on price increases)

• Target group (subsidy

removal should not

result in lower welfare

for poorer households)

• Must be harmonized

with other longer-term

energy policies (fuel-mix

targets, market reform)

Implementation

Considerations

Po

ssib

le T

oo

ls

Market-based pricing

(ensures tariffs keep

pace with fuel price

trends)

Targeted Cash

Subsidies, Grants

(lifeline rates,

vouchers to lower

income groups)

Promote fuel

switching/alternate

fuel sources

Supported by

12

International Experience in Energy Subsidy Programs

Germany

Renewables subsidies support

programs have led to

mounting power bills and

impacted competitiveness

IndonesiaFuel subsidies resulted in Indonesia moving

from an oil-export country to a net import

country in 2004. Government has since

made efforts to increase fuel prices

gradually

PhilippinesPoorer households

supported with lifeline

subsidies during reform

process

Vietnam

Electricity price reform still

underway, but has undertaken

a gradual approach, coupled

with longer-term energy plans

to move to cheaper alternative

fuel sources e.g. coal, nuclear

13

Regional Electricity Trade and Integration

Source: Asean Power Grid

Red Electric De Espana (REE)

Internal Electricity Market in Europe

• On-going efforts to

integrate 6 European

regional electricity markets

into a single market.

• Beyond infrastructure,

regulations and operations

must be developed

together and harmonized

to ensure successful

integration

• Relatively easier given that

most of these regional

markets are in similar

stages of market

development

Asean Power Grid

• Initiative that begun

in 1997 with the end

goal of achieving

supply security and

availability.

• While infrastructure

efforts have

accelerated, but the

differing market

structures,

regulations and policy

frameworks among

member states

remain impediments

for complete

integration e.g.

Singapore and

Philippines are the

only non-subsidized

countries.