How is the price of electricity set and what exactly are consumers paying for? Are today’s electricity tariffs (or rates) too high or too low?
These questions have often been at the center of public and political debates. They’ve sparked questions about the equitable distribution of costs and have, in some cases, led to social unrest and controversy. Recent protests in Bulgaria and Spain, for example, occurred in reaction to steeply rising electricity prices at 14 percent and 18 percent, respectively.
Yet transparency and public participation in the tariff-setting process can provide spaces for different groups to be heard, leading to better decisions that account for the concerns of all stakeholders, including consumers. WRI’s Electricity Governance Initiative (EGI) developed 10 Questions to Ask about Electricity Tariffs, a new publication that’s part of a series of tools designed to help make decision-making processes more transparent and enable greater engagement in the electricity sector.
The “10Qs on Tariffs” is designed to raise important questions about tariff-setting, a process which can often be complicated and opaque. The idea is to equip civil society and consumer groups with the tools they need to engage, design, and participate in the tariff-setting processes in their respective countries.
Civil society groups can use the “10Qs on Tariffs” to evaluate an existing tariff order, prepare for public consultations around a proposed tariff revision, and assess various aspects of a tariff proposal. The 10Qs can also help regulators or others who are designing a public hearing process or seeking to increase transparency. To date, civil society groups in South Africa and Kyrgyzstan have tested the “10Qs on Tariffs” in efforts to improve the tariff-setting processes in their countries.
What is an Electricity Tariff?
An electricity tariff, or rate, is the price at which electricity is sold to consumers. It’s typically referred to in a unit price per kilowatt hour (kWh). Tariffs reflect a number of variables, including the cost to generate energy, the cost of transmitting and distributing it, the cost of using energy during “peak” or high-demand periods versus low-demand periods, and any relevant taxes, levies, and surcharges imposed in a given jurisdiction. Tariffs vary widely from country to country (from 35 cents (c) per kilowatt hour (kWh) in Germany to 8 c/kWh in India), and differ depending on consumer profiles. For example, in South Africa, residential consumer tariffs range from 8.1 c/kWh-14.96 c/kWh, depending on how much electricity is consumed on a monthly basis.
Tariffs are revised for a number of reasons, including to maintain the financial viability of a utility, to support energy efficiency measures, or to reflect the introduction of renewables. In some instances, tariffs are raised without providing any rationale or reason, often raising concern among the public. Transparency mechanisms to ensure disclosure of the reason behind tariff changes and hold governments accountable for tariff decisions—can help minimize these concerns.
Putting the 10 Questions to Use
In South Africa, rising electricity tariffs have been a huge cause for concern among consumers. Between 2008 and 2012, electricity tariffs increased by more than 200 percent. In 2013, the country’s national utility, ESKOM, submitted an application to the National Energy Regulator (NERSA) to increase electricity tariffs 16 percent annually over the next five years in order to cover costs such as generation, depreciation, and operating costs. This would result in a cumulative increase of 540 percent between 2008-2017.
EGI South Africa (EGI-SA), a network of South African civil society organizations focused on electricity policy, used the “10 Qs on Tariffs” to convene workshops and training sessions for community members and other groups. Through these workshops, participants learned about tariff-making processes in South Africa and how to effectively participate in NERSA hearings.
Following these workshops, a number of EGI-SA partners made submissions to NERSA, highlighting their issues and concerns with ESKOM’s application. As a result, NERSA has now increased and opened up its consultation processes to include poorer communities. The public hearings, which include submissions by businesses and municipalities as well as residential consumers, resulted in increased scrutiny of ESKOM’s proposed revenue requirements.
After NERSA’s review of ESKOM’s application and proposed costs, the final result was an average annual increase of 8 percent instead of 16 percent. For poor households, the increase was pegged for the first time to the Consumer Price Index of 5.6 percent, rather than 8 percent.
EGI has also introduced the “10Qs on Tariffs” in Kyrgyzstan. In 2010, violent protests sparked by sharp hikes in tariffs for electricity and heat—as well as mismanagement of the electricity sector—led to a revolution that ousted former President Bakiyev. Formal channels for public engagement in Kyrgyzstan are weak, there is no independent regulator in the electricity sector, and public hearings are limited. Public foundation UNISON, an EGI partner, recently conducted a survey based on EDIT, another EGI tool, and highlighted that the majority of electricity consumers are dissatisfied with the quality of their electricity supply. Furthermore, an EGI assessment showed that there is low awareness on all issues of power supply and electricity.
In 2013, EGI presented the “10Qs on Tariffs” at a roundtable discussion in Kyrgyzstan as a potential framework to guide improvements in tariff-making processes. UNISON convened the group, which included an important cross-section of electricity sector decision-makers, including representatives of the Department of Regulation, Ministry of Energy, the Anti-Monopoly Commission, the Distribution utilities, and several civil society groups. Participants agreed that the 10Qs Framework will be useful for both government agencies and civil society to develop and assess tariff proposals, particularly during seasons when tariffs normally increase. UNISON will use the “10Qs on Tariffs” as they convene stakeholders around upcoming proposed tariff increases.
The “10 Qs on Tariffs” offers a tool whereby stakeholders involved in tariff-setting processes or those wanting to become involved can increase their knowledge and capacity, and contribute more effectively in decision-making processes. Looking ahead, this year, the Tamil Nadu Electricity Governance Initiative (TEGI) will use this framework to assess and help strengthen the tariff-making process in the state of Tamil Nadu, India.