Electricity: Rebalance, Don’t Hike

The government’s plan to increase electricity rates across the board will damage both its credibility and the economy.

By Jawad J. Abbassi

The rapid drop in oil prices, by over 60 percent since the summer, is a game changer for Jordan’s electricity sector. In mid 2013, Jordan’s supplies of natural gas from Egypt stopped completely. This forced the Kingdom to rely on diesel and fuel oil for generating the bulk of its electricity. When oil prices ranged from $100 to $110 throughout 2014, the cost of generating and delivering electricity to end users across Jordan ranged from 180 to 190 fils per kWh.

The drop in fuel costs by around 45 percent reduces Jordan’s electricity cost by around 30 percent. Currently, the cost of generating and delivering electricity to end users across Jordan stands at around 130 fils per kWh. This is due to the fact that the cost of transmission to end users remains fairly constant regardless of generating costs.

Reducing electricity cost is not just tied to the price of oil. Jordan can further reduce its electricity costs by tackling the expanding problem of grid losses and electricity theft. Global standards suggest grid losses shouldn’t exceed 5 percent of total power output, whereas in Jordan, grid losses stand at 14 percent in the central governorates and 11 percent in the northern governorates—and they’ve been increasing annually. Grid losses total cost exceeded $300 million in 2014. Enhancing grid efficiency and cracking down on grid theft would substantially reduce the cost of electricity in the country.

The drop in the cost of energy saves Jordan’s economy close to $2 billion a year. The government shouldn’t distort the savings by setting electricity rates at a much higher price than actual cost, or by having rates that increase costs on some sectors by wide margins while offering other sectors a subsidy. At a cost of 130 fils per kWh, the electricity rates in 2015, as well as the rates in 2014, reveal massive distortions. For example, hospitals, schools, mosques, and churches, which are billed on the residential rate, pay electricity charges far higher than hotels, malls, and other commercial entities. This is an absurd situation by all counts. The government should use the current low oil prices as an opportunity to finally restructure the energy sector. It should start with pricing electricity in a fair and cost-based manner. Selling electricity at cost to all sectors (except low consumption households) with a reasonable surcharge on high users in residential and commercial sectors is the better approach. This should be done with the clear understanding that any future increase or decrease in electricity generating costs will also be passed through to the end user rates (rising or falling).

If the government does all this instead of raising tariffs across the board, then some sectors will have good reductions and others will have moderate rises, counterbalanced by a lower total fuel bill given the reduced gasoline and diesel rates in 2015. The rebalancing and the ability to raise or reduce rates based on actual costs will—for good—end the problem of losses in the electricity sector, which is funded by public debt, as well as start paying down the electrical sector past debts. The lower energy bill in 2015 would also spur economic growth and increase government collections of sales and income taxes. This would also enhance the ability to pay down past electrical sector debts.