Electricity Pricing in Less Developed Countries: Incorporating Economic Efficiency and Equity Objectives

Abstract

Electricity tariffs suffer heavy distortions in many developing countries because of undue government influence. However, in view of increasing financing constraints in recent times and the need for increased energy efficiency, private sector participation in the electric utility industry in these countries is crucial for the future success of the industry. Consequently, to encourage private sectors efforts, electricity tariffs must be adjusted to acceptable economic levels. This paper presents the use of expected system load duration curve (LDC) and power plant input-output function to establish the shadow price for electricity for a study period. The paper also examines how this marginal opportunity cost (MOC) may be adjusted to capture equity objectives. The use of LDC and actual generating unit production function offers the following advantages: better perception of price feedback effects and the ability to incorporate economic despatch into energy shadow prices. Furthermore, with the use of LDC and system generating unit capacity outage function, it is possible to establish price probabilities for the planning period.