Electrification financing and tariffs: international literature review



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University of Cape Town

This report was commissioned by the National Electrification Forum (NELF}. It is a review of international experience in electricity pricing, funding and financial management. The purpose of the report is to assess how these issues have affected electrification programmes in developing countries and to draw conclusions which will assist NELF in establishing appropriate electricity pricing and financing policies for South Africa. A successful electrification programme which enables widened access to electricity is ultimately dependent on the creation and maintenance of a financially viable electricity distribution industry. Financial viability is, in tum, crucially dependent on appropriate pricing and financing policies and financial management practices. The report is based on an extensive review of international literature. The review of electricity pricing commences with a discussion on pricing policies, the principles of economic efficiency and marginal cost-based prices. Some of the difficulties of this approach are highlighted, and additional, often more pressing, pricing objectives are noted, including the imperative of prices which will allow financial viability and prices which will achieve greater equity. Actual practice in developing countries is then examined with regard to tariff levels and structures. Tariff levels are compared with long run marginal costs, generally being much lower in developing countries. The tariff structures discussed include inclining block, single flat rate, two-part, unmetered and time-of-use tariffs. The question of subsidies is raised as well as the problems of implementing equitable life-line tariffs.