FOSSIL FUEL TAXATION AND SUBSIDY POLICIES

FFRE WORKSHOP, 12-16 MAY 2014, MAURITIUS

Ministry of Environment and Energy Republic of Maldives

COUTRY OVERVIEW

• 1192 beautiful tropical islands

• 190 inhabited islands

• 107 Tourist Resorts

• 60 Industrial/agricultural islands

• Population of 350,759

• Land area: 300 km2

• 6-8% GDP growth annually

• Only 1-2 % of the country is land

• 80% of land just over a meter above sea level

ENERGY SECTOR HIGHLIGHTS

• Depend almost entirely on foreign imports

• Oil imports

• USD 470M in 2012 and USD 487M in 2013

• Most oil vulnerable country

• Close to 31% of GDP spent in 2012

• 2009 CO2 emissions was

• 1.3 Million tCO2eq & 4.0 tCO2eq/person/year

• Under a business as usual scenario, emissions could

double by 2020

• Heavily subsidized electricity sector

ELECTRICITY SUBSIDIES

THE SUSTAINABILITY CHALLENGE

Deteriorating fiscal situation mostly driven by rising expenditures;

• Deficit about ~ 16% GDP• Cash deficit ~ 13.4% GDP

Significant role played by electricity subsidies:

• Spending on electricity subsidies increased five fold between 2010 and 2012, going from 90 Million MVR in 2010 to 458 Million in 2012 • Electricitysubsidies~1.4%GDP

THE AFFORDABILITY CHALLENGE

long history of subsidizing electricity consumption motivated by high cost of energy due to:

• Reliance on imports (vulnerability to intl. price/exchange rate shocks ...) • Lack of diversification in energy sources

Households spend a significant proportion of their budget on electricity, especially poorer households (6.5 % and 8.6 respectively)

Electricity subsidies both in the form of • Cross subsidies (higher to lower consumption bands, IBT tariff) • Explicit subsidies

Fuel Surcharge Subsidy (FSS) Usage Subsidy (US)

CROSS SUBSIDIES

Electricity pricing follow an Increasing Block Tariff structure: households pays

different prices on their consumed units for each “block” covered by their

consumption (cross subsidies).

EXPLICIT SUBSIDIES – USAGE SUBSIDY

Introduced to limit impact of 2009 price reform on lower consumption bands

EXPLICIT SUBSIDIES – FUEL SURCHARGE SUBSIDY

2009 Reform: introduction of Fuel Surcharge –utility providers allowed to automatically raise tariff to reflect changes in fuel cost above a threshold.

• Example: STELCO - for each 0.1 Mrf/liter increase in fuel prices above 8 Mrf/liter, tariff increased by Mrf 0.03 per kWh

• Fuel Surcharge Subsidy: Introduced to offset Fuel Surcharge impact on consumers’ bill.

Cost of Explicit Subsidies Increased 5 Fold Between 2010-12 due to

• Relaxation of eligibility criteria• Increase in international prices of fuel• Currency devaluation

EFFCIENCY COSTS

DEMAND SIDE: • Real value of electricity bill declined over time: Households

(more than) fully insulated from changes in the cost of electricity.

• No incentives toward “responsible” consumption; Over-consumption?

SUPPLY SIDE: • Utility providers fully insulated from changes in the cost of

production. • No incentives toward improvements of efficiency levels

REFORM

Two approaches being considered

1. FSS coverage to vary by slab of each unit of electricity consumed (original Government proposal) 2. FSS coverage based on total volume of electricity consumed– all units receive the FSS coverage of the last unit consumed

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