Energy Pricing in Developing Countries: Role of Prices in Investment Allocation and Consumer Choices

Abstract

As noted in preceding chapters, the basic objectives of energy pricing policy will include the achievement of (1) economic efficiency and (2) social equity, while maintaining (3) financial viability. Some of these objectives may be translated in terms of criteria of fixing administered prices, e.g., “lifeline rates” for electricity, subsidized kerosene for meeting basic needs, control of inflation, encouragement to domestic resources, optimum investments in fuel-producing sectors, optimum product mix of refineries, and profitability and efficient management of public sector units. Administered prices could be changed at one or more of the following stages: (1) resource pricing, (2) transfer pricing (to conversion units), (3) output pricing (for the manufacturing unit), and (4) consumer pricing through taxes and subsidies. It is important to realize that some of the objectives of energy pricing can be achieved by adjusting the final product prices through appropriate taxes and subsidies. Adjustment of consumer prices is sufficient to attain objectives such as meeting basic needs, controlling inflation, and considering environmental requirements. Thus, distortions in the mine-mouth or well-head pricing of energy resources, transfer pricing, and product prices can be avoided if it is kept in mind that these prices do not have to be used for achieving macro-economic objectives.