THE government has decided to phase out the entire subsidy of Rs110 billion on electricity by June 2009. But in addition to state subsidy, a high degree of a cross-subsidisation between sectors exists within the system.

Eliminating subsidies and raising prices is a major political challenge. Privileges and benefits, once given, are not easy to withdraw. Consumers develop vested interests in the associated benefits and resist elimination or reduction of subsidies.

The efficient use of electricity requires that its price covers the cost of production. The price cannot be set on the basis of the average cost of cheap plants constructed in the past. The increasing demand of electricity requires new plants. Thus the price should cover the cost of a unit of electricity from the next power plant, i.e., the long-run marginal cost of production, which tends to be much higher. If the input is administratively priced at less than this marginal cost, it is being subsidised. Literature has shown that electricity has cornered a significant share of subsidies in the developing countries.

Opponents of subsidies argue that these are harmful, inefficient, and in some cases detrimental to the poor. There is no justification for subsidies to the large commercial businesses that dominate the energy sector or to industries and commercial sector that provide services mostly to better-off households in developing countries.

The significant differences in duration of electricity availability during both peak time and the off-peak time indicate that the urban and posh area receive priority over the backward one in having a longer duration of electricity availability. In our country, however there is a block structure by which the marginal cost increases with consumption.

Both rural and urban, domestic and commercial consumers suffer from voltage fluctuation that burn out their electric appliances, or decrease their performance. .

Consumers have to spend extra money on the repair of electric motors. It also adds to unnecessary cost burden by forcing consumers to use voltage stabilisers while the rural areas suffer more due to voltage fluctuation.

Unreliable electricity supply has increasingly induced industry to opt for captive power generation while domestic and commercial consumers are increasingly using gas generators and highly inefficient and cost standby UPS.

If the quality of uninterrupted supply were significantly improved, both domestic and commercial consumers would perhaps be willing to pay more, particularly because electricity is often a small part of household budget or total cost of production. Nevertheless, the consumers are bound to reject unsubsidised, high-tariff and unreliable electricity supplies..

Literature shows that domestic consumers are more concerned about their total expenditure on an input like electricity than its unit price. So, if their expenditure stays the same, they will not mind paying more per unit consumed. A higher tariff for the same expenditure means a lower consumption. But this lower consumption must not lead to a decrease in the energy service (lighting, heating, etc) that they obtain.

To achieve the same energy service with a lower consumption requires efficiency improvements, both from electric industry as well as costumer’s side and energy conservation from customers side as well, so that electricity is produced and consumed more efficiently.

Thus, conservation and efficiency improvements must be used to ensure that the resulting reduction of electricity consumption offsets tariff increases so that there are no net increases in consumers’ expenditures on electricity. Thus, the reduction of subsidies and tariff increases must come after implementation of efficiency improvements programme from producers, distributors as well as consumers so as to offset expenditure increases. Both Wapda and Kesc have to improve their performance.

The government has carried out numerous campaigns for conservation of energy by domestic users but it is difficult to make people change their routine when electricity charges are marginal due to heavy subsidy. It may be better to subsidise efficient end-use equipment than subsidising electricity.

For improving efficiency of appliances, the most effective measures have generally been mandatory energy-efficiency standards applied to manufacturers. Many countries have established mandatory standards for a variety of appliances, most commonly refrigerators and air conditioners. In the OECD countries even the least efficient refrigerator consumes about half of the energy of the least efficient product eight years ago.

However design of standards requires considerable technical knowledge. There has to be some flexibility for adapting technological advances that should encourage the industry to develop more energy-efficient technology.

Cost-effective efficiency measures will save consumers money. Improved efficiency will reduce the duration of load shedding without any additional investment on the generation side.

Efficiency policies have a particularly important role to play as the use of electric home appliances has increased substantially. Around 10 million home appliances were sold this year.

A study by the Consumer Rights Commission of Pakistan (CRCP) with the support from the Global Environment Facility (GEF)/UNDP in 2004 showed that none of the ceiling fans tested met efficiency standards, and they consumed an average extra 12.67 watts/8 hours. Energy inefficient bulbs consumed extra energy equivalent to 2.3 watts/8 hours.

Experts reckon that the introduction of 15 million subsidised high-quality compact fluorescent lamps into the domestic market could save customers $78 million within two years. In addition, 880 MW of power demand would be avoided. The cost of such additional new generation capacity would be $1.15 billion.

The power consumption by ACs reached 4,500MW in August when the scorching heat was at its peak. In the same period, the country has been facing scarcity of around 4,500MW. Central air conditioning, which is more efficient, is still relatively rare.

Efficiency improvement is not, however without cost. Investments have to be made on purchasing and installing efficient equipment. If customers cannot afford the first cost of this equipment, they may have to be helped.

In the US, energy labeling has been widely used to encourage the adoption of energy efficient products. These labels are of two types: either information labeling identifying the energy consumption of all products within a particular category; or endorsement labeling identifying the most energy-efficient products.

Information labeling often provides information not only on energy consumption, but also on the estimated operating costs of different models, allowing consumers to identify cost savings and comparing them with price differentials.

Literature suggests that massive funding by the government for energy conservation programmes may not be required in the long run. It would be sufficient if the government would set the process in motion, support it at its early stages, and then allow the private sector to take the lead. A good example of how government involvement should work may be seen in the increasing uptake of technologies that improve the efficiency of commercial and industrial cooling systems.

Electricity is but one component of a household’s basic basket of consumption, whose share of household expenditure in our case is not more than eight per cent of the total household expenditure. The share of other basic component of a household basket which includes food, water, shelter, clothing, and education is much higher. There may be better ways to increase the welfare of poor people than through energy subsidies. For example, the poor could be provided free healthcare or even income transfers so that they can choose the best solutions for themselves.