EN­ER­GY CHAM­BER

The fu­el and elec­tric­i­ty sub­sidy has been one of the most de­bat­ed top­ics, caus­ing much di­ver­gence in opin­ions among tech­nocrats and the cit­i­zen­ry alike. Con­ver­sa­tions around the sub­sidy of­ten fail to reach con­sen­sus and the En­er­gy Cham­ber of T&T con­tin­ues to make strides in in­form­ing and en­gag­ing the pub­lic in dis­course around im­por­tant en­er­gy re­lat­ed is­sues.

How the fu­el sub­sidy works

Un­der the Pe­tro­le­um Pro­duc­tion Levy and Sub­sidy Act, mar­ket­ing com­pa­nies (Na­tion­al Pe­tro­le­um and Unipet) are paid a sub­sidy when­ev­er the ref­er­ence price is above the con­trolled con­sumer price (re­tail price) for pe­tro­le­um fu­els. Sim­ply put, the ref­er­ence price is the sum of the ex-re­fin­ery price, the whole­saler's mar­gin, ex­cise du­ties and han­dling charges; while the re­tail price is fixed and set by the Min­istry of En­er­gy. When­ev­er the ref­er­ence price is less than the re­tail price, the Gov­ern­ment re­ceives a sur­plus on the sale of pe­tro­le­um fu­els. The largest part of our sub­sidy is the trans­port fu­el sub­sidy, of which rough­ly 60 per cent goes to diesel. In the last fi­nan­cial year, the trans­port sub­sidy was es­ti­mat­ed to be more than $4.3 bil­lion (as­sum­ing an av­er­age of US$97.50 WTI oil price). In 2008, T&T ranked 12th out of 174 coun­tries with the low­est price of su­per gaso­line (US$0.36 or $2.29), and ben­e­fit­ed from a low diesel price of about US$0.26 or about $1.64.

Sig­nif­i­cant op­por­tu­ni­ty cost

Al­though cit­i­zens of T&T ben­e­fit from low fu­el prices, the op­por­tu­ni­ty cost of sub­si­dis­ing fu­el for trans­port is high. The size of the sub­sidy is rough­ly the same size as the 2011/2012 to­tal bud­get­ed ex­pen­di­ture on health­care and more than twice the amount bud­get­ed for agri­cul­ture and hous­ing. This $4.3 bil­lion trans­port sub­sidy bill foot­ed by the Gov­ern­ment could have been spent to im­prove the de­liv­ery of health care for our vul­ner­a­ble se­nior cit­i­zens, for the so­cial­ly dis­placed, to fight against the drug trade, and even to im­prove the flow of wa­ter in­to com­mu­ni­ties. The Gov­ern­ment still has not cleared its $4.3 bil­lion debt with NP and Petrotrin.

Cul­ture of wastage, in­ef­fi­cien­cies

As it re­lates to the low cost of elec­tric­i­ty, a sur­vey con­duct­ed by Car­ilec re­veals that when com­pared to our Caribbean neigh­bours, T&T has among the low­est res­i­den­tial, com­mer­cial and in­dus­tri­al elec­tric­i­ty rates on av­er­age per month. Speak­ing at the launch of the Re­new­able En­er­gy and En­er­gy Ef­fi­cien­cy cam­paign on May 4, the Min­is­ter of En­er­gy right­ly ar­gued that "peo­ple waste elec­tric­i­ty and fu­el be­cause it is cheap." This is re­flect­ed by the lack of con­cern for en­er­gy con­ser­va­tion in homes, of­fices and fac­to­ries. The low cost of elec­tric­i­ty al­so in­flu­ences the choice of tech­nol­o­gy used. Con­sid­er that the cost of en­er­gy per kilo­watt hour is 83 per cent more ex­pen­sive in Bar­ba­dos than that in T&T. In 2008, ap­prox­i­mate­ly 40,000 so­lar wa­ter heaters were in op­er­a­tion in Bar­ba­dos-of which 75 per cent rep­re­sent­ed do­mes­tic in­stal­la­tions. This green tech­nol­o­gy is vir­tu­al­ly ab­sent in T&T. Still the ma­jor­i­ty of pow­er gen­er­a­tion plants use sin­gle cy­cle tech­nol­o­gy rather than more high­ly ef­fi­cient com­bined cy­cle tech­nol­o­gy. Some in­ef­fi­cient choic­es brought about by the fu­el sub­sidy in­clude the ab­sence of car pool­ing; lim­it­ed con­sumer pref­er­ence for fu­el ef­fi­cient cars; and the fail­ure to de­vel­op an ef­fi­cient pub­lic trans­porta­tion net­work.

In­come dis­tri­b­u­tion ef­fects

The trans­port fu­el sub­sidy tends to favour rich­er house­holds dis­pro­por­tion­al­ly. A 2010 In­ter­na­tion­al Mon­e­tary Fund study in­di­cat­ed that on av­er­age in Latin Amer­i­ca the rich­est 20 per cent of house­holds re­ceived 38 per cent of the val­ue of trans­port fu­el sub­si­dies, while the poor­est 20 per cent of house­holds re­ceived just 6 per cent of the val­ue of the sub­sidy (See Fig­ure 1). In T&T it is clear that the rich spend more on the sub­sidised goods and ser­vices than the poor (both on fu­el and elec­tric­i­ty). High­er in­come house­holds own larg­er, ful­ly air-con­di­tioned homes, grounds cov­ered with se­cu­ri­ty light­ing, large less fu­el ef­fi­cient ve­hi­cles, and some plea­sure boats all of which con­sume larg­er amounts of sub­sidised elec­tric­i­ty and or fu­el.

Cost of liv­ing

It is of­ten ar­gued that the cost of liv­ing must be con­sid­ered when mak­ing cross-coun­try com­par­isons of elec­tric­i­ty rates and the val­ue of the sub­sidy. This premise as­sumes that the cost of liv­ing in T&T is high­er and as such must be off­set by the sub­sidy and, by ex­ten­sion, low elec­tric­i­ty rates. How­ev­er, a rough com­par­i­son of GDP at pur­chas­ing pow­er par­i­ty (PPP) among six se­lect­ed Caribbean coun­tries re­veals that T&T has the low­est cost of liv­ing (See Fig­ure 2). In­ter­est­ing­ly. these coun­tries have a much high­er cost of en­er­gy per kWh-at least 75 per cent more ex­pen­sive.

Sus­tain­abil­i­ty ar­gu­ment

It is al­so of­ten ar­gued that as right­ful own­ers of its land (and oth­er re­sources), the cit­i­zens of T&T ought to have a stake in its coun­try's oil and gas rev­enues. In all fair­ness, this view is valid on many grounds, es­pe­cial­ly giv­en the eco­nom­ic con­tri­bu­tion of the en­er­gy sec­tor. The en­er­gy sec­tor ac­counts for sig­nif­i­cant­ly more than 50 per cent of to­tal Gov­ern­ment rev­enue and 45.3 per cent to GDP. While the wealth gen­er­at­ed from oil and gas ought to be re­dis­trib­uted to cit­i­zens, it must be done in the most ef­fi­cient and sus­tain­able man­ner. The is­sue of sus­tain­abil­i­ty is even more im­por­tant giv­en that oil and gas are fi­nite and non-re­new­able re­sources. T&T's en­er­gy re­sources be­long to the coun­try's fu­ture gen­er­a­tion just as much as it be­longs to the present. What makes the sit­u­a­tion worse is that oil pro­duc­tion has been on a down­ward tra­jec­to­ry since 1980 (See Fig­ure 3).

To add to this, in­vest­ment rev­enues are not cer­tain, giv­en the in­creas­ing com­pe­ti­tion for in­vest­ment faced by the T&T, from emerg­ing en­er­gy economies such as Brazil, Co­lum­bia and French Guiana. Even if ex­plo­ration ac­tiv­i­ty height­ens and more oil and gas are dis­cov­ered, ul­ti­mate­ly, the re­sources will be de­plet­ed and the coun­try must seek vi­able al­ter­na­tives.

Sub­sidy re­moval strat­e­gy

The fu­el sub­sidy should be grad­u­al­ly phased out and the Gov­ern­ment should for­mu­late a plan iden­ti­fy­ing bench­marks, time and cost vari­ables. One pos­si­ble idea is to cap the lev­el of the sub­sidy (that is, at US$80 WTI bench­mark) and at high­er fu­el prices to in­crease the price at the pump. This could be on slid­ing scale to start with (that is, on­ly a per cent of the full cost be­ing passed on), but it will en­cour­age con­sumers to be­gin to re­spond to the mar­ket and recog­nise that there is a cost in­volved in sup­ply­ing cheap trans­port fu­el. Al­so, there must be a plan to mit­i­gate in­fla­tion­ary ef­fects. While rich­er house­holds ben­e­fit dis­pro­por­tion­al­ly from the sub­sidy, phas­ing it out may have some neg­a­tive so­cial im­pli­ca­tions in some com­mu­ni­ties, es­pe­cial­ly poor rur­al com­mu­ni­ties (who al­ready spend sig­nif­i­cant per­cent of in­come on trans­port). Re­moval of the sub­sidy should be ac­com­pa­nied by sig­nif­i­cant new in­vest­ments in­to pub­lic trans­port and in­to trans­port plan­ning. Bet­ter ur­ban plan­ning, postal ser­vices and e-gov­ern­ment can al­so as­sist in re­duc­ing car us­age.

An in­crease in the num­ber of gas dis­trib­u­tors al­so may al­so cater for the in­fla­tion­ary im­pact of the sub­sidy re­moval. In­creas­ing com­pe­ti­tion in the mar­ket may re­duce the amount of dis­trib­u­tor mar­gins so that the rate of price in­creas­es can be mit­i­gat­ed. Again, any in­ten­tion of re­mov­ing the sub­sidy must aim to take care of the poor. Es­sen­tial­ly, there must be al­ter­na­tives to gaso­line and diesel as trans­port fu­el: com­pressed nat­ur­al gas (CNG) is a vi­able al­ter­na­tive. New­er tech­nol­o­gy has re­duced prob­lems as­so­ci­at­ed with heavy tanks and the con­ver­sion of gaso­line en­gines is straight­for­ward and safe. How­ev­er, there are some is­sues re­lat­ing to con­sumer pref­er­ences and the maxi-taxi sec­tor which need to be re­solved. Last­ly, the sav­ings from re­duc­ing the fu­el sub­sidy can be trans­ferred in­to a trust fund for two pur­pos­es: for her­itage sav­ings and so­cial in­fra­struc­ture fund­ing.

In the short-run, a frac­tion of the sav­ings on sub­si­dies may be al­lo­cat­ed to in­vest­ment in pub­lic goods (health­care, ed­u­ca­tion, wa­ter sup­ply up­grades). While in the long-run, a part of the sav­ings may be ap­por­tioned to her­itage sav­ings as a means of shar­ing the oil and gas wealth with the fu­ture gen­er­a­tion.

In the fu­ture, the sav­ings can be utilised as the Alas­ka Per­ma­nent Fund.

For more in­for­ma­tion on the ar­ti­cle, con­tact Naz­era Ab­dul-Haqq at: re­searchof­fi­cer@en­er­gy.tt

or Sher­win Long at: Sher­win@en­er­gy.tta