Why We Should Raise Electricity Tariffs in Malawi…Because It Is Cheaper!
Updated: Jan 21, 2020
The opinions and views expressed in this article are the author's and do not represent those of any institution.
Of late I have been fascinated by the sentiments and statements made on the issue related to the electricity tariff hike in Malawi and honestly quite moved by the varying degrees of viewpoints. The tariff debate has attracted very interesting headlines like “… against electricity tariff hike” or “Electricity price hike to trigger inflation” or “Lilongwe faults ESCOM on tariff”. These headlines have resulted in various individuals and groups making a series of recommendations to either halt the tariff review process or proceed but take extra care to implement the revised tariff regime. It is for this reason that I feel compelled to write this article and provide Malawians with the correct and right information they need in order to make rational decisions concerning their welfare. In fact at the end of this article I refute the claims that have been aired in our society that are simply not true based on the facts I present below. So let’s get started.
Between November 2017 and January 2018, Malawi for the first time in its history experienced massive load shedding that was highly affected by low water levels in the Shire River further exacerbating Malawi’s already low generation capacity, the lowest in the southern African region. During this time, we all experienced load shedding of more than 30 hours; one wonders why it was called load shedding rather than just claiming to not have any power at all. This was a crucial time of our lives and reminded me of when we used to queue for days on end for just a drop of fuel at our filling stations just 5 years ago. Today, fuel shortages are a thing of the past. Why? Because Malawians now pay the market price of fuel on the market: It all comes down to the economics of pricing and whether the market is able to quickly adjust to forces of demand and supply. During the fuel crisis period, the price of fuel was so low that it did not even match the price that suppliers were paying oil producers abroad. Much as the demand for fuel in Malawi was high, the filling or gas stations were unable to appropriately stock fuel supplies because the price of fuel at the pumps could not attract the needed fuel from the suppliers. We argued and argued and even forced Government not to raise the pump prices. Where did we end up? Queuing for fuel and buying some on the black market for those who could afford prices that were more than triple the controlled fuel price. Did that take us anywhere? Your answer is as good as mine.
Now let me move to the current hot topic in the public domain: whether we should raise electricity prices or not. Let me first start by saying that in all arguments we make concerning electricity it is important that we also compare our use of electricity with the alternative energy sources we are currently using. This is the biggest mistake that we Malawians often make, even the most influential people in our society. If we are to understand the cost of energy we have to compare all alternative energy sources based on standard units of measure: that is per kWh costs. There are eight (8) alternative energy sources that we use for either cooking or lighting in our country. These include electricity, firewood/fuelwood (nkhuni), charcoal (Makala), kerosene/paraffin, petrol generator, diesel generator, Liquid Petroleum Gas (LPG), and solar power. As of December 2017, the average electricity tariff that ESCOM was charging customers was US$0.08 per kWh. Even at this price we all know that ESCOM has been unable to supply us the required power we need to use for our lighting, cooking or even business activities that we engage in to survive and earn a living.
There are indeed many reasons why their performance has been affected and most of these have been discussed in public forums and even our local newspapers. But let me also quickly point out that what is often neglected when discussing the electricity tariff is the fact that during the tariff period covering 2014 – 2018, several increases in the tariff were not implemented even though MERA had approved the phased increased in April 2014. The tariff increases were expected to be implemented in four phases: 13.5% in year 1; 18.18% in year 2; 8.9% in year 3; and, 1.9% in year 4. Much as the first base tariff increase was effected fully on April 4, 2014, the second tranche was partially implemented in 2015, with the remaining two annual base tariff increases for 2016 and 2017 having not effected by MERA at all. If these tariffs were fully effected the average tariff by now would have been hovering around US$0.12 to US$0.13 per kWh.
Why am I raising this issue? The problem we have with our country, and this has been going on since the 1970s, is that we like controlling prices of public goods and services. By controlling these prices we are not dealing with the issue at hand. It is just a time bomb that will eventually explode and may have already exploded given the financial crisis the two utilities (EGENCO and ESCOM) are currently facing: and the pressure keeps on accumulating and quite frankly that is why now we find ourselves facing almost a 60% tariff increase for ESCOM to effectively deliver its services to the public. If MERA had effected the approved electricity tariffs in the just ended four-year base tariff period fully, ESCOM would have been asking the public for a 17% to 25% tariff increase instead of the 60%. The good thing about ESCOM is that they will continue to remind us that this is what it will cost them to produce one unit of power and reliably distribute it to the end user. If that cost is not met… well, your guess is as good as mine.
On the other hand, the retail prices of alternative energy sources on the market are currently as follows: firewood (MK200 per three logs – an average household in the cities spend at least MK600 – MK800 per day to meet their needs); charcoal (MK500 per heap); paraffin (MK719.30 per litre – MERA latest pump prices); petrol (MK888.00 per litre – MERA latest pump prices); diesel (MK890.90 per litre – MERA latest pump prices); LPG (MK2,169.82 per kg – MERA latest prices). By now I am sure you have already made calculations on how much you spend on your alternative energy sources: for instance, for a household that is not connected to the ESCOM grid will spend somewhere between MK20,000 to MK26,000 cumulatively per month just to use firewood and paraffin; those who rely on charcoal and paraffin will spend between MK25,000 to MK30,000 cumulatively on average per month.
But how do we compare these costs with those experienced by households that consume electricity through the electricity grid? We have to convert all the alternative energy sources to per kWh cost. In order to do that, we use standard assumed energy conversion efficiencies for the alternative energy sources: meaning the ratio between the useful input, which is the alternative energy source, to the output or heat it can produce. Of the alternative energy sources that are available to us (Malawians) the assumed standard energy conversion efficiencies have been calculated to be as follows: firewood (15%); charcoal (22%); paraffin (35%); petrol, diesel, and LPG (60%). To put it in simpler terms, think of each alternative energy source as a sponge with varying amounts of useful energy it can hold. Compared to electricity, the assumed energy efficiency is 100% since what we pay to the utility is actually what we directly consume in our households or businesses. Once the necessary comparative calculations to convert these other sources to a per-kWh is done then what we face as consumers is described in the cartoon that came out in our papers as below (modified by myself to convey a point):
Yes, I loved the original caricature, however, it did not describe the true picture of how expensive the other alternative energy sources are to our daily lives! So I did some photo-shopping to show what ESCOM is actually telling the public: for ESCOM to supply reliable electricity to both households and businesses, with good quality and availability, all they are asking MERA is if the electricity tariff can be raised from the existing US$0.08 per kWh to US$0.15 per kWh. According to the numerous studies that have been undertaken, the new retail electricity tariff will clear the electricity market (when demand equals supply) where currently the demand outstrips the supply. Despite the increase, the new tariff would still be cheaper for households and businesses because the varied costs of using the alternative energy sources we currently use (even without factoring in upfront capital costs for households and businesses in purchasing the generators as well as environmental costs) are higher than what we are currently paying to ESCOM. Those who use firewood and kerosene for cooking and lighting are paying a minimum of US$0.18 per kWh. Businesses using either diesel or petrol generators pay on average US$0.19 and US$0.22 per kWh, respectively. Those using LPG for cooking are actually spending US$0.46 per kWh and worse still those who are fond of using charcoal spend more than the rest with a price pegged at US$0.57 per kWh! As a rational economic agent or consumer, given such costs, obviously having reliable electricity from ESCOM is the best option in comparison to continuing with the expensive alternatives that we use each and every day. And I bet that these prices will continue to rise as the alternative energy sources become scarce.
Now on to responding to some of the sentiments that have been aired by some members of our society. Regarding the observation that electricity tariffs will drive up inflation, my response to this is a straight ‘NO’. If the proposed electricity prices are expected to increase the supply of electricity and are more reliable in meeting the existing demand, one should actually expect reduced energy costs rather than increased energy costs since consumers will be substituting the expensive alternative energy sources that we currently use with cheaper and reliable electricity supplied by ESCOM. In fact, this will likely drive inflation down rather than upwards. In a paper that I published in 2016, titled ‘Electricity Revenue and Tariff Growth in Malawi’, using monthly data from ESCOM, I showed that a significant increase in the amount of electricity generated in Malawi will actually reduce tariff growth both in the short and long run. The reasons are twofold: first, cheaper electricity gets substituted with expensive alternative energy sources; second, since in power markets the planning is largely based on satisfying peak demand, in most cases during the day power supply is likely to outstrip demand. In markets where there is excess supply prices tend to fall and if this leads to a reduction in production costs for households and businesses, then the result would entail a fall in inflation over time.
A second point I would like to refute is the notion that raising the electricity tariff is ‘inhumane and burdensome and likely to pile more misery on Malawians’. On the contrary, not raising the tariff and allowing power generation in Malawi to remain unreliable will definitely continue to be burdensome to many Malawians especially for those who are not connected to the grid and therefore forced to use expensive alternative energy sources. Currently, only about 10% of Malawians are connected to the electricity grid with only 351 MW of installed renewable generation capacity: the lowest in Sub-Saharan Africa. It is no secret that insufficient power supply in the country is one of the biggest constraints to economic growth and poverty reduction: it has always appeared in the Malawi Growth and Development Strategy since 2006 as one of the key priority areas.
It is therefore inhumane if we, both politicians and technocrats, do not do anything about the burden that our people are currently forced to bear by not implementing electricity policies that focus on reducing the cost of energy. In actuality it is bad policy for government to continue to impose low and cost-unreflective tariffs on our people in hopes that a miracle will happen. From 1988, when the Water Resources Master Plan was formulated, highlighting the potential areas where we can generate renewable electricity, to the confines of the 1998 ESCOM master plan that recommended the interconnector between Malawi and Mozambique, and followed by the Integrated Resources Plan developed in the early and late 2010s, outlining the generation, transmission and distribution investments to be made, we have continued to implement bad policies through which we continue to charge an electricity tariff that is far much lower than the long-run marginal cost of the electricity needed to power Malawi.
The choice, my fellow Malawians, is solely ours…either to have a future with cheaper and reliable electricity from the grid or to continue using the expensive alternative energy sources I have mentioned in this article. If we choose the latter the options are less Malawians having access to power (as I said only 10% at the moment) and continue to fall further and further behind other countries if we do not address the need to cover electricity costs that allow for investment in generation, transmission and distribution of power as well as increased access to electricity.
Lastly, let me finish by giving my thoughts on some of ESCOM’s related inefficiencies that we are all worried about. Indeed, it is no secret that financial prudence in ESCOM is a major worry at the moment and surely this is not only affecting their creditworthiness but also how independent and trustworthy the utility can be in the new restructured power market. Since the new power market structure is banking heavily on attracting foreign direct investment through Independent Power Producers, it is no secret that, apart from having cost-reflective electricity tariffs that will enable the electricity market to clear (when demand equals supply), the restructured power market will need to have efficient operational and regulatory institutions that are independent, transparent, accountable, creditworthy and trustworthy. In any market, these qualities cannot be absent and they are not an option: they are a must have.
The stories we see in the newspapers concerning ESCOM are all symptoms of a bigger issue: corporate governance. Unpacking what corporate governance means in this article would take up a lot of space: but safe to say that it is important to ensure that a system of rules, practices, processes and a sense of direction and control are triggered to ensure the effective management of an entity. This involves balancing interests of all stakeholders by facilitating an effective, entrepreneurial and prudent management system that can deliver effectively the long-term vision of a firm. To put it more plainly and in the context of our public institutions, especially ESCOM, is to adhere to national procurement rules and procedures, following a recruitment process that selects competent and well qualified management team to effectively carry out the mandate of the company, following a performance management based on best practices, just to mention a few.
Without corporate governance, rent-seeking behaviour and corruption will ensue. A critical solution to this problem is that, while government deals with corruption by prosecuting those who are suspected culprits (we wish them good luck), corporate governance must be strengthened in all institutions involved in the power market. As the saying goes, ‘for you to solve a problem, first you have to change the assumptions that created it, and not the symptoms’. One such important area is to limit government’s involvement in the day-to-day decisions of utilities, strengthen their performance management system clearly tied to deliverables, hiring of well-qualified management staff, allowing the Enterprises to operate as businesses, among others.
There is always a counterargument whenever such an issue is raised, but my answer to most of them is based on a quote Winston Churchill made in 1929: “It is the Treasury dogma steadfastly held, that whatsoever might be the social or political reason, very little additional employment and no permanent additional employment can, in fact, and as a general rule, be created through State borrowing and State expenditure.” In other words, if Government wants to run State Owned Enterprises, the best they can do is to own a sizeable portion of ordinary shares or stocks but leave the management of the enterprises to experienced experts in the industry. Thus, instead of addressing the symptoms (corruption and rent-seeking behaviour), government should address the root causes by ensuring good corporate governance principles are adhered to. Is this possible? Yes!! Just see how Sunbird hotels are efficiently run… yet the majority shareholder is government.
The benefits of having an efficient electricity sector in Malawi are overwhelming as no economy in the world has developed without having an efficient power sector. With reliable power, Malawi will benefit from improved access to electricity that supports economic growth by powering industrial and agricultural production, encouraging businesses to expand as well as allowing new businesses to establish their base in Malawi. This will eventually help in creating new jobs and wealth. On a social front, reliable electricity will likely bring social improvements in our communities, schools, and hospitals: imagine a day when we can boast to other nations that all our primary and secondary schools are connected to electricity! Not because it is a nice-to-have thing but rather an important input to develop our human capital that is technologically sound.
This can only be realised if we make the right decisions today: and that is ensuring that the price of electricity is in line with the cost of providing electricity to customers that will also ensure creditworthiness and a sound financial base of the power institutions. As the saying goes: ‘The fault is not in our stars, but in ourselves, that we are underlings’: meaning that fate is not what drives human beings to their decisions and actions, but rather the human condition.
I have presented to you the existing condition that we are currently in. The choice is definitely for us Malawians to make on which direction to take.
Themba Chirwa is a Malawian economist in Lilongwe. He holds a PhD in Economics from the University of South Africa and has worked in the electricity sector for over 10 years.