Power and Irrigation Subsidies An example for: Andhra Pradesh & Punjab Maximo Torero [email protected]International Food Policy Research Institute Based on paper by: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington. IGC-ISI India Development Policy Conference
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Power and Irrigation Subsidies An example for: Andhra Pradesh & Punjab
Power and Irrigation Subsidies An example for: Andhra Pradesh & Punjab. Maximo Torero [email protected] International Food Policy Research Institute. Based on paper by: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington. - PowerPoint PPT Presentation
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Power and Irrigation Subsidies An example for: Andhra Pradesh &
• Effects of two – first, an increase in the number of pumps, and second, an increase in electricity consumption per pump set – has increased the demand for electricity in irrigation by many folds.
• By 1998, agriculture emerged as a the largest consumer of electricity in India.
Page 7Source: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington
Huge deficit with respect to revenue
• However, the consumption share did not match with the revenue share, and created a financing gap as a result.
• Partial reforms have not been helpful since the cost of supply has been going up while the agricultural tariff has not been reformed
• A reduction in cross-subsidy has added to the odd further Page 9Source: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington
Environmental damageProduction Pattern and Ground Water Level Fall
between 1981 and 2000 in Andhra Pradesh and Punjab
Page 10(a) Andhra Pradesh (b) Punjab
Who are the beneficiaries?Land Possession and Electric Pump Ownership
0
10
20
30
40
50
60
70
80
0 <0.1 <0.4 <0.6 <1 <2 <3 <5 <10 >=10
Land Possession (in Ha)
% o
f HH
s o
wn
s E
lect
ric
Pu
mp
AI AP PJ
• There is a very strong link between land possession and electric pump ownership in AI, and in AP and PJ.
Source: Data from 54th round
Page 11Source: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington
Distribution of subsidy
All India
0
5
10
15
20
25
30
35
Poore
st 2 3 4 5 6 7 8 9
Riches
t0
10
20
30
40
50
60
70
80
90
100
% of Total Irr. Area Total Irr. Area
% o
f T
otal
Irr
. Are
a
Tot
al I
rr. A
rea
• Not surprisingly, the distribution of irrigated land is extremely skewed in the case of all India.
Source: Data from 55th round
Page 12Source: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington
In AP?
Andhra Pradesh
0
5
10
15
20
25
30
0
10
2030
40
50
60
7080
90
100
% of Total Irr. Area Total Irr. Area
% o
f T
otal
Irr
igat
ed A
rea
Tot
al I
rr. A
rea
Page 13Source: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington
And in Punjab?
Punjab
0
5
10
15
20
25
30
35
40
0
1020
30
40
5060
70
8090
100
% of Total Irr. Area Total Irr. Area
% o
f T
otal
Irr
igat
ed A
rea
Tot
al I
rr. A
rea
(cum
ulat
ive)
• And it is worse in Punjab!Page 14Source: Chowdhury, S and Torero, M; (2009). Power and Irrigation Subsidies in Andhra Pradesh & Punjab. IFPRI, Washington
Objective of this paper
• Examine the general setting of subsidy in power for irrigation and canal irrigation
• Identify alternative institutional mechanisms to rationalize the subsidies
Page 15
From a Vicious CirclePublic objective: Low tariff
Exogenous Shocks:Green revolution
Imbalances:Showtfall in
cross-subsidy - Gap between tariff and cost
Supply outcome: low quality, not
reliable and limited
availability
SEBs: Low Supply
availability
Market outcome: Excess demand
Page 16
To a Virtuous CirclePublic objective: Low tariff
Exogenous Shocks:Green revolution
Price discrimination:
optimal consumer
plans
Supply outcome: high quality, reliable and availability
SEBs: Supply availability
Market outcome:
Equilibrium
Page 17
Methodology
We follow a four step methodology:• Step 1: Estimate rural households demand for
electricity• Step 2: Measure consumer welfare• Step 3: Explore alternative price schemes based on
price discrimination theory – to better assign the current subsidy, – to identify ways through which it can be funded through
the market.
Page 18
The Data
• Secondary sources:– Data aggregated at the level of the state and
The own price elasticity for Andhra Pradesh and Punjab together is -0.5192, and the price elasticity for each of the consumer groups based on the size of their land possession can be summarized in:
Step 2: Measure consumer welfare
• Our welfare measure for a given socioeconomic level j, we define
Pmax as the maximum price the consumers will observe, which is instrumentalized by assuming different subsidy regimes
• then including the flat installation charge as an annual installment, the total net surplus for all services is:
max
( ,.) ( ,.) , t
Pj jit it it
p
S p q p dp
j
ittjitititit rpSrpS )(),(
~
Page 22
Step 3: Explore alternative price schemes based on price discrimination theory
Non-linear tariffs based on second degree price discrimination
Assumptions:• Asymetric information: the firm and the regulator
don’t know the value assign by individuals (farmers)• The firm and the regulator know the distribution of
probabilities [ , ]
~ f( ) ===> Disign of mechanisms
Page 23
Step 3: Explore alternative price schemes based on price discrimination theory (Cont 1)
yxsip
xyxsip
xysip
t
nn 1
101
00 0
ytTpayment
ytTpayment ii
nnnTt
Tt
Tt
si ), (
...
si ), (
si ), (
222
111
(t,T)
1. Discount for quantity:
2. Optional Plans:
Page 24
Step 3: Explore alternative price schemes based on price discrimination theory (cont 2)
• The unit cost (Cj) will depend on the quantity demanded by each farmer (y), the monthly rental (R), the rate (t) and the number of free Kwh (L), and is defined for household j as:
• When consumer plans are introduced, the j-th farmer will choose plan k that minimizes its expenditure given yj
*:
• However, consumption plans may change the amount demanded at the equilibrium point and then farmer will re-adjust
*
*
[ ]i i j ij
j
R t y Lc
y
* *[ ] [ ];k k j k m m j mR t y L R t y L m
Page 25
Simulation of three progressive pricing schemes
• The first price scheme is a simple two part payment schedule that established an initial quantity (q1) priced at p1 (q1 is what smallholders consume so they will keep same level of subsidy); while demand exceeding q1 units is priced with marginal cost, i.e. p2.
• This second mechanism considers a fixed rate (F), under which the household receives q1 units of electricity. Consumption exceeding q1 is charged with a marginal cost v1 for households demanding less than q2 units, and households with consumption exceeding q2 will pay v2 for additional units.
• The third consumption plan has a variable first part and two marginal rates. This scenario will eliminate the burden of the subsidy to the government given small-holders will also pay the first part of the tariff based on their consumption. Page 26
Simulation 1: Results of a simple two part tariffAndhra Pradesh
Land size (Ha) Crop % of sample Average Ha (total) Average Ha Motor (HP) Average HP kwh / Ha Charge Rs/HP/Year Actual exp] 0 - 1.8 ] Wheat 0.36 ] 0 - 3 ] 1.5 500.8] 0 - 1.8 ] Paddy 0.38 ] 0 - 3 ] 1.5 1725.6
Simulation 1: Results of a simple two part tariffPunjab
Land size (Ha) Crop % of sample Average Ha (total) Average Ha Motor (HP) Average HP kwh / Ha Charge Rs/HP/Year Actual exp] 0 - 1.9 ] Wheat 0.69 ] 0 - 3 ] 1.5 500.8] 0 - 1.9 ] Paddy 0.24 ] 0 - 3 ] 1.5 1725.6
Simulation 1:Concentration curves for electricity consumption (Kw), actual and two-part tariff simulation
Page 29
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
cumulativ e distribution of irrigated Ha
cum
dist o
f elec
tricity
cons
umtio
n (kw
)
Actual
Simulation
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
cumulativ e distribution of irrigated Ha
cum
dist o
f elec
tricity
cons
umtio
n (kw
)
actual
simulation
PunjabAndhra Pradesh
Simulation 2: Impact of an optimal consumption plan with a fix rate and two marginal rates
2212121
2111
1
)()(
)(
qqifqqqvqqvF
qqqifqqvF
qqifFEXP
ii
ii
ii
This second mechanism considers:• A fixed rate (F), under which the household receives q1 units of electricity. •Consumption exceeding q1 is charged with a marginal cost v1 for households demanding less than q2 units. •Households with consumption exceeding q2 pay v2 for additional units. In this sense, household’s expenditure can be represented by
Page 30
Profits of electricity industry under different combinations of v1 and v2 (v1<v2)
PunjabAndhra Pradesh
Page 31
Summary of Simulation 2, selected values of v1 and v2Andhra Pradesh
Simul Subs / Actual Subs 2.64 1.00 0.75 0.50 0.33 0.02 Subs smallholders / largeholders
Actual 0.05 0.05 0.05 0.05 0.05 0.05 Simul 0.04 0.07 0.10 0.17 0.28 -16.79
Page 33
Summary of Simulation 2, Distribution of electricity subsidy, selected values of v1 and v2 (% of total subsidy): Andhra Pradesh
v1=0, v2=0
0%
10%
20%
30%
40%
50%
60%
Smallholders Medium holders Large holders
Actual
Simulation
v1=0.40, v2=0.75
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Smallholders Medium holders Large holders
Actual
Simulation
v1=0.60, v2=1.55
0%
10%
20%
30%
40%
50%
60%
Smallholders Medium holders Large holders
Actual
Simulation
v1=1.10, v2=2.20
0%
10%
20%
30%
40%
50%
60%
70%
Smallholders Medium holders Large holders
Actual
Simulation
v1=2.00, v2=3.45
-20%
0%
20%
40%
60%
80%
100%
120%
Smallholders Medium holders Large holders
Actual
Simulation
v1=2.70, v2=5.00
-20%
0%
20%
40%
60%
80%
100%
120%
Smallholders Medium holders Large holders
Actual
Simulation
Page 34
Summary of Simulation 2, Distribution of electricity subsidy, selected values of v1 and v2 (% of total subsidy): Punjab
v1=0, v2=0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Smallholders Medium holders Large holders
Actual
Simulation
v1=0.15, v2=0.8
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Smallholders Medium holders Large holders
Actual
Simulation
v1=0.35, v2=1.05
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Smallholders Medium holders Large holders
Actual
Simulation
v1=0.60, v2=1.60
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Smallholders Medium holders Large holders
Actual
Simulation
v1=0.90, v2=2.10
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Smallholders Medium holders Large holders
Actual
Simulation
v1=4.9, v2=5
-20%
0%
20%
40%
60%
80%
100%
120%
Smallholders Medium holders Large holders
Actual
Simulation
Page 35
Summary of Simulation 3: Impacts of an optimal consumption plan with a variable first part and two marginal rates – Andhra Pradesh
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
0
0.5
1
1.5
2sim/actual
loss
v 1
v 2
25% increase in F
Subs first segment=57%
1.5-2
1-1.5
0.5-1
0-0.5
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6sim/actual
loss
v 1
v 2
50% increase in F
Subs first segment=49%
1.4-1.6
1.2-1.4
1-1.2
0.8-1
0.6-0.8
0.4-0.6
0.2-0.4
0-0.2
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6sim/actual
loss
v 1
v 2
75% increase in F
Subs first segment=40%
1.4-1.6
1.2-1.4
1-1.2
0.8-1
0.6-0.8
0.4-0.6
0.2-0.4
0-0.2
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
0
0.2
0.4
0.6
0.8
1
1.2
1.4sim/actual
loss
v 1
v 2
100% increase in F
Subs first segment=32%
1.2-1.4
1-1.2
0.8-1
0.6-0.8
0.4-0.6
0.2-0.4
0-0.2
0
0.9
1.8
2.7
3.6
4.5
0
2.50
0.2
0.4
0.6
0.8
1
1.2
1.4sim/actual
loss
v 1
v 2
125% increase in F
Subs first segment=23%
1.2-1.4
1-1.2
0.8-1
0.6-0.8
0.4-0.6
0.2-0.4
0-0.20
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
-0.2
0
0.2
0.4
0.6
0.8
1
1.2sim/actual
loss
v 1
v 2
150% increase in F
Subs first segment=15%
1-1.2
0.8-1
0.6-0.8
0.4-0.6
0.2-0.4
0-0.2
-0.2-0y
Page 36
Summary of Simulation 3: Impacts of an optimal consumption plan with a variable first part and two marginal rates – Punjab
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
0
0.5
1
1.5
2
2.5sim/actual
loss
v 1
v 2
25% increase in F
Subs first segment=30%
2-2.5
1.5-2
1-1.5
0.5-1
0-0.5
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
-0.5
0
0.5
1
1.5
2
2.5sim/actual
loss
v 1
v 2
50% increase in F
Subs first segment=16%
2-2.5
1.5-2
1-1.5
0.5-1
0-0.5
-0.5-0
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
-0.5
0
0.5
1
1.5
2
2.5sim/actual
loss
v 1
v 2
75% increase in F
Subs first segment=2%
2-2.5
1.5-2
1-1.5
0.5-1
0-0.5
-0.5-0
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
-0.5
0
0.5
1
1.5
2sim/actual
loss
v 1
v 2
100% increase in F
Subs first segment= -11%
1.5-2
1-1.5
0.5-1
0-0.5
-0.5-0
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
-0.5
0
0.5
1
1.5
2sim/actual
loss
v 1
v 2
125% increase in F
Subs first segment= -25%
1.5-2
1-1.5
0.5-1
0-0.5
-0.5-0
0
0.9
1.8
2.7
3.6
4.5
0
2.4
4.8
-0.5
0
0.5
1
1.5
2sim/actual
loss
v 1
v 2
150% increase in F
Subs first segment= -39%
1.5-2
1-1.5
0.5-1
0-0.5
-0.5-0
Page 37
Conclusions• The use of electricity in agriculture for irrigation following the green revolution has significantly
contributed to agricultural productivity growth in India.
• However, there is an inbuilt inefficiency in the current pricing mechanism and measuring system of power for irrigation in India and specifically in Andhra Pradesh and Punjab.
• One of the mechanisms used to cover the subsidy for agricultural (and domestic) power consumption was cross-subsidy from industrial and commercial consumers. In fact, the tariff charged to industrial and commercial consumers in India has been one of the highest in the world.
• Both of this problems have generated what we called along this report a vicious cycle which results in poor supply outcome in form of low quality of power, unreliable supply, unavailable to many potential users and high transmission and distribution (T&D) losses.
• In addition, and most seriously, it had exacerbated the fall of the ground water level.
• A price discrimination strategy is proposed based on the size of the farmers plot and on the implementation of a two part tariff mechanism.
• In summary, in all these three price schemes, the major result is that the subsidy will be more progressive and resources will be used more efficiently. If low-demand consumers or high-demand consumers want to consume more electricity, they will need to pay a charge over the marginal costs for each unit above their fixed charge.
Page 38
Future research
• Implement proposed tariff schemes implemented based on the simulated electricity consumption by the farmers according to their plot size and what they produce
• Open the option for self selecting into pre-paid meters if they belief price schemes are not capturing real consumption and use it as a way to manage the price discrimination mechanism
• Measure the difference between two schemes in terms of:– progressiveness of the distribution of the subsidy with respect to the
first two part tariff mechanism;– reduction or elimination of the burden of the subsidy to the government
by cross subsidizing small holders with the revenues from large holders;– changes in the quality of the service