Selvin Thanacoody is an Economist at Laiterie de Curepipe, an agrofood firm. Prior to being in
this position, he worked as an intern at the Competition Commission of Mauritius where he worked on abuseof dominant position and collusion cases.
He holds a Master 2 in Economics of Markets and Organizations from Toulouse School of Economics (2010-2011)
The project of CT Power in Mauritius has prompted a passionate debate among environmentalists, politicians and even religious spokespersons, on how power generation and transmission capacity should be expanded in order to satisfy increasing demand. The Mauritian electricity industry is vertically integrated and regulated by the state owned utility Central Electricity Board (CEB). With the constant increase in energy demand, the generation segment of the energy market was partly handed over to private operators, who produce and sell energy to CEB. Nowadays, CEB and the Independent Power Producers (IPPs) produce 40% and 60% of the total energy supply respectively. While CEB uses heavy fuel oil thermal power stations and hydroelectric plants, the IPPs use bagasse (only during sugar cane crop seasons) and coal. In 2010, total energy generation amounted to 2700 GWh and total electricity consumption was estimated to be 2454 GWh2 . The concern regarding the negative environment and health effects of electricity production using coal arose in 2006,
when CT Power, a subsidiary of a Malaysian group, agreed with CEB to enter the generation market using a coal-fired technology in the Albion area. CT Power’s project has been delayed by the authorities due to public pressure, while other local IPPs continue to burn coal.
While some highlight the benefits of competition on cost reduction and efficiency in energy production, others stress the pollution it generates. Should we limit the number of producers in order to maintain a safe environment? Should short term benefits be sacrificed for future generations? Should we provide energy at a lower cost to the detriment of the environment? Thus far, environmentalists, politicians and lawyers have contributed to this debate, while economists have remained silent even though economic incentives are at the core of this problem. This article attempts to fill the gap in this debate by pointing out possible solutions that correct the incentives of electricity users and operators. From a microeconomic perspective, restructuring the industry could be based on three fundamental aspects: market mechanism, market failures and negotiation strategies.
Pricing at cost
In Mauritius, the government sets rates for given levels of kWh consumed and connected loads, with the assumption that richer people consume far more electricity than poor people3. While this assumption is robust, the prices are not set at the right levels for efficient consumption. For prices to signal scarcity, they should be determined by the market through supply and demand forces. That is, prices should be higher at peak times, regulating demand and lifting pressure on the network. Customers would respond to peak-pricing and manage their energy consumption patterns more efficiently. Giving CEB more freedom in setting the prices would mean allowing them to charge Time of Use (TOU) or Critical Peak Pricing tariffs4 while taking into account practical realities of the Mauritian market. Pricing related to the time of use is already applied in the irrigation sector, and there is no economic rationale to exclude domestic, commercial and industrial consumers. The consortium consultation realized in 2008 was a good initiative by CEB to set tariffs effectively; the consultants proposed a tariff structure encompassing discrimination between high and low electricity usage and TOU tariffs. Somehow this proposition was abandoned. The logic of these tariff structures is to “reward” those who manage consumption efficiently while “punishing” those who are insensitive to the time of consumption.
The state’s actions and inactions in this industry have been most inappropriate - intervening where the market can operate efficiently, and yet remaining passive where market failures exist. Avoiding pollution is costly for polluting firms, and therefore firms do not have an incentive to limit the amount of pollution they are producing. In the face of such a market failure, the state has a role in stepping in to tax a price pollution externality so as to encourage firms to reduce pollution. By the Polluter Pay principle, all IPPs should be charged an environmental tax5 on carbon and sulphur production - many advanced countries have already implemented such taxation. This means that sugar IPPs would be exempted from such a tax only when producing energy from bagasse. This will give incentives to investors to increase productive efficiency from bagasse and to put emphasis on the use of other cleaner technologies. In the case of CT Power, the generation accounting cost may be low but the economic cost will be higher as it also includes the cost of environment, health and traffic damage. The carbon tax is likely to be more effective than emission quotas in reducing pollution and will act as a compensation for the Albion inhabitants or provide fiscal revenues for the government to implement environment protection programs.
Several techniques such as epidemiological studies, Life Cycle Assessment and Impact-Pathway Methodology enable the quantification of the amount of pollutants released and assess the impact of emissions on humans and the environment over time and space. Subsequently it will be possible to evaluate the impacts economically through Cost-Benefit analysis (CBA). CBA focuses on the variation of people’s satisfaction/dissatisfaction in monetized terms following a change. This monetary value then gives an idea on the level of compensation and thereby the taxation rate, the polluter has to pay to the people affected. Contingent valuation (CV) has been widely used to give a value to non- market goods. If rigorously conducted, CV is an effective instrument to measure individuals’ willingness to pay in order to maintain environmental quality. In general, it is realized using methods of microeconometric modelling.
With the constant pressure from lobbyists, negotiations on environmental issues between the authorities and CT Power are set in a gridlock. Setting regulation should be completed by getting the economic incentives right in order to effectively shift to cleaner generation processes. The Ministry of Environment came up with further requirements before issuing the Environment Impact Assessment permit and some are rightly wondering whether the Ministry is as stringent with local IPPs. Nonetheless the negotiation strategy should be reviewed with the option of externalities valuation. The Ministry should propose a menu of contracts as follows:
1. CT Power to operate the coal-fired plant in Albion; imposition of carbon and health taxes. Obligation of conversion into a clean energy plant after 10 years of operation. Otherwise seizure of plant by CEB to proceed to an international tender for conversion6.
2. Installation of a coal-fired plant in a remote place. Imposition of a carbon tax. No health tax. Obligation of conversion into a clean energy plant after 25 years of operation with financial help from CEB.
3. Installation of a clean energy plant directly in Albion or elsewhere. No externality tax. Allocation of emission rights to the party. The latter to sell it to IPPs who would have to buy rights in order to pollute.
Regardless how sketchy this example is, its principle of a self- selection mechanism to induce truthful revelation provides a new direction for negotiations. The first proposition suggests that should CT Power choose the less costly solution in the short run, it will face financial burden and risks in the long run. In contrast, the third suggestion favours costly implementation in the short run but a safer economic position in the future. The introduction of a restricted amount of CO2 and SOX emission rights puts in place a market- based mechanism. The agents will trade rights among them according to their amount of pollution and will naturally invest in cleaner processes to avoid buying rights from their competitors. In addition, CEB could pay CT Power a fixed capacity charge as paid to local IPPs. It is actually a matter of “carrots and sticks”: rewarding good practices and punishing bad ones.
This article is not the first one advocating marginal cost pricing and environmental taxation but it urges decision makers to redefine public policy in the energy industry and redirect a too narrow-minded debate towards effective solutions. Enforcing an environmental tax will send a strong signal to the international community of the commitment of Mauritius to tackle global warming issues. Yet, implementation of these ideas is likely to face resistance from environmentalists and politicians. Politics obviously have a substantial part to play in this issue, and it is another topic in which microeconomists would have interesting and relevant things to say...
CEB Annual Report, 2009.
Crampes, Claude and Thomas-Olivier Léautier “Dix propositions pour faire (enfin) entrer l’industrie électrique française dans le XXIème siècle “, Livre blanc, Toulouse School of Economics, September 2012.
Dabeedin, Chavan “Electricity Reform in Mauritius: The Case of PSP in Generation”, Utility Management Resources, Institute for Public-Private Partnerships, May 2006.
Devezeaux, Jean-Guy “Environmental Impacts of Electricity Generation”, Uranium Institute, September 2000.
Dr Deepchand, Kassiap “Bagasse-based Cogeneration in Mauritius – A Model for Eastern and Southern Africa”, 2001.
Dr Rosen, Richard et al. “Promoting Environmental Quality in a Restructured Electric Industry” Tellus institute no95-056, December 1995.
International Energy Agency “Environmental and Health impacts of electricity generation, A Comparison of the Environmental Impacts of Hydropower with those of Other Generation Technologies”, June 2002.
Kasenally, Swaley “Coal Power: The Politics of Indecision”, L’Express (Mauritius), February 28th 2012.
1.The author is grateful to Charmaine Tan Huan Yuen for comments and suggestions.
2. See Statistics Mauritius “Digest of Energy and Water Statistics – 2010”, Ministry of Finance and Economic Development, Vol. 13, October 2011. 3. See “The Government Gazette of Mauritius”, no110, November 2010.
4. See for example Celebi, Emre “Models of Efficient Pricing Schemes in Electricity Markets”, Master thesis, University of Waterloo, 2005. 5. See for Example “Do economists all favour a carbon tax?”, The Economist, September 19th 2011.
6. See for example “Coal-fired power plant completes total conversion to renewable biofuel energy”, PennEnergy, February 2012.