Power and Irrigation Subsidies An example for: Andhra Pradesh

1
Power and Irrigation Subsidies An example for
Andhra Pradesh Punjab

• Maximo Torero
• m.torero_at_cgiar.org
• 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
2
Major stylized facts of the current pricing
mechanism and subsidy scheme

• Jump in electric pump use
• Jump in the share of electricity consumption in
  agriculture
• Huge deficit with respect to revenue
• Growing imbalances reduction of cross-subsidy
  and Subsidy substantially increased
• Deterioration of supply
• Environmental damage
• Subsidy is regressive

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Jump in electric pump use

• Bet. 1960 and 2000, irrigated area more than
  doubled.

• This came mostly from tube well (TW) irrigation.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
4
Jump in electric pump use

• In AP, the real changes take place in irrigation
  through TW.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
5
Jump in electric pump use

• The role of TW in irrigation is even more
  prominent in PJ.

• While the role of TW has been increasing, the
  canal irrigation
• has been declining in PJ.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
6
Jump in electric pump useEnergization of TW (in
million)

• With the increased role of TW in irrigation, the
  energization of
• TW took place in a rapid pace.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
7
Jump in the share of electricity consumption in
agriculture

• 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.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
8
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.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
9
Growing imbalances

• 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

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
10
Environmental damageProduction Pattern and
Ground Water Level Fall between 1981 and 2000 in
Andhra Pradesh and Punjab
(a) Andhra Pradesh
(b) Punjab
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Who are the beneficiaries?
Source Data from 54th round

• There is a very strong link between land
  possession and electric pump ownership in AI, and
  in AP and PJ.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
12
Distribution of subsidy
Source Data from 55th round

• Not surprisingly, the distribution of irrigated
  land is extremely skewed in the case of all India.

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
13
In AP?
Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
14
And in Punjab?

• And it is worse in Punjab!

Source Chowdhury, S and Torero, M (2009). Power
and Irrigation Subsidies in Andhra Pradesh
Punjab. IFPRI, Washington
15
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

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From a Vicious Circle
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To a Virtuous Circle
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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.

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The Data

• Secondary sources
• Data aggregated at the level of the state and
  district
• Household data
• NSS 54th round (CPR)
• NSS 55th round (Consumption)

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Step 1 Estimate rural households demand for
electricity

• Estimate rural households demand for electricity
  using the almost ideal demand system (AIDS)
  developed in Deaton and Muellbauer (1980)

N good demand system
are constant parameters and X is the
representative expenditure on the system of
goods given by
where qi is the quantity demanded for ith good
P is the overall price index derived from
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AIDS Elasticity's
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
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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

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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
  dont know the value assign by individuals
  (farmers)
• The firm and the regulator know the distribution
  of probabilities
• q Î q , q
• q f(q ) gt Disign of mechanisms

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Step 3 Explore alternative price schemes based
on price discrimination theory (Cont 1)
1. Discount for quantity
2. Optional Plans
(t,T)
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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

Page 25
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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.

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Simulation 1 Results of a simple two part
tariffAndhra Pradesh
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Simulation 1 Results of a simple two part
tariffPunjab
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Simulation 1Concentration curves for electricity
consumption (Kw), actual and two-part tariff
simulation
Punjab
Andhra Pradesh
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Simulation 2 Impact of an optimal consumption
plan with a fix rate and two marginal rates

• 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, households
  expenditure can be represented by

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Profits of electricity industry under different
combinations of v1 and v2 (v1ltv2)
Punjab
Andhra Pradesh
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Summary of Simulation 2, selected values of v1
and v2Andhra Pradesh
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Summary of Simulation 2, selected values of v1
and v2Punjab
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Summary of Simulation 2, Distribution of
electricity subsidy, selected values of v1 and v2
( of total subsidy) Andhra Pradesh
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Summary of Simulation 2, Distribution of
electricity subsidy, selected values of v1 and v2
( of total subsidy) Punjab
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Summary of Simulation 3 Impacts of an optimal
consumption plan with a variable first part and
two marginal rates Andhra Pradesh
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Summary of Simulation 3 Impacts of an optimal
consumption plan with a variable first part and
two marginal rates Punjab
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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 (TD) 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.

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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