Global annual energy subsidies are in the order of hundreds of billions of dollars. These subsidies encourage over-consumption of fossil fuels and as such are linked to global CO2 emissions. Energy subsidies are regressive, with the rich receiving disproportionally higher benefits than the poor and could be a drain on fiscal resources. Energy subsidies undermine long term energy sector performance and global low-carbon development, as they could lock an economy into a more fossil fuel intensive trajectory, while leading to under-investment in renewable energy generation, energy efficiency and access.
Reforming energy subsidies is a complex undertaking and a political economy challenge. These reforms are politically sensitive and require building strong public support. Removing energy subsidies could adversely affect the poor as well as undermine the competitiveness of energy-intensive industries. Reforming energy subsidies require institutional and administrative capacity and call for strong technical, coordination, communication and leadership skills. Because of the multi-faceted challenges, energy subsidies reforms face significant sustainability risks.
Reforming energy subsidies sustainably requires a comprehensive approach to address multi-faceted challenges to reforms. Energy Sector Management Assistance Program’s (ESMAP) ESRF is uniquely positioned to support governments willing to reform energy subsidies because it takes a cross-sectoral approach to designing reforms, addressing the needs of the poor and vulnerable, and communicating with the public to build consensus and trust in the reform process. ESRF uses World Bank expertise to compile and develop extensive multi-sectoral knowledge on a wide range of topics: energy subsidies assessment; leading sensitive policy dialogue; developing communications strategies and building consensus; improving targeting/ efficiency of social assistance; designing energy pricing frameworks; improving utility performance to reduce reliance on fiscal support, etc. To consolidate accumulated knowledge on design and implementation of a comprehensive, socially responsible package of energy subsidies reforms, the team worked across all four Practice Groups to develop the Energy Subsidy Reform Assessment Framework (ESRAF). ESRAF is a comprehensive analytical toolkit that offers detailed explanations on how governments can identify and quantify their energy subsidies, analyze their impacts on households, industry, the economy and the environment as well as communicate the results. The ESRAF approach was piloted in Egypt and Ukraine in 2013-2016 and showed significant results in reforming energy subsidies sustainably (see results below). After ESRAF approach was demonstrated in Egypt and Ukraine, the framework was formalized in 2017 as a set of the guidance notes and applied in a number of countries that reformed or are in the process of reforming their energy subsidies, including Tunisia and Nigeria (2018-present). ESRAF encapsulates a significant achievement in pioneering a comprehensive approach to the multifaceted nature of energy subsidy reform, which is at the heart of ESRF modus operandi.
Additionally, in 2017-2020 ESRF regularly disseminated generated and accumulated knowledge on design and implementation of sustainable energy subsidy reforms internally and externally through ESRAF Academy sessions, publicly-disclosed country briefs, special events during the IMF-World Bank Spring Meetings and dedicated international fora.
In Egypt, the ESRAF-type comprehensive analyses supported by ESMAP’s ESRF between 2013 and 2017 included detailed power and fuel subsidies assessment, poverty impact assessment of the energy subsidies reforms, communication strategy and social protection system diagnostic. These assessments were used to guide the design and sustainable implementation of a comprehensive energy subsidy reforms program in 2014-2019 which included adjustment of electricity tariffs and phased elimination of fuel subsidies. As a result of the reforms, by the end of 2019, electricity subsidies were fully eliminated, and petroleum subsidies reduced to below 1percent of GDP.
In Ukraine, ESMAP’s ESRF support, initiated in 2014, produced detailed gas and district heating subsidies assessment, fiscal impact of the energy subsidies, continuous poverty and social impact assessment of ongoing reforms, social safety nets diagnostic and suggested modifications and communication strategy. These were used in the design and implementation of a multi-year complex reform package in 2014-2019 that included gas and district heating tariff increases and significant expansion of the targeted social safety nets. As a result of the reforms, energy-induced fiscal subsides were eliminated by 2017, competition in gas supply was stimulated and energy-related social protection was fully monetized in 2019.
In 2017, ESRAF was formalized and has continued to be applied in the World Bank’s policy dialogue. In Tunisia, ESRAF fed into the World Bank’s analytical work and was used to provide advice to the clients on monitoring of energy costs and tariff reform; assessment of the reforms impacts and recommendations of mitigation measures; and political economy analysis and communications support to build social consensus around the reform. These analyses and assessments provided inputs into drafting and then the implementation of the reform roadmap as well as regular dialogue with the Government of Tunisia on the reform roadmap implementation. This facilitated setting up an inter-ministerial Task Force in 2018 on energy subsidy reform with representation from the Ministry of Industry and Small and Medium Enterprises (SMEs), Tunisian Company for Electricity and Gas, Ministry of Finance, and Ministry of Social Affairs under the coordination of the Minister of Grand Reforms.
In Nigeria, ESRAF analysis included subsidies estimation/financial analysis of tariff shortfalls for 2017-21; regulatory and institutional analysis; financial analysis of distribution companies; high level generation planning; and input for the preparation of guidelines for distribution companies' Performance Improvement Plans. Using these analyses, the Government of Nigeria prepared and approved the Power Sector Financial Recovery Plan (PSRP). Support for implementation of PRSP is anchored in the design of the recently US$750 million Power Sector Recovery Performance Based Operation. As part of the PSRP implementation, the Government approved a total funding envelope of US$1.056 billion for covering new tariff shortfalls in 2020, and the regulator issued an order indicating adjustment of end-user tariffs on July 1, 2020 consistent with the PSRP Financing Plan. The adjustment was implemented in August 2020 that raised the average end-user electricity tariff by 46 per cent. Full implementation of the PSRP is expected to bring the sector to full financial sustainability by 2021 thus eliminating the need for sector subsidies.
Overall, from July 2016 to June 2020 ESRF provided over US$14 million of World Bank-executed TA grants to support comprehensive ESRAF-type approach to energy subsidy reforms in over 70 countries, that resulted in 120 analytical reports/ TA outputs that informed 39 World Bank operations (US$12.6 billion in total lending) for energy subsidies policy and/or regulatory reforms. ESRF shared knowledge gained and lessons learned from these engagements through 10 publicly-disclosed country briefs; organized 2 events (together with the Friends of Fossil Fuel Subsidy Reforms) during the IMF-World Bank Spring Meetings in 2017 and 2019; organized 3 international fora (in Bonn in 2017; Marseille and Geneva in 2018). ESRF’s vibrant internal community of practice unites more than 300 energy subsidy reforms practitioners from different GPs at the World Bank and facilitates knowledge exchange as well as peer-to-peer learning.
Bank Group Contribution
ESMAP Trust Fund support for ESRF between July 2016 and June 2020 accounted for $18.8 million, including over $14 million provided for country grants.
ESRF strengthens global communication on energy subsidies through close coordination with the International Monitory Fund (IMF), International Energy Agency (IEA), International Institute for Sustainable Development / Global Subsidies Initiative (IISD/GSI), Organization for Economic Cooperation and Development (OECD), Friends of Fossil Fuel Subsidy Reforms (FFFSR) and other partners. With FFFSR, ESMAP’s ESRF organized 2 events during the IMF-World Bank Spring Meetings on energy subsidies in 2017 and 2019. ESRF organized 3 international fora (in Bonn in 2017; Marseille and Geneva in 2018). IMF has been a frequent discussant on the panels during the events organized by ESRF.
Having consolidated cutting-edge practical knowledge on energy subsidy reforms, ESRF has become systematic about the identification and pursuit of closing knowledge gaps and needs. For example, the facility is producing a series of knowledge papers on energy subsidies in different sectors (transport, industry, agriculture) where progress on energy subsidy reform has been more limited than in the Energy Sector. These activities are also promoting further collaboration between Energy and Extractives and other GPs such as Transport and Agriculture. These papers will become inputs into ESRF Flagship Report (to be delivered this in 2021) and featured in an internal ESRF knowledge event in December 2020.
ESRAF continues to inform work supported by ESRF country TA grants, synthesize lessons learned and best practices based on those experiences, to be disseminated internally and externally.
Main beneficiaries of ESRF knowledge work are governments in the World Bank client countries that are considering or are in the process of reforming energy subsidies; World Bank Task Team Leaders (TTLs) that are engaged in the dialogue on energy subsidies; as well as members of ESRF internal community of practice. The ultimate beneficiaries of ESRF are the citizens of countries where World Bank teams are supporting governments to achieve sustainable and equitable energy subsidy reforms.