Abstract
Selected Issues
Energy and Water Sectors Reforms in Jordan1
The energy and water sectors in Jordan need to secure their recent improvements in performance and sustainability over the medium term. The energy sector will shield the cost recovery of the National Electric Power Company (NEPCO) with an automatic electricity tariff adjustment mechanism. The water sector medium-term strategy should continue to be based on a steady reduction of losses and expand its high coverage of water services while dealing with persistent water scarcity and the challenge of hosting a large number of refugees.
A. Recent Reforms in the Energy and Water Sectors
1. The National Electric Power Company (NEPCO) reached operational cost recovery in the second half of 2015. This owes much to the implementation of the action plan adopted in 2013 and to the sharp decline in oil prices. After the close to full halt of gas flows from Egypt in 2012, the government of Jordan took a successful set of measures. On the revenue side, the Energy and Minerals Regulatory Commission (EMRC) increased electricity tariffs three times annually since 2013. On the cost side, Jordan started importing liquefied natural gas (LNG) as a result of the construction of a terminal in the port of Aqaba. This allowed NEPCO to increase its generation efficiency by shifting back most of its generation from fuel oil and diesel to LNG in mid-2015. Since LNG prices are linked to Brent oil prices, the reduction of international oil prices has also helped NEPCO, which is expected to maintain its positive balance in 2016 (see figure).
NEPCO’s operating losses and Brent oil prices
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data; IMF Primary Commodity Prices.NEPCO’s operating losses and Brent oil prices
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data; IMF Primary Commodity Prices.NEPCO’s operating losses and Brent oil prices
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data; IMF Primary Commodity Prices.2. The implementation of the “Action Plan to Reduce Water Sector Losses” has proceeded as planned but the increase in electricity tariffs and the influx of Syrian refugees has presented new challenges. This plan, which started in 2013, consists of three main components: overall efficiency gains; shift to renewable energy; and targeted tariff increases.2,3 However, the fact that Jordan is one the most water-scarce countries in the world and hosts 1.3 million Syrian refugees reduced the effectiveness of these measures and imposed the need for substantial capital investments. These factors are the main reason behind the Water Authority of Jordan’s (WAJ) persistent overall losses.4,5 Moreover, the 24-percent increase in electricity tariffs for water pumping since 2013 impacted the cost of operations of the sector substantially.
WAJ’s overall losses and nuber of Syrian refugees in Jordan
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data; UNHCR.WAJ’s overall losses and nuber of Syrian refugees in Jordan
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data; UNHCR.WAJ’s overall losses and nuber of Syrian refugees in Jordan
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data; UNHCR.B. Securing the Progress in the Energy Sector
3. The new automatic electricity tariff adjustment mechanism (AETAM) is expected to shield NEPCO’s operating balance from volatile oil prices. Under the current tariff structure, staff estimates that NEPCO’s operating losses over the next five years could be about 1.3 percent of GDP, with substantial upward risks given the volatility of oil prices. The EMRC has already included a “fuel clause” in consumers’ electricity bills in 2015, which is currently set to zero, and the authorities announced the commitment to maintain NEPCO at operational balance over the medium term. The EMRC has already adopted and published in its website the regulation of an AETAM in October 2016 that will be implemented in January 2017 to secure the annual cost recovery of the electric system, and keep NEPCO at annual cost recovery.6 This mechanism would ensure the pass-through of the fuel costs for electricity generation to end-users, which is in line with regulatory principles since these costs are outside the control of the electricity sector.
NEPCO’s operating losses and Brent oil prices
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data, IMF Primary Commodity Prices.1/ Projections of NEPCO’s operating balances from 2017 onwards assume the current tariff and cost structures according to which NEPCO’s operanting balance deriorates by JD 15 million for every dollar increase in Brent oil prices.NEPCO’s operating losses and Brent oil prices
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data, IMF Primary Commodity Prices.1/ Projections of NEPCO’s operating balances from 2017 onwards assume the current tariff and cost structures according to which NEPCO’s operanting balance deriorates by JD 15 million for every dollar increase in Brent oil prices.NEPCO’s operating losses and Brent oil prices
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations from official data, IMF Primary Commodity Prices.1/ Projections of NEPCO’s operating balances from 2017 onwards assume the current tariff and cost structures according to which NEPCO’s operanting balance deriorates by JD 15 million for every dollar increase in Brent oil prices.4. The adjustment mechanism will secure the electrical sector’s cost recovery and could follow international best practices. The design of the AETAM includes several characteristics that are in line with international best practices:
An independent regulator with a transparent mandate. The regulation establishes a formula, which the EMRC will use to map the fuel costs—given the structure of the energy mix for generation, and other costs in the electrical system—to the electricity tariffs using the existing “fuel clause.”
Public information. The regulation describes the timeline of, and principles guiding, future tariff adjustments, which ensures more transparency and commitment than an ad hoc approach. The new published regulation includes a clear mandate and timeline for the EMRC to update tariffs. The EMRC will disclose the updates on costs of the system to make the process more transparent once the implementation of the mechanism starts in order to explain any change in the “fuel clause.”
Frequency of adjustment. The effective application of this mechanism will be monthly, to avoid substantial departures of the revenues of the electrical sector from its volatile cost structure, and includes a buffer to shield the targeted annual cost recovery from unforeseen developments.7
Smooth the adjustment. The three-month moving average that the new regulation follows to update the cost structure of the electric system is a smoothing mechanism that reduces the impact of highly volatile oil prices on end-consumers’ welfare.8
5. However, the AETAM could be strengthened by:
Including efficiency targets. The mechanism does not specify the way in which tariff adjustments will secure the efficient generation, transmission, and distribution of electricity. However, the EMRC oversees these operations using performance indicators and oversees NEPCO since 2015. Consideration could be given to introducing specific efficiency gains over the next several years.
Protecting the poor while preserving cost recovery. An increase in cross-subsidies could heighten incentives for large consumers to exit the grid and risk depriving the electric system of one of its main sources of revenue (see figure).9 The impact on the poorest segments of the population could be mitigated by minimizing the adjustment of existing lifeline tariffs.10,11 The published regulation does not specify the way in which the tariff adjustment will be applied across the different categories of consumers. However, the Ministry of Energy and Mineral Resources has conducted a study that provides policy options for the effective change of the tariff of the different categories of consumers and is expected to conduct a comprehensive analysis of the tariff structure with the help of a specialized consulting firm, which is expected to be finalized by the end of 2017.
Electricity tariffs by consumer category
(Fils/Kwh)
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations with data from EMRC.Electricity tariffs by consumer category
(Fils/Kwh)
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations with data from EMRC.Electricity tariffs by consumer category
(Fils/Kwh)
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Source: Staff calculations with data from EMRC.6. The AETAM should be part of the medium-term strategy of the sector. Renewables could supply up to fifteen percent of the electricity generation’s needs in the coming years. They may help to move the energy mix away from spot oil prices while contributing to global efforts to reduce carbon emissions. Even within gas, alternative sources not necessarily tied to oil prices, such as gas from the Mediterranean or the resumption of gas flows from Egypt, may help to achieve these targets as gas is less harmful to the environment than other fossil fuels.
C. The Challenges of the Water Sector
7. Despite being one the most water-scarce countries, Jordan has almost universal coverage of water services. Jordan ranks highly in the water stress index because of its relatively high variability of water supply and its extremely low water supply per capita. The government could manage this scarce resource successfully by reaching a low use of water per capita and more than 95 percent of the population with access to drinking water and sanitation (see figure). The Syrian Refugees Crisis aggravates the challenge because the demand for water in Jordan has increased by 21 percent since the crisis began. Groundwater overdraft is depleting this resource since the total water extraction rates exceeded the renewable water amount in northern governorates, where the demand for water is estimated to have increased 40 percent.
Jordan in the Water Heat Ranking
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Sources: FAO Aquastat WHO/UNICEF; Joint Monitoring Programme for Water Supply and Sanitation; World Resources Institute Aqueduct; IMF SDN/15/11; and IMF staff calculations.Jordan in the Water Heat Ranking
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Sources: FAO Aquastat WHO/UNICEF; Joint Monitoring Programme for Water Supply and Sanitation; World Resources Institute Aqueduct; IMF SDN/15/11; and IMF staff calculations.Jordan in the Water Heat Ranking
Citation: IMF Staff Country Reports 2017, 232; 10.5089/9781484312063.002.A005
Sources: FAO Aquastat WHO/UNICEF; Joint Monitoring Programme for Water Supply and Sanitation; World Resources Institute Aqueduct; IMF SDN/15/11; and IMF staff calculations.8. Further reforms could ensure universal water coverage in this challenging environment. Since Jordan is in the group of countries with high water stress and high access to water services, it needs to rationalize even further the water use and to identify other water resources to sustain its past performance.12 In order to deal with these structural factors and the persistent demand from the refugees and the potential increase in electricity tariffs, which is an essential input for water pumping, owing to the implementation of the AETAM, the multiple efforts of the government of Jordan to continue providing this essential good include:
The “Action Plan to Reduce Water Sector Losses” that continues towards 2020 with some further measures.13
The recently published “National Water Strategy 2016–2025” confirms the government commitment to rationalize the price structure of water and wastewater services to ensure efficient use of water.14
The “Capital Investment Program 2016–2025” includes projects to increase the water supply through cross-border collaboration with neighbor countries such as the Red Sea-Dead Sea Water Conveyance Project.
These substantial investments, as well as those needed to increase the efficiency, collection of non-revenue water and introduce renewable energy in the water sector, will require substantial financial resources, which cannot be financed through domestic commercial debt given the long-term returns of the provision of this essential public good. The Ministry of Water and Irrigation has prepared a first draft of the new debt management strategy for WAJ and is currently planning future steps with the Ministry of Finance. The strategy includes the optimization of WAJ’s cash and debt management. Its main targets are: to reduce WAJ’s commercial domestic borrowing and rely more on external grant and concessional financing and on central government transfers; to reduce roll-over needs by lengthening maturities; and to centralize WAJ’s debt management at the Ministry of Finance.
The updated action plan on how to reduce the water sector’s losses over the medium term, with further revenue enhancing and cost reduction measures, has been approved by Cabinet and published on April 2017.15 It addresses the impact of refugees and the monitoring of the projects implemented in collaboration with donors, as well as the impact of electricity tariffs on the sector.
References
Coady, D., J. Arze del Granado, L. Eyraud, H. Jin, V. Thakoor, A. Tuladhar, and L. Nemeth, 2012, “Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation, and Fiscal Implications,” IMF Technical Notes and Manuals (Washington: International Monetary Fund).
Kochhar, K., C. Pattillo, Y. Sun, N. Suphaphiphat, A. Swiston, R. Tchaidze, B. Clements, S. Fabrizio, V. Flamini, L. Redifer, H. Finger and IMF Staff Team, 2015, “Is the Glass Half Empty or Half Full? Issues in Managing Water Challenges and Policy Instruments,” IMF SDN/15/11 (Washington: International Monetary Fund).
Prepared by Maximiliano Appendino (MCD).
The plan has aimed for cost reduction through energy efficiency in pumping operations, the improvement of water supply systems to reduce physical losses and energy input, including the use of renewable energy, and system automation to optimize operation and personnel input.
These tariffs adjustments include industrial ground water charges in 2013 and 2016, wastewater tariff in Amman (25 percent), and other governorates (15 percent) in 2014, water and wastewater connection fees in 2015, the municipal water tariff in 2015, and the implementation of ground water irrigation tariff in highland in 2017.
Jordan’s annual renewable freshwater resources available per capita are 123.4 cubic meters as of 2014 well below the international poverty line of 500 cubic meters.
As reported by the authorities. UNCHR numbers in the figure are smaller than the authorities’ because they only include registered refugees.
The regulation makes use of the existing “fuel clause” but this clause will be used to reflect any change in the energy sector cost structure. The process starts in November when NEPCO submits its cost structure to the EMRC, which will evaluate the costs of NEPCO and the other companies in the sector in December, and, if needed, will adjust tariffs in January 2017.
Jordan successfully removed general fuel subsidies in 2012 and, since then, updates retail fuel prices monthly considering past month international prices and a publicly available price equation at the website of the Ministry of Energy and Mineral Resources. This successful experience could help the implementation of the electricity tariff adjustment mechanism.
Several countries have implemented such smoothing mechanisms including ex-post adjustments of the projections in order to secure cost-recovery of the electricity sector over specific periods.
EMRC reduced the tariffs of large consumers, such a mining and quarrying, large industries and telecommunication companies, by about 8 percent on average in November 2016, thereby reducing cross-subsidization.
The World Bank, using the Household Income and Expenditure Surveys of 2010 from the Department of Statistics of Jordan, estimated that the lowest quintile of the household income distribution in Jordan expended less than 2 percent of its budget in electricity and that this share decreases as income rises.
The Ministry of Planning and International Cooperation launched the National Unified Registry and Outreach Program for Targeting Social Assistance in September 2016. Once in place, this registry will allow the government to reach more effectively the most vulnerable by enhancing information-sharing, eligibility, and enrollment in social programs. The government could use this registry to target assistance to vulnerable groups in periods of high fuel prices, as it did after the removal of general fuel subsidies in 2012.
See discussions on water sector policies in Kochhar, K. and others (2015).
These measures include groundwater extraction tariff increases, the introduction of meters to reduce non-revenue water losses, and the introduction of renewable energy to diversify the sources of energy for water pumping.
The World Bank, using the Household Income and Expenditure Surveys of 2010 from the Department of Statistics of Jordan, estimated that the highest quintile of the household income distribution in Jordan expended half the share of its budget in water compared to the lowest quintile.
In order to boost revenues, the government plans to target the reduction of illegal and non-revenue water, to install new meters, and tariff adjustments to distribute the burden to population in a socially acceptable way without affecting the lowest tariff category. And to reduce costs, the government plans to continue to invest in energy efficiency projects, renewables to reduce their exposure to changes in electricity tariffs, new pumping stations, and physical water loss reduction infrastructure projects.
