Appendix16
Subsidy Mechanisms
1. General Price Subsidies:
• It involves keeping electricity prices below costs for all residential consumers. For the
electricity industry, where a network is required, the coverage and the cost of the subsidy
would be considerable. Expected benefits for the poor are high, though they would tend to
create distortions in the price regime resulting from wasteful consumption practices
among consumers. Easy to administer.
2. Lifeline Subsidies:
• These subsidies are restricted to an initial block of consumption, equivalent to what is
considered a basic-need level. Its effectiveness depends on the share of the poor with
access to electricity. Targeting of the poor improves as the size of initial block declines
since more consumption is usually associated with greater income. May become very
costly.
3. Merit-Based Price Discounts:
• Sometimes based on normative qualifications of poverty - for instance, only rural women
under 30 qualify for discounts. Can be very difficult to target and may create significant
distortions. Limits on the levels of consumption where discounts are applied may reduce
moral hazard. May also be quite expensive to administer.
4. Burden Limit:
• Total payment for service is limited based on an income test or similar measure of energy
spending as a share of household income. Tends to show low coverage for the poor and
not well targeted. Low targeting ratio occurs due to weak correlation between per capita
household income and the share of energy spending within the household income.
Thought to be the most distorting of all subsidy mechanisms. Can be quite costly to
administer.
5. Noncollection:
• Refers to non-enforcement of disconnection penalties for unpaid bills. It occurs when
government pressures private operators not to disconnect people due to unpaid bills.
Coverage of the mechanism is low. It creates significant price distortions and results in
inefficient consumption.
6. Cash Transfers:
• Not constrained by the share of poor households not connected to the service. Least
distortionary since households can spend cash support as they wish. Fiscal burden created
by it might be considerable.
16 A fuller description of the subsidy mechanisms presented here appears in the PRSP Sourcebook draft document of
the World Bank.
26