An Integrated Framework for Energy Pricing in Developing Countries

The importance of comprehensive energy planning is described, and an integrated approach to energy pricing is suggested. The 1970s have been characterized by increasing real costs of energy and fluctuations in relative fuel prices. Energy policymakers in developing countries face special difficulties, such as high levels of market distortion and shortages of foreign exchange. To combat these and related problems, a integrated pricing framework must begin with a clear statement of national objectives. Important linkages between the energy sector and the rest of the economy, as well as interactions between and within different energy subsectors, must be analyzed using shadow prices. This shadow pricing methodology must be the same as the one used to make investment decisions. The shadow pricing methodology relies upon a two-stage energy pricing structures. The first stage involves the determination of the shadow priced marginal opportunity cost of a given form of energy based on supply side considerations. In the second stage, the efficient price is adjusted to yield a realistic pricing structure that meets social subsidy considerations, sector financial requirements, andother practical constraints. 15 references.