Tuesday , October 24 2017

After petrol … real pain

THE recent petrol price hikes in Kuwait have, no doubt, been irksome, but not too painful to justify the huge public outcry that has erupted. The real pain is just around the corner, as electricity rate increases are in the pot and will soon be ready. The public should save their real outcry for that surprise.

The increase of electricity rates is frightening because it is likely to have a huge impact on family budgets. Especially, if we accept the assumption that the production cost of one Kilowatt of electricity is 40 fils, which is twenty times the 2 fils rate that households presently pay, then it would be a disaster if rates are increased to cover production costs. A family paying KD 600 per year would suddenly be billed KD 12,000! And those paying KD 1,500 would face a KD 36,000 invoice.

Even if the rates’ increase is instituted gradually, it will only be a matter of time before the full astronomical figures hit the consumers. Also, even if the rates are graded according to consumption levels or tranches, the lowest consumption tranche will still end up paying a multiple of what it pays now. As for the high consumption households, it would become far cheaper for them to migrate to cooler climates throughout the long summers.

The government Economic Restructuring Plan had included electricity rate hikes as part of its objectives. We had critiqued the Plan at the time, not in principle, but on the basis that it seemed to have been constructed in an awful hurry, with a lot of jumble thrown in, without thorough thought, analysis or proper structuring of priorities. That is why we compared it to a “Fatoush” salad.

Reasons for Reconsidering:

First, electricity in Kuwait has become as essential as air – We cannot live without it. Air-conditioning is a must in a hot desert climate, that is expected to become hotter in the coming years. Consequently, the provision of electricity is a prime duty of the State, very much as the provision of internal and external security – without expecting a financial return or gain. Security and social stability supersede all other priorities.

Second, the accounting bookkeeping cost of electricity seem clear theoretically. Divide the costs of production (including Depreciation) by the kilowatts produced and you get the cost per kilowatt. (There are other methods of calculation. But we will keep it simple in this example).

But the question is: what if we included the cost of biryanis and Falafel in the production costs of electricity? The per Kilowatt cost will then be inaccurate. This is what we meant in our earlier critique, when we advised to delay the matter of electricity pricing until a full cost study and analysis of the production costs is carried out. But, you may ask, why are we questioning the authenticity of figures already booked and audited? Because, by conducting a quick comparison of worldwide electricity rates, we find variations that require, no demand, a fresh in depth assessment.

Rates Comparison:

The average household electricity rates in Europe are 48 fils per kilowatt (2nd half 2015), with country variations ranging from Kosovo 16 fils, Serbia 17 fils, Romania 31 fils, Holland 41 fils, France 37 fils, Germany 48 fils, Denmark 31 fils, UK 70 fils. As for the USA, the rates in Texas are 33 fils, Arizona 38 fils, Idaho 30 fils, Massachusetts 55 fils, New York 54 fils. Japan is at 84 fils and China 33 fils.

How to Read the Comparison:

There are four points to take into consideration when comparing world electricity rates with those of Kuwait at 40 fils:

1) The world rates include the profits of the companies producing the electricity together with the distribution costs of pylons and cables.

2) All other countries produce their electricity using their own expensive technicians and engineers, not imported economical workers.

3) Other countries buy the fuel for the electricity plants at the international oil market prices. And fuel is a major component of electricity production.

4) Most other countries don’t suffer from very hot summers that can stretch up to 8 months a year.

Conclusion:

It is imperative that we first find the real cost of producing electricity. And this includes the real direct cost of producing oil. Thereafter, we can decide, as a society, how much the State should subsidize electricity to reduce the suffering of the population, in a climate that exceeds 50 degrees centigrade.

As for rationalizing consumption and eliminating waste, there are a number of ways to do that. The present talk of pure consumption tranches seems rather primitive and naive. The development of the country over the past half century has permitted plenty bad decisions in construction design size and specifications to seep in. We need to search for realistic ways out that minimize damages to all parties concerned. It is important that the consumption tranches reflect such matters as the size of each building, the number of dwellers per house, age of building, type of insulation used. Also, it should consider encouraging households to reduce their consumption by granting discounts for upgrading or refurbishing their insulation to reduce electricity consumption. All this, requires fresh new thinking, outside the box, otherwise we will continue running in circles.

Email: msalamah@marsalpost.com

By Marwan Salamah

Kuwaiti Consultant

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