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dc.titleSetting Appropriate Electricity Tariffs and Subsidies: Financial, Efficiency, and Distributional Implications of Alternative Schemes
dc.contributor.authorBalza, Lenin
dc.contributor.authorEguiguren-Cosmelli, José
dc.contributor.orgunitEnergy Division
dc.coverageLatin America
dc.coverageThe Caribbean
dc.date.available2026-10-28T00:10:00
dc.date.issue2026-10-28T00:10:00
dc.description.abstractElectricity tariffs play a central role in ensuring the financial sustainability and efficiency of the entire electricity sector, while well-designed complementary subsidy schemes safeguard the affordability of electricity services. Yet across Latin America and the Caribbean (LAC), tariff schemes frequently fail to recover the full costs of service provision and to reflect their structure, while subsidy mechanisms remain poorly targeted. The result is electricity sectors that do not cover their costs or, where they do by underinvesting, low-quality service along with fiscal burdens, distorted price signals, and misallocated subsidies. This report examines alternative tariff and subsidy designs using microsimulations for a sample of LAC countries spanning a broad spectrum of income levels and regulatory frameworks. We develop a unified analytical framework that integrates tariff structure design with subsidy policy. A consumption recovery algorithm uses reported household expenditure and the tariff schedule, data available in most countries, to back out the electricity each income decile consumes and the implicit fixed and variable charges it faces. Because every scheme is expressed as a single fixed charge and a single average variable charge per income group, structures with very different designs become comparable, both across countries and across alternative designs. On that basis we simulate five alternative tariff-subsidy scenarios and find that simple recalibrations of fixed and variable charges can materially enhance cost recovery and improve allocative efficiency through better price signals, while preserving or improving distributional equity, especially when subsidies are well targeted. The comparative analysis further clarifies the nature of each country's difficulties, such as high provision costs, poorly designed tariff structures that fail to recover moderate costs, or mistargeted policy schemes, each having different policy implications.
dc.format.extent96
dc.identifier.doihttp://dx.doi.org/10.18235/0014582
dc.identifier.urlhttps://publications.iadb.org/publications/english/document/Setting-Appropriate-Electricity-Tariffs-and-Subsidies-Financial-Efficiency-and-Distributional-Implications-of--Alternative-Schemes.pdf
dc.language.isoen
dc.publisherInter-American Development Bank
dc.subjectElectricity
dc.subjectElectricity Service
dc.subjectSubsidies
dc.subjectIncome Distribution
dc.subjectRegulation
dc.subject.jelcodeL94 - Electric Utilities
dc.subject.jelcodeQ41 - Demand and Supply • Prices
dc.subject.jelcodeH23 - Externalities • Redistributive Effects • Environmental Taxes and Subsidies
dc.subject.jelcodeD63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
dc.subject.jelcodeO54 - Latin America • Caribbean
dc.subject.jelcodeI38 - Government Policy • Provision and Effects of Welfare Programs
dc.subject.jelcodeH21 - Efficiency • Optimal Taxation
dc.subject.keywordsAllocative efficiency;Microsimulations;Distributional equity
dc.typeMonographs
idb.identifier.pubnumberIDB-MG-01385
idb.operationRG-T4527
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