The Public Utilities Authority (Electricity) plenum today approved the largest ever one-time reduction in electricity tariffs. Tariffs will fall by 10-16%, depending on sector and peak/off-peak rates.
While consumers will be pleased to pay lower prices, there are pros and cons to lower electricity tariffs.
Pros
Tariffs are supposed to reflect the cost of producing electricity. Tariffs should rise when the price of fuels rises and should fall when the price of fuels falls. All other considerations such as encouraging energy savings, and energetic streamlining, should be encouraged through taxation or subsidies with the appropriate approvals.
Lower tariffs reduce inflationary pressures and strengthen the competitiveness of exporters. Lower tariffs are also more social friendly and improve the situation of the disadvantaged.
Lowering electricity rates will also indirectly result in other prices being lowered such as water and additional sectors where energy costs are a central factor.
Cons
Lowering the tariff of a product in excessive demand such as electricity will lead to increased consumption and in the long-term require the construction of even more polluting power stations.
Lowering electricity tariffs contradict government policy which is attempting to encourage energetic streamlining.
Electricity tariffs in Israel were already among the lowest in the western world, so there is no reason to cut them further. These low tariffs are one of the main reasons for the difficult financial situation of the Israel Electric Corporation (IEC) (TASE: ELEC.B22).
Low electricity tariffs create a negative incentive for the entrance of private electricity producers into the market. This may delay and even endanger implementation of the reform of Israel's electricity sector, and in the long term the lack of competition from private producers may result in higher prices.
Published by Globes [online], Israel business news - www.globes-online.com - on February 1, 2010
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