Electricity tariff re-balancing: economic efficiency, distributional and environmental goals within the mexican context

Abstract

The design of optimal pricing schedules for electricity has been an important target of utilities within the energy sector. For this, goals of economic efficiency, re-distribution of income and environmental externalities might be considered. However, commonly used electricity tariff schedules, such as the Increasing Block Tariff (IBT), set prices that differ significantly from marginal cost. This leads to inefficiencies and issues with the subsidies targeting mechanism. This research assesses the effect on consumer welfare within the Mexican context of a shift from its current pricing scheme, an IBT, to an economic efficient scenario in which environmental externalities are considered. Furthermore, a proxy mean-test program and a perfect targeting mechanism scenario to improve distributional outcomes are assessed.