Why can't a single price be applied to electricity for household use?

Implementing a single electricity price would increase costs for most users and discourage energy conservation when supply is limited.

The proposed plan for improving the retail electricity tariff for household consumption in 2016-2017, currently being put forward for public comment by Vietnam Electricity Group (EVN), includes three options: Option 1 maintains the current six tiers; Option 2 stipulates a single electricity tariff for household consumption (flat rate) based on the current rate of 1,747 VND/kWh; and Option 3 simplifies the tiered electricity tariff for household consumption from six tiers to three or four tiers.

A flat-rate electricity price is only available in a competitive retail electricity market.

The proposed plan to set a single electricity tariff of 1,747 VND/kWh for household consumption is considered the average price of electricity under the current tiered residential electricity tariff system. While this plan would save manpower and management costs for the electricity sector, it would create difficulties for the poor and those with low average incomes, and would not encourage energy conservation.

According to Mr. Dinh Quang Tri, Deputy General Director of Vietnam Electricity Group (EVN), electricity prices in each country are closely related to the supply and demand of electricity, the conditions of electricity production and business, as well as specific social policies that the government uses to determine prices.

Currently, electricity prices in most countries are determined by the government. Countries where state-owned enterprises account for a large proportion of electricity production and distribution are also subject to government pricing. Generally, countries with strict electricity price controls mostly have tiered pricing systems, with some countries having up to 7-8 tiers, and the highest tier reaching 25-27 cents/kWh, equivalent to 5,000-6,000 VND/kWh.

Comparison table of proposed single-rate (uniform) electricity prices for household consumption versus current electricity pricing scheme.

From that, Mr. Tri argued that countries that apply a single-price (flat rate) electricity pricing scheme all have competitive retail electricity markets for end consumers, such as Singapore, the Philippines, or Western Australia. Currently in Singapore, the flat rate for household electricity is 16-17 cents/kWh, equivalent to nearly 4,000 VND/kWh.

“In Vietnam, if electricity pricing were based on a flat rate with such high retail electricity prices, no consumer would accept it, especially since our country has competitive conditions for electricity production and business compared to other countries. 35% to 40% of Vietnam's electricity production comes from hydropower, a renewable energy source with lower costs and less dependence on imported fuel. Meanwhile, 30% of our electricity comes from domestic gas-fired power plants, and coal-fired power plants also account for 30% of domestic electricity production,” Mr. Tri pointed out.

EVN representatives also stated that, starting in 2017, Vietnam will have to import coal for power generation, with the proportion gradually increasing, and the price of coal will follow world market prices. The price of gas for electricity production is also now basically in line with world market prices. Thus, the fuel input for the entire Vietnamese electricity system is now market-based, while the retail electricity output remains subject to state regulations.

Currently, EVN has not yet agreed on a specific electricity pricing method. However, according to Mr. Dinh Quang Tri, the important aspect of electricity pricing policy is to provide clear signals to both consumers and producers. Electricity prices must ensure that producers have sufficient funds to cover investment costs and operating expenses to continue producing electricity for the system. Consumers must also have a reasonable price to encourage efficient and economical electricity use. Therefore, achieving a reasonable electricity pricing policy cannot be based solely on the demands of one party.

A flat electricity price is a step backward, but a step forward too quickly.

According to Mr. Nguyen Tien Thoa, representative of Vietnam Management and Development Consulting Company Limited (CMD), the option of regulating a single electricity price for household consumption (uniform price) will create transparency, clarity, ease of application, and management, inspection, and supervision. At the same time, this option facilitates improvements in the electricity sales business, particularly in meter reading, and gradually implements a market mechanism, eliminating the practice of social policy through electricity pricing and replacing it with other policies.

"However, compared to the current regulations, switching to a single electricity tariff for household consumption would have several impacts: Households using little to average electricity (around less than 240kWh/month) would see an increase in their monthly electricity bills, while households using a lot of electricity (around 300kWh/month or more) would see a reduction. More importantly, with this method, the pressure to use electricity economically, while still present, would not be as high as with a tiered progressive electricity pricing system," Mr. Thoa analyzed.

Comparison table of proposed single-rate (uniform) electricity prices for household consumption versus current electricity pricing scheme.

From a consumer's perspective, Mr. Nguyen Manh Hung, Vice President and General Secretary of the Vietnam Consumer Protection Association (Vinastas), believes that electricity pricing is not simply a business matter but also relates to social welfare. The electricity pricing method needs to carefully consider and ensure a balance of interests between the state, businesses, and consumers.

"Applying a flat-rate electricity pricing system is clearly inconsistent with the criteria of efficient and economical electricity use, while electricity is a non-renewable energy source and conservation is always a top national priority. The Consumer Protection Association always supports the approach of encouraging savings in production and consumption, therefore we oppose the flat-rate electricity pricing method," Mr. Hung said.

Completely disagreeing with the single electricity price option, Professor and Academician Tran Dinh Long, Vice President of the Vietnam Electricity Association, clearly stated his view: Electricity prices must be a tool of the State to control electricity demand, especially during a period when our country's electricity supply is not yet fully sufficient to meet demand; therefore, the single electricity price option is inappropriate.

"The essence of the flat-rate electricity pricing scheme is to reverse the process that began about 20 years ago or to leapfrog to after 2024 when Vietnam will have a competitive retail electricity market. Therefore, this can be considered a 'leap' that is both a step backward and a leap forward, making it unsuitable and unacceptable at the present stage. Accepting this scheme would also mean eliminating the electricity price regulation tool," Professor and Academician Tran Dinh Long pointed out.

Mr. Nguyen Anh Tuan, Director of the Electricity Regulatory Authority

(Ministry of Industry and Trade):

Vietnam Electricity Group (EVN) will continue to hold consultations on the proposed retail electricity tariff for household consumption in Da Nang and Ho Chi Minh City before submitting the draft to the Ministry of Industry and Trade and the Government. In October 2015, EVN will finalize the proposed retail electricity tariff for household consumption and submit it to the Ministry of Industry and Trade for review and consolidation before presenting it to the Prime Minister for decision.

Alongside the Project on Retail Electricity Pricing for Households, the Ministry of Industry and Trade also directed EVN to actively implement two other projects: improving labor productivity and reducing electricity losses. For the project on improving labor productivity, the goal for 2015 is for EVN's labor productivity to increase by at least 8.5% compared to 2014. For the project on reducing electricity losses, the goal is to reduce electricity losses to 8% per year by 2015.

According to VOV