Jointly reforming the prices of industrial fuels and residential electricity in Saudi Arabia

The Saudi electricity sector currently buys fuel and sells electricity at prices administered by the government. In this analysis, we illustratively explore combining the reform of the fuel prices used in power plants with the implementation of alternative electricity pricing schemes for the households. Compared to the scenario replicating the year 2015, we find: • The aggregate gain to the energy system could reach nearly $12 billion per year by raising both electricity prices to households and industrial fuels to reflect the cost of supply or international markets. • Households would pay an additional $3 billion in electricity costs without any mitigation for the low-income households. However, Lifeline prices would halve this burden, while maintaining greater gains than deregulating fuel prices alone. • The average electricity price paid under the lifeline scenario would be a more manageable 4.0 cents/kWh, versus an average marginal-cost price of 7.1 cents/kWh. In the alternative electricity pricing scenarios we study, natural gas usage by the power utilities falls, allowing gas to flow to other industries, which would consume it to reduce their costs. We find the marginal values of natural gas falling at higher electricity prices, indicating that the supply of gas is becoming less constraining. - Highlights: • Several residential electricity pricing policies are assessed in a long-run 2015. • A policy may be devised such that the impact on low-income households is mitigated. • The market-clearing price of natural gas declines under higher electricity prices. • A multi-sector equilibrium model for Saudi Arabia is utilized.