Analyzing the Effects of the Iranian Energy Subsidy Reform Plan on Short- Run Marginal Generation Cost of Electricity Using Extended Input-Output Price Model

Abstract

Subsidizing energy in Iran has imposed high costs on country's economy. Thus revising energy prices, on the basis of a subsidy reform plan, is a vital remedy to boost up the economy. While the direct consequence of cutting subsidies on electricity generation costs can be determined in a simple way, identifying indirect effects, which reflect higher costs for input factors such as labor, is a challenging problem. In this paper, variables such as compensation of employees and private consumption are endogenized by using extended Input-Output (I-O) price model to evaluate direct and indirect effects of electricity and fuel prices increase on economic subsectors. The determination of the short-run marginal generation cost of electricity using I-O technique with taken into account the Iranian targeted subsidy plan's influences is the main goal of this paper. Marginal cost of electricity, in various scenarios of price adjustment of energy, is estimated for three conventional categories of thermal power plants. Our results show that the raising the price of energy leads to an increase in the electricity production costs. Accordingly, the production costs will be higher than 1000 Rials per kWh until 2014 as predicted in the beginning of the reform plan by electricity suppliers.Keywords: Subsidy reform plan; Short-run marginal cost of electricity; Extended input-output modelJEL Classifications: C67; D57