Ali Saeed (author) SANA’A, Sept. 6—The government announced on Friday it will maintain the subsidy on diesel used for power stations despite calls for the subsidy to be removed, according to the state-run Saba News Agency.
The government’s statement followed local news on Thursday reporting that the state-run Yemen Petroleum Company (YPC) released a statement demanding fuel subsidy cuts to be extended to Yemen’s electricity sector.
The subsidy of diesel used for electricity generation costs the Yemeni government around $759.6 million every year, according to the YPC.
While subsidy cuts in the electricity sector would thus raise the government’s public budget it would also lead to a 90 percent increase in electricity costs in both the private and the public sector. The current tariff in urban areas for individuals is between YR9-19 ($0.042-0.088) per kWh.
“The electricity sector in Yemen is one of the key sectors touching the daily lives of citizens and shaping the business environment in Yemen,” a report by the government’s Executive Bureau (EB) published late June read.
The EB, a governmental office established in December 2013, is tasked with speeding up the absorption of financial aid pledged by donors in consistency with national priorities.
Currently, the EB is working on a two-year action plan on energy reforms to be presented to the government. The EB’s proposals aim to enable the government to provide Yemeni citizens with a reliable electricity supply.
The total production of 1,500 MW does not cover the existing energy demand in Yemen, where only 41 percent of the population has access to electricity, according to the Ministry of Electricity.
“The current state of the sector obliges the government to heavily subsidize each kWh consumed, putting pressure on the government’s budget that is already suffering from the highest deficit in recent years,” the EB report said.
The YPC sells one liter of diesel to the Ministry of Electricity at the subsidized price of YR38.7 ($0.18) while the price for individuals is YR170 ($0.79). The diesel used in powered stations costs the government $80 million each month. The Electricity Ministry pays $16.7 million, whereas the Ministry of Finance pays the remaining $63.3 million as a subsidy.
The amount of diesel used for generating electricity increased during the last two years from 35,000 tons to 70,000 tons per month, according to the YPC. This is due to the government’s increased reliance on power generated and supplied by private firms which use and buy the diesel at a subsidized price, according to Mohamed Al-Absi, a Yemeni business analyst based in Sana’a.
The power generated by private firms increased from 220 MW in late 2011 to 480 MW in late 2013, according to Al-Absi, who adds that some private companies use the pretext of generating electricity in order to get cheap diesel which they then smuggle abroad.
In his view, “the price of diesel must be unified to end chances of smuggling.”
“Urgent reforms are needed in [the electricity] sector to make it sustainable and support increased levels of investments and private sector activity,” the EB report read.