Electricity Tariff Rebalancing in Emerging Countries: The Efficiency-equity Tradeoff and Its Impact on Photovoltaic Distributed Generation

Existing tariff schemes often fail to achieve basic economic objectives. They set prices per unit that either exceed or fall short the social marginal cost and produce unfair distributional outcomes. In many cases, electricity rates also contribute to unsustainable fiscal deficits due to the (almost) generalized electricity subsidies. Moreover, inefficient residential tariffs do not favor the adoption of green technologies and the investment in energy efficiency improvements. We argue that the efficient deployment of green technologies, and more generally, the clean energy transition, will require electricity tariff reforms. In this paper, we use household level data and hourly industry data from Mexico to show how more efficient pricing mechanisms (such as a two-part tariff scheme in the context of efficient nodal pricing), combined with well-design environmental regulations (e.g., net-metering schemes) and correctly targeted transfer programs (e.g., means testing mechanisms) can improve economic, social, and environmental outcomes significantly, all at once.