From Shadow to Light: The Case for Wholesale Dual-Track Reform in Electricity Markets

In many developing countries, regulated electricity tariffs are set below cost, leaving public utilities with chronic losses and restricted subsidies. As a result, supply at the regulated price is limited and rationed consumers turn to informal suppliers at high markups. We analyze a wholesale dual-track reform in which the utility sells electricity to informal suppliers at a market-based wholesale price, who then resell it alongside their own generation. Unlike the classic dual-track framework, which introduces a second track downstream, the second track here operates upstream. We show that the reform raises total production and increases consumer welfare. The key channel operates through the utility's budget constraint: the wholesale price-cost margin generates revenues that relax the budget constraint, enabling expanded provision at the regulated retail price. Whether informal suppliers lose depends on the wholesale price. We characterize the set of wholesale prices for which the reform is Pareto improving. The reform requires neither tariff increases nor new infrastructure, relying instead on institutional design that redirects rents from informal provision toward expanded public supply.