Price reforms in the electricity sector

This paper explains the rationale for determining electricity tariffs on the basis of long run marginal social costs (LRMSCs). It provides estimates of LRMSCs at generation, transmission and consumer ends. It explains the uses of the cost estimates in designing tariffs, in measuring subsidies and cross subsidies, and in signalling the users about the social scarcity value of the resource. Keeping in view goals such as equity and regional development and other transitional problems, it recommends a shift from the existing tariffs regime to the one based on LRMSCs in a phased manner.