Distortionary Effects of Kuwait’s Cheap Electricity and the Case for a Just Reform

Abstract

The story of the past half-century of electricity provision in Kuwait is a cautionary one. Since 1966, the state has distributed electricity to citizens for 0.7 U.S. cents per kilowatt-hour (kWh). That tariff, which is the world’s sixth lowest, covers only 5% of the government’s cost and has continued despite huge increases in wealth, electricity demand, and capital investment requirements. In fact, Kuwait’s power price has declined by 800% over the past 58 years, resulting in a tariff that is only 18% of the average cost across the other five Gulf Cooperation Council (GCC) countries, where prices are also among the world’s lowest. Fuel for subsidized power cost the Kuwaiti state more than $10 billion U.S. dollars in 2022 — equating to US$3,200 per person. Without a means to incentivize efficiency, the state has been forced to impose debilitating power cuts to moderate demand during periods of extreme temperatures. Kuwait’s power subsidy also encourages disproportionate emissions that are out of step with global and national climate goals. More than 99% of Kuwait’s power is generated by burning fossil fuels, including crude oil and refined products that have cleaner and cheaper substitutes as well as higher value in export markets.

This research paper finds that rationalizing electricity prices and recasting the subsidy as a cash benefit would not only improve the welfare of Kuwaiti consumers but also reduce electricity demand and emissions by promoting efficient consumption. Despite strong economic incentives, tariff reform has been more difficult to implement in Kuwait than in the other five GCC states, each of which has achieved some success in rolling back subsidies. However, the temporary dissolution of Kuwait’s Parliament in May 2024 provides an opportunity to reform power prices. This paper presents three options for consideration in support of a just tariff reform that would not place low-income and middle-class households at a disadvantage.

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