Power plant Fuel Price Reform, Value-added Tax and Electricity Demand in Iran: a System Dynamics Approach

Davood Manzoor

Associate Professor, Faculty of Economics, Imam Sadiq University

manzoor@isu.ac.ir

Hossein Rezaee[1]*

Ph.D Student, Faculty of Economics, Imam Sadiq University

hrezaee@isu.ac.ir

Received: 2012/09/27  Accepted: 2013/09/15

Abstract

It is expected that fuel price increase for power plants would lead to higher electricity prices and lower electricity demand, especially in the long run. To quantify these effects we develop a system dynamics model for the electricity market in Iran consisting of demand, price and generation modules. The model is applied and simulated using the POWERSIM software. The results indicate that if current subsidized system of pricing for energy is maintained, electricity shortages of more than 300 terawatt hours will occur by 1400. However, price increases as stipulated by the recently enacted Subsidy Reform Law increases electricity prices and will bring the electricity market back into equilibrium. Finally, enforcing value added tax in the electricity market will result in an additional 5.4% reduction in demand for electricity.

JEL Classification: D43, D50, C63, P22, C61

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