The EP of an Expanding Nontraded Sector: Power
16. A private sector mineral processing project requires a large amount of power per unit of output. The power sector is being expanded and provision is being made to meet the future demands of the mineral processing project. The power input should be valued at the average of its demand and supply price. In the case of an input, incremental production is valued through its average supply price, while nonincremental production is valued through its average demand price. In this case, the extra demand for power as an input will be met through incremental power output, and so it should be valued through its average supply price (see Figure 3). D eSw fSw Quantity (m3) 180,000 Qw 120,000 Qwo Price Pesos/m3 DPwo= 16.0 SPw=SPwo= 13.3 DPw= 5.0
Figure 2. Gross Economic Benefit of Piped Water
17. The power sector is experiencing increasing costs. It is expected that the supply cost of power will increase with the project. The average supply cost in financial prices without and with the project has been calculated; however, this value needs to be converted to economic values, and related to the charge being made for power. Power charges are heavily subsidized, and the cost breakdown for power includes a substantial transfer element. The cost breakdown by proportion without and with the project is assumed to be similar, and is given in Table 5.
Table 5. Economic Supply Price of Power
Cost Economic
Breakdown Conversion Value
(P) Factor (P)
Fuel - traded 0.90 1.000 0.900
Labor 0.04 0.900 0.036
Capital charges - traded 0.30 1.000 0.300
- nontraded 0.34 0.900 0.306 Nontraded inputs 0.12 0.900 0.108 Total 1.70 1.650 Transfer -0.80 Financial 0.90 CF (1.650/0.900) 1.833
Economic values using world price numeraire.
Price SPw SPwo 0.9=DPw=DPwo Dwo Dw Quantity
Figure 3. Fully Incremental Input Supply: Power
18. The present charge for power is P0.90 per kwh. This charge includes a financial subsidy of P0.80 per kwh. The economic supply price of power is calculated as P1.65 per kwh. Where the extra demand for power from the mineral processing project will be met through the expansion of the power sector, that is, entirely from incremental production, the conversion factor of 1.833 should be applied to convert the cost of power to the project into its economic value to the economy as a whole.
The EP of Water Inputs
19. A new industrial project has a high demand for water per unit of output. The water will be drawn from the public supply and treated further in the industrial plant itself. The treatment costs have been included in the project costs. Three-quarters of the extra demand for water by the industrial project will be met from an expansion of supply. This incremental water supply should be valued through its average supply price.
20. The new public water supplies will in part use water that at present is being used for agricultural purposes as there is a strict limit on the amount of water that can be drawn from the common water source. One quarter of the extra demand for water will be drawn away from agricultural uses. This nonincremental water input should be valued through its average demand price. For simplicity, it is assumed that the demand price for agricultural uses is not affected by the project, that is, the without and with demand prices are equal.
21. The cost of extra water supplies to consumers can be converted from financial to economic value (see Table 6). It is assumed that the cost structure for existing water is not different from the new project. Because water is heavily subsidized, its economic value is much greater than its financial value. Also, part of the cost of water includes the cost of power, which itself is subsidized (see the previous example). The SCF for the country is 0.9, and the supply price of labor is 85 percent of its wage.
Table 6. Economic Price of Incremental Water
Cost Economic
Breakdown Conversion Value
(P) Factor (P)
Tradable inputs 29 1.000 29.0
Power 72 1.833 132.0
Capital charges: construction—nontraded 25 0.900 22.5
equipment—traded 7 1.000 7.0 Labor 74 0.765 56.6 Nontradable inputs 13 0.900 11.7 Total 220 258.8 Transfer -120 Financial price 100 Economic price 258.8 CF (258.8/100) 2.588
22. The value of water in agricultural uses is estimated through the marginal loss of net agricultural output, at shadow prices, per unit of water diverted to the new users. Agricultural prices for the staple, crops grown in the area are regulated, and some of the inputs are subsidized. The net effect is expressed in a conversion factor relative to the financial cost of a unit of water. Again, because agricultural water use is also subsidized, this conversion factor, at 1.673, is considerably above one, even using the world price numeraire.
23. The CF for the water inputs is the weighted average of the CFs for incremental and nonincremental supplies. Seventy-five percent of project supplies is incremental and 25 percent is nonincremental. The weighted average CF is
CF = 0.75 * 2.588 + 0.25 * 1.673 = 2.359
The financial charge for water supplies should be multiplied by this CF to give the economic value at the world price level of the project supplies (see Figure 4).
SPw Dwo Dw DP SPwo S Figure 4. Increase in Demand for Water Inputs
I = Incremental (75%) NI = Nonincremental (25%) Price