## Appendix I. Nicaragua: A Medium-Term Framework

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### Concluding observations on electricity-sector equilibria
- Reliable and low-cost electricity provision is critical for economic activity; bad configurations can produce a bad equilibrium with high electricity costs, electricity shortages, expensive self-generation, and large fiscal subsidies arising from unbalanced cross tariff subsidization, fraud and non-payment.
- Countries that transitioned to better equilibria are characterized by: better regulatory frameworks (including adequate tariff setting, enforcement of penalties, and appropriate energy dispatching rules), lower generation costs, lower theft ratios and government subsidies, and investment levels large enough to guarantee supply commensurate with peak demand.
- Investment in the sector depends on: solvency prospects (related to electricity theft and delinquency), adequate tariff setting and dispatching rules, initial conditions, and minimum investment scales.
- Composition of investment between technologies depends on expected relative generation costs and initial composition of the generation matrix; a more diversified generation matrix provides a better hedge to oil price fluctuations.
- Government credibility to address sector problems (particularly electricity theft) affects investment levels: if promises are not credible, private investment, electricity supply and economic activity remain low and tariffs, subsidies and theft remain high; credible commitments spur investment and can enable a transition to a better equilibrium.
- In an infinitely repeated setting, continued commitment to reforms can build credibility and move the sector to a better equilibrium.

### Medium-term framework purpose and scenarios
- Purpose: formulate a baseline and an alternative scenario through 2021 to show how tariff setting and planned investment in generation (mostly from non-renewable sources) affect medium-term sustainability.
- Baseline scenario: “no change” scenario; by 2021 about half of electricity would be generated from non-renewable sources.
- Alternative scenario: projects from the Electricity Generation Expansion Plan increase the share of electricity generated from renewable sources from the current 51 percent to about 77 percent by 2021.
- Shared assumptions across scenarios:
  - Electricity demand grows by about 4 percent annually (in line with projected real GDP growth).
  - Technical and non-technical losses of distribution remain at their 2014 average level.
  - Operational and investment spending in electricity distribution grow in line with U.S. inflation.
  - Medium-term oil prices are in line with the World Economic Outlook forecast at end-2015.
  - Bunker-WTI spread stays at the 2014 level (8.9 US$/barrel).
  - Monomial prices for electricity generated from non-renewable (renewable) sources are a simple average of monomial prices at the companies representing the largest share of generation, assumed to grow in line with bunker prices (U.S. inflation).
  - Notional tariffs reflect actual electricity generation costs and a loss factor equal to that in effect in July 2015 (equal to 1.15).
  - Effective tariffs remain at the level observed in July 2015.
  - The public sector pays its electricity bill on time.
- Operational detail: monomial prices for renewable investments are assumed to be an average of the last three years; all projects are assumed to deliver full generation capacity over two years (notes also state three years for Table A1 projects).

### Assumed investment in generation (selected project assumptions)
- Project timing notes:
  - Geothermal: Casitas is assumed to be delayed by one year.
  - Hydroelectric: Tumarín and Boboké are assumed delayed beyond 2021.
  - All projects assumed to deliver full generation capacity over three years (Table A1 note).
- By end-2021 in the alternative scenario:
  - 99 MWh of geothermal projects assumed operational.
  - 74 MWh of biomass projects assumed operational.
  - 78 MWh of hydroelectric projects assumed operational.

### Oil-price shock stress tests
- Rationale: recent fall in oil prices improved distribution company cash flow but reduced near-term appeal of converting generation matrix toward renewables because monomial prices from oil derivatives are lower than renewable monomial prices.
- Stress test design: both baseline and alternative scenarios are subjected to a permanent positive oil price shock of 50 percent in 2016; Bunker-WTI spread assumed constant at 8.9 US$/barrel; other assumptions unchanged.
- Purpose of stress scenarios: analyze vulnerabilities associated with fluctuations in the oil price.

### Key quantitative comparisons — baseline versus alternative (selected exact figures)
- Baseline scenario dynamics:
  - Notional tariff path: falls 15 percent below effective tariff in 2015, climbs to 3 percent above effective tariff by 2021.
  - Electricity sector's oil bill: reaches 1 percent of GDP in 2021.
  - Electricity from non-renewable sources (percent of total) in 2021: 49.
  - Electricity sector's debt/stock of deposits (2021): -8.4 (percent of GDP).
  - Relief to consumers (2021): -1.0 (percent of GDP).
  - Net debt to generators/stock of deposits (2021): -7.4 (percent of GDP).
  - Tariffs (US$/MWh): Notional 2015=178, 2021=189; Effective 2015=225, 2021=220.
  - Generation cost (US$/MWh) 2021: 109.
- Alternative scenario dynamics:
  - Electricity from non-renewable sources (percent of total) in 2021: 23.
  - Notional tariff: climbs more rapidly in medium term and is 10 percent above the effective tariff in 2021.
  - Electricity sector's oil bill: 0.5 percent of GDP in 2021.
  - Electricity sector's debt/stock of deposits (2021): -6.9 (percent of GDP).
  - Relief to consumers (2021): -0.6 (percent of GDP).
  - Net debt to generators/stock of deposits (2021): -6.3 (percent of GDP).
  - Tariffs (US$/MWh): Notional 2015=178, 2021=209; Effective 2015=225, 2021=220.
  - Generation cost (US$/MWh) 2021: 127.

### Impacts under a permanent 50 percent oil price shock in 2016 (selected exact impacts)
- Baseline scenario with shock:
  - Notional tariff would end up 21 percent above the effective one in 2021.
  - Electricity sector's oil bill would reach 2.8 percent of GDP in 2021.
  - Debt related to relief to consumers would reach 4 percent of GDP in 2021.
  - Notional tariffs (US$/MWh) 2021: 266; Effective 2021: 220.
  - Generation cost (US$/MWh) 2021: 176.
- Alternative scenario with shock:
  - Notional tariff would be 12 percent higher than the effective one in 2021.
  - Electricity sector's oil bill would be half that of the baseline scenario (1.4 percent of GDP in 2021).
  - Debt related to the relief to consumers would be less than 3 percent of GDP in 2021.
  - Notional tariffs (US$/MWh) 2021: 246; Effective 2021: 220.
  - Generation cost (US$/MWh) 2021: 159.
- Comparative conclusion: impact of the oil-price shock is stronger in the baseline than in the alternative due to different generation matrices and lower generation costs in the alternative.

### Memorandum and projection assumptions (selected exact items)
- Loss factor recognized in tariffs: 2015 onward = 1.15 (with earlier years 1.13, 1.15, 1.16 as listed).
- Subsidy for disadvantaged Neighborhoods (US$): 3000000000.
- Technical and non-technical losses of distribution (percent): 2015 = 20.8 (with 2012=20.9, 2013=20.7, 2014=21.1).
- Transmission fee (US$/MWh): 2015 = 7.9 (examples: 2012=6.6, 2013=7.0).
- AVD in tariffs (US$/MWh): 2015 = 15.9 (examples: 2012=22.1, 2013=24.1).
- WTI (US$/barrel) projections: 2015 = 36, 2016 = 40, 2017 = 43, 2018 = 45, 2019 = 45.
- Spread (Bunker - WTI, US$/barrel): 2015 onward = 6.5 (2012 = -0.3, 2013 = 7.3).
- Real GDP growth (percent): 2015 = 4.0, and projected 2016–2021 = 4.0 each year.
- US Inflation (percent): 2015 = 0.1, projections 2016 = 1.1, 2017 = 1.9, 2018 = 2.2, 2019 = 2.3, 2020 = 2.4, 2021 = 2.2.

### Policy implications and recommendations (selected)
- For Haiti: adopt a program rooted in the short-term but with a long-term view; implement a careful sequenced program to build credibility and promote investment; improve regulatory framework (reasonable tariff setting and demand dispatching rules), review penalties for non-payment, tackle theft and strengthen enforcement (particularly from larger clients), and put the state-owned electricity company (EDH) on a sustainable footing to reduce fiscal transfers.
- For Nicaragua: build on gradual continuous efforts that strengthened credibility; continue strengthening the regulatory framework and tackling theft.
  - If continuing a dual tariff system, essential to embed it in a medium-term framework to increase credibility and attract needed levels and composition of investment.
  - Continue diversification to reduce vulnerability to oil price shocks even in a context of low oil prices.
- Strategic trade-offs: converting the generation matrix toward renewables may raise notional tariffs in a low oil-price environment but provides permanent savings in the sector’s oil bill and a hedge against oil-price volatility, with environmental advantages.

*Source: Appendix I, _wp1685 (IMF working paper excerpt).*

### Appendix I. Nicaragua: A Medium-Term Framework ............................................................30

### Appendix I. Nicaragua: A Medium-Term Framework ............................................................30

### Tables
- 1. Simplest Stage Game for Infinitely Repeated Game ...........................................................18
- A1. Nicaragua: Assumed Investment in Electricity Generation 2015-21................................31
- A2. Nicaragua: Baseline and Alternative Scenarios ................................................................33
- A3. Nicaragua: Oil Price Shock ...............................................................................................34

### Figures
- 1. Distribution Losses, Electricity Output, and Electricity Tariffs ..........................................13
- 2. Optimal Output for Alternative Levels of Subsidies ...........................................................15
- 3. Distribution Losses for Alternative Government Objective Functions ...............................16
- 4. Distribution Losses, Electricity Supply, and Tariffs with Endogenous Economic Activity17
- 5. Nicaragua: Electricity Sector Developments .......................................................................25
- A1. Nicaragua: Electricity Sector’s Medium-Term Sustainability of the Electricity Sector ...32

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1685.pdf*

### References .............................................................................................................

### _wp1685 - References

### I. Introduction — core findings and mechanisms
- Reliable and low-cost electricity supply is essential for economic activity and attracting productive investment (Alam, 2006; Payne, 2010); high electricity costs and shortages act as a disincentive to investment and a bottleneck to economic activity.
- Inadequate management leads to rationing and costly subsidies, often exacerbated by fraud and nonpayment, resulting in price distortions and fiscal costs (IMF, 2013; Di Bella and others, 2015).
- Structural reforms that strengthen electricity sector performance and infrastructure increase total factor productivity (IMF, 2015a).
- Models show policy choices can generate different long-term equilibria:
  - Better equilibrium: low theft-ratios and delinquency, strong enforcement, low government subsidies, appropriate tariff setting and dispatching rules → lower generation costs, sufficient investment to meet peak demand.
  - Worse equilibrium: high theft-ratios and subsidies, weak enforcement, inappropriate tariffs and dispatching rules → high generation costs, insufficient investment, bottlenecks to activity.
- Short-term management affects sector cash flow and solvency prospects; constrained financing leads to insufficient supply or rationing. Investors form expectations about future solvency based on current parameters; tariffs below generation costs or high theft/subsidies impair solvency and investment (Varangu and Morgan, 2002; Morgan, 2007; World Bank, 2009a, 2009b).
- Low oil prices improve cash flows and reduce subsidies but reduce incentives to invest in renewables and to hedge against oil-price volatility.

### II. Models for the electricity sector — structure and implications
- Electricity tariff identity (average tariff covers generation cost, aggregate value of distribution, and regulator-defined factors) with explicit recognition of distribution losses via a loss factor.
- Distribution losses comprise technical and non-technical losses (the latter: electricity theft, delinquency, inadequate metering and billing, accounting errors) (World Bank, 2009a, 2009b).
- Generation cost decomposition:
  - Contract (“monomial”) price includes a cost-for-power component and a pure electricity cost that tracks the variable cost of generation; both depend on composition of generation matrix and supplied volume.
  - Base-load (steady-flow) units receive cost-for-power payments; intermittent units (run-of-river hydro, wind) generally do not unless storage is present.
- Dispatching: minimize generation cost by dispatching lower-cost plants first; shortages should not occur if installed capacity covers peak demand.
- Distribution cash flow condition: if actual generation cost or actual distribution losses exceed values recognized in tariff-setting, cash flow per unit sold can be insufficient to cover costs (explicit expression shown in text).
- Optimal investment in generation (two-period investor model):
  - Investor chooses investment in renewable and non-renewable technologies given stochastic returns and minimum scale requirements.
  - Oil price states (high and low) affect relative costs and utilization rates of non-renewable versus renewable plants; expected utilization rates depend on price state.
  - Solvency prospects (probability of buyer ability to pay) are a function of observed distribution losses and sector parameters; below a threshold of solvency, optimal investment can be zero.
  - Take-or-pay contracts can facilitate investment by providing revenue guarantees but can distort price signals and discourage cost-minimizing dispatch, especially risky in fragile governance contexts.
- Distribution network and Zero-Profit Condition (ZPC):
  - Long-term cash flow and optimal network size are determined under ZPC that includes government transfers to compensate recognized distribution losses and a required competitive profit per unit.
  - Intuitive comparative statics: higher distribution losses, higher generation costs, lower government transfers, higher required profits, less efficient technology, and higher interest rates → lower investment/supply and higher tariffs.
  - Credibility of government promise to reduce theft/enforce regulation matters: investor anticipates government choice; if promise is non-credible, investment remains low.
  - Government objective weightings determine credible enforcement: heavier weight on welfare of paying consumers increases credibility of promise to reduce theft and yields higher supply and lower tariffs.
- Endogenous economic activity:
  - Making economic activity endogenous (firms’ output and electricity demand respond to tariffs) amplifies adverse effects: higher distribution losses → higher tariffs → lower electricity demand → lower economic activity → further depressing demand and investment.
- Infinitely repeated game and trigger strategies:
  - Stage-game Nash outcome can be high theft / low investment (worse for both players).
  - With infinitely repeated interactions and trigger strategies, cooperative equilibria (low theft / high investment) can be sub-game perfect if discount factors are sufficiently high.

### III. Short-term dynamics, financing, and cross-subsidies
- Negative cash flow in short term (tariffs not covering recognized/actual costs) can be temporarily sustained by transfers, recapitalization, financing; prolonged negative flows lead to arrears, cross-arrears, and supply reductions.
- Cross-subsidies: average tariffs are weighted across consumer groups; groups with tariffs above generation costs subsidize groups with tariffs below generation costs.
- Self-generation by large consumers increases effective generation costs and may expand peak demand or rely on small diesel units with high unit costs; effective generation costs rise as share of network-supplied electricity declines (explicit formula provided).
- Persistent large self-generation and powerful interests among large consumers can create perverse political incentives and a self-sustaining equilibrium of large losses, high tariffs, and large cross-subsidies, reducing economic activity when output is endogenous.

### IV. Case study — Haiti: stuck in a bad equilibrium
Background observations (IMF, 2015b)
- Regulatory and governance weaknesses: board of Électricité d'Haïti (EDH) sets tariffs while Ministry of Public Works regulates; tariffs rarely adjusted; inefficient dispatching; onerous PPAs with take-or-pay clauses and government guarantees; weak enforcement.
- Persistently high distribution losses and low cash recovery index: cash recovery index about 25 percent in 2014; commercial and industrial clients resort to self-generation.
- Large government subsidies and fiscal vulnerability:
  - EDH deficit was 2.5 percent of GDP in 2014.
  - EDH arrears estimated at 3 percent of GDP at end-2014.
  - Power generation units run arrears with an autonomous government agency managing foreign-aid flows, estimated at 2.4 percent of GDP at end-2014.
- Generation matrix highly non-renewable: about 90 percent of installed capacity based on oil-derivatives (diesel and fuel oil); multiple independent, non-interconnected grids.
- Consequences:
  - Virtually inexistent investment to expand production/grid; high generation costs; share of population connected to grid ~30 percent and stable for decades.
  - Frequent, long, unplanned blackouts; significant self-generation; forfeited economies of scale.
Policy implications recommended for Haiti
- Strengthen regulatory framework: better rules, reduce entry barriers, ensure efficient dispatching and transparent PPAs, publish PPAs, audit EDH accounts, implement competitive bidding for IPPs, revise PPAs to reduce cost dispersion.
- Improve enforcement and reduce theft/delinquency: clean cumulated arrears, penalize nonpayment, improve EDH governance, regular inspections, regularization plans for large arrears, centralize and enforce government payment of electricity bills, budget for public lighting.
- Reduce transfers to the sector: overhauling EDH finances, consolidate cross arrears, increase billing and collections (especially large clients), expenditure restraint (wage bill), and credible plans to reflect losses and generation costs in tariffs.
- Analyze diversification into renewable generation and interconnection of isolated grids to create a national market.
- Establish clearly sequenced reform program with short- and long-term targets to build credibility for reforms and attract investment.

### V. Case study — Nicaragua: transition toward a better equilibrium
Background observations (IMF, 2012)
- Strengthened regulatory framework and reforms since 2007–2009:
  - 2008 agreement to adjust tariffs to reflect generation costs and temporarily subsidize disadvantaged neighborhoods while reducing non-technical losses.
  - Legislation to penalize electricity theft strengthened in 2010.
  - ENATREL operates National Dispatch Center to meet demand at minimum variable cost; INE (autonomous regulator) oversees tariffs and contracts; spot market strengthened price signals.
- Distribution losses decreased (from in excess of 30 percent in early 2000s to about 21 percent in 2014).
- Contained government subsidies: subsidies decreased with oil price declines since 2014, though non-budgetary assistance remained elevated in 2010–13.
Outcomes consistent with model predictions
- Investment and capacity:
  - Effective electricity generation capacity increased from 542 MW in 2007 to 786 MW in 2014.
  - About 60 percent of total electricity generated by private sector as of end-2014.
- Supply, reliability, and diversification:
  - Frequent blackouts were gradually eliminated; by 2010 small seasonal surpluses enabled exports.
  - Generation mix shifted: non-renewable share fell from about 75 percent in 2007 to 50 percent in 2014.
  - Renewable sources in 2014: hydroelectric 10 percent, geothermal 15 percent, biomass 6 percent, wind 20 percent.
Policy implications recommended for Nicaragua
- Continue strengthening regulatory framework; move toward rule-based tariff setting rather than discretion. The dual tariff system (notional vs. effective) increased transparency but requires medium-term framework guidance.
- Further reduce theft and delinquency through enforcement; non-technical losses remain high and unrecognized in tariffs, harming distribution cash flow.
- Keep fiscal subsidies low to preserve credibility of reform promises and limit contingent liabilities; sector debt reached about 2 percent of GDP as of end-2014.
- Analyze further diversification toward renewable sources to hedge oil-price risk and internalize negative externalities.
- Establish a clearly defined medium-term framework for tariffs that accounts for oil price outlook, technical and non-technical losses, and prospective investment.

*Source: _wp1685 - References (excerpts) — IMF working paper content provided in the input.*

### Appendix I shows an example of how such medium-term framework may look like.

### Appendix I. Nicaragua: A Medium-Term Framework

### Concluding observations on electricity-sector equilibria
- Reliable and low-cost electricity provision is critical for economic activity; bad configurations can produce a bad equilibrium with: high electricity costs, electricity shortages, expensive self-generation, and large fiscal subsidies arising from unbalanced cross tariff subsidization, fraud and non-payment.
- Countries that transitioned to better equilibria are characterized by: better regulatory frameworks (including adequate tariff setting, enforcement of penalties, and appropriate energy dispatching rules), lower generation costs, lower theft ratios and government subsidies, and investment levels large enough to guarantee supply commensurate with peak demand.
- Investment in the sector depends on: solvency prospects (related to electricity theft and delinquency), adequate tariff setting and dispatching rules, initial conditions, and minimum investment scales.
- Composition of investment between technologies depends on expected relative generation costs and initial composition of the generation matrix; a more diversified generation matrix provides a better hedge to oil price fluctuations.
- Government credibility to address sector problems (particularly electricity theft) affects investment levels: if promises are not credible, private investment, electricity supply and economic activity remain low and tariffs, subsidies and theft remain high; credible commitments spur investment and can enable a transition to a better equilibrium.
- In an infinitely repeated setting, continued commitment to reforms can build credibility and move the sector to a better equilibrium.

### Medium-term framework purpose and scenarios
- Purpose: formulate a baseline and an alternative scenario through 2021 to show how tariff setting and planned investment in generation (mostly from non-renewable sources) affect medium-term sustainability.
- Baseline scenario: “no change” scenario; by 2021 about half of electricity would be generated from non-renewable sources.
- Alternative scenario: projects from the Electricity Generation Expansion Plan increase the share of electricity generated from renewable sources from the current 51 percent to about 77 percent by 2021.
- Shared assumptions across scenarios:
  - Electricity demand grows by about 4 percent annually (in line with projected real GDP growth).
  - Technical and non-technical losses of distribution remain at their 2014 average level.
  - Operational and investment spending in electricity distribution grow in line with U.S. inflation.
  - Medium-term oil prices are in line with the World Economic Outlook forecast at end-2015.
  - Bunker-WTI spread stays at the 2014 level (8.9 US$/barrel).
  - Monomial prices for electricity generated from non-renewable (renewable) sources are a simple average of monomial prices at the companies representing the largest share of generation, assumed to grow in line with bunker prices (U.S. inflation).
  - Notional tariffs reflect actual electricity generation costs and a loss factor equal to that in effect in July 2015 (equal to 1.15).
  - Effective tariffs remain at the level observed in July 2015.
  - The public sector pays its electricity bill on time.
- Operational detail: monomial prices for renewable investments are assumed to be an average of the last three years; all projects are assumed to deliver full generation capacity over two years (notes also state three years for Table A1 projects).

### Assumed investment in generation (selected project assumptions)
- Project timing notes:
  - Geothermal: Casitas is assumed to be delayed by one year.
  - Hydroelectric: Tumarín and Boboké are assumed delayed beyond 2021.
  - All projects assumed to deliver full generation capacity over three years (Table A1 note).
- By end-2021 in the alternative scenario:
  - 99 MWh of geothermal projects assumed operational.
  - 74 MWh of biomass projects assumed operational.
  - 78 MWh of hydroelectric projects assumed operational.

### Oil-price shock stress tests
- Rationale: recent fall in oil prices improved distribution company cash flow but reduced near-term appeal of converting generation matrix toward renewables because monomial prices from oil derivatives are lower than renewable monomial prices.
- Stress test design: both baseline and alternative scenarios are subjected to a permanent positive oil price shock of 50 percent in 2016; Bunker-WTI spread assumed constant at 8.9 US$/barrel; other assumptions unchanged.
- Purpose of stress scenarios: analyze vulnerabilities associated with fluctuations in the oil price.

### Key quantitative comparisons (baseline versus alternative, and under oil shock)
- Baseline scenario dynamics (selected exact figures):
  - Notional tariff path: falls 15 percent below effective tariff in 2015, climbs to 3 percent above effective tariff by 2021.
  - Electricity sector's oil bill: reaches 1 percent of GDP in 2021.
  - Electricity from non-renewable sources (percent of total) in 2021: 49.
  - Electricity sector's debt/stock of deposits (2021): -8.4 (percent of GDP).
  - Relief to consumers (2021): -1.0 (percent of GDP).
  - Net debt to generators/stock of deposits (2021): -7.4 (percent of GDP).
  - Tariffs table (selected years, US$/MWh): Notional 2015=178, 2021=189; Effective 2015=225, 2021=220.
  - Generation cost (US$/MWh) 2021: 109.
- Alternative scenario dynamics (selected exact figures):
  - Renewable share increases: electricity from non-renewable sources (percent of total) in 2021: 23.
  - Notional tariff: climbs more rapidly in medium term and is 10 percent above the effective tariff in 2021.
  - Electricity sector's oil bill: 0.5 percent of GDP in 2021 (half of baseline).
  - Electricity sector's debt/stock of deposits (2021): -6.9 (percent of GDP).
  - Relief to consumers (2021): -0.6 (percent of GDP).
  - Net debt to generators/stock of deposits (2021): -6.3 (percent of GDP).
  - Tariffs table (selected years, US$/MWh): Notional 2015=178, 2021=209; Effective 2015=225, 2021=220.
  - Generation cost (US$/MWh) 2021: 127.
- Under a permanent 50 percent oil price shock in 2016 (selected impacts):
  - Baseline scenario with shock:
    - Notional tariff would end up 21 percent above the effective one in 2021.
    - Electricity sector's oil bill would reach 2.8 percent of GDP in 2021.
    - Debt related to relief to consumers would reach 4 percent of GDP in 2021.
    - Notional tariffs (US$/MWh) 2021: 266; Effective 2021: 220.
    - Generation cost (US$/MWh) 2021: 176.
  - Alternative scenario with shock:
    - Notional tariff would be 12 percent higher than the effective one in 2021.
    - Electricity sector's oil bill would be half that of the baseline scenario (1.4 percent of GDP in 2021).
    - Debt related to the relief to consumers would be less than 3 percent of GDP in 2021.
    - Notional tariffs (US$/MWh) 2021: 246; Effective 2021: 220.
    - Generation cost (US$/MWh) 2021: 159.
  - Comparative conclusion: impact of the oil-price shock is stronger in the baseline than in the alternative due to different generation matrices and lower generation costs in the alternative.

### Memorandum and projection assumptions (selected exact items)
- Loss factor recognized in tariffs: 2015 onward = 1.15 (with earlier years 1.13, 1.15, 1.16 as listed).
- Subsidy for disadvantaged Neighborhoods (US$): 3000000000.
- Technical and non-technical losses of distribution (percent): 2015 = 20.8 (with 2012=20.9, 2013=20.7, 2014=21.1).
- Transmission fee (US$/MWh): 2015 = 7.9 (examples: 2012=6.6, 2013=7.0).
- AVD in tariffs (US$/MWh): 2015 = 15.9 (examples: 2012=22.1, 2013=24.1).
- WTI (US$/barrel) projections: 2015 = 36, 2016 = 40, 2017 = 43, 2018 = 45, 2019 = 45.
- Spread (Bunker - WTI, US$/barrel): 2015 onward = 6.5 (2012 = -0.3, 2013 = 7.3).
- Real GDP growth (percent): 2015 = 4.0, and projected 2016–2021 = 4.0 each year.
- US Inflation (percent): 2015 = 0.1, projections 2016 = 1.1, 2017 = 1.9, 2018 = 2.2, 2019 = 2.3, 2020 = 2.4, 2021 = 2.2.

### Policy implications and recommendations
- Haiti: adopt a program rooted in the short-term but with a long-term view; implement a careful sequenced program to build credibility and promote investment; improve regulatory framework (reasonable tariff setting and demand dispatching rules), review penalties for non-payment, tackle theft and strengthen enforcement (particularly from larger clients), and put the state-owned electricity company (EDH) on a sustainable footing to reduce fiscal transfers.
- Nicaragua: build on gradual continuous efforts that strengthened credibility; continue strengthening the regulatory framework and tackling theft.
  - If continuing a dual tariff system, essential to embed it in a medium-term framework to increase credibility and attract needed levels and composition of investment.
  - Continue diversification to reduce vulnerability to oil price shocks even in a context of low oil prices.
- Strategic trade-offs: converting the generation matrix toward renewables may raise notional tariffs in a low oil-price environment but provides permanent savings in the sector’s oil bill and a hedge against oil-price volatility, with environmental advantages.

*Source: Appendix I and related sections from the provided IMF working paper content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1685.pdf_