Subsidy Reform in the State of Kuwait – Middle East Centre

by Salem Alhajraf 

Kuwait has historically relied on substantial energy subsidies as a key element of its socio-economic policies. Direct and indirect financial subsidies and support affect nearly all aspects of life, and they are often interpreted by economists as a form of wealth distribution commonly found in countries with natural resource wealth. Those subsidies and financial support take different forms, from direct subsidies on energy, social, housing, and agriculture to indirect financial support covering sectors such as education, healthcare, and employment security. However, electricity is considered as one of the major subsidies in the country reaching 18.4% ($14.5bn) of 2025-26 fiscal budget. The financial sustainability of subsidies in Kuwait is being increasingly questioned, mainly because of fluctuating oil and gas prices and concerns about rising domestic energy consumption. 

This blog explores possible scenarios for successful reforming of electricity subsidies in Kuwait. It raises an important question: What type of reform can ease the growing financial burden on the government budget while also ensuring public acceptance and support?

Wealth Distribution Policies

For countries rich in natural resources, such as Kuwait, the distribution of wealth among citizens is crucial for policymakers and should not be undermined. It is essential to establish clear principles to guide this distribution, aiming to make it more sustainable and equitable while targeting the appropriate segments of the community. There are four main goals for such a policy that are often overlooked in practice: ensuring long-term financial sustainability, achieving independence from hydrocarbon rents, encouraging nationals to participate in the workforce, and supporting economic diversification away from dependence on hydrocarbon revenues.

Subsidies for key sectors, including energy, education, healthcare, job security, and housing, have been a part of Kuwait’s economy since the early days of oil exportation. However, the rising costs of subsidised services from 1963 to 2024 raise significant concerns about the viability of this policy. This is especially true during periods of low oil prices, when government budgets typically run a deficit. Today, the deficit stands at $20.6 billion, accounting for 35% of the total budget for 2025–26, and requires an oil price of $90 per barrel to break even.

Electricity Subsidies in Kuwait

Electricity subsidies cover approximately 95% of production costs, making them a significant contributor to Kuwait’s high per capita electricity consumption and carbon emissions, which rank Kuwait among the highest in the world. The low electricity prices do not reflect the real cost of production, not even a portion of the fuel cost, leading to inefficient consumption behaviour, specifically during peak demand months from April to October, when demand for air conditioning accounts for around 70% of total demand.

Since 1966, the electricity tariff has been set at $0.7 for all consumers. In 2017, the tariff was raised by 150%-1150% for the industrial, commercial, agricultural, and government sectors, and remained unchanged for the residential sector, which is responsible for 60% of consumption. The lack of price signals discourages energy conservation measures and investments in energy-efficient technologies. The economic bias caused by extremely low electricity prices creates a disincentive for end consumers to invest in energy-efficient measures for air conditioning, home appliances, building insulation, and industrial processes. High electricity subsidies fail to incentivise distributed renewable energy technologies, such as rooftop solar PV systems, which could help alleviate pressure on the grid during midday summer peak load demand and reduce reliance on fossil fuel-based power plants. Furthermore, the financial burden of electricity subsidies contributes to draining the budget (among other inefficient use of subsidies) and limits opportunities to develop other non-hydrocarbon-based sectors.

Scenarios for Effective Subsidy Reform

Three scenarios for successful reform of electricity subsidies in Kuwait was proposed and briefly introduced by recent study published by Rice University’s Baker Institute for Public Policy including:

Scenario 1: Capped Subsidy: To establish a fair consumption threshold, the average monthly electricity consumption is determined based on Kuwaiti typical homes size of 400 square meters. This threshold level will be eligible for continued subsidy at its current rate, ensuring that households receive an equal supply of subsidised electricity to meet slightly more than their average monthly needs. Households consuming up to this threshold level can continue to benefit from the state electricity subsidy. However, under this scenario, any consumption that exceeds this level will be charged the market electricity price.

Scenario 2: Tiered Subsidy: Electricity prices are structured into three or four tiers based on consumption levels. The first tier covers usage from zero up to a specific amount, referred to as Level A, which is considered a modest monthly consumption level. This tire receives the highest subsidy, resulting in the lowest electricity tariff. When a consumer’s monthly consumption exceeds the first tier, they move into a higher tier, where the tariff increases but is not completely eliminated. As consumption continues to rise and surpasses the next tier, the subsidies are gradually reduced. In the final tier, which represents the highest level of monthly consumption, customers pay the market price for any additional electricity used. Under this scenario, households that keep their monthly consumption within the first-tier benefit from the maximum subsidy. Even high-consuming households still receive some subsidised electricity at each tier until the subsidy is fully phased out.

Scenario 3: Cash Payment Subsidy: In this scenario, electricity prices will be liberalised and determined solely by market supply and demand. The subsidy will be transformed into a monthly cash payment for each Kuwaiti homeowner, calculated based on a predefined national average of monthly household consumption. This compensation could be deposited directly into the homeowner’s bank account or distributed as credit points with the Ministry of Electricity and Water Resources (MEWRE), which can later be used to pay electricity bills. Customers who maintain their consumption levels below the predefined threshold will accumulate savings that can be periodically withdrawn as cash. Efficient consumers will earn money if their electricity usage remains below the national average. Conversely, households that consume more than the national average will find that the stipend payments are insufficient to cover their additional usage, necessitating out-of-pocket payments for their extra consumption.

Equitable Reform

Any scenario that unfolds should include a comprehensive analysis of subsidy reform, considering both its economic impact on the government’s annual budget and its social effects on low-income households. Subsidy reform requires crucial success factors during implementation including: a gradual implementation process, protection for low- and middle-income families, and measures to mitigate inflationary effects on domestic products and services. A detailed analysis of these three scenarios and elements will be the goal of an in-depth research study on this topic.

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