Tariffs & subsidies
Tariffs and Subsidies: The issue: Perhaps the most complex and politically sensitive of policy issues is the level of energy prices. Low or below-market energy prices have two consequences: 1) they do not encourage consumers to invest in energy efficiency; and 2) low prices fail to provide enough revenue for heat supply companies to repair and modernize their own systems.
Tariff structures sometimes provide exemptions for so many types of consumers - regardless of income - that heating and water enterprises cannot recover their costs and invest in improving their infrastructure. Tariffs should reflect the cost of production and only those below a certain income should be subsidized. But this is much more difficult than it sounds.
National governments need to set the laws that allow cities to take those non-payers who have the means to court (since district heating companies cannot cut off individual consumers). Some countries, like Poland, allow for non-payers' wages to be reduced by the amount of the heating debt. And when cities are responsible for paying the subsidies (as opposed to the national government) it provides an incentive for the city to reduce heat losses - particularly in buildings with a high percentage of subsidized consumers. Every wasted calorie means more money out of the city budget.
In July 2002, the Ukrainian Cabinet of Ministers approved a strategy to replace the system of privileges, or subsidies, paid to residential consumers in the Autonomous Republic of Crimea, in all oblasts, and in the cities of Kyiv and Sevastopol. The strategy aims to ensure that the budget allows for economically and socially substantiated privileges granted to residential consumers on the basis of their service and salary. The Ukraine Cabinet of Ministers Order #383-R is posted in the Laws section of our Library Documents. The document outlines steps the government intends to take to reach its goals.
Making a difference at the Local Level: Improving municipal energy efficiency is inhibited because of continuing governmental subsidies, lack of tariff reform, and chronic non-payment of utility bills. Whatever the status of national policies, creative city leaders have developed ways around this. Some municipalities, such as the Russian city of Cherepovets, have instituted full cost recovery (unlike most Russian cities) and have been able to channel subsidies into energy efficiency investments. Others local leaders have designed a demand charge to penalize consumers that have an excessively-high peak demand. MUNEE will scour the region to look at tariff and subsidy designs that promote energy efficiency and improved heating quality. These case studies will be transferred around the region through in-country workshops, regional exchanges, this website and other means.
Visit the MUNEE library of documents for reports on best practices in Ukrainian municipalities!
On the policy side, we will work with national governments to look at changes in tariff and subsidy regulations that can encourage greater energy efficiency - that can send the right market signals to those who can afford their energy bills and preserve subsidies only for the consumers that truly need them.
The Heat Subsidy Shift (PDF) process in Russia is the object of presentation by the Director of AISU, PNNL, Mr. William Chandler at the U.S. Baltic Power Sector Investment Seminar held in February 2000 in Vilnius, Lithuania. Savings monitoring and verification in the shifting from subsidies to capital in selected municipalities in Russia is done by the Center for Energy Efficiency in Moscow (CENEf).
Utility Services for the Poor: Policies and Practices in Central and Eastern Europe and the FormerSoviet Union
To get a clearer understanding of the types of subsidies various countries in the region use to help citizens pays for the cost of utility services (particularly heat, water and gas), please go to the Miscellaneous Documents section of our Library to download the World Bank report Maintaining Utility Services to the Poor.
The report describes the different kinds of subsidies governments use, assesses their ability to target the poor effectively and recommends different approaches countries can use to improve the design of subsidy programs.
As is too often the case in the region, subsidies are too broad and cover a range of consumers who do not really need them. In addition, local governments often have to shoulder the burden of subsidies and are unable to pay for them out of their budgets. The result is that heat and water utilities cannot invest in improving their infrastructure resulting in high energy losses and poor quality of service. If subsidies can be effectively targeted only to the consumers that really need them, the costs of the subsidies to cities would be lowered and more revenues could flow to utilities. As this report indicates, even targeted subsidies often have unintended effects and end up not really reaching the poor.