Electricity and gas prices are important topics for all customers, irrespective of their citizenship or country of residence. But they are especially important in Ukraine due to the phased “release” of regulated energy prices. With the prospect of fully market-based pricing, these costs keep growing. We asked Svitlana Golikova, Energy Policy and Regulation Expert at the USAID Energy Security Project, about the growth of energy prices and steps to increase consumers’ ability to pay their bills.
With inflation, the cost of many goods is growing year by year in response to rising production costs, inclu’ding rising energy prices. But why does the price for electricity and gas increase? Is there a “ceiling” to this price growth?
Gas and electricity are commodities that require not only human resources but also fuel and technology to produce, and the cost of those also depends on the competitive environment and market prices. For example, fuel (gas, coal) accounts for more than half of the cost of electricity generation, and renewable energy generation currently still uses expensive technologies. Prices for energy resources will keep growing when there is low competition in the markets. And the experience of European countries demonstrates that prices fall with the development and expansion of the generation and supply market or, as in the case with RES, cheaper technologies.
An additional way to save money is by introducing energy-efficient technologies and measures.
How we can protect vulnerable consumers from unaffordable gas and electricity prices? What international experience is available? What are the criteria for designating consumers as “vulnerable”? According to the State Statistics Service, one in five households receives subsidies to pay for housing and communal services. Is it wise to release prices to free-market levels with such a large share of subsidized consumers?
Many countries in the world and in Europe experience the problem of energy poverty. According to the INSIGHT_E think tank, energy poverty is “a set of conditions under which individuals or households are unable to heat or provide other energy services in their homes at an affordable price.”
Consumers suffering from energy poverty are the ones we call “vulnerable.” Energy poverty and consumer vulnerability are characterized by a few key indicators: low income, low thermal efficiency of buildings, and high energy expenses. Several factors affect a household’s risk of energy poverty: energy prices growing faster than income, limited access to cheaper gas or electricity, rising energy demand for household needs, and low energy efficiency. Political risks cannot be ruled out, as energy has become increasingly politicized in recent years.
In the European Union, almost 7 percent of consumers are classified as “energy poor”; vulnerable consumers are those whose energy expenses (for gas, heat and electricity) exceed 10 percent of their income or a certain value set by the state, or those who receive social benefits. Most countries address this issue through monetized subsidies, soft loans for thermal modernization of homes, or other social support.
According to the Ministry of Social Policy, 1.8 million people in Ukraine have a 25 to 100 percent discount on housing and communal services due to their status (children of war, large families, veterans of the National Police, Chernobyl victims, combat veterans, and employees of libraries, public cultural institutions, teachers and doctors in rural areas, etc.). What can be done with these benefits?
With the development of freer energy markets, consumers can choose the supplier with the lowest prices or with the most attractive service packages (just like choosing, for example, a mobile operator). In those segments where the competition is at the start (for example, in heat supply), the state regulates tariffs and must find a balance between consumers’ ability to pay for goods or services and the business needs of producers and suppliers so that they can operate profitably and without interruption.
Ukraine still has a memory of the Soviet past, when low wages were offset by various benefits, including those in electricity, gas, or heat supply. In a market economy, this approach is wrong, and benefits in the form of aid should be provided only to socially vulnerable groups and those who are energy poor. That is: the issue is not about benefits, but rather social justice and equal access to energy resources.