Towards an Energy Community of South Eastern Europe ECSEE Tariff Reform and the Affordability Issue

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Towards an Energy Community of South Eastern
Europe (ECSEE) Tariff Reform and the
Affordability IssueMaria Vagliasindi, Senior
EconomistChief Economist Office,
EBRDBucharest, 11 October 2004
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Structure

• 1. Inherited supply and the need for tariff
  reform
• 2. Tariff challenges
• Tariff levels, structure and methodology
• 3. Tariff reform and service quality
• 4. SEE Power Affordability Study
• Challenges and objectives
• Methodology
• 5. Reducing Energy Poverty
• Subsidy mechanisms in SEE
• Lifeline tariffs in SEE
• 6. Conclusions

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Introduction Why are tariff reforms needed?

• To ensure the protection of consumers against
  exploitation by monopoly suppliers
• To guard investors against expropriation
• To meet the needs of the population for basic and
  essential services
• For most infrastructure industries markets
• cannot be relied on to meet these criteria

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Inherited power supply and the need for
tariff reform

• Despite progress over the past decades in the SEE
• power sector significant challenges remain
• Low level of tariffs and low cash collection
• High energy intensity
• Low operational efficiency and plant availability
  in power and heat generation high losses in the
  transmission and distribution of electricity,
  heat and gas

Effective regulation (including tariff reform) is
needed to address such challenges
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Electricity pricing (level and structure)
Source EBRD Regulatory Survey (2004) Note as
of 2003
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Energy Intensity is high
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Access/reliability of services to business are
still low
Waiting times and Outages (days)
Source BEEPS (2002)
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Tariff challenges

• Establishment and enforcement of a
• methodology for setting tariffs that
• Promotes efficiency in production and consumption
• Guarantees universal access and deals with
  affordability
• Encourages investment
• Price caps vs rate of return
• Incentive effects depend on the review period

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Determinants of effective tariff reform

• Predictable and reasonable regulation (which in
  turns requires an extensive consultation process)
• Strong independent regulator
• Transparency of rules and effective enforcement
• Appeal procedures determined
• Effective tariff reform reduces regulatory
  risks (cost of
• capital) and improves incentives to attract new
  capital

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Regulatory reforms and service quality

• Improvements in the regulatory framework and
  broader institutional reforms (independent
  regulator, tariff reforms and investment)
  contribute to better performance
• Empirical evidence hardening budget constraints,
• introducing independent regulators and
• implementing tariff reforms are significantly
• positively associated to better service quality

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Setting up an independent regulator makes a
difference ...
Outages
Waiting times
Source BEEPS (2002)
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SEE Power Affordability Study

• Analysis of 8 countries
• Albania, BiH, Bulgaria, Croatia, Moldova, FYRM,
  Romania, SiM
• Context Energy Community of South Eastern Europe
  (ECSEE)
• Carried out by IPA consultants in 2003
• sponsored by DfID

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Challenges and objectives

• Basic question What part of household income is
  spent on energy?
• affordability by income group
• affordability at cost-reflective tariffs
• affordability over time
• Assess safety nets What are the most effective
  measure to fight energy poverty?

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Methodology Current Affordability

• Expression of monthly expenditure on electricity
• Electricity tariff x Consumption
• as a proportion of Household Resources
• Average Wages
• Social Welfare Data
• Statistical Surveys of Household
  Income/Expenditure
• ..for different customer categories

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Methodology Future Affordability

• Several stages
• Gather best existing estimate of Long Run
  Marginal Cost
• Construction of a notional tariff path
• Econometric estimation of electricity consumption
  as a function of income
• Incorporation of income and price elasticity
  effects
• Expressing monthly electricity expenditure as a
  proportion of future resources.

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Average affordability current prices, current
consumption
kWh/month
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Affordability by income group current price,
normalised consumption
of Household Resources needed to buy 100kWh
electricity per month
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Affordability at long run marginal cost
Simplified Consumption is constant (No income
effect, no price effect) and no differentiation
in LRMC
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Affordability over time FYR Macedonia
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Reducing Energy Poverty

• Energy Poverty is related to
• Household Resources
• Targeted subsidies
• Energy Prices
• Lifeline (block) tariffs
• Energy Efficiency
• Targeted programs

Household Resources
Energy Efficiency
Energy Prices
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Policy instruments
Need to design policy instruments for selectively

• and/or increasing resources
• Targeted subsidies
• Cross-energy?
• Earmarked or not?
• and encouraging efficient consumption

• ...reducing prices
• Lifeline or block tariffs
• Two or three blocks?
• Optional or compulsory?
• Others (not recommended)
• Non-disconnection
• Across the board price subsidies

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Subsidy mechanisms in SEE
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Lifeline tariffs in SEE
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Conclusions

• Tariff reforms are urgently needed
• to improve efficiency in production and
  consumption
• To improve access and quality of services to
  consumers
• Affordability is a problem
• for some consumers in most countries
• for most consumers in some countries
• Social protection measures are in place but not
  optimised
• targeting
• funding

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Contact at the EBRD

• Power and Energy Utilities
• Director Tony Marsh
• Tel [phone]
• Fax [phone]
• Email marsha_at_ebrd.com
• Office of the Chief Economist
• Maria Vagliasindi, Senior Economist
• Tel [phone]
• Fax [phone]
• Email vagliasm_at_ebrd.com
• Website www.ebrd.com