Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

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Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms about the size of these subsidies and because of the political consequences of unpopular energy-price increases. In general, energy prices remained under government control for longer than most other commodity prices. Energy-price reforms have nevertheless been implemented in Central and Eastern European countries. In many cases, the prices of gasoline and other oil products have been completely deregulated. But the prices of electricity and gas to households are often still below the economic cost of supply, even though subsidies have been reduced in most cases. Harmonisation with EU law, which restricts opportunities for subsidising industry, is a major driving force behind moves to eliminate remaining subsidies. Energy-price liberalisation has been gradual. Progress has been slowest in the case of energy supplied through networks, that is electricity, gas and district heat. Recently, price reform has accelerated in the EU accession countries, as full price liberalisation is a requirement for joining the Union. The main features of this process are as follows: • Oil and oil product prices were raised gradually to market levels reflecting full economic costs in most Central and Eastern European countries by 1991/1992. In most cases, they were adjusted to reflect import prices. For countries that import Russian gas paid for in kind for transit, prices were increased more slowly. • By 1992, electricity and gas prices for industry in Poland, Hungary and the Czech Republic were close to levels in Western Europe. • The prices of electricity and heat for households have increased least and, in many cases, remained perversely below industrial prices. This cross-subsidy emerged as the biggest problem of price liberalisation in the transition economies. • The approach to setting the price of network energy was often based on historic average costs. Governments have tried to balance different interests by reflecting the cost of energy supply in wholesale prices but keeping a cap on end-user prices. The main reasons for subsidising prices are to enhance energy-supply security, increase industrial competitiveness and protect jobs by favouring domestic resources, and to support household incomes. Efficient pricing requires raising all energy prices to full-cost levels, i.e. the long-term marginal cost for electricity and international market prices allowing for transport costs for oil products and other traded fuels. Doing so would improve incentives to use energy efficiently and reduce environmental effects. Many Central and Eastern European countries have started to implement energy efficiency programmes without first adjusting energy prices. The results have been disappointing, because incentives for consumers to change their behaviour or to invest in energy-efficient equipment and technology are weak. Politicians have been particularly reluctant to raise prices to households for social reasons and because of public opposition and fear over the impact of energy-price rises on the general inflation rate. The impact on the living standards of the poorest households was the main reason for the initial slow progress in raising household prices. Delaying price increases hindered efforts to improve energy efficiency in this sector. The adverse social effects would have been dealt with more effectively by direct welfare support to poor households that were most vulnerable to increases in energy bills. Such a system was introduced in the Czech Republic in the second half of the 1990s. 54
Energy Subsidies in the Czech and Slovak Republics 4.3.2 Energy Market Liberalisation The liberalisation of the electricity and gas markets in the European Union has accelerated deregulation of energy prices in the EU accession countries in Central and Eastern Europe. The EU directives on common rules for the creation of an internal energy market require electricity and gas markets to be opened gradually to competition. At present, roughly one third of these markets in EU countries must be open by 2003. The accession countries have negotiated longer transitional periods, but all must liberalise their markets fully by 2007. This will involve removing controls over prices to eligible customers. 4.4 Measuring Energy Subsidies 4.4.1 Methodological Considerations The following overview of energy subsidies in the Czech and Slovak Republics is based on studies undertaken by SEVEn, the Energy Efficiency Centre based in Prague. 32 These studies review direct payments from the public budget that benefit the supply or use of energy, as well as other indirect policies that favour the production and consumption of energy. The problem of external costs and benefits was not considered. Determining the subsidy for uncovered external costs would require a full assessment of these costs. This approach is in line with that adopted in other studies of this kind. 33 The term direct subsidy was used for public expenditures supporting the production and consumption of energy, including direct payments and other public expenditures. An indirect subsidy refers to any accompanying policy such as regulatory measures and cross-subsidies. Funds from international programmes were also included in direct subsidies on the grounds that this support is channelled through the public authorities and either reduces energy prices paid by consumers, raises prices received by producers or lowers the cost of production. However, these sources of subsidy are small in comparison with subsidies from the national budget. Only limited empirical analyses are available. The original data for the Czech and Slovak Republics were taken from the State Final Account, which is broken down by ministry and other government institutions. The collection and presentation of data does not follow a strict and unified methodology, which makes comparisons difficult. The only available sources of information about energy subsidies in the Czech and Slovak Republics are the studies undertaken by SEVEn. In these documents, data for different fuels and subsidy categories are included. However, differences in methodology and presentation limit the extent to which the findings in the two countries can be compared and trends discerned. The studies cover the period between 1994 and 1998 for the Czech Republic and 1993 to 1999 for the Slovak Republic. 32 Florian (1999) and Krivosik (2001). 33 See Oosterhuis (2001). 55
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Page 5 and 6: Acknowledgements Acknowledgements T
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Energy Subsidies: Lessons Learned in Assessing their Impact - UNEP

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