Ambassador to Austria and UK Permanent Representative to the United Nations and other International Organisations in Vienna
Part of UK in Ukraine
24th February 2012
Ukraine: is discounted gas good? #2
I blogged recently about the complexities around Ukraine’s efforts to secure cheap gas from other countries. I noted that increasing the price of gas supplies to domestic consumers could help strengthen Ukraine’s hand in those negotiations.
At present, some consumers of gas in Ukraine (mostly industrial users) pay market prices. Other users pay a lower, subsidised price. This has a number of effects:
(i) By lowering prices for some consumers, energy efficiency and lower consumption of gas are discouraged. So is exploration and exploitation of Ukraine’s own gas reserves. Both elements weaken Ukraine’s hand in negotiating with other countries about gas supplies;
(ii) Subsidising cheap gas for some consumers costs the Ukrainian government huge amounts of money, making it harder to afford to buy the gas it needs from other countries or to pay for government spending inside Ukraine;
(iii) Subsidising cheap gas for some consumers is what economists call a “regressive” subsidy. In other words, a low-income, elderly single person using very little gas benefits a little bit; a wealthy person with a huge house, a heated swimming pool and a Jacuzzi who uses lots of gas benefits immensely.
(iv) A dual-pricing system creates possibilities for “arbitrage”. For example, if A sells gas to B for 50% of the price which C has to pay, B can make money by re-selling that gas to C. This creates corruption and inefficiency, costing tax-payers, and the government, money.
The alternative to all this would be to charge everyone the same price; and then to help poor people who have difficulty paying for gas or heating by providing cash transfers through means-tested social programmes. The infrastructure to do this is already there. Such a policy would boost government finances; promote energy efficiency; increase incentives for exploration and exploitation of gas in Ukraine; and help Ukraine’s negotiations with other countries about gas supplies.
Clearly for any government to increase prices to consumers is a bold political move. But in this case the present system is so harmful that there is a strong argument that raising prices would serve the interests of Ukraine and the Ukrainian people better than leaving the existing system in place.
Is the objective of cash transfers to promote energy efficiency, or simply to provide access to the same amount of gas? If the latter, then there is a big risk that poor people will spent cash transfers for other necessities like food or health care because of the lack of money. If the former, then assessing the effectiveness of the project is even much more difficult, as this
entails upgrading poorly insulated buildings, developing energy efficient housing loan bank products, sharing the knowledge about the benefits of residential energy efficiency.
Complicated! I understand that domestic consumers pay on a sliding scale depending on usage – so arbitrage is not feasible, as the purchase price becomes similar to the industrial price at large volumes. Yes, my UK friends are astonished by our small utility bills – but they are also astonished by the low Ukrainian incomes and pensions. Some are already subsidised for utilities, and already many workers/pensioners only have money for apartment costs, food and marshrutka – and not always for the full month. Possibly a can of worms?