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How much will changes in energy sector cost?

Ukrainian households currently pay only a quarter of the market value for the energy they use. The rest of the costs are subsidized by the state. Privileged population categories pay even less.

Now, Ukraine is potentially moving closer to Europe and the European Union “threatens” us with liberalization. From a political point of view, Ukraine will integrate into the EU energy system, thereby reducing energy dependence on Russia’s Gazprom. But, at the same time to ordinary citizens, the process will most likely result in financial losses.

Simply put, the price of gas for private households and other services which use gas will be calculated on the same basis as commercial users, i.e., private consumers will pay according to the same price schemes as enterprises.

Whether or not the changes are fair or honest, one thing is certain: these changes will clearly not improve the situation in our wallets.

Experts foresee 1.5 times price growth

In the paper “Ukraine on the Verge of Energy Poverty,” analysts from the International Center for Political Studies provide a range of scenarios for price increases for ordinary Ukrainian consumers from basic (with unchanged tariffs and prices of energy carriers during the first few years) to gradual (with 50 percent price increases every six months) to a shocking scenario (under which the price would jump five, or even more times at once).

According to Ildar Gazizullin, one of the authors, we can most likely talk about a gradual increase in prices. “More likely, it is 10 years. Perhaps, about seven or eight. No other option is available at all. Most likely it will be a 25-50 percent rise,” he said.

Mykhailo Honchar, energy programs director at NOMOS Center, is less optimistic. “Already in the initial stage, we are talking about a serious price increase of about 40 percent,” he said.

A young family looks where it can cut budget

The Trofimov family lives in a single-room apartment in Mariupol. The family consists of young parents and a one-year-old child. Andrii works as a driver, and his wife Anastasia is on maternity leave.

Last winter, expenses for heating and hot water supply alone accounted for almost 12 percent of the family’s income. And this is without other utility services. If the experts’ predictions come true, it will soon be as high as 20 percent.

Whereas the Trofimovs family paid Hr 204 for heating last January, the price increase will mean an extra Hr 103. If the hikes in hot water prices are taken into account, they can expect an additional Hr 1,000 in costs annually. And that’s just a single-room apartment.

“If these tariffs really jump 40-50 percent, we will have to cut back on everything, including clothes and food. But how can we save when our child is so small?” Andrii says about a possible 50 percent increase for heating.

At present, the state allocates considerable subsidies to the energy sector to compensate Ukrainians for the cost of their energy bills. In spite of these subsidies, about 10 percent of Ukraine’s population currently spends a significant part of their income (10 percent) on household heating. If the price is raised by one-third (let alone the foreseen 150 percent increase), that percentage of their income dedicated to heating costs will reach the 50 percent mark. And few of the above-mentioned population groups will be granted financial assistance.

According to the Razumkov Center, 75 percent of Ukraine’s population will have difficulties paying for a 50 percent price increase. That equates to 10 million families.

Clearly, a sharp rise of prices will be a financial burden on the population, especially for pensioners, large families, and other low-income groups. Therefore, the government will have to create a system of targeted assistance for such population categories.

How will pensioners and large families survive?

At present, the state covers roughly 75 percent of the market price of energy resources for private households. Of course, this is just an estimate as there is no genuine open market to decide the actual current prices. If the state stopped the subsidies, households would have to pay 4-8 times more, as some vulnerable groups pay as little as 12 percent of the actual costs. Nobody would pay such bills.
The state has to increase its support almost every year to compensate for the difference of what energy costs and what people can afford.

Taras Kachka, an expert for adapting Ukrainian laws to EU legislation at the Ministry of Justice, confirms that partial support on the part of the state will remain: “Abandonment of privileged price tariffs for the population does not deprive the state of its right to provide aid to vulnerable population groups,” Kachka says.

The core legislative framework for such aid is provided by the social action plan within the energy community. However, Ukraine is one of the two community member states that have acceded to the plan but hasn’t yet passed a law on determining socially vulnerable population groups. And it is not known for certain when it is going to pass it.

The positive side will come over time

Nevertheless, experts say, these reforms are required for several reasons.

First of all, overall state energy costs would go down, owing to reforms. Companies providing services to people, the people themselves, but most of all the state – everyone will have a vested interest in that.

According to the Rakurs social and legal portal, the state would be able to save almost Hr 35 billion on electricity subsidies alone. This is the equivalent of more than a half of the sum allocated in the annual budget of Ukraine for implementation of social programs, particularly unemployment benefits.

Besides, the process will make development of new energy saving technologies economically reasonable. In addition, real market competition will arise in the Ukrainian energy market: if there are several suppliers, the consumer will choose between them, and will choose the most beneficial offer. This process would surely result in better quality of services provided to the consumer.

Experts reassure that real competition in the energy supply market will be of benefit both to people and the state in terms of national economy and ecology. As Dmytro Naumenko, senior research fellow at the Center for Economic Research, puts it: “In the long run, tariff growth will be positive to both people and the state overall because energy carrier price increase will secure cost-effectiveness of energy saving measures and alternative fuels.”

Weighing all the pros and cons, we get an ambiguous picture. Certainly, everything depends on the law on socially vulnerable groups but we can say right now that well-off families will lose in financial terms. Average income families will pay more for better quality services. The billions of budget funds, previously spent on subsidies for all, now can be used for other social programs. The situation will be most difficult for low income families but there is still some hope on an efficient law on targeted assistance to socially vulnerable groups.

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How much will changes in energy sector cost?

Ukrainian households currently pay only a quarter of the market value for the energy they use. The rest of the costs are subsidized by the state. Privileged population categories pay even less.

Now, Ukraine is potentially moving closer to Europe and the European Union “threatens” us with liberalization. From a political point of view, Ukraine will integrate into the EU energy system, thereby reducing energy dependence on Russia’s Gazprom. But, at the same time to ordinary citizens, the process will most likely result in financial losses.

Simply put, the price of gas for private households and other services which use gas will be calculated on the same basis as commercial users, i.e., private consumers will pay according to the same price schemes as enterprises.

Whether or not the changes are fair or honest, one thing is certain: these changes will clearly not improve the situation in our wallets.

Experts foresee 1.5 times price growth

In the paper “Ukraine on the Verge of Energy Poverty,” analysts from the International Center for Political Studies provide a range of scenarios for price increases for ordinary Ukrainian consumers from basic (with unchanged tariffs and prices of energy carriers during the first few years) to gradual (with 50 percent price increases every six months) to a shocking scenario (under which the price would jump five, or even more times at once).

According to Ildar Gazizullin, one of the authors, we can most likely talk about a gradual increase in prices. “More likely, it is 10 years. Perhaps, about seven or eight. No other option is available at all. Most likely it will be a 25-50 percent rise,” he said.

Mykhailo Honchar, energy programs director at NOMOS Center, is less optimistic. “Already in the initial stage, we are talking about a serious price increase of about 40 percent,” he said.

A young family looks where it can cut budget

The Trofimov family lives in a single-room apartment in Mariupol. The family consists of young parents and a one-year-old child. Andrii works as a driver, and his wife Anastasia is on maternity leave.

Last winter, expenses for heating and hot water supply alone accounted for almost 12 percent of the family’s income. And this is without other utility services. If the experts’ predictions come true, it will soon be as high as 20 percent.

Whereas the Trofimovs family paid Hr 204 for heating last January, the price increase will mean an extra Hr 103. If the hikes in hot water prices are taken into account, they can expect an additional Hr 1,000 in costs annually. And that’s just a single-room apartment.

“If these tariffs really jump 40-50 percent, we will have to cut back on everything, including clothes and food. But how can we save when our child is so small?” Andrii says about a possible 50 percent increase for heating.

At present, the state allocates considerable subsidies to the energy sector to compensate Ukrainians for the cost of their energy bills. In spite of these subsidies, about 10 percent of Ukraine’s population currently spends a significant part of their income (10 percent) on household heating. If the price is raised by one-third (let alone the foreseen 150 percent increase), that percentage of their income dedicated to heating costs will reach the 50 percent mark. And few of the above-mentioned population groups will be granted financial assistance.

According to the Razumkov Center, 75 percent of Ukraine’s population will have difficulties paying for a 50 percent price increase. That equates to 10 million families.

Clearly, a sharp rise of prices will be a financial burden on the population, especially for pensioners, large families, and other low-income groups. Therefore, the government will have to create a system of targeted assistance for such population categories.

How will pensioners and large families survive?

At present, the state covers roughly 75 percent of the market price of energy resources for private households. Of course, this is just an estimate as there is no genuine open market to decide the actual current prices. If the state stopped the subsidies, households would have to pay 4-8 times more, as some vulnerable groups pay as little as 12 percent of the actual costs. Nobody would pay such bills.
The state has to increase its support almost every year to compensate for the difference of what energy costs and what people can afford.

Taras Kachka, an expert for adapting Ukrainian laws to EU legislation at the Ministry of Justice, confirms that partial support on the part of the state will remain: “Abandonment of privileged price tariffs for the population does not deprive the state of its right to provide aid to vulnerable population groups,” Kachka says.

The core legislative framework for such aid is provided by the social action plan within the energy community. However, Ukraine is one of the two community member states that have acceded to the plan but hasn’t yet passed a law on determining socially vulnerable population groups. And it is not known for certain when it is going to pass it.

The positive side will come over time

Nevertheless, experts say, these reforms are required for several reasons.

First of all, overall state energy costs would go down, owing to reforms. Companies providing services to people, the people themselves, but most of all the state – everyone will have a vested interest in that.

According to the Rakurs social and legal portal, the state would be able to save almost Hr 35 billion on electricity subsidies alone. This is the equivalent of more than a half of the sum allocated in the annual budget of Ukraine for implementation of social programs, particularly unemployment benefits.

Besides, the process will make development of new energy saving technologies economically reasonable. In addition, real market competition will arise in the Ukrainian energy market: if there are several suppliers, the consumer will choose between them, and will choose the most beneficial offer. This process would surely result in better quality of services provided to the consumer.

Experts reassure that real competition in the energy supply market will be of benefit both to people and the state in terms of national economy and ecology. As Dmytro Naumenko, senior research fellow at the Center for Economic Research, puts it: “In the long run, tariff growth will be positive to both people and the state overall because energy carrier price increase will secure cost-effectiveness of energy saving measures and alternative fuels.”

Weighing all the pros and cons, we get an ambiguous picture. Certainly, everything depends on the law on socially vulnerable groups but we can say right now that well-off families will lose in financial terms. Average income families will pay more for better quality services. The billions of budget funds, previously spent on subsidies for all, now can be used for other social programs. The situation will be most difficult for low income families but there is still some hope on an efficient law on targeted assistance to socially vulnerable groups.

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