Government Should Approach Spending on Subsidies with Care – DiXi Group Research

30 September 2016

DiXi Think Tank publishes the third of the notes in the series of comparative studies of functioning of energy markets of Ukraine and the EU countries. The work analyzes the state support mechanisms for disadvantaged consumers of energy resources in the EU and Ukraine.

The most common mechanism in the EU is not a financial support for a consumer by the state but individual work of authorized bodies. Such practice makes automatic decisions on cutting off households from gas and electricity supply networks impossible.

Providing privileges (discounts) for the final cost of the consumed resources and address subsidies are among the most common financial mechanisms used to support disadvantaged households in the EU countries. Less often, states provide some amounts of resources to a consumer free of charge or provide energy efficient basic devices at their own expense.

In order to protect disadvantaged consumers in Ukraine, address subsidies and privileges are used as well, but one should pay attention to a share of such consumers. As of September 2016, 40% of households in Ukraine were receiving the subsidies. At the same time, in the EU countries, only 5-8% of households are considered to be disadvantaged and in need of support.

Such a gap is a result of many factors, including bringing the energy prices to an economically justified level, yet the government reacts in a respective way to the population needs and levels the consequences of tariffs rise. The ultimate expenses of consumers for utilities rose by 62% from 2014 to 2016 – while unexpected costs on supporting the disadvantaged consumers in the expenditure part of the budget increased sevenfold.

The draft State Budget for FY 2017 presented by the Cabinet of Ministers in September envisages even higher expenses for subsidies provision, namely UAH 51 billion – compared to UAH 42 billion in 2016. At the same time, the increase in expenditures on the energy efficiency measures was very insignificant: in 2016 – 790 million UAH, and in 2017 – 800 million UAH.

"In our opinion, a disproportional increase of spending to subsidize the population with almost unchanged spending on energy efficiency measures is not a rational decision that the government is to revise. It is necessary to introduce other means to support poor households. The share of disadvantaged consumers that receive subsidies has to be gradually reduced to an average EU level", DiXi Group analyst Andrii Bilous stressed.

DiXi Group hopes that our studies will help all interested people to quickly understand and see the real situation. These studies are aimed at providing a new stimulus to debates on the reform of gas and electrical power markets in Ukraine, raising the level of their professionalism. Such discussions should be based on facts, not myths or perceptions of an ideal world.

The note was prepared by DiXi Group within the framework of the Think Tank Support Initiative implemented by the International Renaissance Foundation (IRF) in partnership with the Think Tank Foundation (TTF) with the financial support of the Embassy of Sweden in Ukraine (SIDA).

 

To read the note, follow the link

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