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Archive 2001

  • 12.05.2001

    How Much Do Electricity Tariff Increases in Ukraine Hurt the Poor?

    (Code:7)

    After ten years of economic reforms, the electricity tariffs applicable to private households are still a very sensitive subject in Ukraine. Although initial steps to reform the power sector were introduced in 1993 and in 1994, these reforms are now stagnating. Same as in all other transition countries, electricity was treated as a public good or even a human right during Soviet times. Tariffs were set by the state, did not cover costs and were much higher for industrial customers than for households and other final consumers. The impact of these price distortions on the energy sector has been widely discussed in the transition literature (Kennedy, 1999; Stern and Davis 1998; Freund and Wallich 1997). Empirical research made it obvious that these price distortions did not only set the wrong incentives for the allocation of energy resources but also seemed to protect the wrong people. High-income households benefited most from subsidised prices because they were consuming more electricity and the income elasticity of such households was substantially higher (Freud and Wallich, 1997, p. 46).

    Although in Ukraine tariffs have been increased several times since 1991 they still remain far below cost covering levels, and cross subsidisation of private households and agrarian customers by industry still takes place. Expected negative social consequences and lacking political acceptance are the main arguments usually used by political decision makers to explain why the necessary corrections to the tariff structure have not been implemented so far.

    The purpose of this paper is first, to analyse what levels the tariff increases for private households in Ukraine need to reach in order to end price distortions and secondly, to evaluate what welfare impacts they would have on different social groups.

    The structure of the paper is as follows: Section 2 describes the main problems with the electricity price policies inherited from the past, section 3 explains the current methods of determining electricity tariffs for households in Ukraine, section 4 evaluates the impact of possible tariff increases on household expenditures for different income groups, and section 5 presents conclusions and policy implications.

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