“To move away from subsidies, Ukraine needs better accounting, behaviour change, and investments in energy efficiency”

On November 3, a conference on “Measures to promote energy efficiency among vulnerable groups” was be held in Kyiv. The conference was organised by the EU INOGATE program and focused on state policy in the sphere of tariffs, subsidies, and energy conservation. Svyatoslav Pavlyuk, energy expert, was one of the speakers at the conference. We took the opportunity to talk to him about these issues, which have important implications for Ukrainian society.

павлюкOn the president’s website, there is now a petition demanding removing subsidies for individual installation of meters. However, after almost two months, only about three-dozen signatures have been collected. How do you interpret this?

The success of online petitions depends largely on the ability of the authors to explain why the cause is important and how it helps people. But this initiative is very relevant. The introduction of a system of full accounting for energy resources is a vital part of developing public policy on subsidising vulnerable people and not only them. Money to compensate for the costs of energy recourses should not be spent without measurement the expenditures.

As of September 2015, only 29% of residential buildings in Ukraine were equipped with heat meters, 18% with hot water meters, and about 29% with cold water meters. Ukraine is one out of only two countries in the region between Portugal and Tajikistan where the population still does not have full cost accounting of energy resources. The other country is Turkmenistan, where gas costs four dollars per thousand cubic meters. In Ukraine, it is a hundred times more expensive.

There are several reasons why Ukraine finds itself in this situation.

Consumer habits play a large role, and energy suppliers tend to oppose the move toward a full accounting of energy resources because the status quo is more advantageous for them. The current Ukrainian law requires the installation of gas meters beginning in 2018 as later; this deadline has been pushed ahead twice and suppliers are still trying to delay this step. To overcome these challenges, in April the National Commission for Regulation in the Energy Sector decreased the standards for eligibility to write off gas expenses. For example, consumers who use gas stoves and have central hot water supplies can write off from 6 to 3 cubic metres per person per month. This should protect consumers while also encouraging suppliers to actively install gas meters, as lower write-off rules threaten their profitability.

At the same time, the lower standards for tax write offs have inspired some members of the population to sabotage meter installations. The state has to deal with this. Anyone who opposes the system of cost accounting should lose their rights to write-offs, benefits and subsidies. This is consistent with European practice. EU legislation on accounting and auditing of energy consumption provides for settlements between the supplier and the consumer without the meters counter. In such cases, the consumer cannot rely on any kind of government assistance and must pay whatever the provider requests.

Do meters encourage people to save energy?

Yes, and the experience of many EU countries as well as neighbouring Belarus confirms this. In these countries, within eight years of the introduction of meters, the rate of accounting for water expenditure increased from 32% to 94%, and consumption fell by half. This was accomplished without any price change; with the introduction of meters, people began turning off their taps, leading to considerable energy savings on water use.

The issue of full cost accounting for energy will be solved not by electronic petitions to the president, but by the decisions of the government and parliament. There are a number of relevant project laws that would encourage both suppliers and consumers to install meters.

Will meters help save energy if the government continues to provide subsidies for citizens on a large scale?

In fact, accounting for energy use is a just one of necessary step and an important component in the revision of the current subsidisation policy and should be targeted at encouraging people to save energy.

The government spent UAH 6.5 billion to subsidise citizens in 2013 and UAH 8.3 billion in 2014. This year, the government allocated UAH 25.4 billion from the state budget for subsidies and the 2016 draft budget allegedly allocates UAH 48-65 billion. The tariffs are growing, but consumption is not being reduced proportionately, leading to higher and higher costs of subsidies to citizens.

Adding to these figures, the Ukrainian government also provides support to Naftogas to sell gas at a lower price. Last year the company received UAH 113 billion. Additionally, the government pays for the cheap electricity for citizens by selling more expensive electricity to businesses, which cost another UAH 40 billion in 2014. The government also spends on compensations for heating costs.

Overall, these indirect costs in support of Ukrainian citizens amounted to about UAH 160 billion last year: one third of the total state budget.

These policies are actually geared toward energy suppliers, not consumers. For years this has created the illusion of cheap energy and increased citizens’ dependence on the state, which is one of the greatest threats to reforms.

All this money could be allocated to development rather than thrown away on ineffectual subsidies. In recent years the industrial sector has reduced gas consumption by 50% and transportation of heating by 40%. Cost of energy transportation have fallen by about 50%. Meanwhile, citizens managed to reduce their energy consumption by just 1%. Only in 2014, when the government significantly raised energy tariffs, did domestic energy consumption fall by 11%. Faced with higher costs, people started to value and save this resource.

Reducing energy consumption will help vulnerable people save money on energy bills. The huge amounts currently allocated to subsidies should be redirected; instead of paying energy suppliers to provide cheap resources, these funds should be directed to consumers. For example, grants could be provided to help citizens improve building insulation. In 2015 the government allocated just UAH 342 million to such goals. Most of this funding is a result of an EU grant. Compare this to the over UAH 25 billion spent on subsidies.

While we are still quite far from the full transition from subsidies to helping people with energy saving, how is it possible to influence consumer behaviour today?

 

A portion of the subsidies for citizens on fuel is actually paid. This means that a mechanism for influencing consumer behaviour already exists, though it is rarely mentioned. The 2015 state budget allocated over UAH 800 million for such payments, most of which has already been paid out.

When the tariffs on energy rise, we talk a lot about it. I think these debates are unproductive. The Antimonopoly Committee and regulator are the ones who should deal with tariffs. The state should help citizens to reduce consumption without reducing their comfort. This is the only long-lasting way to decrease energy consumption.

We should shift from the debates on tariffs to debates on bills. People have to understand that the way to save money is by reducing their consumption of gas, water, and electricity. People typically don’t like to save resources, but they do like to save money. If we give citizens this opportunity, the saving will be very noticeable.

Of course, in order for this transition to work, it is essential that citizens understand how the existing subsidy system functions. The government should organize awareness campaigns; movements jointly spearheaded by the state and citizens are estimated to lead to energy savings of around 50%. Suppliers should be required to indicate on their invoices not only the amount to be paid, but also the actual cost of consumption, the amount of subsidies to the supplier, and the consumer’s benefits and subsidies. This will help people understand how much of the cost is shouldered by the government and how much is paid out of their own pockets. The next step should be moving toward targeting subsidy money directly to consumers, giving them the opportunity to spend it on projects like improving home insulation.

At the same time, the state should encourage people to take energy-saving measures. The government recently announced its plans to raise tariffs to economically-justified till 2018. The policy on subsidies requires the same clarity. The state aid itself does not motivate people to change their behaviours. The government must develop a plan for a gradual reduction of subsidies with a simultaneous increase in its monetisation mechanism: the transfer of funds available directly to citizens to improve the energy efficiency of their homes.

What is the European experience in this regard?

There are countries where citizens are permitted to take out loans at low interest rates (usually at 1% with repayment over 25 years) to use toward home improvements for energy efficiency. In Ukraine, however, borrowing is more costly for citizens and banks won’t provide loans with repayment periods longer than five years and at 25%. Under such conditions, it is difficult to provide incentives for improving the thermal insulation of homes or reducing energy consumption. In Ukraine, households use on average 250-260 kWh per square metre per year; in the EU, this figure is 90-120 kW and there are plans in place to reduce consumption to 40 kW per square metre per year by 2030.

I mentioned previously that the Ukrainian government allocates about UAH 342 million in 2014 to compensate citizens for energy saving measures. This EU grant is almost completely expended. We need to create a mechanism to fill the void and continue this funding. Poland’s experience is quite interesting. Polish authorities calculated that the state receives 40% of the taxes of works and services for building insulation production chain, starting with the production of insulation material all the way to insulation installation work. The government offered to direct a quarter of this revenue toward providing reimbursements for insulation. That is, the funding for citizens comes from taxes paid by thermo-modernisation market.

European countries’ experiences can serve as a source of inspiration for Ukraine in two ways. The first is technological: best practices established in the EU can inform ways of undertaking energy saving measures while avoiding costly mistakes. Secondly, the EU serves as an example of good governance in this sphere, modelling effective energy management and local governance. The latter falls within the sphere of work undertaken by the Covenant of Mayors.

The Covenant of Mayors is an EU initiative targeting local and regional authorities who voluntarily undertake to improve energy efficiency and increase the use of renewable energy sources on their territories. The Covenant has been signed by 118 Ukrainian cities.

There are also examples of effective work in this sphere in Ukraine. Cherkasy city installed individual heating units that regulate heat consumption in 105 apartment buildings. The resulting reduction in energy consumption ranged from 18-40% on average and savings amounted to UAH 6.5 million. With these savings, the city’s investment in the heating units will pay off in just three years. Homeowners associations in Lutsk and Lviv cut their heat consumption in half by improving building insulation.

So, the three key tasks going forward for both the government and citizens are: creating a system of full accounting of energy consumption, promoting energy efficient behaviour, and investing in energy saving instead of endless subsidies to suppliers.

The article was published on Holos Ukrainy web-site