Energy Affordability and

Public Policy Responses

Jean Constantinescu & Michael J. G. CainRomanian Energy Program, Phase III

International Resources Group1211 Connecticut Avenue

Washington DC 20036

Main Problem• Energy sector restructuring requires significant price

increases to households in the Black Sea region.

• Price increases will make it more difficult for (low income) households to afford energy and can potentially undermine reform efforts.

– Energy is the largest expense, after food, for both poor and low income households in the region

• How can low-income households be helped with increasing energy costs?

Main Topics

What is ‘Energy Affordability’?

How Can Governments Respond to Energy Affordability?

Assess the Main Barriers to Energy Affordability

Develop a (National) Affordability Strategy

Develop Specific Policy Measures

Why is Energy Affordability Important?

Energy Affordability in the Black Sea Region

Connection rates to electric utilities in Black Sea Region are high

Connection rates of rural poor to central gas or heat networks are much lower

Ability of different groups to pay for energy can differ by employment, income source, type of energy consumption, etc.

Affordability (percentage) thresholds differ

International benchmarks: 10-20% of total household expenditure

World Bank, EBRD, IMF, WHO

Identify Characteristics of Low-Income Families

Poverty Profiles and Dynamics

Income Sources and Consumption Patterns

Energy Sources and Energy Usage

Housing Size and Types

Distribution of persons belonging to different consumption groups by heating system

Deciles District heatingIndividual gas station/ gas

stovesStoves withwood/ coal

Without heating or unconnected

from public system  

1 6 4 88 3 100

2 11 9 77 3 100

3 13 15 69 2 100

4 19 19 59 3 100

5 19 24 53 3 100

6 25 27 45 2 100

7 28 32 39 1 100

8 32 35 31 2 100

9 35 36 27 1 100

10 44 39 16 1 100

total 23 24 50 2 100

Data source: CASPIS (ABF, 2004)

Note: the difference to 100 represents ‘other heating system’

Persons living in HH with different heating systems% of total persons

Total Urban Rural

District heating (public or local) 29.2% 55.4% 0.5%

Individual heating station, of which: 6.1% 10.4% 1.3%

- with natural gas 5.5% 9.8% 0.8%

- with solid fuel 0.5% 0.5% 0.5%

- with liquid fuel 0.1% 0.2% 0.1%

Stove heating, of which: 62.7% 30.7% 97.6%

- with natural gas 8.9% 11.4% 6.1%

- with solid fuel 53.6% 19.1% 91.3%

- with liquid fuel 0.2% 0.3% 0.2%

Other heating system 2.1% 3.5% 0.5%

 Total 100% 100% 100%

Population and dwelling census, 2002

To Improve AffordabilityConsider Three Factors

Energy UsageEnergy Usage Energy PricesEnergy Prices

HouseholdHousehold ResourcesResources

Energy Requirements for Poor Households

Assess Main Barriers To Affordability

Legal Barriers

Lack of Legal Definition and Allocation for Services of General Interest (SGI)

Inadequate financing of SGI

Structural Obstacles

Improper Market Surveillance

Multi-sector problems

Different ministries

Financial and Investment Barriers

Energy Investments

Cost of Energy Efficiency

Inflexibility of Loan Criteria for New Projects

Behavioral Changes

Energy Efficiency Education at all levels

Develop a Strategy to Improve AffordabilityDevelop a Strategy to Improve Affordability• Increase Resources to Low-Income FamiliesIncrease Resources to Low-Income Families

– Targeted energy assistanceTargeted energy assistance

• Set Appropriate Prices for EnergySet Appropriate Prices for Energy

– Competitive pricesCompetitive prices

– Lifeline (block) tariffsLifeline (block) tariffs

– Binomial tariffsBinomial tariffs

• Provide Means to Save EnergyProvide Means to Save Energy

– Supply-side energy efficiencySupply-side energy efficiency

– End-user energy efficiencyEnd-user energy efficiency

Develop Appropriate Policy MeasuresREP 3 Responses

• Technical Support for Market Surveillance Strategy

• Technical Support for Tariff Reforms

• Technical Support for Targeting Assistance Payments

• Technical Support Thermal Rehab. of Buildings

• Financing through European Union and World Bank

• Provide policy alternatives for rural energy efficiency

• Public information campaign.

• Promotes Welfare of Poor

– Energy access is welfare enhancing

– Energy access improves health and safety

• Strengthens the Energy Sector

– Improves market liquidity and stability

– Reduces risk of non-payment

– Limits collection and program costs to utility

– Proper incentives for consumption

– Customer retention

Why Is Energy Affordability Important?

One part of Strengthening Markets

One part of Social Protection & Poverty Reduction