How to help people in Europe and Central Asia pay their energy bills

The current energy cost shock poses a clear and widespread challenge in Europe and Central Asia (ECA). The crisis of rising energy prices will not only push many households into extreme poverty, but also make it impossible for many non-poor households to keep their homes warm. Household energy expenditure is relatively high in ECA. And in many countries, average energy spending shares were well above a fuel poverty threshold even before the current crisis. Rising energy prices are also expected to have adverse effects on health and well-being. Research on excessive winter deaths highlights the health risks for people – particularly young children and the elderly – living in low indoor temperatures.

In the short term, many ECA governments will have no choice but to increase welfare. However, there is a risk that governments will take unsustainable, insufficient and inefficient measures. At the start of the heating season, the impetus in many ECA countries is either to extend benefits to the whole population by capping prices below cost-recovery levels, or to support a narrow group of formally defined poor households. Price controls and fine-tuned balancing mechanisms represent two extremes. Price controls provide universal support, which is therefore sparse, regressive, and expensive. Finely targeted aid, on the other hand, cannot adequately cushion the shock, which affects up to 40 percent of the population (the bottom 40). In fact, the particular challenge of this crisis is to ensure sufficient supply and adequacy of energy support for those who need it, without distorting prices (Figure 1).

Figure 1. Price controls and pro-poor welfare leave huge gaps

Figure 1. Price controls and pro-poor welfare leave huge gaps Source: author

ECA countries should mobilize energy assistance that is adequate in scale and population coverage, rapidly scalable and well-targeted. In addition, mitigation measures should be designed in such a way that they do not have unintended consequences. When the market is transparent and competitive, less price regulation intervention is better. When markets are uncompetitive, efforts must be made to address market inefficiencies.

Some of the social protection approaches considered or adopted and categorized in Table 1 do not meet the above criteria for effective energy support. Some fall into the category of untargeted subsidies, which indiscriminately subsidize energy inputs via below-cost-recovery price controls and offer ill-designed tax breaks that are distributionally regressive and could result in below-average supply and service disruptions; insufficient investments in production, transmission and distribution infrastructure; adverse consequences for the environment; and tax health issues. To respond to this crisis, therefore, governments need to consider the above principles when choosing appropriate social protection response options.

Table 1. Types and examples of social assistance to cushion energy price shocks

type of transfer beneficiaries examples
targeted default Topping up categorical or means-tested poverty benefits
Social tariffs or subsidies for electricity bills
Not standardized Benefits of Energy Poverty
untargeted Price controls, caps and tax rebates
Hybrid Dual pricing (line tariffs)

Source: author

note: Standard beneficiaries are defined as existing beneficiaries or beneficiaries easily identifiable through social registers or existing legislation that defines eligibility requirements. Fuel poverty benefits target low-income households who cannot heat their homes without incurring prohibitive costs relative to their income. These households are not standard beneficiaries that typical safety nets are designed to support. Block tariff/dual pricing refers to the subsidization of an initial block of energy consumption.

What stands in the way of sound social protection in ECA?

One of the main challenges for social protection systems in ECA is their limited administrative capacity for rapid expansion. Administrative capacities include the ability to identify and screen households in need, increase the distribution of payments and control fraud. When administrative capacity is weak, governments are tempted to introduce price controls because they are easy to implement. Such measures are fiscally unsustainable and produce mixed results, as the policy’s dampening effect is diluted across a large base of beneficiaries, resulting in prohibitively high costs but insufficient support for the most vulnerable.

What social protection options do ECA countries have?

When countries have advanced administrative, data sharing, and institutional targeting capabilities, the best option is to introduce a benefit that limits the energy burden, which is defined by the level of energy spending relative to the total household budget. This could be an adaptive energy benefit that varies with income and housing conditions and could be specified to target the poorest 40 percent of households. Because benefit generosity varies with income, this approach could achieve high coverage, adequacy, and good targeting in terms of resources spent.

Countries with weak administrative capacity could expand existing programs and provide additional benefits to standard beneficiaries such as the poor and other vulnerable groups already targeted by the system. This would result in more adequate protection for the most vulnerable groups, although it would not fully mitigate the impact of fuel poverty. A life-line tariff coupled with an increase in energy benefits on top of existing benefits could be a way forward towards that goal. Restricting price subsidies to the initial consumption block is a cheaper alternative to general price subsidies and combines universal access with self-alignment.

However, many households may just need assistance to manage energy bill volatility.

To protect non-poor households, governments could consider subsidizing energy use – a smoothing that spreads the impact of short-term price spikes over several years. Such a mechanism can be provided at the utility or energy service provider level by amortizing energy costs over a longer period of time during energy price spikes. In combination with support for energy poverty, such a hybrid approach offers a better opportunity to let the markets drive prices and use public resources in a targeted manner than untargeted approaches, such as e.g. B. Controlling prices.

The net effect of government policies will depend on how the impact is distributed and who bears the burden of protecting households. An administrative quick fix such as freezing prices that does not follow the principles outlined above will have costly and unintended consequences.

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