DISTRIBUTIONAL IMPACT OF TARIFF ADJUSTMENT FOR RESIDENTIAL CONSUMERS Bulgaria: Power Sector Stabilization and Market Reform Reimbursable Technical Assistance June 29, 2017
Context and outline of the presentation This presentation has been prepared by the World Bank (WB) in the context of the Power Sector Financial Stabilization and Market liberalization Reimbursable Technical Assistance undertaken by the WB and financed by the Bulgarian Energy Holding (BEH). The objective: to provide a platform for discussion and to inform decision making. While implementing its reform strategy for the power sector, the government has sought assistance for: analyzing the distributional impact of potential tariff increases on residential consumers, and for assessing the effectiveness and efficiency of the existing and proposed new social protection mechanisms to make energy affordable for the vulnerable population.
Scope of analysis, data and methodology Scope of the analysis: I. Energy consumption and coverage of existing social assistance programs II. Potential tariff adjustments and options to mitigate adverse distributional impacts Data and methodology: Quantitative analysis statistical analysis and scenario modeling based on: 2014 Household Budget Survey microdata 2014 EU-SILC / Statistics on Income and Living Conditions Administrative data on ongoing social protection programs
I. Energy consumption and coverage of existing social assistance programs
Electricity is the main source of energy for most households, regardless of type of settlement, income, or poverty status. Main Source of Heating by Type of Settlement (share of population) Main Source of Heating by Expenditure Quintiles (share of population) 100% 80% 100% 80% 23% 21% 18% 16% 15% 60% 60% 40% 69% 73% 69% 61% 40% 68% 71% 74% 69% 64% 0% Total City Small Town Village 0% Poorest 2 3 4 Richest Electricity Gas Heating Solid Electricity Gas Heating Solid 100% 80% 60% 40% 0% Main Source of Heating by Poverty Status (share of population) 17% 24% 70% 67% Non Poor Poor Electricity Gas Heating Solid Poor are persons with disposable income below the National Poverty Line of BLG 323.75 per month as defined by Council of Ministers Decree No. 296. The results are consistent with using 60% of the median disposable income. Source: World Bank estimates based on 2014 HBS.
Wealthier households consume at least 2 times more than lower income households but electricity is a larger share of spending for those at the bottom of the distribution 2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 Energy consumption by expenditure quintiles (Lev per year, all households) 331,9 472,1 489,1 606,7 773,6 1 2 3 4 5 Electricity Gas Liquid fuels Solid fuels Heat energy Source: World Bank estimates based on 2014 HBS. 15% 10% 5% 0% Energy expenditures by quintile (share of total expenditures, all households) Poorest Electricity Liquid fuels 2 3 4 Richest Expenditure quintiles Other solid fuel Hot water Gas Firewood Central heating
There are about 444,000 households who are both poor and energy vulnerable. An additional 148,000 households are poor and could become energy vulnerable Income poor (national poverty line) Energy vulnerable (consume >10% on energy) Non-vulnerable Vulnerable All households Case 1 Case 2 Non poor 1,042,831 1,120,990 2,163,821 Case 3 Case 4 Poor 148,323 444,453 592,776 All households 1,191,154 1,565,443 2,756,598 1) Energy vulnerable defined as households with energy expenditures that exceed 10% of total household spending. 2) Income poor are defined as households with disposable income below BLG 323.75 per month. Source: World Bank estimates based on 2014 HBS imputed to the 2014 SILC..
Social assistance programs have low coverage and make up a relatively small share of household income Coverage of Social Protection Programs (share of poor households) Generosity (share of total household income) 35% 30% 25% 32% 50% 45% 40% 35% 47% Poor Non-poor 30% 15% 12% 13% 14% 25% 22% 10% 5% 0% 5% 15% 10% 5% 0% 6% 5% 3% Source: Bulgaria SILC 2014
II. Potential Tariff Adjustments and Options to Mitigate Distributional Impacts
Poverty rate (percent of households) Baseline scenario: poverty would increase by 1 percentage point in the absence of mitigating measures Assumptions: An upper bound tariff increase: a nominal 5 percent increase per year between 2016 and 2020 (i.e. cumulative 21.55% over the next five years) was used to simulate the distributional impact Assumes no behavioral response Poverty will increase without mitigating measures at the end of 5 years 25% 24% 23% 22% 21,5% 22,5% Number of poor households and effect of tariff increase Number of poor Increase in poor households Before market liberalization 592,776 In the absence of mitigation 620,372 27,596 21% Current prices +21.5% elec. tariff Source: World Bank estimates based on Bulgarian 2014 HBS and SILC 2014.
A social tariff is proposed as a temporary risk mitigation measure The concept is developed with the support of the European Commission and following the approach of other countries which liberalize their electricity markets joint WG of Government of Bulgaria and the EC (DG Energy) and analytical support from the WB Proposed eligible categories: Elderly over 70 years of age, living alone, with income only from pension that is up to the defined poverty line in the country for the respective year; Persons with over 90 percent reduced ability, with an attendant; Families with disabled children, with an attendant; Persons and families, receiving targeted assistance for heating under the Social Assistance Act; Estimated coverage: in accordance with the above-mentioned criteria the group of vulnerable customers is expected to include around 500 000 persons and families, which is approximately about 1,1 million people (or about 14 % of the population) Duration: 5 years, temporary Amount: the social tariff will cover 70% of the liberalized electricity price for 100 kwh or 150 kwh (depending on whether district heating or boiler is used for heating water) Presentation Title
Poverety rate (percent of households) The simulations show that the social tariff could mitigate some of the impact on the poor Assumptions: the social tariff covers 70% of the commercialization tariff 100% take up (all eligible households get the benefit) 25,0% 24,5% 24,0% 23,5% 23,0% 22,5% 22,0% 21,5% 21,0% 20,5% 20,0% Poverty headcount rate 21,5% 22,5% Baseline: no mitigation 21,9% ST covers 70% of comm. tariff Current prices Market liberalization over next 5 years Source: World Bank estimates based on Bulgarian 2014 HBS and SILC 2014. ST = Social tariff Number of poor Change in poor households vs no mitigation Projected impact Over 16,000 households are protected from falling into Poverty compared to the baseline Cost (million Lev per year) households Before market liberalization 592,776 In the absence of mitigation 620,372 With social tariff 604,083-16,289 69.5
The social tariff is expected to amount to only about 187 lev per household per year, making up a small share of the incomes of the poor Lev per year Share of household income 170 Generosity of the social tariff (70% of commercial tariff) 5,0% 165 160 155 150 145 140 135 Poorest 2 3 4 Richest Non Poor Poor Income quintiles Income poverty Lev per year Share of household income 4,5% 4,0% 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% Source: World Bank estimates based on 2014 HBS imputed to the 2014 SILC..
Share of poor households A significant share of the poor will be eligible for the social tariff 100% 90% 80% 70% 60% 50% 40% 30% 10% 0% Poor Households by Household Size and Social Tariff Eligibility All poor Eligible for ST Not eligible for ST Single member Two members Three members Four or more members Source: World Bank estimates based on Bulgarian 2014 SILC with imputed energy expenditures from the 2014 HBS.
There can be potential changes in design to increase poverty impact Alternative scenarios exist with trade-offs (within ST or beyond) Usually applied after observations from implementation 1. Increase the social tariff to cover 100% of the commercialization tariff 2. Extend the coverage to groups of energy vulnerable consumers which are currently not covered 3. Increase the electricity consumption limit (with awareness of incentives for saving of electricity) 4. (Medium term, beyond ST): Phase out the ST and extend the heating allowance
A mitigation strategy could use the existing heating allowance, which is well targeted but has limited coverage Coverage of heating allowance by category of beneficiary (beneficiaries as a share of poor households) Heating allowance beneficiary under any category Parent rearing a child up to 3 years of age Single parent with child up to age 18 (age 20 if in school) Single parent with child/ren up to 3 years of age At least one disabled member in HH Person with permanent reduction of ability to work (disability) living alone Person living alone Person cohabitating with other person or family At least one person over 70 in the household Person over 65 years of age living alone Person over 75 years of age living alone 7% 9% 14% 13% 21% 25% 24% 25% 26% 28% 39% 0% 5% 10% 15% 25% 30% 35% 40% 45% Poor and not energy vulnerable Poor and energy vulnerable Poor Source: Own estimates based on 2014 SILC.
Increase of the coverage and generosity of the heating allowance Given the good targeting performance and positive reputation of the existing heating allowance, refining its design, expanding its coverage and increasing its generosity could be preferable to creating a new program to protect the poor and vulnerable from energy price increases Coverage of the heating allowance could be increased through: Review of eligibility criteria to find those that exclude poor and vulnerable (e.g. filters on living space, bank deposits, or ownership of real estate; 6-month registration requirement for unemployed, etc.) Reducing transaction costs (i.e. making it easier for households to apply for this benefit) Increasing awareness of this program as a measure to address energy vulnerability The amount of the heating allowance could be increased to compensate for the increase in energy prices for eligible households; the increase would depend on the fiscal space for this program Important strength of this approach implementation infrastructure is in place
Combining financial with non-financial measures Financial measures: ST for electricity (short-term) and strengthening the heating allowance (long-term) Non-financial measures: Prohibition of electricity disconnect for specific categories of vulnerable customers Postponement of electricity disconnect for the winter period for specific categories of vulnerable customers Possibility for debt restructuring and rescheduling; Energy efficiency literacy, awareness of how to save energy, information campaigns, online platforms Long-term measures: Direct and indirect (with incentives) support for improving energy efficiency in residential buildings Presentation Title
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