Energy Subsidies and energy subsidy reform in the EU Eastern Partnership countries

1. Energy subsidies and energy subsidy
reform in the EU Eastern Partnership
countries
Nelly Petkova, OECD

2. Structure of the presentation
• Objectives and scope of the analysis
• Definition of subsidy and quantification
methodology
• Energy pricing policies
• Government support to fossil fuel production and
consumption
• Government support to energy efficiency and
renewables
• Concluding remarks

3. Objectives and scope of the project
Main objectives
• Identify relevant subsidy schemes, quantify them and prepare
robust and comprehensive analysis as a basis for further reforms
• Fill in information gaps with the aim of increasing transparency in
this very important public policy field
• Launch a debate on existing energy subsidies and the need for
their reforms – stakeholder meetings in all countries in 2016
Scope of the analysis:
• Government support to producers and consumers of fossil fuels
(coal, oil, related petroleum products (particularly used in the
transport sector), natural gas and electricity and heat generated
by these fuels subsidies for renewables
• Government support to energy efficiency and renewables
• Government support to nuclear not included in the analysis!

4. Subsidy definition
• A multitude of definitions developed by various international
organisations and for different purposes – IMF, World Bank, UN
Statistics Division, EC (State Aid), WTO
• Sector specific definitions – IEA (on energy subsidies), OECD (on
agriculture), FAO (on fisheries)
• WTO definition - the only legally internationally binding definition,
specified in the Agreement on subsidies and countervailing measures,
defines subsidies across all sectors
• OECD definition on environmentally-harmful subsidies – EHS are a
result of a government action that confers an advantage to consumers
or producers in order to supplement their income or lower their costs
but in doing so discriminates against sound environmental policies. All
other things being equal, the EHS increases the level of waste, pollution
and natural resource exploitation to those connected
Despite differences, most international definitions cover the main
elements of a subsidy

5. What is really a subsidy?
OECD has adopted a broader definition and speaks about government
support rather than subsidy
• The definition is closely linked to classification:
 Subsidies are diverse and come in many different forms – e.g.
direct budgetary transfers, tax reduction or exemption, price
control measures, in-kind support
 Unlike direct budgetary transfers, all other forms are not visible in
the budget - difficult to identify and measure
• OECD government support classification
 Direct transfer of funds
 Tax revenue forgone (tax expenditure)
 Transfer of risk to government (state guarantees)
 Induced transfers (price regulation, cross-subsidisation)

6. What do EaP countries include in the national
definition of subsidies?
EaP Country Direct budget
transfers
Tax revenue
foregone
Induced
transfers
(regulated
prices)
Transfer of risk
to government
Armenia
Azerbaijan
Belarus
Georgia
Moldova
Ukraine
Covered by the
national definitions of
both “subsidy” and
“state support”
Covered only
the national
definition of
“state support”
Covered by the national
definitions of neither
“subsidy” nor “state
support”

7. Subsidy quantification methodology
• Two main approaches used in the study:
– Top-down or price-gap approach
• We used this methodology in calculating induced subsidies
(through price regulation) (e.g. subsidy to natural gas
consumption) and tax expenditure (e.g. reduced VAT rate on
natural gas to households in Moldova)
– Bottom-up or inventory approach – looks at each
government measure individually
Combining the two approaches gives best results!
Price gap = Reference price – End-User Price
Subsidy = Price gap × Units consumed

8. Quantifying fossil-fuel consumption subsidies
using the price gap approach
0 0.2 0.4 0.6 0.8 1.0
Gasoline
Diesel
LPG
Dollarsper litre
International price
Freight and insurance
Internaldistribution
Value-added tax
End-useprice
Price gap
(subsidy)
The price-gap method compares end-use prices paid by consumers with reference prices that
correspond to the full cost of supply – a subsidy is present if the end-use price falls short
of the reference price

9. Ukraine: Requirement for state-owned domestic gas producers to sell
gas for household needs at regulated tariffs
Subsidy Category
Income or price support → Market price support and regulation →
Regulated prices set at below-market rates for households
Stimulated Activity Consumption of natural gas
Subsidy Name Requirement for state-owned domestic gas producers to sell gas for
household needs at regulated tariffs
Jurisdiction National level
Legislation/Endorsing
Organisation
Artcle No. 10 of the Law No. 2467-VI, 2010; (Ministry of Energy, 2015)
Policy Objective(s) of
Subsidy
To ensure reliable gas supply and keep tariffs low for households
Households
Background Under (Law No. 2467-VI, 2010) “On the Principles and Functioning of the
Natural Gas Market” state-owned enterprises (50% and more shares in state
ownership) were required to sell all domestically produced gas for the needs
of households at the regulated tariffs established by the NCSEPU.
Amount of Subsidy
Conferred
2012 UAH 43.2 billion (USD 5.4 billion)
2013 UAH 44.5 billion (USD 5.6 billion)
2014 UAH 36.7 billion (USD 3.1 billion)
2015p UAH 53.9 billion (USD 2.5 billion)
Information Sources (World Bank, 2015), (Naftogaz, 2015c) and Resolutions of the NCSEPU
establishing purchase prices for gas produced domestically by
Ukrgasvydobuvannya and Chornomornaftogaz.

10. Key characteristics of energy pricing policies
Armenia Azerbaijan Belarus Georgia Moldova Ukraine
Price-
setting
authority
Public
Services
Regulatory
Commission
Tariff
Council
Council of
Ministers as
prepared by
the Ministry
of Economy
Georgian
National Energy
and Water Supply
Regulatory
Commission
National
Energy
Regulatory
Agency
National
Commission for
State
Regulation of
Energy and
Public Utilities
Natural gas Regulated
prices
Regulated
prices
Regulated
prices,
cross-
subsidies
Mostly regulated
prices, elements
of both cross-
subsidies and
deregulation
Regulated
prices
Regulated for
households,
deregulated for
industry
Electricity Regulated
prices, cross-
subsidies
Heat n.a. n.a. Regulated
prices
Liquid
petroleum
products
Deregulated
prices
Regulated
prices
Deregulated
prices
Coal and
other solid
fuels

11. Quantified fossil fuel subsidies in the
EaP countries, 2010 – 2015, USD mln

14. Subsidies to fossil fuels vs subsidies to
EE/RE, 2014, mln USD

15. Summary of major findings
• Ukraine is by far the country with the largest fossil fuel subsidies in the
region
• The bulk of subsidies goes to natural gas, heat and electricity (natural
gas dominates the energy mix and is used in generating heat and
electricity)
• Regulated energy prices set at below market rates and benefit
consumers are the most important form of subsidisation
• Cross-subsidisation continues to persist and is still widely spread
• Subsidies to EE/RE are negligible compared to FFSs
• A number of tax breaks to fossil-fuel producers remained unquantified
such as those provided through Production Sharing Agreements (e.g.
in Azerbaijan)
• Need for transparency and better reporting
– Tax expenditure
– Fossil fuel subsidies – likely to become subject to reporting under SDG 12
target C which calls for countries to rationalise inefficient FFSs

16. Reform measures
• Energy subsidy reforms do continue to evolve
however they are often framed as energy pricing
reforms:
– Armenia – eliminated its excise exemption on CNG
(compressed natural gas) in May 2016 which was worth
USD 9 mln per year
– Belarus – cancelled a VAT exemption for gas, heat and
electricity for households in January 2016 that was
worth USD 200 mln per year
– Ukraine – stopped subsidising coal and in April 2016
natural gas tariffs were increased to cost recovery levels