To most people, electricity rates as low as Ukraine’s might seem luxurious.
In fact, those rates contribute to a multi-billion dollar debt problem within the energy sector – a problem that is choking off the influx of new energy technology, suppressing Ukraine’s state budget revenues and causing periodic blackouts throughout the country.
Household electricity payments in Ukraine cover only 80 percent of energy generation and transportation costs, according to Ukraine’s National Electricity Regulating Council (NERC). The main contributors to the problem are low rates, chronic non-payment and a corrosive system of privileges whereby some 40 percent of the population is entitled to breaks on their already small energy bills.
The archaic price structure and system of privileges are a relic of the Soviet era, when fuel to run Ukraine’s generators was both cheap and plentiful for Ukraine. Today, it is neither. The country spent some $5.5 billion last year on energy imports, according to the State Statistics Committee, accounting for about 40 percent of its annual imports bill. To make matters worse, a trilateral disarmament agreement between Ukraine, Russia and the United States, under which Ukraine received $375 million worth of nuclear fuel rods free of charge from Russia for three years, expired at the end of 1998.
Yet retail energy rates have gone up only marginally since Soviet times and per-capita electricity consumption in Ukraine remains higher than almost all developing countries. The result is debt on a massive scale. Analysts estimate that power companies in Ukraine are owed about Hr 4 billion by households and industry combined. Power companies, in turn, owe billions of dollars to Russian natural gas supplier Gazprom and other fuel suppliers.
Raising household electricity rates is one easy way to attack the problem of energy debt, analysts say. International lending organizations have long lambasted Ukraine’s retail electricity prices, which are among the world’s lowest.
The World Bank suspended a $370 million energy sector loan in 1997 as a result of Ukraine’s failure to raise household electricity rates and has continued to make its loans contingent on substantial electricity rate hikes. The International Monetary Fund has put similar pressure on Ukraine to bring those rates up – a hike in communal service rates is one of 88 conditions underpinning a currently suspended $2.2 billion loan agreed to in July 1998.
Even more damaging than low prices, according to the World Bank, are the extensive subsidies and privileges Ukraine grants to its citizens. Milenky said that more than 13 million citizens are entitled to privileged electricity rates in Ukraine. Again, both the World Bank and the IMF have conditioned loans on a reduction in household electricity privileges.
It may seem strange to target household rates in a country where industrial consumers burn through 80 percent of electricity. But industrial rates are already about 20 percent higher than household rates, according to Serhiy Milenky, an energy operations officer with the World Bank in Kyiv. Contrary to popular belief, Milenky adds, electricity payments by industrial consumers tend to cover a higher percentage of generating costs, although rampant barter and corruption make that difficult to prove. Either way, the problem of low household electricity rates is easier to attack than the intractable problems that pervade Ukraine’s industrial sector. All it takes is raising prices and eliminating privileges.
Skeptics argue that doing that would just fuel more non-payment in the sector. According to the NERC, households only paid for about 77 percent of what they legitimately owed for electricity in 1998 – despite the low prices and privileges.
Although Milenky admitted that some degree of non-payment is inevitable, he dispelled the notion that delinquency contributes more to the problem than low prices.
‘Actually, payments by households aren’t that bad,’ Milenky said. ‘The 80-percent (energy cost coverage) figure is an indication of this. If the subsidies and privileges were cut back the payments would be better.’
The powerful and populist leftist faction in parliament has led the way in skewering most attempts by reform-minded politicians to raise household electricity rates and eliminate privileges. Leftists in parliament have shot down a government plan to raise electricity rates in July of 1997 that led to the suspension of the World Bank loan, and later rejected a draft law canceling many privileged rates. Last October, it imposed a moratorium on communal service rate hikes that effectively froze household electricity rates.
The government was finally able to press some price hikes through last summer, when it increased household electricity rates by an average of 22.5 percent, industrial electricity rates by an average of about 5 percent.
But analysts said the rate hikes did not go far enough, as Ukraine’s electricity rates remain laughably low by world standards. And they could be getting lower instead of higher. The Cabinet ordered household electricity rates established in hyrvna as of Jan. 1. They had been pegged to the dollar before that. The result is that rates have effectively dropped about three percent since early February, in line with the hryvna’s devaluation.
‘If the moratorium on raising charges for housing and municipal services provided to the population is not lifted, we will be forced to raise electricity tariffs for industrial and other consumers and also tighten control over the cost of generating electricity,’ said NERC chairman Zynoviy Butsio, according to Ukrainian News. ‘Tariffs need to be raised in line with the devaluation of the hryvna.’
But the NERC has acted suspiciously wishy-washy. The commission actually lowered rates on electricity used for household heating and hot water supply by ten percent on Jan. 1, and lowered rates on electricity delivered to rural enterprises by five percent.
Meanwhile, the Constitutional Court has been considering the legality of the moratorium since last December, but it has yet to render a decision.
Unless it does overturn the decision, Ukraine will continue to cope with outdated technology, drastic over-consumption of electricity, periodic power shortages and other crippling consequences of low energy prices.
In part two of this series, the Post will take a look at the damage caused by electricity over-consumption and the need for new technology to minimize that damage.
Vitaly Sych contributed to this article
