Social Protection in the Transition to full Liberalization of the Electricity Market – How to Realized It?
1. Social protection in Bulgaria
Energy support is provided through the general social protection system implemented by the Ministry of Labor and Social Policy through the Agency for Social Assistance. Within the framework of the general social assistance system, there is an explicit program for targeted heating aid, so-called energy aid. The individuals and households covered by the program are determined annually on the basis of a percentage of the guaranteed minimum income.
The monthly amount of the aid for heating by electricity or for district heating customers is defined as the equivalent of 450 kWh day rate and 150 kWh night rate electricity, depending on electricity prices at the beginning of the heating season. The monthly amount of the solid fuel heating aid is determined on the basis of the BGN equivalent of 1.2 tons of briquettes for the whole heating season at an average final selling price for the country.
For the 2016/2017 season the monthly amount of the aid is BGN 72.46 or totally for the five heating months – BGN 362.30. The total budget expenditures (considering 250 thousands supported) are expected to be about BGN 90 million.
2. European practices
There is no definition of energy poverty at European level, nor is there a requirement for a mandatory definition of this concept and use of unified mechanisms at national level. Member States apply a variety of practices in accordance with traditions, climate, living standards, etc.
According to “Second consumer market study on the functioning of the retail electricity markets for consumers in the EU”[1], 11 of 30 European countries (ЕС28+2), including Bulgaria, apply a holistic approach and provide energy aid through the general social protection system. The understanding is that energy poverty is an element of general poverty, and measures to combat poverty overcome all aspects of it, including the energy one. Therefore, in many European countries, no legal definitions have been introduced for “energy poverty” specifically.
In five European countries, it is considered that there is no need for direct financial support to households to combat energy poverty but other mitigating measures are used – for example, use of prepaid electricity meters, deferred payment of bills, a reasonable restriction on electricity supply interruption.
Nine of the thirty countries examined apply in one form or another the so-called social tariffs – mechanisms that entitle users meeting certain criteria to lower bills. Funding of social tariffs is realised either from national and/or local budgets, or through surcharges to electricity prices that are paid by electricity consumers outside of the group of those considered energy poor.
3. Trends – fading role of social tariffs
Social tariffs are easily applicable in a case of a single supplier and regulated energy prices. However, they are incompatible with the liberalized environment due to multiple suppliers, multiple tariffs, and dynamic prices.
Their application is only possible as a temporary measure during the transition to full retail market liberalization, but with multiple modifications to avoid the difficulties of their practical application.
Some countries retain access to regulated prices (social tariffs) only for households meeting certain energy poverty criteria, for instance the regulated prices supplier (default supplier) being determined through a tender based on the lowest price bid made by the applicants for the provision of this service. The costs of the selected supplier are covered by budget funds for social assistance.
Another modification is the imposition of an obligation on each of the traders (retail suppliers) to provide energy to energy poor households at the most favorable of all tariffs it offers, for a certain period of time.
A typical trend is the replacement of social tariffs with other forms of protection – heating aid, for example (England in 2011) or vouchers (France at present).
4. The 2016 proposal of the Ministry of Energy
The transition to retail market liberalization creates more price risks and risks in terms of security of supply. In order to be successful, the transition must be carried out with a concurrent operation of a secure and efficient mechanism for the protection of vulnerable households and individuals.
This is the reason a working group of experts, from the Energy and Social Ministries as well as the European Commission, proposed a model for extending the current energy assistance system to ensure a successful and socially stable transition to full liberalization. The model provides:
- introduction of a “social tariff” for vulnerable households that is 70% lower than the energy component of the electricity price for 100-150 KWh per month, for households connected and not connected to the district heating system respectively;
- the groups eligible for the new assistance include (1) people aged over 70 who live alone and have income below the poverty level for the country; (2) persons with over 90 percent disability, with personal assistance (regardless of income); (3) families with children with disabilities, with personal assistance (regardless of income); and (4) individuals and families receiving the targeted heating aid;
- approximately 500 thousands households or 1.1 million people, representing about 14% of the population, are expected to gain access to the new type of assistance;
- it is expected through the social tariff mechanism an annual bonus of about BGN 187 per household to be granted and the total amount needed for its funding is estimated at about BGN 50 million per year (added to BGN 90 million heating aid).
5. World Bank on social tariff
In the summary of the report “Bulgaria Power Sector: Making the Transition to Financial Recovery and Market Liberalization” [2] of November 2016, World Bank considers social tariff as a measure, to protect vulnerable consumers, of a temporary nature and recommends moving towards a more holistic approach to social protection. This approach provides for: (a) the integration of energy aid within existing social assistance schemes and increasing their scope, and (b) combining financial support with non-financial measures to support energy vulnerable consumers – energy efficiency of residential buildings for example.
6. Recommendations
Social protection mechanisms applied during the transition to full liberalization of the electricity market – the parameters, the way of receiving the aid, the process of identifying the beneficiaries – will be critical to the success of the initiative.
Therefore, a good approach would be the decision-making in this aspect to comply with the recommendations that follow, taking into account both the good practices of social protection in the country and the European practices and trends:
A. Making the most efficient use of the available administrative and information structures to ensure automatic inclusion of the eligible beneficiaries in the social protection scheme.
Integrating new measures, aimed at mitigating the risks of the liberalization, into the current social assistance system. This will allow as efficiently as possible to use the available databases and the eligible beneficiaries to be included in the new support scheme. As energy supply is essential for social status, responsibility for identifying vulnerable households should be borne by those, which have access to the necessary information and have relevant experience and skills, i.e. those providing current social services. Energy companies will also need to cooperate in this process, notably by providing necessary information about their customers.
B. Extensive social policy is the best mechanism for coping with poverty, including energy poverty.
The general definition of socially disadvantaged households and individuals integrates also the “energy disadvantaged” households and individuals. Generally, when households do not have sufficient funds, there is a question of how to pay for all basic needs, especially for food, not just for energy. From this point of view, the existing practice, completed also with the proposals of the Ministry of Energy, is a good basis for social protection not needing specific definitions of “energy poor”.
C. Funding of social tariff should not be done through electricity prices.
If this is done, Obligations to Society price will increase – a new social surcharge will be added to the current ones, applied for funding of green energy, cogeneration, energy under long-term power purchase agreements, and NEK deficits. The surcharges to the energy price, intended to provide funding for energy and environmental policies, are the main driver of electricity price increase in the EU in recent years. This leads to an increase in the share of energy expenditure in household budgets and creates risks for the competitiveness of the European economy. European consumers are therefore particularly sensitive to the size of the amounts in their bills. An additional reason to support this recommendation is the need to replenish the significant NEK deficit, which, along with EU policy, will add on to the pressure towards electricity price increase over the coming years.
D. As soon as possible, household bills should be based on market prices and not used as means of financing other policies.
It is clear that the growth of electricity price surcharges increases poverty. As EC data show, energy costs in total household budgets have risen from 5% to 6% between 2000 and 2014, but for the poorest households they have risen from 6% to 9%. The issue is also in the focus of the current European debates, as the main proposal of the electricity industry (EURELECTRIC [3]) is to abolish the surcharges to electricity prices by transferring them to the general tax policy and accordingly – to the budget.
E. Aid provided to socially disadvantaged individuals and households should be funded through general taxation.
Progressive nature of taxation allows for a fairer burden sharing, without having people with lower income to bear a disproportionately greater burden.
F. Linking social electricity assistance to a more transparent and more sustainable component of electricity prices.
The 2016 proposal (item 4 above) binds the amount of new energy aid to the energy component of regulated prices. In the short term, however, phasing out of regulated prices is expected, so they could not be a sustainable calculation basis. Therefore, it would be better to link social aid to another price component – regulated, visible, and sustainable over time. All these requirements are met by Obligations to Society price. If this recommendation is accepted and the aid is based on Obligations to Society price, a clear message will be sent that people and low-income households will not be obliged to support environmental and energy policies but will have access to the benefits of them.
The adoption of the new mechanism should be preceded by a wide debate with stakeholders. In addition to the issues raised above, there are probably many others that may find their more accurate solution, so the assistance can reach in a fair and effective way those in need of it.
[1] http://ec.europa.eu/newsroom/just/item-detail.cfm?item_id=53331
[2] https://www.me.government.bg/files/useruploads/files/wb_ras_i__summary_report_en.pdf
[3] http://www.eurelectric.org/media/325597/energy-poverty-final-2017-2500-0003-01-e.pdf
