Abstract
The creation of the Energy Community of South Eastern Europe in 2005 committed countries in South Eastern Europe to liberalize their energy markets in accordance to EU regulations. The Government of Montenegro is thus in the process of reforming its energy sector, which includes an electricity tariff reform. This paper analyzes the environmental and social impacts of an increase in residential electricity tariffs contemplated – which is expected to range anywhere from 40 to over 100% increase. As this analysis shows, such a significant price rise will impose a heavy burden on the poor households and it may adversely affect the environment. In an ex ante investigation of the welfare impact of this price increase on households in Montenegro, we show that the anticipated price increase will result in a very significant increase in households' energy expenditures. A simulation of alternative policy measures analyzes the impact of different tariff levels and structures, focusing on the poor and vulnerable households. Higher electricity prices could also significantly increase the proportion of households using fuelwood for space heating. Thus the level of fuelwood consumption should be carefully monitored under the electricity tariff reforms and the Government of Montenegro should combine the tariff reforms with a carefully evaluated set of policy measures to mitigate the effect of the electricity price increase on the poor.
Highlights
Countries with former centrally planned economies in Europe and Central Asia are in the process of implementing structural reforms in the energy sector
The substantial increase in energy prices in the region has had an adverse impact on poverty and the environment when pricing reforms were not combined with measures to mitigate the losses from a price increase on the poor households
We investigate the potential impact of electricity tariff reforms on household heating fuel choice by estimating a fuel switching model
Summary
Countries with former centrally planned economies in Europe and Central Asia are in the process of implementing structural reforms in the energy sector. Along with the other countries in South East Europe, Montenegro recently signed a regional energy treaty, which commits the signatory countries to liberalize the non-residential energy market by January 1st 2008.2 This treaty includes a set of measures intended to support the development of a regional electricity market, such as raising electricity tariffs to the cost-recovery level, enforcing payments discipline, restructuring energy companies, establishing an independent energy regulator, revising tariff methodologies, and putting in place social safety nets to offset the adverse impact of tariff increases on vulnerable households. Maintaining tariffs below cost recovery levels would undermine the government’s commitment to the development of a regional electricity market To resolve this dilemma, the Government of Montenegro could evaluate a range of alternatives that combine the price increase with measures that would mitigate the effect of this dramatic price increase on poor and vulnerable households. P o la n d S lo vakRepub lic A lb a n ia B u lg a ria C roatia FYR M acedonia M ontenegro R om ania
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