Working paper abstract

#2012-066

Switching the lights off: The impact of energy tariff increases on households in the Kyrgyz Republic

Franziska Gassmann

Raising energy prices to cost-recovery tariffs has several implications. The implicit (quasi-fiscal) subsidization of the energy sector will be reduced to a large extent. Energy companies will have higher revenues, and consumers will be faced with a major increase of their energy bills and potentially high welfare losses. Removing subsidies affects poor households more as they spend on average a larger share of household income on energy and because they have fewer options to adjust their energy consumption. This paper analyses the impact of higher energy tariffs on households in the Kyrgyz Republic using micro-data from the Kyrgyz Integrated Household Survey 2009. It aims at answering the question which households will be most affected by higher energy tariffs and to what extent mitigation measures, such as lifeline tariffs or direct cash transfers could soften the impact on poor and vulnerable households. The analysis focuses on first-order effects and uses benefit incidence analysis and static micro-simulation to estimate expected costs and benefits of higher energy prices and the corresponding mitigation measures. Results suggest that both the type of energy and the level of connectedness matter. Increasing tariffs for thermal power used for central heating and hot water mainly affects richer households in urban areas. Reducing implicit electricity subsidies affects the whole population due to nearly full country coverage with electricity connections. Lifeline tariffs for electricity could mitigate the effect of higher tariffs to a certain extent as long as households have actual control over their consumption. However, all households would benefit equally. Direct cash transfers targeted at poor households improve the targeting performance and lower the costs compared to universal subsidies.

Keywords: energy subsidy, poverty, social transfers, Kyrgyz Republic

JEL Codes: H23, I38, P22