Simulation and evaluation of the economic impact of the change of the tariff policy on Ukrainian electricity market

Among all types of economic activities in Ukraine, power industry is the only one utilizing the mechanism of cross subsidization. Electricity tariffs for the residential consumers are set far beyond the estimated retail level, while industrial consumers have to pay higher prices in order to compensate those costs. In 2012, electricity consumption subsidies exceeded 31 billion UAH, which is over 8, 7% of the central government budget and 2, 3% of Ukraine's GDP. In this study, a static computable general equilibrium model is applied to investigate distributional and poverty-related effects of the price reform in the electricity sector of Ukraine, considering the scenarios of 30%, 50% and 100% subsidies elimination. In addition, different choices of compensating mechanisms for various households' groups are studied, such as direct transfers from the central government budget, partial preservation of cross-subsidization and compensation through increase of taxes on production and imports. The results indicate that essential positive effects from the elimination of subsidies (lower production costs, output gain and revival of investment processes) mostly take place in the industrial activities. Moreover, the highest growth rates are observed for those industries that are not only active electricity consumers, but also produce energy intensive goods and services. Regardless of the nature of the implemented compensation mechanisms, the decrease in cross-subsidization leads to investments growth: for some scenarios, by up to 4.5 billion UAH. At the same time, residential consumers suffer from the regressive effects: poor households lose relatively more than the rich ones. In his context, the indemnity options analyzed in this study prove to be efficient social dampers.