Poverty and Environmental Impacts of Electricity Price Reforms in Montenegro

According to the recently announced decision of the Regulatory Agency for the Energy Sector, starting from 30 June 2007, Montenegrin households will pay and increased electricity price. The price of electricity for households with meters that have both off-peak and on-peak tariffs will be 6.28c€/kWh, while for those with only one tariff, the price of electricity will be 8.62c€/kWh. Such prices do not include value added tax which is an additional 17%, or 7.35c€/kWh and 10.1c€/kWh, respectively. Though other countries in the region do have block tariffs in place, the Montenegrin regulator decided not to go with such a solution since the intention is to reduce and finally dismiss any kind of cross-subsidies between different consumer groups. In addition, a block tariff is qualified as complicated for calculations. This significant price rise will impose a heavy burden on the poor households and it may adversely affect the environment. However, even though electricity tariffs are increased and it is expected will increase more, the Government of Montenegro did not come up with a proper safety net infrastructure for poor people; rather, ad hoc measures are taken. 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. Higher electricity prices could also significantly increase the proportion of households using fuelwood for space heating. The Government of Montenegro needs to combine the pricing reforms with a carefully evaluated set of measures that will mitigate the effect of these reforms on the poor and the environment. A simulation of alternative policy measures shows that non-linear electricity pricing schemes may be a successful way of protecting the poor due to the high level of correlation between electricity consumption and income level in Montenegro. Alternatively, the Government of Montenegro could consider reforming the current social assistance scheme to broaden the base of qualifying households and improve the program's targeting of the poor, or it might evaluate the feasibility of innovative financing schemes with the participation of the private sector, the electric utility company, and an emphasis on improving energy efficiency in the residential sector. The analysis has been completed prior to the decision of the Regulatory Agency, but assumed price increase is a good approximation. In addition, the paper briefly introduces the current situation in the energy sector in Montenegro.