E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) FEBRUARY 2018 SERBIA • Electricity is the largest component of household energy expenditures in Serbia. • The power sector in Serbia faced increasing THE CHALLENGE financial difficulty in 2014. High technical and commercial losses along with below-cost provision Back in 2014, the power sector in Serbia faced the of electricity to consumers resulted in a revenue challenge of revenues being inadequate to cover costs, shortfall for the state power utility and became a because average tariffs were set below the cost-recovery huge burden on the government. level and because of high commercial and technical losses. The revenue shortfall was equivalent to approxi- • ESMAP grants supported World Bank cross- mately two percent of GDP. At the same time, the bottom sectoral analyses, which fed into advice to the Serbian government on designing electricity tariff quintile of households received only 16 percent of the reforms paying attention to energy affordability subsidy resulting from below-cost tariffs and low energy and protecting vulnerable households in the face prices encouraged excessive use of energy. of price increases. THE RESPONSE The Government of Serbia initiated a comprehensive The Government asked the World Bank to assist it in reform of the energy sector to tackle these challenges. reforming energy tariffs in a socially responsible manner. The reform included a major corporate restructuring From 2015 to 2017, the Bank team used grants from the of the large national electricity (Elektroprivreda Srbije, Energy Sector Management Assistance Program (ESMAP) EPS) and gas (JP Srbijagas) utility companies and raising to fund analyses that informed the policy dialogue on electricity tariffs to cost-recovery levels. Restructuring electricity tariff reforms in Serbia, as well as Albania and of the companies was motivated by efficiency concerns Kosovo. but also necessary to comply with European Union accession requirements. E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) Tariff reforms began in Serbia in 2015. Residential elec- tricity prices were increased by 12 percent (4.5 percent tariff increase plus 7.5 percent excise tax) in August of that year. A further 3.8 percent increase occurred in October 2016 and another 2 percent in October 2017. The changes were aimed at improving the Serbian government’s fiscal balance and ensuring the financial sustainability of the energy sector. Drawing on the findings of the cross-sectoral analyses supported by ESMAP, the World Bank team advised the Serbian government on paying attention to affordabil- ity and protecting vulnerable households facing price increases while implementing energy tariff reforms. Timely assessment of poverty and distribution impacts by the World Bank team provided a strong basis for engagement with the Government from the start. Bank assessments showed that one in five households (two in three households in the bottom income quintile) struggled to keep their homes warm even before the price increase. Electricity has long been the largest component of household energy expenditures in Serbia, accounting for roughly three-quarters of energy expenditures on average. The World Bank’s analysis showed that the substantial increase in electricity prices envisaged could have a significant impact on household energy expen- populations against higher energy expenditures. After ditures, especially in the short-run when households do implementation of the first tariff increase in August not have the flexibility to switch energy sources or switch 2015, an inter-ministerial working group, chaired by the between energy and other types of consumption. The Ministry of Mining and Energy, was set up to strengthen analysis found that the most vulnerable populations were the existing legislation with the objective of increasing the poor as well as the elderly living alone, who spent a the program’s coverage. The coverage of the electricity significant part of their household budget on electricity. benefit was low, at less than 4 percent of all households in June 2014, with low take-up among those eligible The ESMAP grants in effect supported a cross-sectoral because the program had been defined and implemented dialogue with the Government, resulting in efforts in ways that made it difficult for many households to to enhance social protection for vulnerable groups. qualify for it. Since 2014 Serbia had been implementing an energy bill discount program (energy benefit) for vulnerable The World Bank team’s assessment of the energy benefit households, following a requirement anchored in the program informed discussions with the Government on country’s Energy Law. This energy benefit, financed from how to strengthen the program in light of the potential the central budget and administered directly through welfare impacts of tariff increases. Technical assistance the utility billing process, aimed to cushion vulnerable was provided to improve both the design of the program E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) and its implementation. Fiscal analyses of alternative of identifying vulnerable groups from the Centers for social protection scenarios were carried out and they Social Works to local governments. In 2016, local gov- underpinned discussions between the Government and ernments were required to process all applications for IMF on the program’s budget, resulting in a significant energy benefit. Between 2016 and 2017, from January to budget increase for the program by the end of 2015. August, the average number of beneficiary households increased from around 42,000 to 64,000. In 2017, the benefit was extended to cover a new beneficiary group: THE IMPACT households that have members with disabilities. The electricity tariff increases along with restructuring have strengthened the financial sustainability of the MOVING FORWARD electricity supplier, EPS. This was also an important step in the Government’s fiscal consolidation efforts to lower Serbia has made significant progress in reforming its public debt to sustainable levels and effectively manage energy tariffs and providing protection for vulnerable future fiscal risks. populations. Analytics and technical assistance, sup- ported by ESMAP, contributed to informing these reform Supported by the ESMAP grants, the Bank team’s engage- efforts. It is important to maintain the momentum as ment with the Government and its emphasis on protect- Serbia completes its energy sector reform agenda -- ing economically vulnerable households in the face of further electricity tariff increases are planned until full price increases had a positive impact. On December 31, recovery of economic costs is achieved. 2015, the Government approved the Decree on Energy Vulnerable Customers to ease the eligibility criteria and increase coverage of the energy benefit. Among other aspects, the new energy consumption qualification thresholds for 2016 were set at significantly higher levels than before. Another obstacle that was removed had to do with energy bill payment arrears; arrears no longer affected eligibility for deductions on a household’s current bill. Further, the program budget was raised from RSD 900 million in 2015 to RSD 1,650 million in 2016. As a result, a higher number of beneficiaries became eligible for the maximum bill deduction. From January to August 2016, some 82 percent of all claimants were eligible for 100 percent of the legally allowed deduction, and an additional 15 percent were eligible for a deduction of their entire bill, which is significantly higher than before. Around half of the total amount of the benefit went to households in the bottom quintile, reflecting a strong means-testing component in the eligibility rule. The World Bank team continued to support the Government in the design and implementation of the energy benefit program in 2016 when changes in the beneficiary identification mechanism switched the burden E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) However, energy benefits such as price discounts, pro- reforms and at the same time protecting vulnerable gressive tariffs or social tariffs are usually considered households against price increases. The team was able temporary solutions applied, for example, at times of to produce evidence-based analysis that supported the energy tariff restructuring and complementary to other ongoing policy dialogue on energy tariff reforms and social protection measures. Since they are focused addressed energy affordability. As a result, the energy primarily on ensuring short-term energy affordability benefit program was redesigned to expand access. A and are not aimed at long-term energy poverty allevi- higher number of beneficiaries became eligible for max- ation, they tend not to be sustainable. In the medium imum bill deduction in 2016 and the average number of and long-term, it will be important to promote energy beneficiary household increased from around 42,000 in efficiency measures and protect vulnerable households 2016 (January to August) to 64,000 in 2017 (same period). under a broader social protection system rather than through parallel benefit programs administered by particular sectors. ESMAP’s $20 million Energy Subsidy Reform Facility (ESRF) was set up in 2013 to help countries remove fossil fuel subsidies while protecting the poor. CONCLUSION ESRF provides technical assistance to governments, develops tools for assessment and decision-making, and facilitates knowledge-exchange for a global The multi-sectoral technical assistance and analytical community of reformers. activities financed by ESMAP from 2015 to 2017 achieved the objective of supporting the Government with tariff ABOUT ESMAP The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by the World Bank. It provides analytical and advisory services to low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Denmark, the European Commission, Finland, France, Germany, Iceland, Italy, Japan, Lithuania, Luxembourg, the Netherlands, Norway, the Rockefeller Foundation, Sweden, Switzerland, and the United Kingdom, as well as the World Bank. ESMAP | 1818 H Street, NW | Washington DC 20433 | 202.522.3018 | www.esmap.org