Oleksandr Klymenko Official website
Articles | 2179 | 27.03.2015

Housing and communal services: a dead end, another deadlock …

Need to concentrate all the efforts on heat modernization of end-user

From April 1, next «surprise» is waiting for the whole country. It is about the increase of tariffs for electricity, gas and heating for the population, namely from 50 to 330%. And this is not an April Fools joke.

Experts and politicians from all fields are discussing, is it good or bad (of course, the majority believes that it is bad), is it justified or not. However, nobody says that the increase of tariffs somehow will affect the improvement of questionable quality of housing and communal services, which are provided to the population.

Moreover, Ukrainian housing and communal services with its chronic problems is not the topic on the agenda. The reform of this sector is not discussed in the media. It is not included in the list of so-called key reforms, which were presented by the Cabinet of Ministers.

All over the world municipal sector – is a lucrative, but complicated business. This is monopolistic market, which is strictly regulated by the state. The state writes the rules and observes its implementation. Meanwhile, the executors ensure the quality of housing services with an affordable price to the consumer

Why not? The IMF did not demand, and we did not tumble to it. The government is full of investment bankers, who do not want to understand the issues related to the municipal services. Dmitry Vovk, 24-year-old former manager in Roshen, who has never been involved in the field of energy and communal services, was assigned as the head of core regulator – The National Commission for State Regulation of Energy and Public Utilities, which should institute tariffs and determine the game rules in this market.

All over the world municipal sector – is a lucrative, but complicated business. This is monopolistic market, which is strictly regulated by the state. The state writes the rules and observes its implementation. Meanwhile, the executors ensure the quality of housing services with an affordable price to the consumer. Such approach is used almost in all countries of the world. For instance, the first regulator in USA began to operate at the beginning of the last century – in 1904.

Municipal sector in Ukraine has always been a hostage of political expediency and a bargaining chip during the next elections. Unfortunately, it remains the same.

However, despite the political component, the economy will not disappear. According to an approximate estimate, total volume of public services market in 2014 amounted to about 65-70 billion UAH. About 40-45 billion UAH go to heating market and 25 billion UAH go to water supply and sanitation.

Why, does not investor go into the industry? The answer is simple: even if we abstract from the general crisis in the economy, no one will invest with the understanding that recoupment of the investments is almost zero.

Until the last increase of tariffs for natural gas, electricity and thermal energy, it covers the prime cost on nearly 60-70%. According to representatives of the National Commission, increasing of the heat cost by 71.8% and gas for domestic customers more than tripled (it was approved on April 1) covers all expenses on the production, transportation and supply of these resources. Thus, UAH 500 million was provided for the refund of the difference between reasonable and regulated tariffs in the state budget for 2015 instead of required UAH 5-6 billion compensation.

It means that even rising of tariffs does not cover costs entirely. Therefore, utility companies are constantly faced with the dilemma, what expenses they should cover, namely: to pay salaries, pay for gas, electricity or, for instance, buy reagents for water purification.  It is naturally that there are no free funds for the implementation of any investment programs or for replacement of the networks and equipment.

We are not talking about profitability and interest on loans.

Therefore, about UAH 65-70 million is the total volume of the market of utility services in Ukraine in 2014

For instance, it is necessary to replace nearly 2,2 thousand km of water supply system (it is 2.9% of its total amount). According to an approximate estimate, only 0.8% is being replaced per year (3.5 times less than it is required). As a result, nearly 260 accidents per 100 km of pipelines take place per year in Ukraine. This index is 5 times higher than in Europe.

The absolute majority of tariff does not include investment component. Even if it is included, it often does not exceed 2-3%, and goes to compensation for expenses on cost price. For instance, here is the structure of tariffs for thermal energy: up to 65% is expenses on gas, about 10% – on electricity, 25% goes to staff salaries and 10% on other costs (depreciation, mandatory contributions, etc.). For comparison, the structure of the water price in Paris includes 34% of the investment component of the tariff!

There is only one way to save the industry – transition to the stimulating tariff. Such model is successful. It has already proved its efficiency in Europe, in some countries of the former Soviet Union as well as in South and North America. This approach encourages and even forces companies to reduce their operating costs.

Thus, when the regulator defines the rate of the tariff and includes sufficient investment component, he has to set a task before the company to reduce costs.  It will result in decrease of tariffs for consumers. The company obtains a clear cash flow and a clear profit, and the consumer – quality service, the price, which does not increase, and can be even declined.

The instance of Britain is demonstrative one. In 1999 rates were raised to the level of economically justified costs plus investment component. This helped to attract private funds, to modernize the industry, to reduce the prime cost of services. As a result, nowadays the population is spending less on utilities (!) than before the tariff increasing.

Therefore, if the state increases the tariffs to the level of the prime cost, this step should become an impulse for the reforming of all housing sector.

However, at this stage we can not forget about consumers – ordinary people. In general, you should be very careful while choosing a solution for utilities. These services are extremely important. The government should focus on the real solvency of the citizens in matters of state tariff policy. Hasty steps can lead millions of people on the verge of survival, and the state – on the brink of default.

In plethora European countries there is a term «energy poverty». It means that people should pay for energy (heating, electricity, gas) no more than 10% of total family income. World Bank agrees with these calculations.

For instance, the US share of family expenses on utilities (including gas, heating, electricity and water) ranges from 5 to 6% of the family budget, namely: 9.2% in Austria, 10.8%, in Hungary, 9,9% in Poland. “The average check” in Ukraine before the increasing was about 13% of income, after the increasing it can reach 33%

In plethora European countries there is a term «energy poverty». It means that people should pay for energy (heating, electricity, gas) no more than 10% of total family income

After the institution of economically justified tariffs for population, 80% of Ukrainian families will be below the energy poverty line and will not be able to pay.

Current situation in Ukraine is not suitable for social experiments. Therefore, if the state wants to avoid social explosion and a wave of protests against tariff increases (as it was in Moldova in 2013), it should not raise tariffs instantaneously. It is necessary to gradually bring the tariffs for public utilities, primarily for thermal energy, to the level of the prime cost during the next 5-10 years. There is only such way!  Tariff increases must be accompanied by an increase of people’s solvency. Otherwise, social protests and massive arrears are inevitable.

Possible alternative ways such as subsidies or compensation for the difference in tariffs have proven its inefficiency.

In parallel with the tariff regulation, it is necessary to improve energy efficiency in order to reduce consumption and use the finances more rationally.  For instance, the gas can cost three times more expensive. However, if people need five times less of gas vol., the expanses will not grow on it. A company, which use it, will benefit.

One of the most inefficient applying of natural resources is the municipal power system. It is still using the Soviet approach, where design capacity (not an actual consumption) was high-priority. Therefore, there is a huge loss of heat energy both at the stage of its generation and its delivery to the consumer.

We must transit to the efficient consumption and a clear accounting of resource consumption. If we carry out the approach of “pay only for what is actually consumed”, there will be a desire to reduce the loss. Nowadays, only 40% of consumers pay for heat on the counter in Ukraine. The rest pay according to the standards, which include losses. In other words, they pay for mismanagement of public utilities. I would say more, only 80% of heat energy sources are equipped with metering devices. It means that we do not know, how much heat was consumed, how much it was produced.

It is also important make local authorities be interested in the modernization and energy efficiency. Nowadays, they are competing with each other in escalating damages for utility services. These «losses» allow them to raise the issue about the obtaining of additional subsidies from the state budget

Modernization of heat economy will reduce losses and improve its energy efficiency. Well, boilers and networks, which were installed in the 60s of the last century, can not be energy efficient.

According to the experts of the World Bank (project “Municipal power”) corresponding national program would require the cost of UAH 250 billion (in prices of 2013). Country, of course, does not have such money. It will never have it. Therefore, given the inevitability of this work, it is necessary to understand where to get the money and where to send them foremost.

According to the conclusion of the World Bank, the largest savings – 41% of heat – will be carried out by insulation of residential buildings. This section will cost UAH 70 billion. For comparison: the modernization of boiler rooms will cost UAH 141 billion, but there is only 4% of the potential reducing the losses. Concerning the transportation, namely, the replacement of heating mains, has the following characteristics: the expanses – UAH 33 billion, possible reduction of losses – 14%.

It looks logical to concentrate all the efforts on heat modernization of end-user. It has already begun, though, by the residents in most cases. People join their forces, install heat meters, individual heating points with the adjustment of the coolant temperature, insulate facades, roofs and basements. According to practice, the effect can be seen almost immediately.

For instance, if you install the house account of thermal energy unit (counter), the amount of heating bills will be reduced by an average of 20%. If you equip the individual heating unit with thermoregulation system, it will be reduced by another 10%. And if you conduct thermo modernization (full house warming, replacement of the windows, etc.), it will be reduced by 40%.

Link to source: Forbes

Photo: УНИАН