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Energy tariffs need efficiency

So far the political debate leading to the next general election has been dominated by the water and electricity tariffs. It would not be worth discussing that subject in this Business section if one only noted the political rhetoric. Fact is, however, that the issue has fiscal and economic connotations, in addition to its socio-political dimension.

Only a minority of households have roofs that can accommodate photovoltaic equipment
- Lino Spiteri

Tariffs are high, reflecting in part the price of the by-products of crude oil, which is fluctuating along a high trend line. The costly input to production and consumption raises inevitable difficulties. Producers and service providers complain that their costs are rising as a result of costly and costlier fuel.

Consumers, at whatever level of income, say that energy tariffs are taking a much higher cut of disposable income than hitherto. These reactions led the opposition Labour Party to claim that energy tariffs can be lower and to make a solemn promise to slash them, if it is returned to office.

The governing Nationalist Party makes hay of this promise, challenging the Labour Party to explain how it would fulfil it. The Opposition replies that it will do so once the electoral manifestos are published, but asserts that it will not raises taxes to make good for lower energy tariffs.

The matter is not resting there. The Government felt uncertain enough to abandon the full-recovery commitment to the electorate and the EU.

It froze tariffs at a given level earlier this year, making good for the resulting shortfall to Enemalta with a subsidy of €25 million for 2012. It undertook to repeat that next year, assuming it wins the election.

The political ball bounces all over the place. Labour has maintained its position, which must be explained at one stage or another. The Nationalists, aside from capping tariffs, have come up with another offensive line. The Prime Minister, in his Xarabank debate with the Leader of the Opposition, made a big deal of photovoltaic equipment.

The government has been encouraging households and business enterprises to install this equipment, which can save energy and also earn owners a return from excess supply fed to Enemalta. The Prime Minister went so far as to suggest that energy bills could be cut to zero, and brandished a bill on television to prove his point.

That has attracted a critical reaction, not without good reason. There is no doubt that the government is right to encourage use of this alternative energy, and to invest in subsidies to encourage it. Fact is, however, that the scope for it, while large, is very finite. For one thing, there is the capital cost.

Even at the subsidised level it is too high for most households.

The subsidised capital cost still cannot be met by lower middle and lower income groups, which amount to thousands, even if one adjusts for families who live in or are at risk to poverty, according to the latest living survey by the National Statistics Office.

There is also a physical constraint. Only a minority of households have roofs that can accommodate photovoltaic equipment, even if affordable to them. The bulk of buildings in Malta include three- or even multi-storey units.

Clearly, photovoltaic can only be a partial private solution, even if the Government finds the financial resources to finance thousands more households.

The truth is that a review of energy policy is required. The inescapable fact is that ultimately tariffs depend on the international cost of crude oil and its by-products, influenced by factors like the exchange rate, seasonality and storage capacity.

Whoever is in government, I suggest, the only sensible economic and financial action is the following: Enemalta has to convince the regulator and public opinion that it is purchasing its energy needs as efficiently as can be. Such efficiency is limited by the level of purchases Enemalta can make, so international prices are not inevitably convertible into domestic purchase costs.

Enemalta also has to convince that it is producing electricity efficiently. So far that is not the case. It is a fact that the Marsa power plant was inefficient for years. More problematic is the situation of the first Delimara plant. There has not been convincing evidence that it made a leap in efficiency.

It remains to be seen what level of efficiency is achieved by the controversial extension which should finally come on stream soon. A review should be undertaken to determine whether Enemalta is adopting the most cost-efficient production techniques.

The regulator and the public have also to be convinced that distribution of energy is done efficiently. As can be seen, these factors all turn on the efficiency condition. Without higher efficiency, it will be difficult, if not impossible, to bring down energy costs such that they reflect international by-product prices, allowing for diseconomies of purchase scale.

Provided these factors are satisfied, such that industrial and domestic consumers are no longer forced to pay through their nose for Enemalta’s various inefficiencies, energy prices should be set on the full-recovery principle, with prices following international input costs.

That leaves a problem for economic agents, who will have to price the tariffs in their cost structure like other producers and suppliers do, plus a more intractable social problem. A substantial number of households will still be unable to afford their bills, if by-product prices remain high or rise further.

That calls for a review of the social policy which provides for subsidies to such households. The policy should remain. The level of subsidy needs to be revised. Running away from the parameters outlined here will leave nothing but political rhetoric in the air.

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