On the politics of energy price hikes
 
 

Prime Minister Ibrahim Mehleb announced today that savings from planned natural gas price increases would be used to fund efforts to connect households to the country’s gas grid.

At the end of May, natural gas prices for residential and commercial users are set to almost double. Consumers using less that 25 cubic meters of gas per month will be charged 40 piastres per cubic meter. According to Egypt’s oil ministry, the current household price for natural gas is 20 piastres. The next block, from 25 to 50 cubic meters will cost LE1 per cubic meter, with any use exceeding that charged at LE1.5 per cubic meter.

This means that a typical household with a natural gas connection will see its monthly bill increase by just a few pounds per month, says Mohamed Abu Basha, a Cairo-based economist at EFG-Hermes.

Most households pay LE6-8 per month for their natural gas. Under the new pricing scheme, this would rise to closer to LE15.

Although the change will impose a financial burden on families connected to the gas grid, economists and energy experts generally regard the move as a step in the right direction.

Egypt is facing a yawning budget deficit, which Finance Minister Hany Qadry estimates will reach 11-12 percent during the current fiscal year. Much of this is driven by the country’s energy subsidy bill, which eats up about 20 percent of the overall government budget. At the same time, the country is facing a dire energy shortage that has resulted in gas lines and electricity cuts nationwide.

The changes in natural gas pricing will be just a drop in the bucket for Egypt’s government. It predicts that decreasing subsidies on natural gas will save LE800 million to LE1 billion, compared to the LE130 billion budgeted for energy subsidies this year. “It’s more or less insignificant from a macro perspective,” says Abu Basha.

Nor is it likely to make much of a dent in consumption. The sectors affected by the increase amount to merely one percent of natural gas usage, explains Abu Basha, with the vast majority going to electricity production and industry.

However, it is one of the easiest reforms to initiate, since the government has a monopoly on natural gas distribution, and already tracks consumer usage and charges different rates based on consumption. An official decree is, itself, enough to see charges increase. This is not the case for gasoline and diesel, which is sold by multiple vendors, easily smuggled outside of the system and difficult to track to individual customers.

If the savings on the subsidy bill are indeed used to finance connecting additional households to Egypt’s gas grid, both the government and Egypt’s most vulnerable consumers stand to benefit. Most of the country’s poorest households rely on butane cylinders for cooking and heating water. Not only are the cylinders more costly for consumers, they are also one of the most heavily subsidized fuel products. The cylinders cost the government about LE75, and the official sale price is LE8, with the difference made up by subsidies.

The cylinders are also subject to shortages and price manipulation, causing hardship to consumers. At times, anger over shortages has erupted into deadly violence, as desperate consumers crowd trucks and warehouses trying to secure butane for their families. Piping natural gas into more households has the potential to be a win for both the government and consumers.

More controversial, although also more significant, are proposed electricity price increases.

On the sidelines of an IMF-World Bank meeting in Washington D.C., Minister of Planning and International Cooperation Ashraf al-Arabi, told Reuters that Egypt will increase electricity tariffs for the richest 20 percent of Egyptians by May. The remark appears to have been completely off the cuff, and was eventually walked back by the Cabinet’s official spokesman.

Even assuming the minister meant that prices would be increased for the top 20 percent of household consumers, rather than simply targeting the wealthy, that figure sounds a bit random, says Mohamed al-Sobky, director of the Energy Research Center at Cairo University.

Like natural gas, electricity in Egypt is charged based on consumption blocs, Sobky explains. Household usage is charged at six different rates, with tariffs ranging from five piastres per kilowatt-hour for households consuming less than 50 kilowatt hours per month, up to 67 piastres for each kilowatt hour exceeding 1,000. Prices have been increased several times in recent years, but only for those in the top brackets.

According to the most recent available figures, from the 2011/12 fiscal year, Sobky says the top bracket encompasses about two percent of households. If the government is aiming to increase prices for the top 20 percent of residential users, it will likely target customers in the top three brackets, who use more than 350 kilowatt hours per month.

In general, Sobky says, high consumption is associated with wealth, since its driven by air conditioners and other large appliances that remain beyond the means of most Egyptians. Increasing rates for the top brackets would send a strong signal to energy users, Sobky says. “The government is realizing that people who consume more, reflecting their own prosperity, need to pay for that.”

However, even if such a move exempts the country’s poorest households, a price hike will hit middle and upper class Egyptian hard, and will likely prove massively unpopular.

This has led to speculation that the price hikes are timed for just before the upcoming presidential election — in which former military head Abdel Fattah al-Sisi is strongly favored — in order to smooth the path for the new administration. “It gives the next administration breathing room,” says Abu Basha.

However, in addition to the presidential election, May is also when Egypt’s energy consumption begins to peak and raising prices is likely the most effective way to get consumers to monitor their use.

“Part of the rationale is more or less compulsory rationalization of electricity,” says Abu Basha. With this in mind, raising prices before the presidential election shouldn’t be seen as premature, he says. “We’ve already been late for five or six years now.”

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Isabel Esterman