Is Moldova on the road to energy sector viability?

The reliable and affordable supply of electricity and heating is an issue of major concern for Moldovan citizens, businesses and policy-makers. The viability and sustainability of the country’s energy sector rests on Moldova’s ability to diversify supply options and put in place the right tariff structures that would encourage investments in the energy sector. Currently, 98 percent of the energy resources consumed are imported, with over 80 percent of electricity and all natural gas coming from single sources.

To support the country’s energy sector development, the World Bank recently completed a study on electricity and heat tariffs in Moldova. The study shows the projected range of tariff increases, how much more different kinds of households would have to pay, how the Ajutor Social program and the Heating Allowance could protect vulnerable people, and how much those social payments would cost.

The big issue is that the cost of imported power and gas has gone up. Bulk purchase of electricity makes up approximately 70 percent of the total cost of delivering electricity to end-users. Purchase contracts for imported electricity are priced in US dollars so the recent depreciation of the Moldovan Leu has increased the cost of purchasing electricity by 50 percent since 2012. At the same time, the cost of natural gas makes up almost 80 percent of the final cost of district heating supply to final consumers. The 20 percent increase in the gas price since 2011 and a potential further increase of 20 percent must therefore be reflected in the district heating tariff.

The cost of supplying heat and electricity is now significantly above the tariffs paid by consumers. Energy sector companies are therefore making a loss on every single unit delivered.

Urgent action is needed to ensure a continuous and reliable supply of electricity and heat in Moldova. If end-user tariffs continue to be below the cost of providing the service, there is a risk that the suppliers will not be able to pay for bulk purchase of electricity and gas that are needed to deliver electricity and heat to consumers. In the short term, this could mean power cuts and cold apartments. In the long-term, this will prevent investments in the energy sector, which are badly needed to refurbish and upgrade the ageing infrastructure.
 

Energy tariff adjustments will mostly impact the poor, who mainly live in rural areas. The tariff increases would increase the poverty rate from 17 percent to approximately 19 percent in rural areas. Fortunately, Moldova already has two well-targeted social assistance programs: Ajutor Social and the Heating Allowance. The World Bank believes that any electricity or heating tariff increase should be accompanied by the expansion of these social programs.  

A well-structured electricity sector regulation was established in Moldova in the late 1990s. This framework enabled remarkable progress in the technical and commercial performance of electricity sector companies. As an example, the losses of the largest electricity distribution company were reduced from 14 percent in 2009 to 10 percent in 2014, and the interruptions in electricity supply have been reduced by approximately 70 percent from 2007-2013.

However, since 2012, the energy sector regulator has not been able to ensure proper implementation of existing regulations. Through good energy sector policies and restoring the transparency and credibility of energy sector regulation, Moldova could attract much needed investments into the energy sector, for example connecting to new sources of supply. This in turn would create greater competition and put downward pressure on electricity and heat prices for consumers.

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