The tariff increase envisaged by the natural gas system distribution operator AS “Gaso” alone would not be critical, but if one evaluates in general with the high inflation as well as the increase in energy prices and electricity tariffs , the impact on the economy will be negative, banking analysts say.
“SEB banka” economist Dainis Gašpuitis stressed that any increase in tariffs gives impetus to inflation. “If it is evaluated separately, then the increase would not be critical. But with the current high inflation, it is difficult to determine to what cent the purchasing power of households collapses,” explained Gašpuitis.
According to him, many other companies think and act in a similar way, raising prices to offset costs. There, entrepreneurs have to evaluate the long-term competitiveness of their service or product, because any price increase pushes the consumer to think more and more actively about alternatives.
Gašpuitis explained that in this case there is a very special situation and it is necessary to understand what to do in the long term with the infrastructure in which huge funds have been invested. High gas prices will increasingly drive people and businesses away from gas, leaving the burden of fixed costs on fewer and fewer consumers.
He stressed that in this case, the Public Service Regulatory Commission (PSRK) must evaluate all options in order to carefully assess the justification and limit the size of the increase, possibly postponing part of it to a later time.
“Citadele” bank economist Mārtiņš Āboliņš said that gas-consuming households and companies will, of course, be negatively affected by the tariff increase planned by “Gaso”, but this decision by itself will not have a macroeconomic impact on the economy of Latvia as a whole. The impact of the proposed tariff on the Latvian economy will be less than 0.1% of gross domestic product (GDP).
However, he points out that currently a tariff increase cannot be seen in isolation from rising energy prices and other tariff increases, such as electricity distribution. Together, obviously, they have a negative effect on the economy and are certainly not desirable right now. Aboliņš said the price hikes cannot be completely avoided, however, electricity and gas prices are currently uneconomic.
“In my opinion, we need to be very cautious and should not rush to fix all energy price increases in transmission tariffs. This will negatively affect our competitiveness and we are already lagging behind our neighbors in economic development,” said Āboliņš , adding that the cost increases for infrastructure companies are objective and cannot be ignored, however other ways may need to be found to offset this increase.
He also said that in the context of natural gas, declining natural gas consumption is also a major issue, one that is likely to remain even if gas prices normalize. This forces infrastructure costs to be redistributed to the remaining consumers and, in a certain sense, penalizes efforts to reduce gas consumption.
As stated by Agnese Buceniece, Acting Chief Economist of “Swedbank”, if the PUK approves the tariffs for the natural gas distribution service presented by “Gaso”, it will obviously increase the price of gas payments for both citizens and companies . However, the impact on the total payment will be significantly less than what we’ve seen from the natural gas price increase.
“Inflation statistics show that in October, the use of natural gas for citizens, with the application of state support, was about 134% or 2.3 times more expensive than the previous year,” he said. said Buceniece, explaining that the total price of natural gas for the end user consists of five components: natural gas prices, tariffs for natural gas distribution and transmission services, as well as taxes, excise duties and the on value added (VAT). The most important component of the payment is the price of natural gas. The distribution tariff (variable part and fixed part together) without VAT, on the other hand, constitutes about a third of the consideration for natural gas for residents who use the gas for cooking. For users of larger volumes of natural gas, the distribution fee is usually a smaller portion of the total consideration.
“Since it appears that the expected rate increase for the natural gas distribution service for most consumer groups will not exceed 30%, the impact on the total gas payment is expected to be up to 10% on average. I Residents should expect that natural gas prices will likely be increased again on January 1 from the regulated price,” Buceniece said, adding that it is not yet known how much of an increase is expected.
He also explains that the impact of the regulated natural gas price increase on the overall consideration will likely be greater than that of the distribution tariff increase.
As reported, “Gaso” presented the new tariffs for the natural gas distribution service to the PUC, which provides for an increase in both the variable part of the tariff and the fixed part, according to what was communicated in the official publication “Latvijas Vēstnesis”.
The proposed tariff could take effect from 1 January 2023.
The tariff increase, as explained in the press release, is correlated to a significant increase in natural gas prices, an increase caused by inflation and labor costs, as well as a significant decrease in the quantity of natural gas supplied to users, which affects significant way on the representation of “Gaso”.
The company also notes that the increase in the variable part of the tariffs is different for each consumption band, as the increase in the variable part of the tariff is affected by the changes in the three-year average consumption of natural gas in each tariff band.
