The tariff increase planned by the natural gas system distribution operator AS “Gaso” alone would not be critical, but if it is evaluated 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, bank analysts said.
“SEB banka” economist Dainis Gašpuitis pointed out that any tariff increase 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 at which cent the purchasing power of households collapses,” Gašpuitis explained.
According to him, many other companies think and act similarly, raising prices to offset costs. There, entrepreneurs must assess the competitiveness of their service or product in the long term, because any price increase makes the consumer 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 push people and businesses away from gas more and more, leaving the burden of fixed costs on fewer and fewer consumers.
He pointed out that in this case, the Public Service Regulatory Commission (PSRK) must evaluate all options in order to carefully evaluate the justification and limit the scale of the increase, possibly postponing a part to a later time.
Bank “Citadele” economist Mārtiņš Āboliņš expressed that households and companies that consume gas will, of course, be negatively affected by the tariff increase planned by “Gaso”, but this decision in itself will not have a macroeconomic impact on Latvia’s economy as a whole. The impact of the proposed tariff on the Latvian economy will be less than 0.1% of the gross domestic product (GDP).
However, he pointed out that currently one tariff increase cannot be viewed separately from the increase in energy prices and other tariff increases, such as electricity distribution. Together, of course, they have a negative effect on the economy and are certainly not desirable at this time. Aboliņš expressed that price increases cannot be completely avoided, however, electricity and gas prices are currently uneconomically high.
“In my opinion, we have 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 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 expressed that in the context of natural gas, the decline in natural gas consumption is also an important issue, which is likely to remain even if gas prices normalize. This forces infrastructure costs to be redistributed to remaining consumers and, in a sense, penalizes efforts to reduce gas consumption.
As stated by Agnese Buceniece, Acting Chief Economist of “Swedbank”, if PUK approves the tariffs for natural gas distribution service submitted by “Gaso”, it will of course increase the price of gas payments for both citizens and companies. However, the impact on the total payment will be significantly less than we saw from the increase in the price of natural gas.
“Inflation statistics show that in October, the use of natural gas for citizens, with the application of state support, was approximately 134% or 2.3 times more expensive than a year earlier,” said Buceniece, explaining that the total price of natural gas for the end user consists of five components – natural gas prices, natural gas distribution and transmission service tariffs, as well as taxes – excise duty and value added tax (VAT). The largest component of the payment is the price of natural gas. On the other hand, the distribution tariff (variable and fixed part combined) without VAT makes up about a third of the natural gas payment for residents who use gas for cooking. For those who use larger volumes of natural gas, the distribution tariff is usually a smaller part of the total payment.
“Since it looks like the planned increase in tariffs for the natural gas distribution service for most consumer groups does not exceed 30%, the impact on the total payment for gas should be up to 10% on average. Residents should expect that natural gas prices will likely be increased again on January 1 the regulated price,” said Buceniece, adding that it is not yet known how much of an increase is expected.
She also explained that the impact of the increase in the regulated price of natural gas on the total payment is likely to be greater than that of the increase in distribution tariffs.
As reported, “Gaso” has submitted new tariffs for the natural gas distribution service to PUC, which provides for an increase in both the variable part of the tariff and the fixed part, according to the announcement in the official publication “Latvijas Vēstnesis”.
The proposed tariff could enter into force from January 1, 2023.
The tariff increase, as explained in the statement, is related to a significant increase in natural gas prices, an increase caused by inflation and labor costs, as well as a significant decrease in the amount of natural gas transferred to users, which significantly affects the performance of “Gaso”.
The company also notes that the increase in the variable part of tariffs is different for each consumption group, because the increase in the variable part of the tariff is affected by changes in the three-year average natural gas consumption of each tariff group.
