Household demand for natural gas in Ukraine - the effects of the subsidy reform

Abstract: Implicit natural gas and heat subsidies for households had been the main driver of a host of problems for Ukraine, including wasteful gas consumption, low energy efficiency, large budgetary costs and foregone revenues for domestic production. Between 2014 and 2016, however, implicit natural gas subsidies were entirely removed and implicit heat subsidies lowered. This paper estimates the effect on household gas demand from this subsidy removal by estimating the price elasticities of demand for both household gas and heat consumption, using cross-sectional data from a 2014 household living condition survey. The results reveal that the price elasticity of gas and heat consumption is -0.2 and -0.15, respectively. Additionally, we estimate short and long-run effects from the subsidy removal on energy efficiency improvements. Altogether, the model predicts between 5.7 and 9.3 bcm decline in annual natural gas consumption, constituting a 26-42% decline from the 2014 baseline. The change will result in net yearly savings for the Ukrainian budget of around 1.1%, while simultaneously stimulating domestic production by almost doubling the dollar value of the household market for gas. The Ukrainian experience can serve as an example for policymakers considering energy subsidy reforms.