Centre for Economic and Regional Studies Hungarian Academy of Sciences Centre of Excellence

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Highlights
– Rationale for and consequences of Hungary’s post-2012 utility rate cuts are asssed.
– The logarithmic mean Divisia index is used to decompose residential energy-use change.
– We find energy use to have increased in the first years and stabilised at a higher level.
– There are negative effects on energy conservation/efficiency and energy investment.
– Positive impacts are identified for most households, but contradictions prevail.

Abstract
In Hungary, regulated energy prices have been crucial in supplying electricity, district heating and natural gas to households, and as a result of a utility cost reduction programme, implemented in several stage starting from 2013, a sharp decline has been seen in these prices. However, this state intervention was performed without a strong policy background and the energy policy documents were just later adjusted to the prevailing situation. This paper focuses on the direct and indirect effects of this programme. The logarithmic mean Divisia index (LMDI) method is applied to decompose the absolute change in residential energy consumption between 2010 and 2017. We calculate price, intensive structure, extensive structure, expenditure and population effects. The results are in line with our expectations that decreasing energy prices for households had a positive impact on their energy use in the first few years.
Overall, it induced an additional energy use of as much as 18.9 PJ between 2013 and 2017, while residential energy consumption stood at 263 PJ in 2017. We find that the state intervention created a new situation where the ratio of residential expenditure on energy services to total expenditure significantly decreased, the inflation rate declined and the economic and income situation of the majority, especially that of the middle class, considerably improved. However, the efficiency of the applied measures is still doubtful and several negative effects have also been detected. The utility cost reduction programme discourages energy conservation and energy efficiency; erodes the competitiveness of renewables; reduces gross capital formation in the energy sector; deteriorates security of supply; and increases energy prices for non-household customers. Despite these drawbacks, the utility cost reduction programme is expected to continue with some adjustments at most.

JEL: P22, P28, Q41, Q48

Keywords: utility cost reduction, decomposition, energy consumption, residential sector, energy prices, energy efficiency, energy poverty, energy policy, energy investment