Uzbekistan's utility hike predicament

When the government last mooted putting up prices for gas and electricity, it went out of its way to keep the public in the loop. This time, the hike is being delivered as a fait accompli.

Electricity and gas tariffs for households in Uzbekistan are set to increase starting from May 1. This is the first price adjustment of its kind since August 2019. In this guest post, Tashkent-based economic affairs reporter Shukhrat Latipov offers some insights into why this is happening and what it means. This article is an edited version of a Russian-language post first published on Shukhrat’s Telegram channel. It is being reproduced here with permission.

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The government laid no groundwork before announcing how much households will now have to pay for their utilities.

The last time a price rise was mooted, in 2022, details on the proposal were made available for public consultation a full six weeks before the date of the planned rate hike. Officials met with bloggers and journalists and quizzed them about what issues needed to be taken into account. They carried out an extensive information campaign and devised a bill calculator so consumers could work out how much electricity and gas they were using, how their costs were likely to change, and what to do to save money. In the end, the rate increase was put on ice.

Sidenote: It is probably just as well the utilities hike was postponed. On the same day they would have taken effect, protests in the western autonomous republic of Karakalpakstan were suppressed by the National Guard — a crackdown that culminated in the death of 21 people, including four law enforcement officers.

The authorities have gone about things differently on this occasion. The government only began briefing the public on the rate increase after announcing that it was going to happen. And they have made scant effort to explain in detail why the rate increase is needed. As a result, they have run into a great deal of negativity. 

As things stand, there is little understanding of how gas and power bills are calculated. The entire chain of energy resource costs needs to be disclosed so consumers can get a sense of why prices are the way they are. When information is hidden and opaque, the public views it with suspicion.

Uzbekistan at present carries out an annual review of tariffs for so-called natural monopolies. The government sets the price for services and goods provided by monopolies based on costs. The final tariff is based on the expense incurred by the monopolies plus a fixed rate for the cost of overhauling physical assets. Ultimately though, consumers are shielded from rising prices through government interventions.

As the economist Bekzod Khoshimov has argued, if you are the head of a monopoly, it is in your interest to maximize the amount of funds available for investment and transparency. That is the only way you can hope to justify rate hikes.

Two years ago, the Energy Ministry stated that the cost of producing 1 cubic meter of natural gas was 1,400 sums ($0.13 at the time), while producing 1 kilowatt of electric power cost 800 sums ($0.07). Now they say the cost of doing the same is 2,000 sums ($0.16 at the current rate) and 1,000 sums ($0.08), respectively. In other words, the cost of producing gas has increased by more than 40 percent, while electricity is up 25 percent. And that is despite the fact that the president demanded a reduction in production costs in 2021-22 and 2023.

Now let’s take a look at how much the government spends on subsidies; which is to say, how much is spent on cushioning the public from the rising cost of providing those utilities. 

There are a lot of numbers to take in here, but the broad picture should hopefully be clear.

In 2021, the authorities earmarked 5.6 trillion sums (around $530 million at the time) for subsidies. In 2022, that went up to 12.26 trillion sums. In 2023, the figure rose to a record 29.25 trillion sums ($2.5 billion). Fully 18 trillion sums go toward bridging the shortfall on gas. Another 1.7 trillion sums are spent on keeping household heating more affordable.

The tariff increases will allow for those subsidies to be trimmed back to 9.5 trillion sums.

Thoughts will now turn to how the government plans to use those savings. 

If the authorities spend the money on ineffective projects that only serve to compound the budget deficit (which stood at 59 trillion sums, around $5 billion, in 2023), officials will have some explaining to do. Things are already looking troubling. Data for the first quarter of 2024 showed the deficit over that period hitting a record 19.8 trillion sums.

For those favouring strong state interventions, subsidies are just the start.

Bobur Bekmurodov, a lawmaker and the head of the Yuksalish public association, says the Energy Ministry needs to develop a compensation mechanism for reimbursing electricity consumers whose appliances are damaged by unexpected power surges. Uzbekistan’s power supply regime has been spotty in recent years and those kinds of occurrences are commonplace. Personally, I would suggest that compensation be set aside for businesses whose activities are interrupted by rolling blackouts. 

The government needs to ensure transparency in showing how money is being spent on modernizing the energy industry. More than $5 billion raised through government debt, plus billions more from the state budget, have been set aside for this purpose, but we have little information about whether those funds are being utilised efficiently.

Finally, Bekmurodov suggests looking to the experience of other countries for guidance on how to structure utility tariffs. There are some regions of Uzbekistan where households are not hooked up to the central heating grid or the gas network. Many of those people use electric heaters or air conditioners to regulate the temperature of their homes. A bespoke set of utility rates might sometimes be in order, depending on the circumstances of specific settlements and neighbourhoods.

Another form of flexible pricing mechanism would allow for a substantially increased rate when demand for electricity is especially intense, such as when the country is experiencing anomalous weather conditions.