## Responses to the Energy Crisis in Europe and Malta ## Source details **Canonical URL:** [Responses to the Energy Crisis in Europe and Malta](https://www.imf.org/-/media/files/publications/cr/2023/english/1mltea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1mltea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1mltea2023002.pdf.json) --- ### A. The Maltese energy sector - Structural characteristics: - Small island economy, largely disconnected from the European energy network, with limited diversification in energy sources and low average energy consumption per capita relative to European peers. - Energy mix (shares of Malta’s energy production): - Imported liquified natural gas (LNG): 80 percent - Other fossil fuels: 12 percent - Renewable energy (including solar and bioenergy): 8 percent - Market structure and prices: - State-owned ENEMALTA and ENEMED are the sole electricity and petroleum product companies, respectively, and administratively set retail energy prices. - Electricity prices have not been changed since 2014; gasoline and diesel prices have fluctuated but generally remained very stable. - Interconnector with Italy: - Underwater electricity cable capacity: up to 200MW - Became operational: March 2015 - Accounts for between 15 to 20 percent of Malta’s electricity consumption - Electricity supplied through the interconnector is subject to daily market price volatility. - Near-term developments and vulnerability: - Construction of a second interconnector with Italy expected to be completed by 2025. - Authorities soliciting investors for large-scale offshore wind farms. - Despite efforts, increased energy self-reliance is unlikely to materialize within the next several years. ### B. The recent energy crisis and Malta’s policy response - External shock and macro effects: - Since early 2021 upward pressures on energy prices increased; the Russian invasion of Ukraine raised Brent by about 30 percent and natural gas (TTF) by more than fourfold. - These developments represent a negative terms-of-trade shock, dampening recovery and raising inflation. - Typical European policy responses (broad categories): - (I) Measures that impede price passthrough - (II) Targeted support for households - (III) Less/untargeted support for households - (IV) Corporate support - More than half of European countries imposed some type of price freeze or subsidy; many lowered excise taxes and provided targeted transfers/subsidies to industries. - Malta’s approach and observed effects: - Government froze electricity and fuel prices and provided subsidies to ENEMALTA and ENEMED to compensate for losses (difference between retail prices and production costs). - Helped contain headline inflation: November 2022 headline inflation was 7.2 percent, below the euro area average of 10 percent. - Helped support consumer confidence, real wages, and economic activity. - Malta’s retail prices for electricity and fuels became among the lowest in Europe. - Costs and trade-offs: - Fiscal costs of energy subsidies expected to be 2½ percent of GDP in 2022 and 3½ percent of GDP in 2023, well above the European median of 1 percent of GDP. - Policy mutes incentives for energy conservation and investment in renewable energy. - Untargeted policy benefits richer households (who consume more energy in absolute terms), although as a share of income lower-income households benefit more. ### C. Simulating distributional impacts and fiscal implications (CPAT scenarios) - Modeling approach: - Uses IMF’s Carbon Pricing Assessment Tool (CPAT) to estimate direct and indirect effects on households for two scenarios. - Energy products included: electricity, natural gas, gasoline, diesel, oil, coal, kerosene, and LPG. - Full passthrough counterfactual assumes electricity and fuel prices increase by around 130 percent and 40 percent, respectively—consistent with a counterfactual without the government’s fixed price policy. - Scenarios: - Scenario 1: Full passthrough of energy prices on households (no targeted compensation). - Scenario 2: Full passthrough with targeted subsidies to low and middle-income households. - Key simulation results and statistics: - Estimated cost of fully compensating all households: about 2½ percent of GDP (broadly aligned with price freeze subsidies in the 2023 Budget). - Household burden under full passthrough (Scenario 1): - Burden on households estimated at 6 percent of consumption (half due to direct increase in electricity price; remainder split between gasoline, diesel, and indirect effects). - Lowest consumption decile: burden close to 9 percent of consumption. - Highest consumption decile: burden about 4 percent of consumption. - Indirect effects: - Indirect burden on consumption estimated at 1¼ percent of total consumption (smaller than the European average of 1¾ percent), reflecting Malta’s relatively low share of energy intensive industry. - By industry, estimated price increases: - Public transportation: prices increasing by 5 percent - Clothing and chemicals: close to 4 percent increases - Recreation and tourism: around 1½ percent - Targeting (Scenario 2) fiscal implications: - Cost of fully compensating the first three consumption deciles: under 0.5 percent of GDP - Cost of compensating the first five deciles: close to 1 percent of GDP - Cost of compensating all households: 2.5 percent of GDP ### D. Considerations for alternative energy pricing policies and exit strategy - Policy objectives to guide an exit: - Preserve the price signal to enhance incentives for energy conservation and investment in energy efficiency and renewable energy. - Provide targeted income support that is fiscally cost-effective and directed to vulnerable households that spend a greater share of income on energy. - Accelerate the green transition by using the crisis as an opportunity to reduce reliance on fossil fuels and advance renewable energy; provide support for energy-saving investments by households and firms. - First-best recommendation: higher passthrough coupled with targeted transfers - Broad assessment: - "This option broadly meets the policy objectives discussed above." - Preserves the price signal while obtaining "substantial fiscal savings" by supporting only a segment of households. - Provides greater incentives for energy conservation and investment (examples given: "installation of insulation, heat pumps, and photovoltaic panels"). - Implementation challenges: - Requires means testing with up-to-date information on households’ income and wealth. - "An inadequate transfer program risks leaving out households who are vulnerable." - Existing program note: - "Malta currently has a program (Energy Benefit) aimed to mitigate the effect of the increase in expenditure on water and electricity bills of low-income families. However, currently, there is no framework to provide targeted cash transfers to individuals, not on social assistance programs. Energy Benefit (DSS) (gov.mt)" - Second-best: strengthen progressive tariff structure for electricity - Rationale: - ENEMALTA’s tariff structure has some progressive elements, "increasing sharply for high consumption levels above 10,000 kWh." - "For below 10,000 kWh, the incremental increase in the tariff is relatively flat." - Proposed redesign: - "The tariff structure for electricity can be redesigned to better reflect the subsistence level of power consumption and marginal cost (i.e., the incremental cost of electricity production)." - Principle: "the subsistence level of consumption can be priced at below marginal cost, whereas consumption above a subsistence level can be priced at marginal cost." - "The subsistence level of consumption should also be set by taking into account the number of households." - Alternative/subsidy redesign: - "An alternative would be to redesign the current eco-reduction subsidy applied to electricity and water bills and which provides a discount on total consumption, provided it is below a given threshold." - Introduction of peak demand electricity charges - Rationale: - Electricity consumption varies by time of day, day of week, and season; "electricity demand in Malta is particularly high during high-temperature days in the summer." - Peak demand charges "help divert electricity consumption away from high-demand periods." - Expected benefits: - Contribute to improved efficiency, reliability, and costs of electricity distribution and production. - Role: - Can be considered "as a complement to the other options." - Conclusions and policy trade-offs: - Malta’s fixed energy price policy has contributed to taming inflationary pressure, provided confidence to economic agents, and supported growth. - Across-the-board subsidies entail "significant fiscal costs" and suppression of the price signal, which "does not enhance incentives for energy conservation and investment in energy-efficient products and renewable energies." - Long-run objective: "reducing Malta’s dependency on imported fossil fuel is the best way to ensure Malta’s resilience to energy price shocks and its fiscal robustness." - Implementation of Malta’s climate change mitigation strategy under its Recovery and Resilience Plan and 2021 Low Carbon Development Strategy will "help strengthen Malta’s resilience and long-run competitiveness." - Implementation guidance: - Gradual implementation recommended: "Policymakers need to balance the pros and cons of each option, and the implementation of the exit strategy should be gradual." - Risks of too-fast implementation: could "aggravate inflationary pressures and hurt economic activity." - Administrative considerations: - Higher passthrough with targeted cash transfers reduces fiscal cost and encourages conservation but requires accurate and timely means testing; "administrative costs associated with this option should also be considered." - Redesigning the tariff structure is "administratively less costly," but effectiveness depends on "the details of the tariff adjustment." - A "peak demand" charge could complement other options. - Overarching guidance: - "Regardless of the choice of a new policy, its implementation should be gradual to contain inflationary pressures and negative effects on economic activity." *Prepared by IMF staff (content unit: Responses to the Energy Crisis in Europe and Malta).* ### References ___________________________________________________________________________________ 11 ### Responses to the Energy Crisis in Europe and Malta ### A. The Maltese energy sector - Malta is a small island economy, largely disconnected from the European energy network, with limited diversification in energy sources and low average energy consumption per capita relative to European peers. - Energy mix (shares of Malta’s energy production): - Imported liquified natural gas (LNG): 80 percent - Other fossil fuels: 12 percent - Renewable energy (including solar and bioenergy): 8 percent - Market structure and prices: - State-owned ENEMALTA and ENEMED are the sole electricity and petroleum product companies, respectively, and administratively set retail energy prices. - Electricity prices have not been changed since 2014; gasoline and diesel prices have fluctuated but generally remained very stable. - Interconnector with Italy: - Underwater electricity cable capacity: up to 200MW - Became operational: March 2015 - Accounts for between 15 to 20 percent of Malta’s electricity consumption - Electricity supplied through the interconnector is subject to daily market price volatility. - Near-term developments and vulnerability: - Construction of a second interconnector with Italy expected to be completed by 2025. - Authorities soliciting investors for large-scale offshore wind farms. - Despite efforts, increased energy self-reliance is unlikely to materialize within the next several years. ### B. The recent energy crisis and Malta’s policy response - International price shocks: - Since early 2021 upward pressures on energy prices increased; the Russian invasion of Ukraine raised Brent by about 30 percent and natural gas (TTF) by more than fourfold. - These developments represent a negative terms-of-trade shock, dampening recovery and raising inflation. - Typical European policy responses (broad categories): - (I) Measures that impede price passthrough - (II) Targeted support for households - (III) Less/untargeted support for households - (IV) Corporate support - More than half of European countries imposed some type of price freeze or subsidy; many lowered excise taxes and provided targeted transfers/subsidies to industries. - Malta’s approach: - Government froze electricity and fuel prices and provided subsidies to ENEMALTA and ENEMED to compensate for losses (difference between retail prices and production costs). - Effects observed: - Helped contain headline inflation: November 2022 headline inflation was 7.2 percent, below the euro area average of 10 percent. - Helped support consumer confidence, real wages, and economic activity. - Malta’s retail prices for electricity and fuels became among the lowest in Europe. - Costs and trade-offs of the price freeze: - Fiscal costs of energy subsidies expected to be 2½ percent of GDP in 2022 and 3½ percent of GDP in 2023, well above the European median of 1 percent of GDP. - Policy mutes incentives for energy conservation and investment in renewable energy. - Untargeted policy benefits richer households (who consume more energy in absolute terms), although as a share of income lower-income households benefit more. ### C. Simulating distributional impacts and fiscal implications (CPAT scenarios) - Modeling approach: - Uses IMF’s Carbon Pricing Assessment Tool (CPAT) to estimate direct and indirect effects on households for two scenarios. - Energy products included: electricity, natural gas, gasoline, diesel, oil, coal, kerosene, and LPG. - Full passthrough counterfactual assumes electricity and fuel prices increase by around 130 percent and 40 percent, respectively—consistent with a counterfactual without the government’s fixed price policy. - Scenarios: - Scenario 1: Full passthrough of energy prices on households (no targeted compensation). - Scenario 2: Full passthrough with targeted subsidies to low and middle-income households. - Key simulation results and statistics: - Estimated cost of fully compensating all households: about 2½ percent of GDP (broadly aligned with price freeze subsidies in the 2023 Budget). - Household burden under full passthrough (Scenario 1): - Burden on households estimated at 6 percent of consumption (half due to direct increase in electricity price; remainder split between gasoline, diesel, and indirect effects). - Lowest consumption decile: burden close to 9 percent of consumption. - Highest consumption decile: burden about 4 percent of consumption. - Indirect effects: - Indirect burden on consumption estimated at 1¼ percent of total consumption (smaller than the European average of 1¾ percent), reflecting Malta’s relatively low share of energy intensive industry. - By industry, estimated price increases: - Public transportation: prices increasing by 5 percent - Clothing and chemicals: close to 4 percent increases - Recreation and tourism: around 1½ percent - Targeting (Scenario 2) fiscal implications: - Cost of fully compensating the first three consumption deciles: under 0.5 percent of GDP - Cost of compensating the first five deciles: close to 1 percent of GDP - Cost of compensating all households: 2.5 percent of GDP ### D. Considerations for alternative energy pricing policies and exit strategy - Policy objectives to guide an exit from the fixed price policy: - Preserving the price signal: - Important to enhance incentives for energy conservation and investment in energy efficiency and renewable energy. - Price suppression can be justified temporarily when fiscal space is ample or rapid implementation is required, but should be temporary given the negative terms-of-trade nature of the shock. - Providing targeted income support: - Support should be fiscally cost-effective and targeted to vulnerable households that spend a greater share of income on energy. - Targeting high-need households frees fiscal resources for other priorities. - Accelerating the green transition: - Use the crisis as an opportunity to reduce reliance on fossil fuels and advance renewable energy. - Beyond preserving price signals, governments can incentivize energy-saving investments by providing support to households and firms for energy-efficiency improvements. *Prepared by IMF staff (content unit: Responses to the Energy Crisis in Europe and Malta).* ### 16. The first best policy is accepting a higher level of passthrough coupled with targeted ### 16. The first best policy is accepting a higher level of passthrough coupled with targeted ### Higher passthrough coupled with targeted transfers - Broad assessment: - "This option broadly meets the policy objectives discussed above." - Preserves the price signal while obtaining "substantial fiscal savings" by supporting only a segment of households. - Provides greater incentives for energy conservation and investment (examples given: "installation of insulation, heat pumps, and photovoltaic panels"). - Implementation challenges: - Requires means testing with up-to-date information on households’ income and wealth. - "An inadequate transfer program risks leaving out households who are vulnerable." - Existing program note: - "Malta currently has a program (Energy Benefit) aimed to mitigate the effect of the increase in expenditure on water and electricity bills of low-income families. However, currently, there is no framework to provide targeted cash transfers to individuals, not on social assistance programs. Energy Benefit (DSS) (gov.mt)" (footnote 9). ### Strengthening the progressive tariff structure for electricity (second-best option) - Rationale: - ENEMALTA’s tariff structure has some progressive elements, "increasing sharply for high consumption levels above 10,000 kWh." - "For below 10,000 kWh, the incremental increase in the tariff is relatively flat." - Proposed redesign: - "The tariff structure for electricity can be redesigned to better reflect the subsistence level of power consumption and marginal cost (i.e., the incremental cost of electricity production)." - Principle: "the subsistence level of consumption can be priced at below marginal cost, whereas consumption above a subsistence level can be priced at marginal cost." - "The subsistence level of consumption should also be set by taking into account the number of households." - Alternative/subsidy redesign: - "An alternative would be to redesign the current eco-reduction subsidy applied to electricity and water bills and which provides a discount on total consumption, provided it is below a given threshold." (footnote 10) ### Introduction of peak demand electricity charges - Rationale: - Electricity consumption varies by time of day, day of week, and season; "electricity demand in Malta is particularly high during high-temperature days in the summer." - Peak demand charges "help divert electricity consumption away from high-demand periods." - Expected benefits: - Contribute to improved efficiency, reliability, and costs of electricity distribution and production. - Role: - Can be considered "as a complement to the other options." ### Conclusions and policy trade-offs - Context: - Malta’s fixed energy price policy has: contributed to taming inflationary pressure, provided confidence to economic agents, and supported growth. - Costs and drawbacks of across-the-board subsidies: "significant fiscal costs" and suppression of the price signal, which "does not enhance incentives for energy conservation and investment in energy-efficient products and renewable energies." - Long-run objective: "reducing Malta’s dependency on imported fossil fuel is the best way to ensure Malta’s resilience to energy price shocks and its fiscal robustness." - Implementation of Malta’s climate change mitigation strategy under its Recovery and Resilience Plan and 2021 Low Carbon Development Strategy will "help strengthen Malta’s resilience and long-run competitiveness." ### Implementation guidance - Gradual implementation recommended: - "Policymakers need to balance the pros and cons of each option, and the implementation of the exit strategy should be gradual." - Risks of too-fast implementation: could "aggravate inflationary pressures and hurt economic activity." - Administrative considerations: - Higher passthrough with targeted cash transfers reduces fiscal cost and encourages conservation but requires accurate and timely means testing; "administrative costs associated with this option should also be considered." - Redesigning the tariff structure is "administratively less costly," but effectiveness depends on "the details of the tariff adjustment." - A "peak demand" charge could complement other options. - Overarching guidance: - "Regardless of the choice of a new policy, its implementation should be gradual to contain inflationary pressures and negative effects on economic activity." *International Monetary Fund — Malta chapter excerpt* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mltea2023002.pdf_