**_<u>Table 9.  Household fuel choice and electricity prices</u>_**

||**_Actu_**<br>**_propo_**<br>|**_al fuel cho_**<br>**_rtions obse_**<br>|**_ice_**<br>**_rved_**<br>|**_Estimates_**<br>**_multino_**<br>|**_of fuel ch_**<br>**_mial logit_**<br>|**_oice by_**<br>**_model_**<br>|**_Predicted_**<br>**_higher e_**<br>|**_fuel choi_**<br>**_lectricity_**<br>|**_ce with_**<br>**_tariffs_**<br>|
|---|---|---|---|---|---|---|---|---|---|
|**Quintiles**|**_Electric_**<br>**_only_**|**_Wood_**<br>**_only_**|**_Use_**<br>**_both_**|**_Electric_**<br>**_only_**|**_Wood_**<br>**_only_**|**_Use_**<br>**_both_**|**_Electric_**<br>**_only_**|**_Wood_**<br>**_only_**|**_Use_**<br>**_both_**|
|**1**|11|75|14|12|78|10|7|87|6|
|**2**|22|68|10|20|67|13|12|78|10|
|**3**|33|58|9|31|58|11|23|68|8|
|**4**|41|43|16|38|46|16|29|58|13|
|**5**|60|24|16|59|26|15|49|37|14|
|**ALL**|**38**|**49**|**13**|**36**|**51**|**13**|**26**|**63**|**11**|

# **6. Conclusion and policy recommendations**

In this note we analyze the impact of higher electricity tariffs on household welfare, the distributional and fiscal impact of alternative electricity tariff structures, and the potential impact of higher electricity tariffs on household choice of space heating fuel. We pay particular attention to the welfare losses of higher electricity tariffs on poor households and the distributional implications of alternative electricity tariff structures.

Our analysis suggests that the proposed electricity tariff reforms could have a very significant impact on the welfare of poor households. We find that households in the poorest quintile spend, on average, twice the share of richest households’ expenditures on energy. The burden of electricity expenditures on households in the poorest quintile amounts to 10 percent of household expenditures for those relying only on electricity for heating. As such, the impact of higher electricity prices would affect poor household’s welfare considerably. If we assume that poor households do not switch heating fuel and have fairly inelastic demand for electricity, they would experience welfare losses in the range of 3 to 5 percent of household expenditures due to proposed electricity tariff increases to 7 c€/kWh. These impacts, however, depend on the extent households adjust their consumption of electricity as a result of the higher tariffs and the type of tariff structure which is adopted.

More than half of the population relies on fuelwood for space heating. Higher electricity prices could significantly increase the proportion of households using fuelwood for space heating to nearly two thirds of the population. A higher proportion of the poor already rely on fuelwood for space heating and more would be expected to switch to fuelwood as result of higher electricity tariffs. Additional demand for fuelwood as a result of higher electricity prices therefore could have negative impacts on fuelwood availability, with increase demand potentially leading to higher fuelwood prices and an even greater energy affordability problem for poor households. How electricity price reforms affect household choice of space heating fuel and fuelwood demand should be carefully monitored. This underscores the importance of keeping in 21