Government energy subsidies costing a conservative €400 million

Subsidies to keep the prices of electricity, LPG gas and fuels stable will be costing public coffers a whopping €400 million, a conservative estimate shows.

The exercise carried out by MaltaToday is based on the number of dwellings and excludes energy use by commercial entities, which would take the amount well beyond this mark.

Government adopted a policy of price stability in the wake of the energy crisis that has hit Europe as a result of the war in Ukraine. On the continent, electricity and fuel prices have soared, hitting families hard and forcing governments now to intervene heavily

The Maltese government, which adopted the interventionist approach early on, has so far refrained from saying what the cost of these energy subsidies is.

However, writing in MaltaToday on Sunday, Energy Minister Miriam Dalli says that government subsidies are saving the average household “a very conservative” €1,700 per year.

3% of GDP

According to the 2021 Census, there are 230,000 dwellings in Malta. If each of these dwellings are saving €1,700, the average yearly cost of subsidies would shoot up to €391 million.

This figure excludes the expense to subsidise energy costs borne by commercial outlets and businesses, which will take the amount way beyond the €400 million mark, with some government sources indicating it could be as high as €450 million.

These figures have not been confirmed officially, but Dalli writes: “Our conscious price stability policy decision comes with a hefty cost to public coffers but the stark reality is that it would have been costlier for our people, for our families and our businesses to carry the financial burden upon themselves.”

The subsidies are indeed a massive hit on public finances. Based on last year’s economic data, energy subsidies are equivalent to 3% of GDP.

A cushion of €200 million earmarked in the budget last year to mitigate against inflation as a result of supply chain disruptions caused by the post-COVID recovery pales into insignificance when compared to gargantuan task at hand. The cushion identified by Finance Minister Clyde Caruana was before Russia invaded Ukraine.

Earlier this summer, Caruana asked ministers to identify expenditure cuts worth €200 million across all the government to mitigate the impact of energy subsidies on public finances and keep the deficit from running away.

The Energy Ministry has also issued guidelines to public entities on energy saving measures that include switching off the lights on public buildings at night and regulating AC temperatures in offices. The guidelines are intended to cut waste by minimising non-essential electricity consumption across the government system.

Government is not imposing mandatory electricity cuts across the board unlike legally binding decisions taken in some European countries to force shops to switch off facades at night in anticipation of expected gas shortages over the winter.

Europe is suffering the birth pangs of its decision to wean itself off Russian gas and oil following the Ukraine invasion. Russia has retaliated to EU sanctions by shutting down pipeline gas, leaving many EU countries scrambling to find alternatives. Meanwhile, the price of gas has increased sevenfold compared to a year ago, leading to a knock-on effect on higher electricity prices.

EU scrambles to find solutions

Energy Minister Miriam Dalli (Left) talking with her Italian counterpart Roberto Cingolani at Friday’s emergency EU summit of energy ministers

The EU is trying to take collective decisions to respond to the crisis, including the introduction of a price cap on natural gas and cuts in electricity demands.

But an emergency summit of energy ministers last Friday appears to have gotten bogged down in the details of how the policies proposed by the European Commission would work.

According to finalised notes of the meeting obtained by Politico, a news portal, ministers expressed general support for capping the price of natural gas, but there was disagreement over whether such a cap would apply to all imports or just those from Russia as proposed by European Commission President Ursula von der Leyen.

Some countries fear that a price cap on all natural gas will drive demand elsewhere and create shortages.

There was also disagreement over how to cut energy demand. The Commission wants that to be mandatory, but not all countries agree.

Malta’s energy minister has disagreed with mandatory cuts in energy demand and advocated for a price cap on gas used for electricity generation.

In a statement on Friday, Dalli said the introduction of a price cap on gas used for electricity generation could be the most successful proposal if complemented with measures that can ensure that there will be no further gas shortages.

“This is seen as a measure that can actually mitigate the wholesale price of electricity,” she said.

She added that any proposal suggesting a mandatory electricity demand reduction that “hurts both people and European economies should be avoided”.

Dalli also advocated for more investment in renewable energy, calling on the European Commission to invest in the transition to green energy as much as it did during the financial crisis, where €3.2 trillion were invested to inject liquidity in European banks over an eight-year period.