The decision of the Minister of Economy Luis Caputo to postpone increases in electricity and gas services made the percentage of subsidies that the State put in place in May to cover the part that residential users do not pay of the “real cost” of energy exceeds the levels of the same period last year. If the freeze continues, the trend will deepen due to greater consumption due to lower temperatures and higher costs.
The strong increases in the first quarter, between 200% and 400%, did not translate into a correction in the expenditure item to which the most subsidies are allocated per year. This front generated internal tensions in the last Governments but none of the efforts found a solution.
It happens that the rates are made up of four items: the cost of generating the energy (electricity or gas), transportation, distribution and municipal, provincial and national taxes. The part that the State subsidizes is the generation through the transfers made by the Electrical Wholesale Market Management Company SA (Cammesa) to electricity generators and gas transporters. There is currently a conflict over a debt with companies of almost USD 2,000 million.
Users are divided into three residential categories according to the segmentation scheme in force since 2022. high income users (N1) It was contemplated that they pay the full cost of the energy, those of low income (N2) with social rate and those of average income (N3) with a subsidized consumption ceiling. The latest official data showed that N1 is 5.3 million, N2 is 8 million and N3 is 2.7 million.
The increases in the first quarter were only for N1, businesses and industries due to generation. For N2 and N3, the increases were focused on the concepts of transportation and distribution, with the aim of improving the income of these companies after the previous Government kept their rates frozen.
Julian Rojoeconomist Interdisciplinary Institute of Political Economy (IIEP) of UBA-Conicetcalculated that with the freezing of electricity prices, the generation cost coverage of the entire system is 52% in May.
This means that on average of every $100 of the cost of the service, $52 is paid by users and $48 by the Government through Cammesa. That ratio was $53 to $47 in May of last year during the administration of Alberto Fernandez and Sergio Massa.
The increases in the first quarter were only for N1, businesses and industries due to generation
In the case of electricity, the IIEP detailed that N1 residential users paid 100% of the cost in December and remained that way until April. With the freeze, from May high-income segments will pay only 65% of the service. In the case of gas, there was an improvement in the proportion due to the latest increases: in December they covered 35% and reached 51% in May, on the threshold of winter where the cost of the fluid is higher.
The N2 residential areas paid 15% of the cost of electricity in December and with the freeze in May they will end up at 4 percent. In the case of gas, they covered 10% of the generation cost while this month that ratio was 14 percent.
The N3 residential areas paid 18% of the service cost in December while now they cover only 5 percent. In the case of gas the jump was from 13% to 20%, although if rates remain unchanged that ratio will fall again.
It is important to note that about 70% of energy subsidies go to electricity rates while the remaining 30% goes to natural gas services.
During his participation in the IAEF Annual Congress, Caputo gave three reasons why it was decided to postpone the increase in rates that were scheduled for May. The first is that the Government feels “comfortable” from a fiscal point of view after closing the quarter with the first financial surplus in 16 years, the second is to give a “breather” to the middle class and the third is to support the process of disinflation.
The Minister of Economy also assured, in reference to the well-known Cepis ruling during the government of Mauricio Macri, the increases that were given to N1 in the first quarter could not be applied to N2 and N3. “I didn’t want to re-update N1 and trade without touching back N2 and N3, which are paying 5% of the rate. It seemed like it didn’t make much sense,” he commented.
Private calculations show that the Economy will need up to USD 1,000 million more in subsidies per month to sustain the freeze, although the ministry maintains that the fiscal balance is not in danger.
Private calculations show that the Economy will need up to USD 1,000 million more in subsidies per month to sustain the freeze
Although it is expected that in 2024 there will be a cut in energy subsidies compared to last year, it will be of a smaller magnitude than expected. “Last year you had 2.3% of GDP in subsidies (1.6% Energy and 0.7% Transportation). And the Government committed to taking it to 1.6% (1.1% Energy and 0.5% Transport, a cut of 0.7 points). We believe that energy will end up at 1.4-1.5% and transportation subsidies will remain at 0.5 percent. This gives you a total cut of 2.3% to 1.9-2% of GDP,” Rojo estimated in a scenario in which increases are resumed after the winter period.
The Government’s main crossroads is how to start charging higher rates to the N2 and N3 segments, which represent almost 11 million users or almost 2 thirds of the total. The aspiration of the Secretary of Energy, Eduardo Rodríguez Chirillowas to resolve this front with the implementation of a new subsidy allocation scheme based on a Basic Energy Basket (CBE). First it was going to be applied in April, it went to May, then to June and for now it is not certain that it will be applied. It is even analyzed in a different scheme for the medium term, although there are no definitions in this regard.
As this media was able to reconstruct from official sources and the energy sector, the delay has to do with the difficulty of cross-referencing the data they need to determine which households will continue with the assistance on their ballots. The Chief of Staff works to find the right harmony, Nicolas Posse, Caputo and Chirillo. The triad maintains contact every week to calibrate the roadmap.
