Modelling a household tariff for reducing sectoral cross-subsidies in the Russian power market

Cross-subsidy in electric power industry distorts normal pricing without achieving the goals of fair and equitable access to electricity for all and leads to wasteful electricity consumption. The paper focuses on the analysis of cross-subsidy between the residential and non-residential (industry) electricity consumers in Russia and the establishment of economically and socially optimal prices. First, benefits and deficiencies of various research approaches to tariff setting in the industry are outlined. Second, the review of ultimate electricity prices in over 50 countries allowed identifying cases for tariff policy analysis and comparison. Third, recommended electricity tariffs for the industrial and household consumers (well-off and lower income) were calculated for 10 Russia's regions. The results for the first time suggest no price increase if the consumption is within the block tariff, challenging the dominant premises that the household tariff has to grow for the entire population. These findings allow unblocking further policy and public discussion of the issue, as they offer solutions for cross-subsidy elimination, while guaranteeing the affordable electricity for all. Lowering inefficient expenditures of retail energy companies may allow further electricity price reduction. Importantly, tariffs and the social consumption norm should be tailored for each of Russia's 85 regions.