Energy sector reforms can significantly impact vulnerable populations, including low-income households, households experiencing energy poverty, and energy vulnerable customers, such as people with disabilities or health issues. Appropriate social support mechanisms are critical to prevent negative distributional outcomes of reform and to build confidence among the public for the reform process. This chapter analyses key vulnerabilities to energy sector reform and assesses the readiness of social support mechanisms in the Western Balkans. It analyses the distributional incidence of existing measures to determine their suitability in a reform scenario. Existing programmes, if appropriately scaled up, can mitigate the poverty impact of reforms that will lead to increases in energy prices. Analysis confirms that measures complementary to income support schemes will be needed to protect vulnerable populations.
Energy Prices and Subsidies in the Western Balkans
Abstract
A substantial share of the Western Balkans population faces socio-economic challenges and energy-related hardship. In 2024, 23.2% of people in the region were at risk of poverty, with incomes below 60% of the national median after social transfers. At the same time, energy poverty remains a pressing issue. Despite low electricity prices, the 5 000 kWh of electricity (the approximate average annual consumption of a household) costs 7.9% of GDP per capita, compared to 4.5% in the EU average. Many households struggle to keep their homes warm, fall behind on utility bills, and face poor housing quality.
The social concerns have perpetuated energy subsidies and price regulation in the Western Balkans. In many Western Balkan economies, the prevailing situation in the energy sector is one in which incumbent state-owned enterprises (SOEs) receive direct and indirect public support to offset the costs – including opportunity costs – of maintaining low energy prices for households and small businesses. In most economies, for example, electricity prices did not respond to the volatility of international markets during the energy crisis in 2021-22. Moreover, energy subsidies, particularly those to coal mining, aim to sustain livelihoods in local economies that are heavily dependent on the mining and energy sectors.
However, the current energy support system directs substantial aid to those who do not need it, while tying up public resources that could be used differently. Considering that the current systems of maintaining low electricity prices are applied broadly, on average across the region, the richest 20% of households receive 26% of such support, while the poorest 20% receive 14%. The OECD Inventory of Subsidies and Support Measures of the Western Balkans shows that phasing out direct fiscal subsidies to fossil fuels and fossil-fuelled electricity production could free up to EUR 510 million annually for complementary social spending and investments in the energy transition.
Adequate support mechanism for vulnerable populations could more effectively enhance the fairness of the energy transition in the Western Balkans. Social protection programmes such as direct cash transfers or energy vouchers, can provide valuable support for low-income households, ensuring they can afford basic energy services. Likewise, improving energy efficiency by introducing energy efficiency initiatives can support vulnerable communities in reducing overall energy demand and costs. Additionally, promoting decentralised renewable energy solutions, like solar home systems or mini-grids, can enhance access in remote or underserved areas.
This chapter investigates the key vulnerabilities to energy sector reforms in the Western Balkans, and analyses the readiness of regional support mechanisms in the Western Balkans to provide targeted mitigation transfers to those in need. The chapter starts with an overview of key vulnerabilities in the Western Balkans. It then reviews the effectiveness of social safety nets and programmes to support vulnerable populations across the region. Overall, the chapter shows that social transfer systems in the region target the right groups; however, their dimensions are too small to have any sizeable positive effects on reducing poverty and inequality. The chapter goes on to analyse the distributional incidence of price regulation and how social protection systems can respond to the removal of subsidies. Finally, it concludes with ways forward in terms of possibilities for adapted programmes to complement the existing social protection systems.
Energy sector reforms can significantly impact consumers, particularly vulnerable populations. As documented in this report, interventions into electricity markets keep prices low in the region, at the expense of significant fiscal costs (Chapter 3). Market liberalisation can help align incentives for actors to make better use of energy resources and reduce the exposure of public finances to the fortunes of the energy sector. However, such reforms are likely to cause increases in the prices of energy – and of electricity in particular – faced by customers who are currently protected through price interventions. Rising energy prices reduce the real disposable income of low-income individuals, exacerbating their financial hardship. Additionally, higher prices can make it more costly to meet basic energy needs and thus push more households into energy poverty. Box 5.1 provides definitions of key forms of vulnerability that are likely to be impacted by energy sector reforms.
In this report, the term “vulnerable populations” refers to groups that are particularly exposed to socio‑economic disadvantages and energy-related hardships and are thus vulnerable in the case of an energy sector reform. The report focuses on income or monetary poverty and energy poverty as key dimensions of vulnerability. It therefore analyses three groups: low-income households, household experiencing energy poverty, and energy vulnerable consumers – such as people with disabilities or health issues – who often face significant challenges.
Monetary poverty: Households with low incomes often lack the financial capacity to afford adequate energy services, forcing them to under-consume energy or rely on unsafe, inefficient fuels. At the same time, they are more likely to live in poorly insulated homes and lack access to energy-efficient appliances or clean energy technologies (United Nations, 2019[1]). Most economies in the region rely on the at-risk-of-poverty rate as the main measure of monetary poverty. This rate is the share of people with an equivalised disposable income (after social transfers) below the at-risk-of-poverty threshold, which is set at 60% of the national median equivalised disposable income after social transfers. This indicator is a relative poverty measure and as such measures low income in comparison to other residents in that economy, which does not necessarily imply a low standard of living (Eurostat, 2025[2]). In Bosnia and Herzegovina the measurement of poverty is done on the basis of consumption data with an analogous definition (the poverty line is set at 60% of median consumption expenditure by adult-equivalent). In this report, when the impact of social transfers is analysed, an absolute measure of monetary poverty (based on the international poverty line for upper middle-income economies at 6.85 USD/day in 2017 PPP) is preferred, as relative measures can behave in unintuitive manners when simulations alter the underlying distribution.
Energy poverty: Energy poverty in the EU is broadly defined as a situation in which “household must reduce its energy consumption to a degree that negatively impacts the inhabitants’ health and wellbeing” (European Comission, 2025[3]). Energy poverty has wide-reaching implications that extend far beyond discomfort or financial strain, affecting health, social inclusion, education, and overall quality of life. While no single indicator is effective to measure energy poverty, there is a range of indicators can reveal its incidence and its severity. Serbia is the only economy in the region that has currently a legal definition of energy poverty. Based on the Law on Energy Efficiency and Rational Use of Energy (2021[4]), energy poverty is defined “as a result of combination of low household income, large expenditure of disposable income on energy and insufficient energy efficiency”. For measurement purposes, in this report, energy poverty households are identified as those that spend more than 10% of their income on energy (Boardman, 1991[5]).
Vulnerable energy customers: As contracting parties to the Energy Community all economies in the region have official definitions of energy vulnerability. Across the region, the definition of vulnerable energy customers refers to persons for whom access to electricity is necessary to maintain their health or mobility as well as persons in socially vulnerable situations (Ban et al., 2021[6]). The EU acquis does not put forward a specific definition, leaving individual economies to define energy vulnerability with wide variation in the degree to which operational definitions rely on social and health criteria, or both (Table 5.1).
Energy poverty remains a major concern in the Western Balkans
Energy poverty is a major concern in the Western Balkans. The Survey on Income and Living Conditions (SILC) includes three subjective indicators typically used to analyse energy poverty. They include whether a household can afford to keep their home warm, whether the household had arrears on utility bills. Across the Western Balkans, energy poverty is a concern across all three indicators, and whether they live in a dwelling with signs of excess humidity (leaking roof, damp walls, floors or foundations, or rot). As of 2023, the share of people who report they cannot afford to keep their home adequately warm is 25% in the Western Balkans compared with an EU average of 10.6%. In 2023, 32% of Western Balkan households were in arrears on utility bills, compared with an EU average of 7%. Data indicate that the situation is particularly severe in Albania, Kosovo and North Macedonia (data for Bosnia and Herzegovina are not yet available). Finally, about 18% of people report living in dwellings with leaking roofs and damp walls (Figure 5.1). When homes are poorly insulated or in disrepair, they require far more energy to heat (or cool) to comfortable levels. Many energy-poor families reside in older, substandard housing where heat easily escapes through thin walls, drafty windows, or leaky roofs.
Note: For all panels data for North Macedonia for 2020, for Albania it is 2021, for Montenegro and Serbia 2022 and for Kosovo 2018.
Source: Eurostat (2025[7]), Arrears on utility bills, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdes07/default/table; Eurostat (2025[8]), Inability to keep home adequately warm, https://ec.europa.eu/eurostat/databrowser/view/ILC_MDES01/default/table?lang=en; Eurostat (2025[9]), Total population living in a dwelling with a leaking roof, damp walls, floors or foundation, or rot in window frames or floor, https://ec.europa.eu/eurostat/databrowser/view/ilc_mdho01/default/table.
Relative to their incomes, household energy expenditures are high in the Western Balkans. Annual electricity consumption of 5 000 kWh costs on average 7.9% of annual gross domestic product (GDP) per capita (including both taxes and levies) in the region, compared with only 4.5% across the European Union (Figure 5.2). Bringing the average household electricity price in the Western Balkans in line with the EU average would push the annual household electricity cost up to 18% of GDP per capita (excluding taxes and levies). If the EU tax burden were to be applied, the figure would increase to 23% (Eurostat, 2025[10]; OECD, 2022[11]; World Bank, 2025[12]). In addition, poorer households tend to dedicate a greater proportion of their expenditure to energy consumption, as it fulfils basic needs (Figure 5.3). This implies a higher cost burden on household budgets in the Western Balkans, especially for the households with the lowest incomes (Figure 5.3).
Average price (including taxes and levies) for 5 000 kWh for households (% of GDP per capita), 2024
Note: 5 000 kWh is the average annual consumption of a household in line with the IEA’s estimation for the average annual household consumption in Europe (IEA, 2022[13]). Price data is S1-2024, GDP data is for 2023 from WDI.
Source: Eurostat (2025[10]), Electricity prices for household consumers - bi-annual data (from 2007 onwards), https://ec.europa.eu/eurostat/databrowser/view/nrg_pc_204/default/table?lang=en&category=nrg.nrg_price.nrg_pc; World Bank (2025[12]), World Development Indicators, https://databank.worldbank.org/source/world-development-indicators.
Energy consumption by income quintile (% of spending on electricity, gas and other fuels as a share of total consumption expenditure), 2020.
Note: Data for Kosovo and North Macedonia are for 2015.
Source: Eurostat (2024[14]), Structure of consumption expenditure by COICOP consumption purpose (database), https://doi.org/10.2908/HBS_STR_T211.
Most people at risk of poverty are also exposed to energy poverty, but many energy poor are not income poor in the Western Balkans
Nearly a quarter of people in the region are at risk of monetary poverty. The share of people living at risk of poverty – defined as having an equivalised1 income below 60% of the national median income after social transfers – was 23.2% in 2024 (Figure 5.4). A potential rise in electricity prices could significantly impact low-income households, as higher energy costs would consume a larger share of their limited income, thereby exacerbating financial hardship.
At-risk-of-poverty rate (%), 2024 or latest available year
Note: The at-risk-of-poverty rate is the share of persons with an equivalised income below 60% of the national median income after social transfers. Panel A – The latest available year is 2015 for Bosnia and Herzegovina, 2018 for Kosovo, 2022 for Montenegro, 2021 for Albania, 2023 for Serbia and 2020 for North Macedonia.
Source: Eurostat (2025[15]), Persons at risk of poverty or social exclusion by age and sex, https://ec.europa.eu/eurostat/databrowser/view/ILC_PEPS01N__custom_6444563/default/table?lang=en; (ESPN, 2019[16]), In-work poverty in Bosnia and Herzegovina, https://ec.europa.eu/social/BlobServlet?docId=21121&langId=en.
While energy poverty and monetary poverty are related, they do not fully overlap. Low incomes are an important determinant of energy poverty, as the cost of meeting one’s energy needs can be a major obstacle. However, not everyone who is energy-poor would be classified as income-poor, and vice versa. Some households above the income poverty line still struggle with energy bills – for example, a modest-income family living in a very energy-inefficient home might spend a large portion of their budget on heating, making them energy poor even if their income is slightly above the poverty threshold. Conversely, a low-income household in subsidised or efficient housing might avoid severe energy poverty (Bouzarovski et al., 2024[17]). The analysis for Bosnia and Herzegovina and Montenegro based on micro-data reveals that many people at risk of income poverty are also energy poor (37% in Bosnia and Herzegovina, 54% in Montenegro). However, a significant proportion of the energy poor are not income poor. This suggests that while targeted social protection schemes, such as social assistance, are crucial for addressing energy poverty among low-income groups, additional targeted measures are needed to support those experiencing energy poverty who will typically not be the target of means-tested interventions (Figure 5.5).
Share of energy poor by income or consumption poverty status (% of total population)
Source: Data sourced from background papers prepared for this report: Bosnia and Herzegovina data from Vladisavljević and Žarković (forthcoming[18]), Montenegro data are from Vladisavljević and Žarković (forthcoming[19]) and Serbia data from Vladisavljević and Žarković (forthcoming[20]).
Support for vulnerable energy customers
As Contracting Parties of the Energy Community, Western Balkan economies are legally bound to define criteria to identify and protect vulnerable energy customers. The Directives on the Internal Market for Electricity (EU, 2009[21]) and the Internal Market for Gas (EU, 2009[22]) – adopted by the European Union in 2009 as part of the Third Energy Package and by the Energy Community in 2011 (EnC, 2011[23]) – included the obligation for each member state to define the concept of vulnerable energy customers and ensure measures to protect them. This obligation is maintained in the revised Electricity Directive (EU, 2019[24]) adopted by the European Union as part of the Fourth Energy Package in 2019 and by the Energy Community as part of the Electricity Integration Package in 2022 (EC, 2002[25]).
Energy supply to vulnerable energy customers is subject to a number of protections. In particular, customers identified as vulnerable are protected against disconnection. Levels of protection typically depend on the degree of vulnerability. In Montenegro, customers exposed to both social and health risks are protected from disconnection, while customers in other socially vulnerable categories have this protection only in winter months. Vulnerable energy customers can also be exempt from connection or reconnection charges.
The economies of the Western Balkans support vulnerable energy customers through explicit energy subsidies
Vulnerable energy customers across the region receive targeted financial support in the form of energy subsidies. This support benefits the most vulnerable, typically identified as those receiving means-tested income support. Support to energy consumption, however, is more broadly distributed. Beneficiaries of other social transfers are typically eligible, including beneficiaries of disability transfers (in Albania, Bosnia and Herzegovina, North Macedonia and Montenegro) and war veterans (in Kosovo and Montenegro). In Albania and Kosovo, pensioners are also included under certain conditions. Finally, in Albania and Serbia, subsidies are also allocated to households on low incomes.
Consumption subsidies to vulnerable energy customers reach a larger share of the population than social assistance programmes. Although programmes for vulnerable energy customers typically target the most vulnerable segments of the population (Ban et al., 2021[6]), they also reach certain categories that would be excluded from social assistance. Support is typically tiered, with the most vulnerable receiving larger transfers. The tier reserved to the most vulnerable reaches only a small share of the population (e.g. 0.4% in Montenegro). In contrast, general energy subsides reach a sizeable proportion of the population, between 6% of households in Serbia and 28% in Albania.
Subsidies to support investment in energy efficiency complement energy subsidies for vulnerable energy customers. Across the region, authorities have put in place programmes to incentivise households to improve energy efficiency through fuel-switching, installing more efficient stoves, improving insulation or installing solar panels. Generally, such programmes offer partial subsidies, which make them less attractive to poorer households (in turn, better-off households participate and capture the benefits). Certain economies have modulated the level of support and now explicitly target vulnerable households through specific lines of support. North Macedonia covers up to 70% of the cost of a pellet furnace and offers, for certain investments, higher levels of support than are available to the general public (Ministry of Finance of North Macedonia, 2021[26]; Energy Community Secretariat, 2023[27]).
Note: * The operational definition called for in the law has not yet been adopted.
Source: Law on power sector (2015[28]), https://ere.gov.al/doc/Law_no.43-2015_On_Power_Sector.pdf; Energy Community Secretariat (2023[27]), Protection of vulnerable households in the Western Balkans Contracting Parties in the context of rising energy prices and the EU Energy Support Package, https://www.energy-community.org/news/Energy-Community-News/2023/07/13.html; Energy Community Secretariat (2021[29]), Study on Addressing Energy Poverty in the Energy Community Contracting Parties, https://www.energy-community.org/dam/jcr:f201fefd-3281-4a1f-94f9-23c3fce4bbf0/DOOREIHP_poverty_122021.pdf; Dávalos et al. (2018[30]), The Distributional Impact of the Fiscal System in Albania, http://econ.worldbank.org.; Law on electricity (2015[31]), https://fmeri.gov.ba/media/1614/law-on-electricity-of-the-federation-of-bih.pdf; Vlada Federacije Bosne i Hercegovine (2022[32]), 520. ODLUKA o izmjeni i dopuni Odluke o provođenju mjera za smanjenje troškova električne energije domaćinstvima i stimulaciji energetske efikasnosti, https://fbihvlada.gov.ba/hr/520-odluka-o-izmjeni-i-dopuni-odluke-o-provodenju-mjera-za-smanjenje-troskova-elektricne-energije-domacinstvima-i-stimulaciji-energetske-efikasnosti; Electricity Act (2020[33]), https://www.paragraf.ba/propisi/republika-srpska/zakon-o-elektricnoj-energiji.html; Obradović, Jusić and Mihajlovic (2020[34]), ESPN Thematic Report on Access to essential services for low-income people – Bosnia and Herzegovina, https://www.researchgate.net/publication/344174775_Access_to_essential_services_for_low-income_people_Bosnia_and_Herzegovina; IMF (2023[35]), Kosovo: First Reviews Under the Stand-By Arrangement and the Arrangement Under the Resilience and Sustainability Facility and Request for Modification of Reform Measure-Press Release, https://www.imf.org/en/Publications/CR/Issues/2023/11/20/Republic-of-Kosovo-First-Reviews-Under-the-Stand-By-Arrangement-and-the-Arrangement-Under-541634; Law on electricity (2016[36]), https://ero-ks.org/2016/Ligjet/LIGJI_PER_ENERGJINE_ELEKTRIKE_ang.pdf; Energy Act (2020[37]), https://www.katalogpropisa.me/propisi-crne-gore/zakon-o-energetici-3/; REGAGEN (2023[38]), Izvejstaj o stanju energetskog sektora Crne Gore za 2022. Godinu, https://regagen.co.me/wp-content/uploads/2023/09/IZVJESTAJ-O-STANJU-ENERGETSKOG-SEKTORA-CRNE-GORE-ZA-2022-god.pdf; Government of Montenegro (2024[39]), Informacija o sprovodenju programa subvencioniranj racuna za elektricnu energiju, https://www.gov.me/en/documents/bbbdefcd-0046-4f84-aa6f-78f5b8d92cd7; Government of North Macedonia (2021[40]), Бектеши: Обезбедени 60 милиони денари за над 7.500 домаќинства со ниски приходи кои ќе добиваат намалени сметки за струја од 600 до 800 денари во 2022 година | Влада на Република Северна Македонија, https://vlada.mk/node/27338; Ministry of Labour and Social Welfare of North Macedonia (2023[41]), ИПА, https://mtsp.gov.mk/ipa.nspx; Amendment to the Energy Law (2022[42]), https://www.erc.org.mk/odluki/Izmeni%20na%20Zakon%20za%20energetika_236%2022_MK.pdf; Decree on energy vulnerable consumer (2023[43]), https://www.paragraf.rs/propisi/uredba-o-energetski-ugrozenom-kupcu-republike-srbije.html; Energy act (2011[44]), Energy act 57/11, https://www.aers.rs/FILES/Zakoni/Eng/Zakon%20o%20energetici_57-11.pdf; Ministry of Mining and Energy (2022[45]), https://oie.rs/wp-content/uploads/2022/12/draft_of_the_roadmap_sr.pdf.
The energy crisis has accelerated policy action directed towards vulnerable energy customers
In the face of the energy crisis, Western Balkan economies stepped up protection for their citizens and for vulnerable energy customers in particular. Certain economies declared states of emergency or crisis in 2021 (Albania, Kosovo and North Macedonia). In some cases, specific electricity producers were mandated to supply universal service suppliers (USS) at regulated, below-market prices in 2022 (Albania and North Macedonia). Other economies expanded existing support programmes (Kosovo and North Macedonia). Kosovo significantly expanded existing support schemes, from 36 000 to around 200 000 beneficiaries. Serbia reformed its main subsidy programme such that coverage increased from 66 834 customers in 2021 to over 191 000 in 2022. Others (Bosnia and Herzegovina, Montenegro and North Macedonia) set up new programmes in 2022, designed initially to be temporary or to complement existing programmes (Energy Community Secretariat, 2023[27]). In some cases, the new programmes remain in place or have become permanent.
Financial support from the European Union enabled expansion of support programmes for vulnerable energy customers. In November 2022, the European Union approved EUR 1 billion of funding for the region as part of an EU Energy Support Package. Of this, EUR 500 million was set to address the immediate impacts of increased energy prices for both households and small- and medium-sized enterprises (SMEs), of which 90% was disbursed in early 2023 (Energy Community Secretariat, 2023[27]). The support to immediate measures was provided as budget support and practice resources were front-loaded by the economies in the region, which in some cases also committed the remaining 10% from own funds. In most cases, this additional support was much larger than the budgets of existing programmes for vulnerable energy customers (RES Foundation/TheGreens/EFA, 2023[46]). Over EUR 100 million was directed specifically towards programmes to support vulnerable energy customers (Table 5.2). Programmes for energy efficiency were, in some cases, also targeted towards vulnerable energy households (Energy Community Secretariat, 2023[27]).
To significantly expand the scope of protection of vulnerable energy customers, the scope of the corresponding definitions and targeting criteria was amended. In this context, Albania put in place an inter-ministerial committee to advance implementation of legal provisions related to vulnerable energy customers (for which secondary legislation has not yet been issued). Serbia adopted a Decree on Energy Vulnerable Customers in December 2022, significantly expanding coverage of its energy subsidy programme. Rapid expansion of the programmes was largely achieved by including specific categorical groups. Several economies in the region included pensioners whose pensions were below a certain threshold. As a result, pensioners were a large share of recipients of emergency energy support. They accounted for about two-thirds of new beneficiaries in the Federation of Bosnia and Herzegovina (FBiH) in Bosnia and Herzegovina, for example.
Inclusion of specific provisions to incentivise energy savings are a notable feature of recent reforms targeting vulnerable energy customers. In several cases, existing energy subsidies have been conditional on having relatively low consumption. One innovation is adding bonuses linked to reductions in consumption. In Serbia between October 2022 and March 2023, the guaranteed supplier (Elektroprivreda Srbije [EPS]) offered gradually increasing discounts on electricity bills when consumption was lower than in the previous year – by 15% for reductions of 5% to 20%; by 20% for reductions of 20% to 30%; and by 30% for reductions greater than 30%. Serbia also included a similar approach to determine the subsidy itself, which is now slashed by half for those consuming over four times the amount eligible for subsidy. The threshold itself varies from 120 kWh/mo for a one-member household to 250 kWh/mo for a 6-person household. In Kosovo, the main programme put in place as part of the EU Energy Support Package offered a subsidy to consumers who lowered their electricity consumption more than 5% (in kWh) in comparison with the same month of the past year. The subsidy amount was double the amount (in EUR) of the difference between year-to-year bills. In North Macedonia, those eligible for subsidies receive a sizeable additional reduction (between 30% and 50% increase in the level of support) on the bill if they reduced consumption by 10% or more.
Source: European Commission (2023[47]), The EU disburses €450 million to the Western Balkans partners delivering on the Energy Support Package for the region, https://ec.europa.eu/commission/presscorner/detail/en/AC_23_3196; Ministry of mining and energy of Republic of Serbia (2022[48]), Energy Support Roadmap, https://oie.rs/wp-content/uploads/2022/12/draft_of_the_roadmap_sr.pdf; Ministry of Labour and Social Welfare of North Macedonia (2023[41]), ИПА, https://mtsp.gov.mk/ipa.nspx; Decree for the proclamation of the law on financial support of socially vulnerable citizens to deal with the energy crisis (2022[49]), https://mtsp.gov.mk/content/pdf/zakoni/2022/zakon_finansiska_poddrska_mkd.pdf; WBIF (2023[50]), EU energy support package of €30 million to help most vulnerable households and SMEs in Montenegro, https://www.wbif.eu/news-details/eu-energy-support-30-million-help-most-vulnerable-households-and-smes-montenegro; Energy Community Secretariat (2023[27]), Protection of vulnerable households in the Western Balkans Contracting Parties in the context of rising energy prices and the EU Energy Support Package, https://www.energy-community.org/news/Energy-Community-News/2023/07/13.html; Delegation of the EU to Bosnia and Herzegovina (2023[51]), How the EU Energy Support Package will be implemented – FBiH, RS and Brčko District institutions present their plans | EEAS, https://www.eeas.europa.eu/delegations/bosnia-and-herzegovina/how-eu-energy-support-package-will-be-implemented-%E2%80%93-fbih-rs-and-br%C4%8Dko-district-institutions-present_en?s=219; Vlada Republike Srpske (2023[52]), Вијести Одржана 35. сједница Владе Републике Српске: Финансијска помоћ енергетски сиромашним потрошачима, https://vladars.rs/sr-SP-Cyrl/Vlada/media/vijesti/Pages/odrzana-35.-sjednica-vlade-republike-srpske.aspx; Vlada Brčko distrikta BiH (2023[53]), Održana konferencija za medije: Podrška EU za ublažavanje energetske krize, http://www.vlada.bdcentral.net/Publication/Read/podrska-eu-za-ublazavanje-energetske-krize; Government of Kosovo (2023[54]), Decision 1 No. 03/128, https://gzk.rks-gov.net/ActDocumentDetail.aspx?ActID=69791; IMF (2023[55]), Republic of Serbia: Second Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria-Press Release; and Staff Report for Republic of Serbia; IMF Country Report No. 23/433; 4 December 2023, https://www.imf.org/en/Publications/CR/Issues/2023/12/20/Republic-of-Serbia-Second-Review-Under-the-Stand-By-Arrangement-and-Request-for-542671.
Social protection systems in the Western Balkans often do not provide adequate income security to those most in need. Labour market challenges, such as high long-term unemployment, undermine the effectiveness of social security systems to provide safety nets to people. Additionally, social assistance systems are often poorly targeted and inadequate, and do not sufficiently integrate beneficiaries into labour markets, thereby further increasing their dependency on welfare. At the same time, local governments, which have a lead role in creating integrated social service delivery systems, often have very limited capacity and funding to fulfil their role (OECD, 2022[11]). This chapter examines the effectiveness of overall tax and transfer systems, existing social assistance schemes, energy consumption related transfer allowances and crisis-related support measures in mitigating the poverty and inequality impacts in the Western Balkans. Using the Commitment to Equity (CEQ) framework, the analysis assesses the readiness of these support mechanisms to protect vulnerable groups during the energy transition (Box 5.2).
The Commitment to Equity (CEQ) framework can be used to compare the ability of tax and transfer systems across economies to redistribute income and reduce poverty. The CEQ framework is a diagnostic tool that uses household income data to analyse the distributional incidence of specific taxes and government spending and to simulate potential reforms of these systems or programmes. The CEQ framework offers a comprehensive picture of an economy’s tax and transfer system. This allows comparing the distributional incidence – i.e. the impact of taxes and transfers in different income groups within an economy. It can be used to analyse an existing or a hypothetical programme in the context of the entire tax and benefits system. This is of critical importance, as whether an individual tax or transfer will be progressive or regressive is related to all other elements of the entire system. To date, the CEQ framework has been applied in more than 80 economies, which allows for comparison of results across economies.
The CEQ approach defines various income concepts and constructs them by adding individual taxes and transfers on a household-level dataset. The four income concepts include:
Market income (prefiscal income) is a household’s income before taxes and transfers. In the analysis carried out for this report, contributory pensions are treated as deferred market income (not as government transfers). Therefore, in this report, market income includes income from contributory pensions and excludes contributions to social insurance old-age pensions.
Disposable income is income after direct taxes and transfers, which include various social transfers as well as personal income taxes and social contributions (among others).
Consumable income is income after direct and indirect taxes and transfers, corresponding to disposable income plus any price subsidies minus value-added tax (VAT), excises and other indirect taxes.
Final income is consumable income plus the monetised value of in-kind transfers in education and health (net of co-payments).
The framework rests on a micro-simulation model: individual taxes and transfers are calculated for each household in the sample and calibrated to aggregate administrative or statistical estimates. Where necessary, programme rules are used to impute values for specific programmes or categories of households.
Source: Lustig, N. (ed.) (2022[56]), Commitment to Equity Handbook: Estimating the impact of fiscal policy on inequality and poverty. Second edition; (Dávalos et al., 2018[30]), The Distributional Impact of the Fiscal System in Albania.
This chapter applies several indicators derived from CEQ analysis to assess the progressivity or regressivity of individual social transfers and of a given economy’s tax and transfer system as a whole.
The concentration coefficient of a transfer measures the degree to which households near the bottom of the income distribution receive a greater share of the total benefits distributed. Concentration coefficients reflect values in absolute terms: they are negative when the poor get more than the rich and positive when the rich get more than the poor.
The Kakwani index measures the extent to which the distribution of a tax or transfer is not proportional to the distribution of market income. It is constructed as the difference between the concentration coefficient of a given tax or transfer and the Gini coefficient of market income. A zero Kakwani coefficient indicates that a transfer or tax is neutral. A negative coefficient indicates a transfer is unequalising. A positive Kawani index indicates a transfer is progressive, equalising and pro-poor. Lower or higher scores indicate the degree of regressivity or progressivity.
The marginal contribution of a specific tax or transfer measures an instrument’s impact on inequality by comparing the Gini coefficient (including the entire tax and transfer system) with and without the instrument in question. The indicator is measured as the difference between the two Gini indices, with positive numbers indicating a reduction in inequality. Marginal contributions to poverty reduction are calculated in the same way, with positive numbers indicating a reduction in poverty.
Source: Lustig, N. (ed.) (2022[56]), Commitment to Equity Handbook: Estimating the impact of fiscal policy on inequality and poverty. Second edition.
Overall tax and transfers systems in the Western Balkans reduce inequality, albeit modestly, but increase poverty
Comparing inequality (Gini coefficients) and absolute poverty headcounts with their counterparts offers a measure of the ability of each economy to redistribute income. To this end, inequality and poverty are compared before and after direct and indirect taxes and transfers. This provides information on how the overall tax and transfer system influences inequality (Figure 5.6 – Panel A) and poverty (Figure 5.6 – Panel B).
Overall, tax and transfer systems in the Western Balkans have only modest redistributive effects. An analysis of inequality before and after the application of direct and indirect taxes and transfers shows a reduction in inequality across the five economies with available data: Albania, Kosovo, North Macedonia, Montenegro, and Serbia. While taxes and transfers in these economies do reduce the Gini coefficient, the resulting decreases in inequality are relatively modest compared to countries like Spain and Poland. (Figure 5.6 – Panel A).
On the other hand, government interventions through taxes and transfers are associated with an increase in poverty. This is mainly the result of indirect taxes. Direct taxes and transfers do reduce poverty in four regional economies: by 3.8 percentage points Kosovo, by 3.7 percentage points in Albania, by 1.8 percentage points in North Macedonia, and by 0.7 percentage points in Serbia (Figure 5.6 – Panel B). Direct taxes and transfers increase poverty in Montenegro. While direct taxes and transfers reduce extreme poverty in Montenegro (from 7.3% to 4.4% at the USD 3.20 per day poverty line), they increase poverty rates at the official poverty line (at 60% of median income). This reflects that direct taxes and contributions are larger than direct transfers for the second decile. However, indirect taxes and transfers increase poverty in all five economies as they significantly reduce consumable incomes. When all taxes and transfers are accounted for, their impact is a notable increase in poverty. These results suggest that social transfers currently cannot fully offset the burden of taxes on poverty, thereby having an important implication on reforms related to energy prices. This pattern is not exclusive to economies of the Western Balkans. It can also be observed in Türkiye and in other Central and Eastern European economies (e.g. Croatia, Poland and Romania), albeit to a lesser degree.
Gini coefficient based on market income and after taxes and transfers (Panel A), and absolute poverty headcount based on market income and after taxes and transfers (%) (Panel B).
Note: Data for the latest available CEQ assessment in each comparator economy: Colombia, Croatia and Poland (2014), Romania, Türkiye and the United States (2016), Argentina and Spain (2017). Data on Albania are for 2015. Data for Serbia and Montenegro are based on 2019 reference data. Data for North Macedonia are based on 2018 baseline data but simulate current social protection systems. Panel B. Poverty measured at the upper middle-income absolute poverty line (5.50 USD/day in 2011 PPP, 6.85 USD/day in 2017 PPP). Results for Albania are based on the upper middle-income absolute poverty line in 2005 PPP (4 USD/day). Results for Croatia and Poland correspond to the lower middle-income poverty line (2.5 USD/day in 2005 PPP.
Source: Data sourced from background papers prepared for this report: Montenegro data are from (Vladisavljević and Žarković, forthcoming[19]) Serbia data from (Vladisavljević and Žarković, forthcoming[20]), North Macedonia from (Petreski, forthcoming[57]). Others sourced from CEQ (2024[58]), CEQ Standard indicators web version 5.0, CEQ Institute, https://commitmentoequity.org/datacenter/.
Existing social assistance programmes in the Western Balkans can mitigate the impacts on poverty but are insufficient to compensate all vulnerable persons
Social assistance programmes play a crucial role in mitigating the impact of energy poverty by providing targeted support to the most vulnerable households. Through social assistance schemes, such as direct cash transfers, these programmes help ensure that low-income families can afford essential energy services without compromising other basic needs.
Western Balkan economies have established various mean-tested social assistance schemes aimed at supporting vulnerable populations that are at risk of income poverty. In Albania, the primary programmes include economic assistance for low-income families (Ndhima Ekonomike [NE]) and social pensions for elderly individuals without sufficient contributory records. Bosnia and Herzegovina administers social assistance at the entity and cantonal levels, offering programmes such as permanent social assistance. Kosovo’s main scheme is the Social Assistance Scheme (SAS), providing last-resort income support to households meeting specific eligibility criteria. Montenegro offers social assistance through material support for families, child allowances, and disability benefits. North Macedonia implements programmes like the Guaranteed Minimum Assistance (GMA), and social pensions. Serbia operates two major means-tested programmes: Financial Social Assistance (FSA) and child allowance, both designed to support low-income households and families with children.
Albania, Montenegro, North Macedonia and Serbia haver recently undertaken important reforms of their social protection systems and of social assistance schemes. Albania’s social assistance reform streamlined the cash assistance programme NE through a proxy means test and digital management system, improved targeting and benefit levels, and introduced employment activation measures (ILO, 2022[59]). Montenegro’s social assistance reform expanded child benefits, making them universal, and reintroduced categorical programmes (World Bank/UNICEF, 2022[60]). In 2019 North Macedonia launched a comprehensive social protection reform to consolidate its fragmented social assistance programmes, introducing a means-tested GMA scheme. This reform significantly improved coverage, targeting, and adequacy, offering a more effective safety net compared to the previous system (World Bank, 2022[61]). In 2022, Serbia implemented the Social Card Registry, a centralised electronic database, which pulls data on recipients and applicants to social assistance from a range of official databases, to more accurately assess their socio-economic status and eligibility for benefits (World Bank, 2022[62]).
Social assistance programmes in the economies in the region are designed to be progressive but have relatively little impact on poverty rates. Analysis undertaken for this report applies the CEQ methodology to analyse specifically the impact of social protection programmes on inequality and poverty. The analysis relies on microdata (SILC in the cases of Albania, Montenegro, North Macedonia and Serbia, HBS in the case of Bosnia and Herzegovina). It focuses primarily on programmes for which the source data identify the amounts received from specific programmes. In a few cases, the analysis simulated key programmes for which data was not available. That is the case for example of the GMA, which did not exist at the time of collection of the data used. CEQ analysis shows that North Macedonia’s GMA as simulated is most effective programme when it comes to redistribution (Figure 5.7 – Panel A) and poverty reduction in the region (Figure 5.7 – Panel B). This is explained in part by the fact that GMA is simulated to follow programme rules and therefore have perfect targeting. While the GMA’s impact is modest, at 1.5 percentage points of absolute poverty, it is higher than in other economies, especially in Bosnia and Herzegovina and Serbia. The relatively small impacts stem largely from the relatively small size of the programmes in terms of total value transferred. The larger impact in North Macedonia reflects that it mobilises more funds relative to average household incomes – 0.82% in comparison to 0.34% in Serbia and 0.11% in Bosnia and Herzegovina, where the impact on poverty reduction is smallest. It should be noted that results reported for North Macedonia rely on the simulation of GMA rules applied to 2018 baseline data, which assumes no inclusion errors, while results for Albania and Serbia rely on observed receipt data from HBS. The North Macedonian social protection system was reformed in mid-2019. To ensure consistency in social protection data and avoid using 2020 data, which reflects anomalies linked to the COVID-19 pandemic, 2018 data were used instead and the impact of reform was introduced through simulation (Petreski, forthcoming[57]).
Source: Data sourced from background papers prepared for this report: Serbia data from (Vladisavljević and Žarković, forthcoming[20]), North Macedonia from (Petreski, forthcoming[57]). Data for Albania are from (Zhabjaku Shehaj, forthcoming[63]).
Explicit energy consumption related transfer allowances
Across most of the region, direct energy subsidies have relatively small impacts on poverty and inequality. Regular schemes directed for energy consumers, in contrast to those related to the energy crisis, tend to act as additional payments for beneficiaries of social assistance programmes. As a result, they mirror the distributional incidence of social assistance. Notably, even though beneficiaries are largely concentrated in the bottom of the income distribution, overall impacts on inequality and poverty are relatively modest. In the case of energy subsidy programmes, their relatively small size limits their impacts on poverty and inequality.
Several energy consumption related transfer programmes target the poor but remain too small to have significant incidence on poverty or inequality. In North Macedonia, an energy allowance – representing 0.05% of market income – complements the main social assistance programme (the GMA). As it is targeted to GMA beneficiaries, it has a similar value (1.22) for the progressivity coefficient (Kakwani index) (Figure 5.7 – Panel A). However, because the total value transferred is small, the energy allowance reduces poverty by only 0.1 percentage points. A similar picture emerges for the electricity and gas allowance in Serbia, which reduces monetary poverty by only 0.02 percentage points (Table 5.3).
Serbia’s subsidy for energy-vulnerable consumers (SEVC) was reformed in 2022 and amended in 2023, expanding its scope and increasing its impact. As current data do not reflect the updated programme, it was simulated using 2019 data, after accounting for changes in disposable incomes and prices. Based on the revised rules (Government of the Republic of Serbia, 2022[64]), the simulated average subsidy amounts to RSD 1 963, covering 285 000 households and costing RSD 6.7 billion (EUR 57 million) annually – up from 72 000 beneficiaries and RSD 1.2 billion (EUR 10 million) in 2019 (AERS, 2021[65]). The simulation does not correct for targeting errors, which partly explains the higher coverage. The reformed SEVC is slightly more progressive than its predecessor and has a poverty-reducing effect comparable to Financial Social Assistance (FSA) (see Chapter 12).
When broadly distributed, energy subsidies can have greater impacts but they tend to be less progressive. Larger, direct subsidy programmes in the Western Balkans tend to include more beneficiaries among the non-poor, rather than effectively directing larger energy-related transfers to the poor. As a result, they are less progressive but – if large enough – may still have poverty-reducing impacts. In 2015, energy transfers in Albania commanded 0.42% of households’ market income, the same order of magnitude (0.55%) as the main means-tested income support programme (Ndihma Ekonomike [NE]). However, the relatively low Kakwani index (0.38) indicates that the energy transfer distributed almost uniformly across the entire income distribution. As the income distribution itself is more unequal, the programme does contribute to reducing inequality and poverty. However, the incidence of this scheme on income poverty (0.35%) is a fraction of that of the NE programme (0.72%) (Figure 5.7 – Panel B).
Source: Data sourced from background papers prepared for this report: Montenegro data from (Vladisavljević and Žarković, forthcoming[19]) Serbia data from (Vladisavljević and Žarković, forthcoming[20]), North Macedonia from (Petreski, forthcoming[57]). Data for Albania are from (Zhabjaku Shehaj, forthcoming[63]).
Mitigation programmes implemented in response to the energy crisis have had significant impacts but were not always accurately targeted to those in need
As reflected in the inventory developed for this report, several new transfer programmes put in place in 2021-22 were several times larger than some existing programmes in Western Balkan economies. Prior to the energy crisis, support for vulnerable energy customers commanded just under EUR 40 million per year across the region. Over half of this amount was accounted for by compensation for removing block tariffs in Albania (see Chapter 3). The crisis triggered a significant increase in support, with substantial funding from the EU Energy Support Package, of about EUR 500 million aimed to address the immediate impacts of increased energy prices for both households and small- and medium-sized enterprises (SMEs) (Energy Community Secretariat, 2023[27]).
The same micro-simulation models can be used to also analyse the distributional incidence of emergency programmes. It will only be possible to measure accurately the distributional incidence of emergency programmes when they are completed and when the data capturing beneficiaries and their characteristics are made available. As an alternative approach, selected emergency programmes were simulated using pre-existing data in the CEQ methodological framework. For the case of North Macedonia described below, for example, analysis for this report uses 2018 data to simulate the social protection system as reformed and also simulates the impact of emergency measures taken during the energy crisis.
In North Macedonia, a transfer programme put in place during 2021-23 is estimated to have had impacts similar to existing programmes – despite having broader targeting. The programme provided subsidies for monthly electricity bills for households with income below a certain threshold (determined based on household composition) (Petreski, forthcoming[57]). Simulations suggest that it reduced poverty by only 0.03%, lower than the pre-existing energy allowance at 0.1% (Table 5.3). This stems, in part, from broader targeting, which implies that beneficiaries were less concentrated among the poorest. Also, it should be noted that the impact is likely to be additional to pre-existing programmes, which already acted as a top-up for social assistance beneficiaries, largely targeting households on zero market incomes. The eligibility threshold for the pre-existing programmes is MKD 4 000 per adult equivalent, or one-third of minimum wage. The crisis response programme threshold was MKD 19 000 for a single person, thus targeting low-income households more broadly. An important caveat to this result is that targeting relied, in part, on the beneficiaries actively requesting subsidies. According to simulations, the budget needed if all eligible households had filed requests would have been around ten times larger than the allocated MKD 60 million. The simulation results presented randomly allocate recipients among eligible households to reflect the size of the programme, but do not correct for positive or negative self-selection into it. Notably, a programme with a budget of MKD 600 million would have had an estimated poverty reduction impact of 0.3%.
Broader support measures, such as reductions in VAT rates, had significant incidence, but at much higher costs. The Government of North Macedonia reduced the VAT rate on electricity from the standard 18% to a preferential 5% in January 2021, raised it to 10% in July 2022 and returned it to the standard rate in January 2023. Similarly, the VAT rate on gasoline and other petroleum products was lowered from 18% to 10% from March 2022 to May 2022. According to the simulations, these VAT reductions would have reduced poverty by 0.50% in the case of electricity and 0.19% for petroleum products.2 Since the distribution of benefits from VAT reductions mimics the distribution of consumption, VAT reductions favoured the better-off more than the poor. This approach was progressive in that, relative to their market incomes, the reductions contributed more to the poor than to the rich (Figure 5.8). However, the cost of the reduction – MKD 3.7 billion (EUR 60 million) – has been substantial, exceeding even the cost of the GMA, which stands at approximately MKD 2.2 billion as simulated (EUR 35 million) (Petreski, forthcoming[57]).
Simulated incidence of energy crisis mitigation measures (as % of income)
Source: Petreski (forthcoming[57]), The distributional impact of North Macedonia's taxes and social spending and of government electricity-related measures during the energy and food price crisis of 2022-23.
Regulation of energy prices is an important means by which Western Balkan economies support households. Almost all households in the region receive electricity from USS at regulated prices. Historically, retail prices have been low compared with those in EU countries. Notably during the 2021-22 crisis period, regulated retail prices were largely isolated from volatility and increases in international market prices. In Albania, FBiH in Bosnia and Herzegovina and Montenegro, regulated prices were kept unchanged despite increased international and wholesale prices. In the Brčko District of Bosnia and Herzegovina, Kosovo, North Macedonia and Serbia, retail prices for customers supplied by the USS did increase, albeit significantly less than wholesale prices.
By intervening in pricing and keeping electricity rates below market levels, governments in the region provided significant induced support to households. By comparing market prices with actual prices in the region, supply of electricity at below-market prices accounted for induced support to consumption of about EUR 19.1 billion over 2018-23, ranging between EUR 1.2 billion in Montenegro to EUR 8.6 billion in Serbia (see Chapter 3).
Low electricity prices are regressive in absolute terms but progressive in relative terms. Generally, better-off households consume more electricity than poorer households, although the distribution of electricity consumption is much less unequal than that of income. This implies that the implicit transfer through price regulation is progressive in relative terms: that is, relative to their income levels, households at the bottom of the income distribution receive a much higher transfer than households at the top. However, as better-off households consume more electricity per capita, they receive a larger absolute transfer (Figure 5.9).
Note: These figures represent the simulated impact of increases of electricity prices in both absolute and relative terms across the income distribution. The absolute impact is in annual per capita terms except for North Macedonia, where it is aggregate terms for the decile.
Source: Authors’ calculations based on HBS data from Albania and Kosovo, Vladisavljević and Žarković (forthcoming[18]), (forthcoming[19]) and (forthcoming[20]) for Bosnia and Herzegovina, Montenegro and Serbia, and Petreski (forthcoming[57]) for North Macedonia.
Increases in electricity prices can have a disproportionately negative impact on energy-poor households, who already struggle to afford basic energy services. These households typically spend a larger share of their income on energy, leaving them highly sensitive to price changes. As electricity costs rise, energy-poor families may be forced to reduce their consumption to unsafe or inadequate levels, leading to under-heated homes, reduced use of essential appliances, or even disconnection from the grid due to unpaid bills. This can further exacerbate social exclusion, worsen health outcomes, and deepen financial hardship. Indeed, data from available economies show that implicit energy subsidies make a significant contribution to poverty reduction (Table 5.4). Monetary poverty is typically measured on the basis of income, and therefore not directly affected by changes in prices. The results in Table 5.4 consider the implicit subsidy due to price regulation as an indirect transfer, and re-estimate poverty after this indirect transfer has been removed.
Note: The size of the implicit subsidy is set to correspond approximately to the pre-energy crisis gap between retail and counterfactual market prices for households.
Source: Bosnia and Herzegovina data are from Vladisavljević and Žarković (forthcoming[18]), Montenegro data from (Vladisavljević and Žarković, forthcoming[19]) Serbia data from (forthcoming[20]), and North Macedonia from (Petreski, forthcoming[57]).
Existing social assistance programmes in the Western Balkans can mitigate the impacts on poverty but are insufficient to compensate all vulnerable households
To avoid increasing the risk of poverty and energy poverty during price reform, those at the bottom of the income distribution in Western Balkan economies would need to be compensated. In the case of North Macedonia, where price regulation deviates relatively less form the market-based benchmark, households in the poorest decile receive the equivalent of 7.5% of their market income in the form of lower electricity prices. It follows that removing regulation would have significant negative impacts on poverty, driving absolute poverty up by 1 percentage point. Energy poverty would also increase, as the cost of fulfilling energy needs increases. In the case that higher prices do not prompt a fall in energy demand, the share of people in energy poverty would increase by 12%. While a shift in demand is expected and desirable, it may require complementary investment in energy efficiency in buildings and appliances.
Removing electricity price regulation would generate significant fiscal resources for the energy sector and the state, which could be used to shield the most vulnerable from poverty. Energy market reforms that lead to increased prices will tend to generate fiscal income through indirect tax receipts, although the sums depend critically on the overall impact on aggregate final demand. In addition, such reforms would generate significant revenues for the energy sector, which in the region is dominated by state-owned enterprises. Therefore, it is possible for governments to tap those revenues and direct them towards compensatory measures, including social protection schemes. Simulations undertaken for North Macedonia suggest that an increase by MKD 860 million (EUR 13.5 million) of the budget of the GMA would compensate for the impact of higher prices on extreme poverty, which would only increase marginally (by 0.02%). A larger MKD 1.3 billion (EUR 21 million) increase in the budget of the GMA would be sufficient to ensure that moderate monetary poverty rate is kept unchanged.
Broader social transfers to vulnerable customers are needed to cushion the impacts of energy price reform. At present in Western Balkan economies, programmes for vulnerable customers target broader segments of the population than are covered by means-tested, income support safety nets. In North Macedonia, the temporary programme put in place by the Ministry of Economy to support vulnerable households is estimated to have lowered poverty by 0.2% at the intermediate poverty line (3.65 USD/day). The impact on moderate poverty (6.85 USD/day) would be less than one basis point.
Protecting households from the increases and volatility of energy prices in 2021-22 solely through existing social protection mechanisms would have been even more challenging. Had retail prices reflected wholesale prices in 2022, electricity prices in North Macedonia would have been 247% higher than they were. Corresponding impacts on poverty and inequality would have been extremely high, including a 21% increase in poverty and a 19% increase in energy poverty. Existing targeting mechanisms would not be well adapted to shift (in an efficient manner) from targeting 12% of the population (the baseline poverty headcount) to targeting the bottom 31%.
The scope of necessary interventions to mitigate the impacts of energy reform on the poor will be significant. The ability to identify winners and losers of a reform – and to mitigate the impacts of reform on the most vulnerable – is an important factor of reform success. When social protection systems are sufficiently developed, they can cushion the negative impacts of reform on the most vulnerable. Where social safety nets are less effective, targeted transfers can be introduced to compensate the most vulnerable for increases in energy prices (UNDP, 2021[66]; IMF, 2013[67]; OECD and IEA, 2021[68]). Indicators of energy poverty suggest that well over 20% of the population in each Western Balkan economy is at risk of energy poverty. By some metrics, almost 40% of residents of Albania and Kosovo are facing energy poverty as are over one-quarter of residents of North Macedonia. Compensation for energy price increases would therefore need to cover substantially more people than are currently targeted by existing income support and direct energy subsidy schemes.
For social protection systems to play this role in the Western Balkans, they will need to be scaled up significantly. Targeted cash transfers can be a particularly well-adapted tool to mitigate the impacts of energy subsidy reform on poor and/or vulnerable households. In the Western Balkans, means-tested income support programmes focus on the poorest and have limited coverage and generosity. As such, their impact on poverty reduction is modest. Existing programmes for vulnerable energy customers have broader coverage and appear more suited to cushion the impacts of energy reform on the most vulnerable. For both means-tested income support programmes and vulnerable customer programmes, compensating the most vulnerable would require significant scaling. In Serbia, funding volumes would need to increase by 2.5 times for means-tested support programmes and by 4.6 times for vulnerable customer programmes.
Recent social protection interventions can help scale future programmes. The scale of emergency interventions put in place during the energy crisis of 2021-22 is significantly larger than past programmes to protect energy vulnerable energy customers in the Western Balkans. In some cases, as in FBiH in Bosnia and Herzegovina, new targeting and delivery systems put in place should inform the design of social assistance mechanisms going forward. Some recent reforms, such as Serbia’s Social Card Registry, have streamlined targeting mechanisms. Such systems can help scale up interventions if they also cover households above eligibility thresholds and that could benefit from programmes aimed specifically at mitigating energy poverty, be it at the time of reform or in the face of another period of turmoil in international energy markets.
Energy vouchers and social tariffs are alternatives to income-targeted cash transfers and universally regulated prices. Both energy vouchers and social tariffs aim to provide support in a targeted manner to those who need it. Vouchers have the advantage that they can be used across all types of energy, which avoids penalising households that do not use electricity for space heating (whether because of equipment or of arbitration across fuels). In some cases, authorities may have policy objectives to prioritise the use of specific fuels or energy carriers. Energy vouchers can also be used for investments in energy efficiency (e.g. to purchase more efficient appliances or for insulation works), if authorities place that as the higher priority. Social tariffs typically pose a low administrative burden on beneficiary households. In cases where reliable social registries exist, household eligibility can be determined centrally and the social tariff applied by energy suppliers.
To apply any of these measures effectively, it is necessary to explicitly target those at risk of energy poverty. A formal operational definition of energy poverty, which may differ among Western Balkan economies, would help to identify appropriate target groups. Energy poverty is a multi-dimensional issue; as such, it can be measured through multiple indicators. In the absence of officially sanctioned operational definitions – that appropriately link energy needs, income deprivation and socio-economic factors – targeting tends to be based on energy consumption levels. Schemes that exclude higher levels of consumption tend to exclude certain categories who do not need support. Yet they are also likely to penalise particularly vulnerable categories who do consume more (e.g. households with more than four children) as well as those whose consumption is high because they lack funds to invest in energy efficiency improvements in their homes.
Addressing energy poverty will require interventions beyond compensatory transfers. Low energy efficiency of dwellings is a key contributing factor to energy poverty, especially when combined with economic deprivation. As such, measures to improve energy efficiency for such households are particularly important. Some programmes recently put in place in the Western Balkans support energy efficiency investments, including switching appliances. As these programmes typically require upfront financing on the part of the beneficiary, they are likely to exclude those most in need. Designing specific schemes to accompany the poorest in energy efficiency investments, or designing programme features that offer better support overall, would help tackle the problem where it is most pressing.
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← 1. Equivalised disposable income is the total income of a household, after tax and other deductions, that is available for spending or saving. To reflect differences in a household’s size and composition, the total (net) household income is divided by the number of “equivalent adults”, using a standard OECD equivalence scale. This scale gives a weight to all members of the household, then adds these up to arrive at the equivalised household size (Eurostat, 2025[69]).
← 2. These estimates account for the distribution of electricity and fuel consumption in the reference year (2018). Demand response to increased prices would lead to lower incidence of transfers, while changes in the underlying distribution of income could lead to larger poverty impacts to the extent real incomes had shifted downwards.