Thailand extends diesel price cap amid long-term energy concerns

Efforts by the Thailand government to cap energy prices, and diesel subsidies may appease the public in the short term, but there are growing concerns about the long-term implications on fuel consumption.

The extension of the diesel price subsidy, funded by the Oil Fuel Fund, is a recent measure that fixes the retail price at 33 baht per litre until July 31. This initiative aims to alleviate financial pressures on households and businesses, particularly those affected by the pandemic and rising global crude prices following the escalation of the Russia-Ukraine war in 2022.

The policies to control diesel prices, initially introduced by the Prayut Chan-o-cha administration through a diesel excise tax cut and Oil Fuel Fund subsidy, have been maintained by Prime Minister Srettha Thavisin. Although the tax cut has expired, the retail prices of diesel are still being curbed through the fund.

In the electricity sector, the government remains cautious about raising rates, even though this approach delays the Electricity Generating Authority of Thailand (EGAT) from addressing its substantial losses incurred from subsidising electricity prices that surged due to the Russia-Ukraine conflict. A portion of each power bill is used to reimburse EGAT, subject to government policy and public hearings.

Long-term control of energy prices could impact investments in fuel upgrades for environmental purposes and hinder efforts to promote energy efficiency, crucial for combating climate change.

The Energy Ministry’s decision to delay the increase in diesel prices to adopt a higher-quality Euro 5 diesel, originally set for implementation on January 1, 2024, has attracted widespread criticism. This postponement benefits consumers but disappoints oil refinery operators who invested billions of baht to develop Euro 5 diesel.

Euro 5 diesel

The development of Euro 5 diesel was initiated years prior, with relevant agencies encouraging oil companies to invest in improving diesel quality. Refinery operators collectively allocated over 50 billion baht to upgrade facilities and expand production capacity, according to the Petroleum Refining Industry Club of the Federation of Thai Industries.

The new fuel, to replace Euro 4, was set to be applied to biodiesel B7 and B20, blending 7% and 20% palm oil-derived methyl ester, respectively.

In early January, the Department of Energy Business announced that petrol stations would be allowed to sell Euro 4 diesel for three to four months before transitioning to Euro 5 diesel. Later that month, then Energy Minister Pirapan Salirathavibhaga stated that the ministry needed to block a request from local refineries to increase diesel prices by 0.5 baht per litre following the Euro 5 policy enforcement.

This move is part of a broader effort to keep energy prices low throughout 2024. However, many highlighted the need for clarity on the future of the Euro 5 policy in Thailand.

Prolonged energy price subsidies raise concerns about their negative impact on promoting efficient energy consumption, a critical aspect of climate change campaigns, according to energy analysts. Extended subsidy schemes may reduce public motivation to save energy and improve consumption habits.

An economist at Thammasat University, Praipol Koomsup describes this delay as detrimental to Thailand’s efforts to combat climate change.

Climate change efforts

“People enjoying low prices for fossil fuel-derived fuels for a long time could slow down efforts to deal with climate change,

“This raises the question of when Thailand will achieve its carbon neutrality and net-zero targets.”

In 2021, at the 26th UN Climate Change Conference, former Prime Minister Prayut Chan-o-cha committed Thailand to achieving carbon neutrality by 2050 and net-zero greenhouse gas emissions by 2065. While subsidies help ease financial burdens for businesses and individuals, executives warn of the long-term impact on energy consumption habits.

Lower energy prices often lead to higher usage, whereas the absence of subsidies typically increases awareness of energy consumption. Consumption of gasoline and gasohol, a mix of gasoline and ethanol, decreased by 0.2% to 31.7 million litres per day in the first quarter of this year after state measures to reduce energy costs ended.

The price reductions for gasohol and gasoline, ranging from 0.8 to 2.5 baht per litre, were effective from November 7 to January 31, 2023, through excise tax cuts and state-managed price subsidy programmes.

In the power sector, the electricity price subsidy programme might lead to negligence in energy-saving practices, as most electricity is generated by fossil fuel-fired power plants. Praipol expressed concern over the continued use of fossil fuels, a primary source of carbon dioxide emissions.

Lack of awareness

Pripol added that over the past two decades, policymakers have not launched strong campaigns to promote energy conservation, resulting in a lack of public awareness about managing energy usage effectively.

Continued energy price subsidy programmes should be more selective, targeting low-income earners to prevent draining government funds, Praipol advised. This approach would optimise budget allocation, easing living costs while promoting energy efficiency.

Although populist schemes may attract voters, the government needs to be cautious about budget spending on energy price subsidies, which could increase public debt over time, reported Bangkok Post.