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27/11/2015

Praises and Pitfalls of Progressive Tariffs

Over the past years, Sia Partners has carried out multiple assignments about progressive tariffs in France and Belgium. This Insight briefly covers the concept and stakes of such measure and refers to Sia Partners’ latest study on the topic. It shows that frequent pitfalls relate to expected benefits and operational implementation. Acknowledging the difficulties and carefully considering the model and its parameters are key to a successful implementation strategy. 

 

Energy savings and energy poverty: the general context of progressive tariffs

The Rational Use of Energy (RUE) and energy poverty belong to the key challenges to be tackled by energy policymakers.

On the one hand, targets have been set for the reduction of greenhouse gas (GHG) emissions, such as the European objective of a 30% cut between 1990 and 2025. These goals have been translated into different targets, one of them usually being the reduction of electricity consumption ceteris paribus (i.e. notwithstanding new usages such as electric vehicles).

Policies that affect electricity prices can influence consumption. For instance, Sia Partners studied the impact of grants and support mechanisms on energy efficiency investments and, ultimately, energy savings. Conversely, increasing the marginal price of electricity could lead households to reduce their consumption by investing in their dwelling’s energy efficiency or by changing their behavior.

On the other hand, the latest version of the Energy Poverty Barometer indicates that 21% of Belgian households are affected by energy poverty. Previous analyses by Sia Partners suggest that, on average, poorer households spend less on energy consumption but that these expenses account for a larger share of their revenues.

Energy poverty remains a root cause of abnormally high death rate (Excess Winter Mortality) as it significantly increases the risk of contracting various diseases. It also leads to psychological disorders and prevents individuals from living a decent life. Nonetheless, energy-poor households lack the necessary financial means to improve their situation by themselves.

Since these households tend to consume less electricity (on average), progressive tariffs have the theoretical potential to address part of the issue.

 

Concept and implementations of progressive tariffs

The conventional electricity tariffs are comprised of a fixed and a variable part. Hence, they are degressive per se: the larger the household’s consumption, the lower the electricity price per kilowatt-hour (kWh). Conversely, progressive tariffs aim at tying the increase in consumption to an increase in price. As highlighted previously, this can potentially address the issues of Rational Use of Energy and energy poverty.

Many countries have thus implemented progressive tariffs for these environmental and social reasons. This is the case for the State of California and Japan, for instance, where such tariffs have been in place since the 1970’s.

 

Progressive tariffs in Belgium

Progressive tariffs for residential consumers have also been considered in Belgium (Figure 1). While discussions are ongoing in Brussels, the lessons learned from Flanders and Wallonia highlight the potential pitfalls such measure can face.

In Flanders, since 1999, a “free” quantity of electricity (gratis hoeveelheid) is offered to every household. This quantity has been linked to the household size for 12 years. In April 2015, the new regional government (N-VA, CD&V & Open Vld) decided to end the measure as from 2016, arguing that it had failed to reach its social and environmental goals.

In Wallonia, a similar measure – taking household size into account – (Tarification progressive, solidaire et familiale) was decided in January 2014.  However, in September 2015, the new majority (PS-cdh) delayed its introduction to 2017 due to operational difficulties linked to the selected methodology.

In Brussels, the introduction of progressive tariffs at the 2018 horizon was voted in May 2014. In March 2015, the Energy Minister asked the regulator Brugel to analyze the consequences of this implementation.

 

Figure 1 – Comparative analysis of progressive tariffs in Belgium

Sia Partners has accompanied both Walloon and Brussels authorities in studying these consequences of the progressive tariffs. It also carried out related assignments in France. Our latest study can be found on Brugel’s website.

This expertise – built in different contexts and with different models – clearly shows that the typical pitfalls belong to two main categories, both sensitive to the selected model and to its parameters:

  • Expected benefits: the relationship between the measure and the actual effect on energy prices is not always straightforward. Nor is the link between these prices and the expected social and environmental benefits ;
  • Operational implementation: the theoretical appeal of the measure does not outshine its practical consequences as it affects most of the stakeholders (suppliers, grid operators and regulators).

 

Conclusion

Progressive tariffs are an appealing concept, able to address the challenges of both Rational Use of Energy and energy poverty. Past experiences in different regions and countries have however highlighted the potential pitfalls of such measure.

Sia Partners recommends to acknowledge these barriers and consider the various possible models – as well as their necessary complements. These are the first two steps of a successful implementation strategy that secures the expected benefits and minimizes the operational difficulties.

 

Copyright © 2015 Sia Partners

To download the full article in PDF, click here

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