Progressive energy tariffs in France: an inefficient and unfair response to fuel poverty and energy efficiency goalsDecember 19th, 2012 by François Lévêque, Ecole des mines de Paris
The French Lower House passed a law last October introducing progressive tariffs for all energies distributed through a network: natural gas, electricity and heat. Though it was rejected by the Senate, the government is still supporting it. Introducing progressive tariffs for energy was one of the 60 promises of French President Hollande during his campaign. The law aims at reducing residential energy consumption and fighting fuel poverty. But the system proposed by the Lower House is extremely unlikely to reach these two goals.
As the bill is designed, a baseline is calculated for each household in France using numerous parameters: geographical localization, number of persons, type of heating, age, use of electric vehicle or medical appliances, etc. The baseline is calculated for each type of network energy the household uses. It is supposed to correspond to basic energy needs. In addition to the normal price of energy, a bonus or a malus is granted according to the following rule. Each kilowatt-hour consumed under the baseline is rewarded by a bonus. Each kilowatt-hour above the baseline is penalized by a malus, which becomes a super-malus above 150 % of the baseline.
The baseline will vary a lot between different customers and all the parameters will be set by the government. During a debate at the National Assembly (i.e., the French Lower House), the political majority gave preliminary figures for electricity: The baseline would be 4 MWh per year per consumer unit (i.e., the first adult of the household counts for 1 consumer unit, other adults count for 0.5 unit and children for 0.3.) for a household using electric heating and 1.5 MWh per year per consumer unit for the others households to cover the basic specific electricity needs (e.g., lightning, electronic devices, domestic electrical appliances).
Graph 1 plots the general shape of the reward that would be received by a household as a function of consumption. The baseline is assumed to be 8 MWh per year. It is also assumed that the household only uses electricity. The abscissa represents the total year electricity consumption of the household. The ordinate represents the bonus/malus on the electricity bill. Positive figures represent a reward received by the household and negative figures represent a penalty.
Progressive tariffs are not an effective tool to foster energy savings. Theoretically, the malus will increase the marginal cost of energy and so reduce consumption for the households. But various types of consumers have a low price-elasticity and may not save as much energy as expected. The incentive is said to be around 50 € a year (about 4 % of the average residential energy expenses of a household), so it will certainly not affect high-income consumers. Moderate income households who live in bad-insulating houses and already save as much energy as possible will probably not be able to make any supplementary efforts. In addition, the bonus/malus is far too low to stimulate thermal refurbishment. California, Italy and Japan adopted progressive tariffs for electricity. It may be more efficient in those countries because they use a lot of electricity for air conditioning, for which demand is much more elastic. On the contrary, countries like Belgium and Germany abandoned progressive tariffs.
Small consumers will be granted a reward. They will be incentivize to increase their energy consumption because the price of energy will decrease for them. This rebound effect is difficult to estimate because it depends on their response to prices. If consumers are economically rationale, they will consider marginal cost only. So the rebound effect will be limited to a few people consuming less than the baseline. But if consumers consider average cost, energy consumption will increase for all households whose bonus exceeds their malus. A Californian study performed in California supports the second hypothesis, which means a higher rebound effect. In fact, consumers do not seem to act rationally because they do not understand their bills and they pay it once or twice a year, so a long time after consuming. To conclude, the negative effects of the bonus/malus can possibly overcome the positive effects and the system may result in an overall increase in residential energy consumption.
As far as electricity is concerned, inefficiency is even more severe. Production costs for electricity do not depend on total consumption but on the instantaneous power required by the grid. In France, the higher the power needed, the more expensive and polluting marginal production plants are. Therefore, efficient tariffs should reflect the seasonal, daily and hourly variations of production costs for both economic and ecological reasons. So, dynamic tariffs should be preferred to universal progressive tariffs.
The government will unlikely be able to financially balance the system. It is incredibly complex and requires a huge data collection and cross-checking. Administrative costs will explode and frauds will be easy. A high malus or a low baseline will be necessary to balance the system. Governments will surely be reluctant to increase energy prices and the system will accumulate an incredible debt at the expense of energy providers. That is already the case for two similar systems: The “CSPE” (a contribution financing public services and renewable subsidies related with electricity) and the bonus-malus for cars (a tax incentivizing the purchasing of less polluting vehicles).
In a nutshell, the bill is environmentally, economically and financially inefficient.
The bill will create more inequalities instead of reducing them. Why does it plan to reward wealthy households living in a new and well-insulated house? They already enjoy low energy bills and a good comfort. Giving them a bonus for their low consumption is not especially fair…. Moreover, it is also environmentally unsound because of the rebound effect mentioned above. As a matter of fact, residential energy consumption is not well correlated with revenues, contrary to the assumption of the National Assembly. Only specific electricity needs are actually related to income. Therefore, progressive tariffs for electricity (and not for gas or heat networks) are adapted to countries where electric heating is not significant. But since a third of French homes are heated with electricity, progressive tariffs in France must include heating. That is the reason why the French system is so unfair. Indeed, heating represents 70 % of residential energy needs and it is poorly correlated to revenues. Brand new low consumption homes consume approximately five times less energy per square meter than homes built before 1975, which represent two third of all residences. So energy needs vary a lot especially for low income households. Many of them will have to pay a high malus.
Tables 1 to 3 give some insights of the French residential energy consumption. They show that residential energy is extremely heterogeneous. Some sources of energy are preferred for collective heating, others for insulated houses. Each house was built according to the fashion of its time which results in a great diversity. Table 4 shows that residential energy is a heavier burden for the poorest.
The bill does not significantly improve the situation for people suffering from fuel poverty. Admittedly, current social tariffs for gas and electricity are unfair and insufficient. Social tariffs for electricity only cover specific electricity and they are limited to approximately 100 € for a four-person household. Gas consumers can also benefit from social tariffs for gas to cover their heating expenditures. They are also limited to 150 € for a four-person household, far below the actual needs. If the bill is accepted, low-income households will be granted a higher bonus and a lower malus and super-malus. However, the baseline should remain the same for them. The new system will give a higher aid to people using electric heating. However, standalone heating systems (fuel oil, LPG, wood) will still not be considered. Moreover, people most suffering from fuel poverty will receive a lower aid. Indeed, the bonus reaches its maximum if consumption equals the baseline. After that point, it slowly decreases. Therefore, poor people leaving in bad- insulated homes will be disadvantaged even if their bills are higher and their comfort lower. In addition, they cannot afford insulation works or they are not even allowed to undertake them because they do not own their homes. This is especially unfair. The energy check combined with an unlimited discount on energy price is a much better way to fight fuel poverty. The energy check addresses people with a standalone heating system and the discount addresses people using gas or electricity. It gives an unlimited aid to people in extreme fuel poverty.
Unfair and inefficient, the National Assembly’s bill should be abandoned. It aims at solving two very different problems with one single instrument: energy efficiency and fuel poverty. Hence, it is doomed to fail. Two specific instruments should rather be considered. The Senate proposed a simplified system with a malus only to foster energy savings. It is an interesting proposition even though smart meters and dynamic tariffs are more promising for the future. More effective specific solutions to fight fuel poverty, like the energy check, also exist.
François Lévêque, Mines ParisTech and Bastien Poubeau, Ecole Polytechnique