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Progressive energy tariffs in France: an inefficient and unfair response to fuel poverty and energy efficiency goals

December 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.

Capture d’écran 2012-12-19 à 17.31.29

Inefficiency
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.

Inequality
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.

Capture d’écran 2012-12-19 à 18.16.19

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.
Capture d’écran 2012-12-19 à 18.18.10

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

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3 Responses to “Progressive energy tariffs in France: an inefficient and unfair response to fuel poverty and energy efficiency goals”

  1. Thierry Badouard Says:

    Talking about progressive tariffs, or increasing block tariffs / inverted block rates as they are usually called in the scientific literature, is complex.
    First, it is useful to mention that the French law in process to be adopted “aims to tend toward an energy sufficient economy”. It does not deal with the peak load issue, although it is particularly problematic in France.
    Second, saying that Belgium and Germany have given up in implementing such a system is not exact. Let’s be precise on these two points. Germany has not adopted the so called progressive tariffs because the main goal pursued in the survey commended by the German government was to eradicate fuel poverty. The report has concluded that it was not the right tool to do so. It didn’t conclude on its effective efficiency to deal with environmental issues and/or social impact of such a model if associated with others tools to fight fuel poverty. Belgium, is still working on the project but it is facing issues in implementing it because of conflicts between federal and regional competences/legislation, not because of the alleged inefficiency of the system.
    Third, explaining that this system fit well with California, Italy and Japan because they are countries with a large number of air-conditioning systems is solely partly right because the need for fresh air is strong there. So, I am doubtful about the citizens’ willingness to reduce their air-conditioning in these countries so they need fresh-air. In addition, by mentioning only theses three countries, the author forgets that more than 90 others countries around the world are currently using this model tariffs and sometimes in countries with cold weather (Argentina, Canada, Mongolia…). More investigations about the consumers’ willingness to reduce their heating/cooling system have to be carried out to draw some kind of conclusions.
    Regarding the signal to which respond customers,, Ito has indeed shown that customers respond to average tariffs rather than marginal tariffs, mainly because of their bounded rationality. However, in the case of France, where linear tariffs go along with basic tariffs, it results in a declining block tariffs structure (kWh are getting cheaper as the energy consumption increases). Therefore, the implementation of increasing block tariffs structure will result in an inclining average tariffs curve rather than declining as it is currently the case (see Ito’s research paper mentioned in the article above, chart page 49).
    Regarding the relevance of the tariff grid at it is written in the law proposal, I do agree with the author to say that the incentives are way too much insufficient. The household budget survey led by the French Institute of Statistics (INSEE) in 2006, clearly show that there is positive correlation between household revenue to energy spending in accommodation. This positive correlation is accepted is all the economic literature. The survey shows that, the richer the household is, the higher his energy bill, so his energy consumption. Therefore, applying an increasing block tariffs structure will result in lowering the poorest household energy bill and increasing the richest’ (See Borenstein 2011; Lin & Jiang 2012).
    The 2006 INSEE survey also shows that household revenue portion dedicated to energy spending is almost twofold higher for the first quintile than for the last one. We conclude that the price-elasticity is higher for poor households than for rich ones because the impact of any increase in energy prices is higher for them.
    The combination of the positive correlation previously mentioned with the price-elasticity through the various populations classes encourage to have a tariffs models much more inclined that the French is as it is currently written, even if we don’t know yet the final version of it (the graph shown in the article is taking into account the extreme limits of the tariffs grid of the law proposal although we don’t know if it will be applied in such a way). Specially, to reach the energy sufficiency goals mentioned by the French law, malus and bonus level should not be symmetric as they are in the law proposal. Rather, the bonus (tariff reduction for the first energy consumption blocks) should be much lower to the malus (tariffs increase for the highest energy consumption blocks) to incentivize to energy conservation. The price-signal must particularly focus on the higher blocks of the tariffs model because it corresponds to the energy consumption level of the richest households, which are the people with access to banking loans that are necessary to invest in energy efficiency.
    You can find much more detailled information on increasing block tariffs for electricity on my blog: http://tarification-progressive-de-lenergie.com/. Unfortunately, it is in French but you can google translate it quite easily.
    Th.

  2. François Lévêque Says:

    I am not convinced about your explanation about the price-elasticity of poor/rich consumers. Indeed, rich people pay more for their heating essentially because they have bigger houses! The Belgian regulator gave an extensive bibliographical study about price-elasticity for electricity. All studies agree it is higher (in absolute value) for rich consumers.
    The Graph in our post corresponds to figures given during the discussion at the National Assembly. It corresponds to a family composed of 2 parents with a child above 15 or 2 young children. The only type of energy used is electricity. A single person will have a twice smaller baseline.
    Concerning air conditioning, we cannot prove our conclusion. It is just an engineer’s intuition, but we still believe it is worth raising the point.
    Concerning progressive energy tariffs, there is a big misunderstanding about the “positive correlation between revenue and consumption”. This correlation is just true IN AVERAGE. There is certainly a high dispersion for each revenue quintile. Unfortunately, we do not have this information. From an economic point of view, the great disparity in homes’ energy efficiency should result in a great disparity in energy bills for each revenue class. Hence, a lot of poor people pay more than a lot of rich people for their energy, even if all the poor pay in average less than all the rich together. You lose a great deal of information if you consider the average value only and not the repartition! Consult following link in French: http://www.developpement-durable.gouv.fr/La-RT2012-un-saut-energetique-pour.html

    The authors

  3. energieleverancier kiezen Says:

    I think it’s good that the French government thinks about saving energy for energy efficiency goals.But like you said: with progressive tariffs its not working. So why not investing now in green energy, while searching for better alternatives?

    With using more green energy, the pollution will go down. Yes, still there is the efficiency problem. But I think it’s a good start.

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