Can Energy Policy Be Social


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Can Energy Policy Be Social

  1. 1. Can Energy Policy be Social? Rudi Hakvoort Delft University of Technology & D-Cision B.V.
  2. 2. 2 Overview  Introduction  Economic theory  Guidelines for social tariffs  Suggested approach for a subsidy programme
  4. 4. 4 The challenge of oil price development...
  5. 5. 5 Dependence on the world market for oil  These are external costs, which need to be paid for A country needs to pay for oil on the international market, irrespective of how these costs are allocated nationally  Governments may choose how to allocate these costs:  consumers  government (by subsidies)  any remaining costs must be absorbed by the utilities
  6. 6. 6 Who pays for oil ??? Government Utilities Consumers
  7. 7. 7 Objectives of energy policy Energy policy reflects the manner a given (often governmental) entity has decided to address issues of energy production, distribution and consumption.  The attributes of energy policy may include legislation, international treaties, incentives to investment, guidelines for energy conservation, taxation and other public policy techniques.  Frequently, the dominant issue of energy policy is the risk of supply- demand mismatch. Current energy policies also address environmental issues.  Some governments state explicit energy policy, but, declared or not, each government practices some type of energy policy.
  8. 8. 8 Objectives of social policy Social policy relates to guidelines for the changing, maintenance or creation of living conditions that are conducive to human welfare.  Social policy is that part of public policy that has to do with social issues such as public access to social programs and to essential services.  Social policy aims to improve human welfare and to meet human needs for education, health, housing, energy and social security. In an academic environment, social policy refers to the study of the welfare state and the range of responses to social need.
  9. 9. 9 Is there some objective truth?
  11. 11. 11 Energy consumption is influenced by: Long term Short term Consumer √  preferences Structure of the √  economy √  Available fuels Available √  technology √ √ Energy price
  12. 12. 12 The interplay between social policy and energy policy Energy consumption is directly influenced by the price Price Prijs Demand curve Vraagcurve Hoeveelheid Quantity Subsidies to consumers affect the energy price experienced by consumers, which affects energy consumption.
  13. 13. 13 Subsidies have associated costs Obvious:  Someone has to pay for the amount subsidized Less obvious:  Disturbed price-signals lead to ‘efficiency costs’  economic scarcity is not reflected in the price leading to suboptimal allocation of resources  costs are difficult to quantify, but do exist!
  14. 14. 14 The equilibrium situation at P* PRICE supply curve P* demand curve Q* QUANTITY
  15. 15. 15 After a subsidy, the consumer feels Pconsumption PRICE supply curve Pproduction P* demand Psubsidy curve Q* Qsubsidy QUANTITY
  16. 16. 16 The money transfer effected by the subsidy PRICE supply curve Pproduction For these units, the value for consumers P* is less than the cost of production demand Pconsumption curve Q* Qsubsidy QUANTITY
  17. 17. 17 However, at the cost of a decrease of welfare PRICE supply curve Pproduction efficiency loss By paying the subsidy, the government ‘buys’ economic surplus for consumers P* and producers at a too high price! demand Pconsumption curve Q* Qsubsidy QUANTITY
  18. 18. 18 PLEASE NOTE!  The consumers pay for energy which has less value than the total amount paid for it (directly and indirectly).  In the end, the cost of the too expensive units produced are paid by the consumers themselves, as subsidies are generally paid for from the treasury.  This is especially true when subsidies are allocated indifferently to all consumers.  If the beneficiaries of the subsidies are a limited group, the evaluation is more complex: the cost of the efficiency loss are socialised, however counterbalanced by the benefits of having more universal access to the energy supply. Subsidies are an efficient mechanism to reduce welfare!
  19. 19. 19 Inventory of negative effects of subsidies Too low prices result in:  ... reduction of economic efficiency by consuming energy of which the marginal benefit is lower than the reference price.  ... reduction of incentives for producers to become more efficient and lower their price.  ... reduction of the remunerativeness of alternative (e.g. renewable) energy production. Too high consumption results in:  ... a higher demand for crude oil which, in turn, leads to increased payments to foreign parties.  ... a reduced incentive for energy conservation.  ... higher (environmentally detrimental) emissions.
  20. 20. 20 Look at it from a different perspective...
  21. 21. 21 In principle, all costs for the energy supply should be charged to the consumers, presuming the costs are reasonable... Government party Consumer = ‘any consuming energy’ In practice, tarification of energy for households is a sensitive issue Utilities Consumers
  22. 22. 22 However, the government may contribute to the costs of energy (by providing subsidies) Government Subsidies financed from taxes are indirectly paid by consumers. Financing from foreign assistance is associated with opportunity cost Utilities Consumers
  23. 23. 23 Any difference (COSTS minus TARIFFS minus SUBSIDIES) must be absorbed by the utilities If costs are not recovered, utility’s Government revenues will decrease Lower rate of return may affect reven- ues for the government (as share- Subsidies holder) and interest on future loans Costs Tariffs Utilities Consumers
  25. 25. 26 Present experience with subsidies  In many countries (esp. those with energy markets), governments conclude that some form of social policy for energy support is desirable.  It is assumed that society as a whole benefits from universal access to the energy supply.  However, success of these programmes is not obvious.  However, due to the environmental effects (resulting from the high energy consumption) and the high economic costs, many programmes are presently reviewed.
  26. 26. 27 ‘Good subsidies’ A ‘good subsidy’ is one that enhances access to modern energy or has a positive impact on the environment, while sustaining incentives for efficient delivery and consumption.  A subsidy should actually lead to an increased accessibility of the energy supply  A subsidy should guarantee efficient distribution (i.e. reduction of illegal consumption) and consumption (i.e. efficient use of energy)
  27. 27. 28 1. Subsidies should be focused* Energy subsidies should be received only by those targeted to receive them. Often, subsidies are being received by people who don’t need them, which provides wrong economic incentives and increase the cost of the subsidy programme *UNEP and OECD/IEA, Reforming Energy Subsidies, United Nations Publication, 200, ISBN 92-807-2208-5, p.21–23.
  28. 28. 29 2. Subsidies should be efficient Energy subsidies should not counter the incentives to producers and consumers to produce/consume energy efficiently. Subsidies should be high enough to guarantee access to the energy supply, but nevertheless such that the consumers still feel the cost of energy. E.g. subsiding a relative part of the energy bill is preferred above capping of tariffs (which makes consumers insensitive to high oil prices on the world market).
  29. 29. 30 3. Subsidies should be economically sound Programmes for energy subsidies should be justified by a sound analysis of its associated costs and benefits. It is advisable that governments make an inventory of all economic, social and environmental costs related to a subsidy before embarking on such a route. Periodically, such an analysis needs to be revisited, as time may change certain assumptions.
  30. 30. 31 4. Subsidies should be practical The total cost of the subsidies should be affordable to the government and the administration should not be too costly. Sometimes, practical limits should be taken into account, e.g. the total amount of money available for subsidies. Also, the administrative cost of the subsidy programme (including monitoring the effect of the subsidy and prevention of abuse) should be limited.
  31. 31. 32 5. Subsidies should be transparent Information on the total amount involved in a subsidy programme and the parties benefiting from it needs to be transparent. In order to prevent abuse and for justification of resources, all financial transactions within the subsidy programme should be transparent and controllable.
  32. 32. 33 6. Subsidies should be limited in time Any subsidy programme should include provisions for ending the programme, in order to prevent perpetual dependence on subsidies and too high costs of the programme. Due to changing circumstances, the (economic) effects of any subsidy programme may change during time. As changes in the subsidy regime often incur a lot of social debate, it is best to include conditions on finalizing the programme automatically right from the start. This will also be an ‘insurance’ against skyrocketing of the costs of the programme.
  34. 34. 35 Why guidelines?  Before a subsidy programme is initiated, it is preferable to have a common understanding of the goals and principles  in order to manage the cost of the programme  in order to maximize the success of the programme  in order to minimize the negative effects of the programme
  35. 35. 36 Guideline I Apply a relative price criterion instead of an absolute price criterion. Do not cap the tariff to be paid by consumers, but design a subsidy programme that contributes a relative share of the energy cost. This will result in some residual demand elasticity. Furthermore, the magnitude of the subsidy could be related to some benchmark, e.g. the energy costs in comparable countries. ‘Consumers in your country should not be worse of than consumers in countries X, Y, Z...’ Such an approach allows fuel price changes to be passed on to the energy consumers.
  36. 36. 37 Guideline II Guarantee that the tariffs cover the cost of service, including a reasonable profit. On the long term, it is important that the utility cost are recovered from the tariffs. This is not only needed for having financial healthy companies, but also for being able to perform all necessary investment. Insufficient guarantees that investments will be remunerated, will deter foreign investors, which is bad on the long term for a country.
  37. 37. 38 Guideline III Pass on all costs related to fuel purchases to the end users (in the tariffs). Fuel costs are non-controllable (opex) costs (at least on a short term). Consumers should ‘feel’ the price signal, and adjust consumption accordingly.
  38. 38. 39 Guideline IV Support (only) those consumers who really need government support for paying their energy bill. If it is decided from a social policy perspective that some consumers need assistance in paying their energy bill, limit the subsidy programme to those people. The group of recipients should be carefully defined (and proper use of the subsidy should be easy to assess), and Guarantee that the programme will not result in increased consumption.
  39. 39. 40 Guideline V Socialize the costs of the energy subsidies among all consumers in a transparent way. Since all costs for subsidy programmes are being paid in the end by the consumers themselves, it is preferable to allocate these costs directly. Actually, subsidies are a re-allocation of income. Several approaches may be followed, e.g. direct inclusion in the energy bill (as a separate item). It is important that the costs of the subsidy programme are clear to all, both the beneficiaries and the people who pay for it.
  40. 40. 42 Discussion Thank you very much for your attention! Rudi Hakvoort Delft University of Technology & D-Cision B.V. E-mail: