It's a Tax pure and simple - and It's a Bad Tax. The Recession Diaries - August 10th

Do not be confused. The Government’s recently announced increase in electricity prices through the Public Service Obligation levy (PSO) is a tax, pure and simple. And it’s a very bad tax.

The PSO levy subsidises electricity suppliers who are required to purchase electricity from renewable and peat-generated sources. This is because the costs of electricity from those sources are ‘uncompetitive’. In other words, the cost of electricity generated from these sources are higher than other sources and, if it was left to the ‘market’, no on would buy their high-priced product. The State requires suppliers to buy these products and, in return, they are compensated. The Commission on Energy Regulation has assessed that the cost of the subsidy is approximately €157 million.

In principle, there is nothing wrong with subsidising producers of renewable and peat-generated electricity. There are sound social, environmental and long-term economic reasons (which the market can’t accommodate) for subsidising these activities. The problem is the manner of the subsidy.

The state can do one of two things (or some variant):

• It can directly subsidise the producers of renewable and peat-generated electricity or the energy suppliers who are required to purchase that electricity out of general taxation
• It can impose a tax on all electricity consumers and distribute the proceeds to the producers or the suppliers.

The difference is key. In the first option, companies are directly subsidised from the Exchequer. This increases current expenditure which has to be met by increased general taxation, borrowing or cutting back on other spending. But it doesn’t affect the price.

In the second, a tax is levied on all consumers – in other words, the subsidy is paid through higher prices. But it doesn’t directly affect the Exchequer.

What the Government is doing transferring the cost of the subsidy from the Exchequer to the consumer and the wider economy through higher energy costs.

The levy is regressive. If the subsidy was paid out of general taxation, this would mean that, by and large, people with taxable incomes would pay (you could always impose a special levy on high incomes to pay for the €157 million but let’s not get all Leveler about this).

However, the levy will be paid by everyone, regardless of income or employment status – from the elderly pensioner living alone to high income households, from profitable companies to unprofitable companies. And this will be regressive as low-income households pay a higher proportion of their income on electricity than higher income households according to the latest CSO data.

The lowest income households – the 1st and 2nd deciles – pay three to four times more of the disposable income on electricity than the highest or 10th decile, households. So it’s no surprise that a levy on electricity prices will be highly regressive. As I’m using numbers from the CSO 2005 survey the percentages will have changed but the ratios between low and high incomes will stay roughly the same.

The PSO levy will be regressive. It will impact on low-income households five times harder than on higher income groups. This is socially unjust.

It is also economically irrational. As pointed out in the previous post, domestic demand in the economy remains weak (‘anaemic’ is the word the ESRI used). The last thing – the very last thing – you do is to fleece low and average income earners who are more likely to spend. High income groups will easily absorb the minuscule impact on their incomes; those on lower incomes will compensate by reducing spending in other areas.

This is not an argument against public subsidy to renewable energy producers. If anything, there might be an argument for increasing that subsidy.

The problem is the way the subsidy is being delivered. What the government is doing will be bad for most households, it will be bad for the economy, it will be bad for those non-energy businesses who are reliant upon consumer spending, it will be bad for fuel poverty.

You couldn’t make this stuff up.

Comments

[John Goodwillie]

All price increases are regressive, unless it's a commodity that the poor don't buy. So you could make a similar argument for subsidising bread or washing-powder, if those prices were likely to increase.

The argument for putting in the subsidy for renewable energy as a price rise is that the price of all fuel will go up in the future, and people should be given as much incentive as possible for finding ways of using less energy.

[CMK]

John, you're not addressing what I think is the point of this article. That the levy (tax) is essentially discretionary and that, yet again, the government has used it's discretion to hit low and middle income earners and dressed it up as an eco-friendly advance.

Also, you're correct that all price rises are regressive, but there's a, ya' know, recession and all, going on. Nearly half a million unemployed, many more at risk of losing their jobs and pay cuts entrenched in the public service. In addition, with tens of thousands in mortgage arrears during the lowest interest rate regime in decades, you'd think any government conscious of social and economic reality would defer the levy until such time as the economy and employment stabilised. Households are going to need some 'fat' in their budgets when interest rates start to rise, and all the evidence suggests there's precious little left in most household budgets to absord increases in administered prices, or indeed other prices. That the FF/GP coalition don't exercise their discretion to assist households, re-iterates my previous point: this government could care less and will push any amount of regressive taxes (water tax soon) onto low and middle income workers, regardless of the consequences. Consequences, that Michael, and others, have started to identify and track.

The once honourable Green Party appear to have no qualms about this policy direction, once it's dressed up as environmentallhy 'progressive'. There really does seem to be nothing that the Greens won't contemplate to stay in office.

[James Conran]

What's the case is for subsidising peat? As for renewable - the carbon tax is surely already a subsidy.

[Radler]

"The state can do one of two things ..."

Well there's at least one other thing that the govt could do (in combination with the other approaches perhaps).

And that is forcing down costs in the ESB and using the savings to part-fund the renewable PSOs.

The labour aristocrats in Poolbeg power station pulling in 140k a year on average could I'm sure afford to take the hit much more that the ordinary working stiff.

[Michael Taft]

While I intend to deal with John's comments in a separate post next week (he raises important issue over to what extent we can rely on price mechanisms to achieve desirable social and economic results, I will comment on Radler's contribution.

Radler, you may not realise that the ESB does have control over its prices. The price is set by the CER and the reason the ESB tariff is so set high is to ensur that private companies can get a return on their investment. If the ESB were allowed to set its own price, they have stated they would reduce it. But if they did this, it would mean they would be too competitive and drive private companies out of the market. This is not something the Government will allow to happen.

Therefore, all the workers in the ESB could work for free and it wouldn't have anything to do with ESB prices - since the price is set in relation to private companies ROI.

It might also interest you to know Radler that labour costs in the Irish utility sector is one of the lowest in comparison with other EU countries. Misinformation campaigns (like the €140,000 per year figure you use) ensures that we don't get this type of factual information.

[Radler]

Michael,

Note I didn't advocate any change to the tariff charged by ESB. Rather I suggested re-directing some of ESB's profligate spending to fund the renewable PSO.

The fact that the regulator controls prices charged to customers is not relevant in this case.

And on your misinformation point, I was referring to the 2006 study carried out by Deloitte consulatants for the government:

http://www.rte.ie/business/2006/1002/esb.html

[Eddie O' Connor]

This really is a bad time for this nonsense.

Firstly we have an electricity market of approximately 5000megawatts. Wind only blows 30% of the time in a way that will drive wind turbines and generate electricity. Problem is we need electricity 100% of the time!

That means we need 5000mw available (maybe 6000mw if you allow for maintainence/breakdowns etc)through conventional - and yes that means fossil fuels - sources 24/7 - 356! for security of supply reasons. But we're installing 5000mw of wind! And guess what? When the wind does blow that 30% of the time the market dictates that its the wind energy that must be purchased by suppliers in the electircity pool market system regardless of price!. Its lunacy.

Yes it means we can all go around thinking we're saving the planet. But we,re not making any difference and we're paying through the nose for it while in fact all we are doing is installing expensive and subsidised wind that does not reduce by one kilowatt, never mind a megawatt, the energy we need from conventional sources.......or, put another way, we're producing and paying for 11000mw of energy in a 5-6mw market at a time of deep recession.

What was that you were saying Michael? Regressive? The word doesn't begin to describe this madness!

[Eddie O' Connor]

Oh, and Radler......you really must keep up to date. The deloitte report you paste - apart from costing 2.5m euro to produce - has been found to be inaccurate and unusable even by Government. For example, on Poolbeg, the staff numbers in Poolbeg have been reduced in the last 3 years from 260 to 38. Thats almost a 90% cut in staff costs in the medias pet powerstation in the 3 years since your much loved report was published. I'm not surprised the media havn't told you that, but the information is available. A 90% cut in staff costs in 3 years and electrickity prices continue to jump up and up and up..........

[Fergal]

Radler,
Are you in favour of a maximum wage?Or are you just against certain people earning alot of money?What's your cut off point?How would you police a minimum wage in the private sector?

[Michael Taft]

Eddie - thanks for that welcome dose of common sense. Though I didn't get into the lunacy of the electricity market per se as I was focusing on the PSO levy (the ATGWU titled their report on the electricity market as 'Alice in Wonderland') your comments hit the nail. What many don't realise (or are not being told) is that, apart from the simple fact that the ESB is not allowed to compete - and therefore lower prices - is that being an island market with little interconnection to other markets severely limits our ability to rely on renewable energy in its current state. This is not to oppose a move to renewable technology. It's just that Government policy is predicated on a model that is substantially different from what we have here. On the continent, there is greater reliance on renewables without the need for 100% conventional back-up because of inter-connection (you buy just-in-time electricity from some other country or region). That's not an option here.

What would people think if they knew that their wind energy supplier is supported not only by kilo-for-kilo fossil fuel energy, but even nuclear energy via the Scottish connection.

I'm afraid, Eddie, even madness doesn't quite capture. We need an economic Kafka to do it justice.

And, Radler, you might be interested in this post I did at the time of the Deloitte report's publication: http://notesonthefront.typepad.com/politicaleconomy/2006/11/electricity_pri.html

[Radler]

@Eddie

For example, on Poolbeg, the staff numbers in Poolbeg have been reduced in the last 3 years from 260 to 38. Thats almost a 90% cut in staff costs

Of course staff numbers have been reduced, the darn thing is being decommissioned!

Its hardly a mark of uber-efficiency to redeploy staff from a moribund facility, now is it?

Well maybe it, by ESB standards ... this being the company that pays staff to sit around moth-balled stations playing cards.

[Eddie O' Connor]

ok Radler,

your mask has slipped. You're one of these anti-ESB - probably anti state everything - reaganites the SINDO loves so much. staff 'redeployed'? Eh....I don't think so......a company who has reduced its staff numbers from 13000 to 5800 in a growing industry doesn't smack of too much 'redeployment' to me. Or perhaps you would rather it closed completely and all the employees were put on the dole to take from the exchequer every week rather than paying into it? And the private sector can do a better job I suppose? yes, like they did in the financial/banking sector I suppose, or in the energy sector with companies like ENRON!

Try dealing with some facts rather than espousing a failed right wing ideology which has destroyed the world economy

[Radler]

Ok Eddie,

5800 employees you say?

How come in the most recent ESB annual report, the total number of employees is put at 7870, in excess of a third more than you claim.

And how far back in time do we have to go to when ESB last employed 13000 workers?

[Eddie O' Connor]

the most recent report is just published I believe in the last week and ESB have shed thousands of jobs in recent years, many in teh last year due to a voluntary retirement package, the sale of power plants to a Spanish electricity company and the closure of the old Poolbeg Station. I read that in the recent pension ballot 5200 ballot papers were issued!

ESB employed 13000 people when Charlie Haughey demanded the state companies employ more - maybe its called a job stimulus - in the last recession. Since then numbers have fallen fallen fallen, and continue to do so.

Looking on the visited on us by the PRIVATE sector financial and bankings blocks thats why unemployment is so high. Maybe we should just close down all services and put everybodu on the dole, that will satisfy the right wing idealogues I suppose