Everyone should be guaranteed a minimum amount of energy, either free or at below-market rates. This is the principle behind ‘Universal Basic Energy’. By redistributing costs from lower to higher income groups It has the potential to significantly reduce fuel poverty while incentivising energy efficient investment among groups who can afford it.
The Government, having resisted price controls to date, appear to be curious. The Business Post reports:
‘The Government has tasked the Economic and Social Research Institute with modelling possible price guarantees which, in theory, would see household and some businesses allowed a portion of their average monthly energy consumption at a guaranteed price per unit of energy. Anything exceeding the allowed level would be charged at the market rate.’
There are any number of ways this could work. The New Economics Foundation has done good work on Universal Basic Energy. How would this work in Ireland?
- The Utilities Regulator estimates that average annual consumption of electricity per household is 4,200 kWh (kilowatts per hour). The following assumes that low consumption is related to income-poorer households consume less electricity than higher-income households (smaller homes, fewer appliances, etc.).
- In the absence of a decile breakdown of energy consumption in Ireland (i.e. how much energy is consumed by the lowest 10 percent, the next 10 percent, etc.) the following uses a UK breakdown. The standard price comes from Electricity Ireland via Bonkers.ie.
If 2,000 kWh – nearly half of the average consumption – were provided free to households, with the excess amount charged at the market rate so that energy retailers don’t lose out or require a state subsidy, the following estimates the gains and losses per decile. It should be emphasised that, given the patchy and missing data, this is for indicative purposes only.
Under this formulation, the price per kWh would rise from the current 43 cent per unit to 83 cent per unit – a near doubling. However, combined with the free allowance, the lowest income group could see their electricity cut by half, saving nearly €600 per year. At the highest end, electricity bills could rise by nearly €700, or 27 percent.
This would help meet the two criteria – providing relief to lower income groups while incentivising higher income groups to reduce electricity.
Using the SILC data for weekly income, electricity expenditure for the lowest 10 percent under the current tariff regime is approaching 10 percent of income, falling to less than 2 percent for the highest 10 percent. With a Universal Basic Energy Free Allowance, electricity costs fall to less than 5 percent for low-income households, with a slight increase at the highest end. In many respects, the free energy allowance would operate like the income tax system which applies a tax-free allowance, or credit, on earnings.
The above is just an exercise. The ESRI will have access to better consumption and price data, including distributional data. So the numbers and percentages above would change if consumption patterns are different, but the redistributive dynamic would be broadly similar. Were the state to subsidise the price, tariffs could be further reduced.
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There are any number of variations on this model. The free allowance could be reduced to 1,000 kWh (or even increased). Instead of a free allowance, it could be charged at below-market rates. For instance, the first 2,000 kWh could be charged at 10 cents or 20 cents, compared to the current 43 cents market rate. There are also other considerations.
- The standing charge: the inherently regressive flat-rate charge imposed on electricity consumers regardless of the amount they consume could be capped at a much lower rate (our Electricity Ireland tariff charges €278 per year). This could be reduced to €50, bringing significant relief to low-income groups.
- A European-style social tariff could be introduced, a means-tested programme that provides subsidies to low-income households to ensure that energy costs don’t exceed the fuel poverty benchmark. This would be helpful to low-income households that may require higher electricity consumption (e.g. households with all day occupancy due to age, disability, caring).
- A similar free allowance could be introduced for gas and heating oil consumers.
This programme could be introduced on a temporary basis, for the duration of the cost-of-living crisis (though Cliff Taylor argues that high energy prices are here to stay). However, it could also become a permanent feature to eliminate fuel poverty and incentivise investment in energy efficiencies.
Such a programme requires a substantial public intervention in price-setting mechanisms with an activist Utilities Regulator to ensure there is no profit-gouging. If energy is a ‘public good’, then the pricing structure is not something to be left exclusively to market operators.
Universal Basic Energy is a example of how markets – in this instance, energy retail markets – can be reformed to achieve social and environmental goals, becoming more democratically accountable and socially fit-for-purpose.
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