ESRI Research Bulletin

Is there a Fairer Way to Finance Energy Subsidies?

ESRI Research Bulletin Articles provide short summaries of work published by ESRI researchers and overviews of thematic areas covered by ESRI programmes of research. Bulletin Articles are designed to be easily accessible to a wide readership. A reference or references to the full publication is included at the start of each Bulletin article.

June 23, 2015
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Along with environmental impacts, renewable energy affects societal welfare through subsidy costs and electricity price changes. Identifying the distribution of both these impacts is of increasing importance as deployment grows. Subsidies are commonly financed by consumption-based Public Service Obligation (PSO) levies. We compare the distributional impact of different PSO levy structures using the example of a market with high and rising renewables penetration: Ireland. A flat-rate charge is more regressive than a unit-based charge. The regressive impacts of a fixed per-unit charge are greater for a subgroup of heavy electricity users, some with low incomes. Incremental Block Pricing (IBP) exaggerates these effects. A hybrid fixed/variable structure reduces regressivity for heavy users but lessens overall regressivity reduction. Redistributive mechanisms structured like Ireland's Household Benefits Package imperfectly target poorer households, with income and household size-based measures more effective. Including electricity price reductions due to renewables deployment, fixed per-unit charges have a neutral effect while flat charges redistribute some burden from rich to poor. IBP shifts cost to heavy electricity users, predominantly large households. IBP yields a negative net burden for most households across all income groups. These findings are generalised to inform equitable renewable energy subsidy mechanisms both in Ireland and elsewhere.