Haar, Lawrence

English

An Empirical Analysis of the Fiscal Incidence of Renewable Energy Support in the European UnionSlides: THE FISCAL INCIDENCE OF RENEWABLE ENERGY IN THE EUIn liberalised energy markets, electricity from Renewable Energy (RE) using Solar PV and Wind Turbines requires financial support because the expected number of generation hours is insufficient to induce private investment. Such support has a direct cost from the additional expenditure over what would have been incurred had fossil fuel generation been used and indirect costs arising from the random and distributed nature of the RE output. Comparing European Union countries between 2007 and 2017, we find the pricing structure of retail electricity is regressive and correlated to reliance upon RE. Although initially, the direct and indirect costs of RE affects integrated utilities and aggregators, the ultimate burden largely falls upon lower income cohorts. Given policy objectives for RE, these finding are worrisome. Though as a society we may benefit from reducing dependence upon fossil fuels, the burden of this transition falls upon those with the lowest income, raising questions over fairness. Explaining the reasons for fiscal regressiveness leads to normative suggestions on how it may be redressed.<br/

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THE FISCAL INCIDENCE OF RENEWABLE ENERGY IN THE EUDr Lawrence HaarSenior Lecturer in Banking & FinanceCopyright Dr Lawrence HaarRENEWABLE ENERGY CHALLENGES• In liberalised power markets, electricity generated by Solar PV and Wind Turbines because of its high cost on a Levelized Basis requires support to induce private investment.• Compared to conventional dispatchable fossil fuel or nuclear, RE generation produces far less electricity (Solar PV 18%, On Shore Wind 25%, Off-Shore Wind 33%).• Rewarding RE investment is problematic because there are insufficient hours to generate adequate returns; hence subsidies or support is needed.Copyright Dr Lawrence HaarSUPPORTING RE• Various incentives are used to support RE including incentive tariffs, price premiums, tax credits and allowances.• RE is also given dispatch priority requiring conventional plants to reduce output whenever the sun shines or wind blows.• Dispatch priority creates balancing costs for both the Grid and Fossil Fuel plants• The distributed nature of RE generation requires additional investment in connections and transmission.• In some markets, dispatchable plants are given capacity payments to be available for both peak demand and if and when RE does not generate.• Across support schemes, we see in general a transference of risk from private investors to third parties.Copyright Dr Lawrence HaarCROSS EU ELECTRICITY PRICE COMPARISONS• The price of electricity comprises both fixed and variable cost components although for Renewables it is almost entirely the former.• The fixed and variable cost component of electricity prices vary greatly across the EU.• Such differences  in how electricity costs are met have distributional effects.Copyright Dr Lawrence HaarRE SUPPORT & EXPENDITURE• The issue of how we pay for supporting RE would not matter if the amounts involved were small but they are not.• Since 2007, we have seen a large increase in the percent contribution made by RE  to electricity consumption.Copyright Dr Lawrence HaarEU 28: HYPOTHETICAL ADDITIONAL EXPENDITURE ON RE 2016 (Assuming Wholesale Price of €45.00 and Blended Price of Solar PV (4%) and Wind (11%) of €172.77MWh of Electricity Consumption by Sectors 2016Green Energy Contribution MWh 2016 - 15%Additional Expenditure on Wind and Solar REIndustry 1,013,148,000 151,972,200 €         19,417,487,994 Transport 63,828,000 9,574,200 €           1,223,295,534 Households 1,707,301,000 256,095,150 €         32,721,277,316 Total 2,784,277,000 417,641,550 €         53,362,060,844 RE EXPENDITURE• Although EU Feed-in-Tariffs have been reduced for new investment, efforts by various governments to apply the revised tariff retrospectively have been largely unsuccessful.• To the extent that Industry, Business and Transport do not absorb the cost of supporting RE, an additional € 28 billion in costs on top of the €44 already faced by retail consumers must be met directly through the pricing structure or indirectly through burden shifting. • The magnitude of RE support across the EU, raises the question of whether retail consumers, households within a given country are treated equally Copyright Dr Lawrence HaarELECTRICITY PRICING: COMPONENTS• Wholesale costs refer to how much a supplier must pay for electricity to supply the retail customer. Such electricity may be priced through a contract with a generator.• Network charges concern the wires for transmission and distribution carrying electricity to homes and businesses.• Taxes and Levies involve all manner of social initiatives: Environmental and Social costs for such objectives as a saving energy, reducing emissions and encouraging the use of renewable energy.• In the UK, we see that network charges plus taxes and levies now represent nearly 43% and exceed the wholesale energy cost component.Copyright Dr Lawrence HaarCOMPONENTS OF RETAIL ELECTRICITY PRICES UK 2016  (Source:  Ofgem.gov.uk)Wholesale costs 33.52%Network costs 25.46%Environmental and social obligation costs17.45%Other direct costs 1.26%Operating costs 17.15%Supplier pre-tax margin 0.40%VAT 4.76%ELECTRICITY PRICES ACROSS THE EUNotwithstanding common grid codes and integration through connectors, atcountry level electricity prices paid by households vary greatly because ofdifferent tariff structures and the respective contributions from network charges,taxes and levies.Copyright Dr Lawrence HaarAVERAGE EU RETAIL (HOUSEHOLD) ELECTRICITY PRICES (EUROS/KWH)Even if Levies and Taxes are excluded from our calculations, we still observe large differences as shown in the table below:Copyright Dr Lawrence HaarAVERAGE EU RETAIL ELECTRICITY PRICES EUORS/KWhRetail Prices and Levies w/o Taxes & LeviesElectricity Prices excluding Taxes & LeviesElectricity Prices including Taxes & LeviesMinimum €0.08 €0.09Maximum €0.19 €0.30Average €0.12 €0.15Percent Difference Minimum to Maximum92% 119%PRICING OF ELECTRICITY BY HOUSEHOLD SIZEAnnual Household Electricity Consumption (KWh) (Eurostat Categories)Household Consumption LevelsMinimum MaximumFirst 0 1,000Second 1,000 2,499Third 2,500 4,999Fourth 5,000 14,999Fifth 15,000Copyright Dr Lawrence HaarTHE MORE ONE TAKES THE LESS ONE PAYSCopyright Dr Lawrence HaarNETWORK CHARGES BY CONSUMER CATEGORY, 2017Copyright Dr Lawrence HaarTAXES, FEES AND LEVIES BY CONSUMER CATEGORIES, 2017Copyright Dr Lawrence HaarRETAIL ELECTRICITY PRICES HAVE INCREASED MOST FOR THE SMALLEST CONSUMERSCopyright Dr Lawrence HaarSMALLEST HOUSEHOLDS PAY THE MOST FOR TAXES AND LEVIESCopyright Dr Lawrence HaarREGRESSIVE PRICING ACROSS THE EUCopyright Dr Lawrence HaarBelgium leads in regressiveness with the largest absolute difference of 34 pence between what the smallest versus largest consumers pay.EU WIDE REGRESSIVENESS STATISTICSEU + NORWAY COMPARISONS OF ENERGY PRICE COMPONENTS SMALLEST VS. LARGEST CONSUMERS PERCENT DIFFERENCE  2017Energy Costs Network charges TaxesMaximum 115% 203% 166%Average 42% 84% 49%Minimum 0% -2% -10%Copyright Dr Lawrence HaarRetail Electricity Pricing Structure (Source: Eurostat, 2018)REGRESSIVENESS HAS GROWN OVER TIMECopyright Dr Lawrence HaarBIGGER HOMES, BIGGER CONSUMPTION BIGGER INCOME• Data on electricity consumption by socio-demographic statistics is not available for all countries of the EU.• EU collects retail electricity prices according to five annual household consumption levels, as we have shown.• For Germany there are some household surveys; in the UK electricity consumption is collected by size of dwelling and other parameters, age and number of occupants.• We have used the size of dwelling as a proxy for income arguing that the lager one’s home, the greater one’s income.  • For the UK, the average household consumers 71 KWh per annum per square meter.  • Smaller homes tend to use electricity for space heating and have less cavity insulation.• In continental Europe, 79% of residential energy consumption is for space and water heating of which 36% comes from burning natural gas (Eurostat, 2018).• In Germany the encouragement of heat-pumps in homes has led top greater electricity consumption.Copyright Dr Lawrence HaarHOUSEHOLD WEALTH (Quintiles)OWN WITH MORTGAGEOWN OUTRIGHT RENT1 (Least Wealthy) 7.80% 0.20% 92.00%2 43.20% 11.40% 45.40%3 50.40% 38.00% 11.60%4 44.60% 49.80% 5.60%5 (Most Wealthy) 40.40% 56.40% 3.20%Home Ownership and Financing (Source: UK ONS)REGRESSIVE PRICING AND RENEWABLE ENERGY RELIANCECopyright Dr Lawrence Haar• As a natural monopoly, electricity generation presents a problem:  To correct the inefficiency of a natural monopolist, prices may be set through regulation at marginal costs making customer expenditure a linear function of price and quantity but this leads to a loss, requiring a subsidy to continue operating.• To cover the loss, a two-part non-linear tariff consisting of a fixed amount or fee, invariant to consumption, plus a price per unit is levied.  • This approach to pricing electricity addresses the shortfall but raises the question of how the fixed portion should be shared. • To cover the Loss show in the figure an amount Loss/N, where N is the number of customers could be charged.  • Under this approach all customers regardless of consumption pay an equal portion of fixed costs.  • Although EU electricity markets are deregulated and privatised, the technology of RE, almost entirely driven by fixed costs but supported per unit of output, creates the problem of how such cost be shared across customers.CORRELATION BETWEEN REGRESSIVENESS AND RE CONSUMPTIONCORRELATION BETWEEN REGRESSIVENESS AND RE CONTRIBUTION 2008 TO 2016 TOP TEN EU ECONOMIESRegressiveness in Prices 37%Regressiveness in Prices excluding Belgium and Poland 47%Regressiveness in Taxes and Levies 37%Regressiveness in Taxes and Levies excluding Belgium and Poland 40%Copyright Dr Lawrence Haar(Source: Author’s calculations using Eurostat data)CORRELATIONS BETWEEN GREEN ENERGY CONSUMPTION AND REGRESSIVENESS: SMALLEST CUSTOMERS VS. LARGEST CUSTOMERS   EU 28 + Norway   2008 to 2017Correlations Smallest vs. Largest ConsumersCorrelation between RE Consumption and Regressiveness in Energy Costs28%Correlation between RE Consumption and Regressiveness of Network charges2%Correlations between RE Consumption and Regressiveness of Taxes and Levies44%RANKINGS OF CORRELATION BETWEEN RE CONTRIBUTION AND REGRESSIVENESS 2008 TO 2017Copyright Dr Lawrence HaarRANKING OF CORRELATIONS BETWEEN PRICE REGRESSIVENESS AND RE CONTRIBUTION 2008 to 2017Finland 98% Ireland 68%Austria 95% United Kingdom 67%The Netherlands 95% Denmark 63%Czech Republic 79% Bulgaria 54%German 74% Hungary 45%Slovenia 72% Romania 44%Greece 71% Sweden 44%Italy 70% Slovakia 30%Source: Author’s calculations using Eurostat dataEXPLANATIONS• Correlation does not prove causation but the observed relationship is widespread.• With RE, whether a household takes 2000 KWh or 10,000 KWh is immaterial from a cost perspective.• Regressive pricing to recover fixed capital costs is appealing as it reduces the risk of either a linear pricing model or even a non-linear model in which both variable and fixed costs are recovered.• Regressive pricing is exacerbated through the effects of taxes and levies along with how poorer households live.• Lower income cohorts in rented accommodation are unlikely to be investing in Solar PV and therefore miss-out on access to capturing the subsidies for RE.• Faced with the threats of lower sales because of greater efficiency, the impact of random renewable output and under-utilisation of dispatchable generation, having predictable returns on assets is desirable.  • Having predictable returns may even lower the cost of capital and thus Utilities and Integrated Energy Suppliers have an incentive to favour regressive pricing structures.Copyright Dr Lawrence HaarSOLUTIONS TO REGRESSIVE PRICING OF RE IN LIBERALISED ELECTRICITY MARKETS• In the US many regulators are implementing mechanisms to decouple revenues from commodity sales (electricity) to promote efficiency and conservation. • Although the Variable Costs of RE are zero, to ensure Total Revenue equals Total Costs, pricing could still be tied to the volume of consumption.• In a few countries a flat pricing structure is applied.  Different fixed fees could be charged to different consumers.  • Perhaps supporting RE in a fair and equitable manner requires a discriminatory two-part tariff; not based on the willingness to pay but rather the ability to pay.  • Putting a greater burden of fixed costs upon the largest consumers and households perhaps through a lump sum tax might be justified on equality of loss to marginal utility.Copyright Dr Lawrence Haar

The Fiscal Incidence of Renewable Energy in the EU

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The Fiscal Incidence of Renewable Energy in the EU

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