Is pricing a route to sustainable energy consumption?

A report written by CSE for the National Consumer Council explores how energy tariffs might be used to cut overall electricity and gas use

31 July 2008

One of the ways for energy suppliers to incentivise lower energy use among their customers — and so help meet their statutory obligations to reduce carbon emissions — is by changing the way they price their gas or electricity.

But can this be done in a way that is also fair to low-income consumers and financially viable for the companies involved? In other words, is there a tariff regime that balances the ‘three pilars' of sustainable development: environmental sustainability, social justice and economic efficiency.

This was the question that CSE's William Baker and Vicki White hoped to answer in a report commissioned by the National Consumer Council (NCC) and entitled ‘Towards sustainable energy tariffs'.

Evaluating a range of tariffs, both existing and theoretical, William Baker, who lead the study, said ". No one tariff structure scores highly on all three pillars of sustainability — current tariffs score more strongly on the economic objective, while possible future tariffs do not adequately address all three objectives."

Instead, the report identifies four possible options by which tariffs and non-tariff policies could improve energy sustainability. These include:

1) A further development of existing policy, by which suppliers are encouraged to offer more meaningful incentives to their better-off customers to reduce consumption and more extensive social tariffs for low-income customers. Alongside this better off consumers are helped to invest in low-carbon measures and free grants provided to low-income. 

2) Rising block tariffs, by which the first block of a household's energy consumption is offered at a low rate, with subsequent blocks costing progressively more. The report stresses that dispensation would be required for low-income consumers with high levels of consumption, and that the tariff structure would have to be extensively modelled and tested before introduction.

3) Variable VAT rates, by which energy consumption is taxed at for example 5% up to a certain threshold and 17.5% above this and possibly even at a greater rate for higher levels of consumption. This policy would have a similar (but less pronounced) effect to rising block tariffs (above) and, again, low-income consumers with high consumption would need ‘protection' from the effects of the price change.

Along with these three options, the report recommends the introduction of a feed-in tariff for small-scale renewable electricity and heat generation — conditional upon investment in energy efficiency measures in the property.

"The NCC has sent the report to the Government, Ofgem, energy suppliers and other stakeholders" said William Baker, "and we hope that it will bring sustainable energy tariffs a step closer for British consumers." 

Click here to download the report www.cse.org.uk/pdf/pub1111.pdf

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