Could progressive electricity pricing cut inequality?

The short answer from the Greens is YES. Metiria has just launched the Green Party’s  Mind the Gap package, the third instalment of our Green New Deal and frankly, a better way to prioritise spending in this week’s budget.

This year’s package focuses on tackling inequality. One of the eight measures proposed is a long standing Green Party policy – progressive pricing for electricity.

There are a lot of ways to do it, so the Greens used a well developed NZ model – HydroNZ – to see how it would impact on the estimated 410,000 households in New Zealand that are considered to be in energy poverty.

Energy poverty is most often defined as:

Households which would need to spend more than 10% of their income on all household energy fuels in order to achieve a satisfactory indoor heating regime are in a state of fuel poverty. (Clinch and Healy 2001) (no link, sorry)

How would it work? If you took some of our cheap renewable energy generation and sold the first block of power to every household and business at a modest price, then raised the price of the second tier of power to make up the cost difference, you would have a progressive pricing regime. There are many ways to do this, but the revenue neutral example above is the easiest to get your head around.

We estimate that a simple two tiered progressive system could lift ~70,000 households completely out of energy poverty, and significantly impact, for the better, a further 310,000 households.

That’s not too bad, eh?

So why would big business accept a slightly higher cost of electricity up front? Because having a percentage of any ongoing cost of business locked down in real terms in perpetuity is every Chief Financial Officer’s dream. This would come at a small up front cost, but allow them to avoid any cost increases on that portion in perpetuity.

There’s more detail than this short post in the Mind the Gap package, and seven more ways that a Green budget would reduce inequality. Give it a read!

8 Comments Posted

  1. None of this makes sense. You are saying effectively you want to fix prices. Hasn’t that sort of been tried quite a lot in many contexts and not found to be sustainable? Why would it magically work in this one?

    You don’t say why you want to fix prices except to cure the nebulous concept of “inequality”. Is it because prices are too expensive? Well compared to what? Isn’t it much easier jsut to give a grant to poor people?

    “The Electricity Commission would bulk purchase, at wholesale costs, a large tranche of New Zealand’s renewable electricity, and retailers would pass the savings through to all households and businesses.”

    No it won;t because it won’t exist ina few months. But why bother with this bureaucratisation? Why not just direct prices be set at a certain level? It all just seems to be to create some market veneer that serves no useful purpose. Are you going to compel power companies to sell to the central buyer because otherwise wouldn;t the incentive be to hold off and deal direct with customers? How are you going to make sure investment in generation is cost efficient if there is no price signal. Central energy planning is littered with historic failures.

    You then assume that the fuel poverty definition used by some in the UK is relevant to NZ. Got any research to back that up? There was a project going on in MSD to see if it was. Wonder what happened to it?

    AS for California having similar process and being efficient, well, is there a causal link or is that coincidence. California’s efficiency programme is driven by economics not by social justice.

  2. Great comments from everyone! Yes, the best solution to energy poverty is to get all NZ households up to scratch energy efficiency wise. But research shows even with the Green’s home insulation fund, it will take up to 20 years to achieve this, because our housing is so appalling!

    A bit of a stick for rental properties is definitely on the cards, but the Greens wanted to make sure that all the state houses were up to scratch first, and we negotiated with labour for tens of millions to do this. The job is almost done, so maybe it’s time to look at rentals?

    Samuella:
    Your comment about business versus households is pretty accurate, given the limited info in this post. businesses wouldn’t get a progressive distribution – we couldn’t have large businesses helping small ones – for the comercial users their allocation for the first tier would probably be proportional to their electricity use.

  3. Hmmm…sounds like lots of admin if you need to keep track of the number of people per household to get a fair system. Perhaps number of rooms is more static? Not sure this is really a goer.
    An important target (for both energy efficiency and fuel poverty) must be poorly insulated rental homes, where there’s been some carrot waved around already. Time for some stick? Require rental adverts to show the cost of electricity for the previous 12 months. And star ratings for house sales.

  4. OK, so what are you trying to achieve by having progressive pricing for electricity? Presumably the two main goals are (1) encouraging energy conservation and (2) making sure that low income households can afford a reasonable amount of electricity?

    If the limit at which the second tier of pricing sets in is so high that it doesn’t affect most households, then really what you are doing is putting in different rates for residential and commercial/industrial users. Fair enough if that is what you want to achieve. However, such a measure will not encourage energy efficiency within most households.

    You really need to work out an efficient way you can charge for per person usage. In the past this would have been difficult or impossible, but it may be possible with new technology. I know some houses have prepaid electricity meters, where you recharge them with a pre-purchased card. If all houses were issued with such meters, then you could sell electricity quotas through the post office (for example). Each registered voter would be eligible for a certain quota of cheaper electricity per year, and could top up with more expensive electricity once this quota was used up. It would be quite a difficult system to administer, but if you are serious about using price incentives to encourage energy conservation, you have to implement something along these lines. Otherwise you end up with small households wasting their cheap power, and large households picking up the cost through higher prices.

    The more you think about ideas such as progressive pricing for electricity, the more it seems like a flat rate is the best alternative because of the problems involved with a progressive scheme. In my opinion you have to look for other ways than pricing to encourage energy efficiency and ensuring that low income households can afford electricity.

  5. Good question.

    This policy should be set at a rate where the majority of households benefit, even slightly larger ones. Where you are getting households with 20+ people then maybe not, but a household that big has serious housing and health concerns: that’s why we have housing measures in Mind the Gap, for example to build new state and community housing and reduce the housing demand crisis.

  6. I was just about to say great idea! Then I read samiuela’s comment… hmmm, how do we account for that frog/Greens? (without a messy household declaration solution)

  7. This sounds like a good idea, but there are a few potential catches.

    Where I live, water is charged for progressively. This is a good incentive not to waste water, but also penalises large households (which might use less than average per person, but more than average as a household).

    Would progressive pricing for electricity also have the same problems? The household with just a couple of working people in it could easily fall in the low energy usage bracket. On the other hand a household with a couple of families (including children) may end up worse, and in fact it is probably this type of household that needs more assistance with energy bills.

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