Paying for Green Energy: The Fiscal Incidence of Renewable Energy Support Mechanisms in the EU

Electricity generated by Renewable Energy (RE) in the form of Solar PV and Wind Turbines because of its high cost on a levelized basis requires various support mechanisms to induce private investment in liberalised electricity markets. In some countries, incentive tariffs and premiums are employed; elsewhere, tax credits and allowances are utilised. Such support mechanisms have both a direct cost in terms of 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. Critically, support for RE may have distributional effects: Across the EU, retail prices for electricity paid by households, comprising fixed and variable cost components, differ widely. Within individual countries, how electricity is priced to households varies according to the level of annual consumption or customer categories.
In my research, I examine the structure of pricing and seek to explain such differences, investigating the proposition that such differences are related to how RE is supported. Comparing European Union (EU) countries between 2008 and 2016, I find the pricing structure of retail electricity to be regressive and related to reliance upon RE. Although, initially, the direct and indirect costs of RE affect integrated utilities and aggregators, to a large extent, the ultimate burden rests with lower income households. The inelasticity of electricity consumption, the greater reliance upon electricity for space-heating and the larger proportion of disposable income used for energy, exacerbates the impact of a regressive pricing structure. Given ambitious policy objectives for RE, these finding are matters of concern. Although as a society I may benefit from reducing dependence upon fossil fuels, the burden of this transition falls disproportionately upon lower income population cohorts raising questions of fairness and equity. The paper is organised in the following manner: After the Introduction of Section 1, I address in Section 2, the level of support for RE. In Section 3, I look at how electricity is priced to retail-household consumers. In Section 4, comparing EU countries over time, I investigate the proposition that the observed electricity pricing structure is related to the growth in and reliance upon RE and consider how it may be explained from the perspective of regulatory theory. From the perspective of regulatory theory, I conclude in Section 5 with policy observations and recommendations.