Stephanie Taylor and George Hoberg
March 1, 2011 (updated September 28, 2011)
Electricity pricing in BC is a concept that is little understood, yet frequently the subject of grumbling by ratepayers, especially when rates are going up. Recent proposals by BC Hydro to raise rates by 50% over the next five years have been criticized by media and energy experts. In our last post on electricity pricing, we outlined current and alternative rate-setting mechanisms. We also introduced readers to the concept of conservation pricing. This post delves further into conservation pricing, exploring both its benefits and its drawbacks.
To recap, conservation pricing involves increasing the price of electricity to all or some ratepayers in order to give them an incentive to reduce their electricity consumption. Conservation pricing can be achieved in numerous ways, though increasing block and time-of-use (TOU) pricing are the most common. Increasing block pricing involves charging higher per kWh prices for additional consumption above a pre-determined level. With TOU pricing, ratepayers pay more depending on how much demand there is for electricity at that time. This technique often requires the installation of smart meters, in order to accurately track demand in real-time.
BC has already implemented increased block pricing (which it calls its ‘conservation rate’). BC Hydro has announced plans to install smart meters in all homes in the next few years, but has not yet proposed introducing time-of-use pricing. However, in order to reach BC’s stated goal of achieving 66 percent of BC Hydro’s electricity requirements through conservation by 2020, prices will probably need to be raised further.
[September 26 update: In response to suggestions by BC Hydro that time of use pricing is an effective conservation tool, Energy Minister Rich Coleman emphatically denied the government was considering it. (Globe and Mail)]
One of the complaints most frequently voiced by critics of conservation pricing in BC is that it unduly harms low-income customers. However, this criticism need not mean that conservation pricing is unworkable in BC. It is possible to address this concern while still maintaining the benefits of conservation pricing. Pricing can be used to encourage lower electricity consumption without harming low-income customers.
In economic terms, conservation pricing amounts to a tax on electricity consumption. As with consumption taxes in general, there are concerns that conservation pricing could be regressive (International Energy Agency, 2010, p. 68); that is, the proportion of income dedicated to paying the higher rate is greater for low-income consumers than for high-income consumers. Furthermore, evidence shows that those with higher incomes consume more electricity than low-income consumers (Pineau, 2008, p. 384), meaning that the poor would pay a greater proportion of their income to reduce usage of a good whose overconsumption is due primarily to higher income groups.
Governments usually mitigate the impact of consumption taxes on low-income groups through the use of rebates, as has been the case with the Goods and Service Tax and Provincial Sales Tax (and now the Harmonized Sales Tax) in BC. However, the best comparison to conservation pricing would be BC’s carbon tax. Both are consumption taxes designed to achieve conservation-minded goals by making certain environmentally-damaging behaviours more expensive, and thus less attractive. BC tackled the regressive nature of carbon taxation by mandating reductions to the lowest two income tax brackets as well as introducing a refundable Low Income Climate Action Tax Credit. In a recent report, the Canadian Centre for Policy Alternatives and Sierra Club argue that, of the measures introduced to assist low-income British Columbians, the Low Income Climate Action Tax Credit is “the most beneficial expenditure in terms of compensating the poorest households” (Lee, 2011, p. 19). That report shows that low-income BC residents will end up paying more in carbon taxes than they will get back in credits, but that is a flaw in design of the credit, not in the concept.
September 28 update: For a specific set of proposals to deal with the fairness aspect of electricity price increases in BC, see the report from the Canadian Centre for Policy Alternatives, Fighting Energy Poverty in the Transition to Zero-Emission Housing: A Framework for BC (summary op-ed by Marc Lee here).
While some critics of the carbon tax argue that revenues should be used for purposes other than tax reduction, the carbon tax is in fact a very good model for how to devise a workable and progressive conservation pricing system for electricity consumption. Regardless of how BC Hydro chooses to raise rates (increases to the block rate, TOU pricing, or an across-the-board rate increase, for example), refunding the increased costs of higher rates borne by low-income customers through income tax credits and/or cuts would be a feasible method of eliminating regressivity. In fact, the implementation of tax credits and tax reductions for low-income consumers of electricity and energy is supported by experts. Pierre-Olivier Pineau, who is perhaps Canada’s foremost expert on electricity pricing, explains that combining targeted assistance to low-income ratepayers with conservation pricing “would expose all consumers to the correct price signal, while making sure electricity remains affordable” (Pineau, 2009, p. 25). The International Energy Agency also promotes targeted measures as one solution to the regressive nature of conservation pricing (IEA, 2010, p. 68).
Despite what critics say, it is not inevitable that conservation pricing will result in a disproportionate financial burden to low-income customers. Dismissing carbon pricing out of hand without investigating ways in which it can be made fairer amounts to a dismissal of electricity overconsumption as a legitimate problem. Solutions to regressive taxation such as income tax reductions to low-income British Columbians have been successfully implemented in the past. There is no reason to believe that we could not use similar strategies to devise an environmentally effective and economically progressive conservation pricing system for electricity in BC.
International Energy Agency. Energy Efficiency Governance. Paris: 2010.
Lee, Marc. Fair and Effective Carbon Pricing: Lessons from BC. The Canadian Centre for Policy Alternatives and the Sierra Club. Vancouver: 2011.
Pineau, Pierre-Olivier. “Electricity Subsidies in Low-Cost Jurisdictions: The Case of British Columbia.” Canadian Public Policy 34 (3) (2008): pp. 379-394.
Pineau, Pierre-Olivier. “Rethinking Electricity Pricing in Canada: Richer, Greener and Fairer.” Working Paper, l’École des Hautes Études Commerciales de Montréal, June 2009.