The Price Impact of Energy Vouchers.

AuthorPodesta, Marion

    France and South Korea have recently implemented vouchers that allow consumers to pay for energy services such as electricity and gas. The objective of this program is to counter "energy poverty", which occurs when "a household is unable to afford the most basic amount of energy for adequate heating, cooking, lighting, and use of appliances in the home" (Charlier and Legendre, 2019). Both countries measure energy poverty by the criterion proposed by Boardman (1991) in her seminal contribution on the subject: (1) households who spend more than 10% of their income on energy housing services (ADEME, 2018 and MOTIE, 2014). By this criterion, the problem seems far-reaching: the Environment and Energy Management Agency of France estimates that 3.8 million French households--or 14 % of households--were energy poor in 2018 (ADEME, 2018). According to the Ministry of Trade, Industry and Energy of South Korea, the corresponding number for this country is 1.78 million households, or 11.6% of households in 2011 (MOTIE, 2014). The voucher programs are thus of a large scale: the French Ministry for the Ecological and Inclusive Transition mentions that 3.6 million households (2) received them in 2018 for an average amount of [euro]150 per household and per year (MEIT, 2018 and MEIT, 2019). Even though, to our knowledge, there is no governmental source that supplies such statistics in South Korea, by coupling data from Yun and Park (2017) and Yoo and Seo (2018), we can estimate that 1.57 million Korean households were eligible for vouchers in 2015, for an average of approximately 101,000 won (W). (3) Programs of such scale are likely to have a significant impact on market demand.

    Although the use of vouchers to subsidize necessary goods has existed for a long time, they traditionally target goods supplied by private firms with relatively low market power at the national level (e.g. food and housing) or by non-profit organizations (e.g. education and health care). (4) In contrast, the market structure that dominates energy supply is one of a national oligopolistic network industry. (5) Firms of such an industry can have a strategic response to any policy that impacts it.

    This paper studies the impact of voucher distribution on the final price of the targeted good (hereafter, energy) in the context of an oligopolistic industry. Its main contribution is to the literature on vouchers and it is threefold. First, we take into account the strategic reaction of firms on the supply side of the market, while the rare theoretical papers that study the impact of vouchers on the equilibrium price, such as Bradford and Shaviro (1999), consider a passive supply side with the usual upward sloping supply curve. Second, we endogenize the value of vouchers that the regulator emits instead of considering that vouchers are an exogenous shift of the demand curve. Third, we state demand conditions under which vouchers are potentially an adequate redistributive instrument in an oligopolistic market.

    We also contribute to the literature on energy poverty because, while this literature has focused mainly on the measurement of energy poverty, we focus on the impact of an actual program aimed to fight it. As mentioned by Chaton and Lacroix (2018), "[t]he lack of consensus on a definition obviously makes it difficult to determine how to measure fuel poverty". Thomson et al. (2017) classify proposed measurement methods in three approaches: the expenditure, the consensual and the direct approaches. (6) The Boardman definition used by the French program belongs to the first approach. However, within this approach, there are also debates on the way to measure expenditure, the proper concept of income to be used as well as the expenditure-to-income ratio to use (Moore, 2012). (7) Our model is general enough to make our results independent of the exact way energy expenditure or income are defined or measured within the expenditure approach. (8) We thus extract ourselves from the measurement debates on energy poverty to rather determine the foreseeable market consequences of an actual policy implemented to fight it.

    More precisely, we aim to determine whether a voucher program has a price impact over and above its redistributive impact. Other policy measures have been proposed to fight energy poverty. For instance, a regulatory approach is to impose increasing block pricing, so that basic consumption is cheaper than less necessary consumption. A comparative advantage of the voucher program is its relative simplicity and the fact that it separates the distribution policy from the realm and the complexities of the industry regulation. Accordingly, Leautier (2019, p. 130), considers vouchers to be "much less disruptive, hence preferred by economists". However, to our knowledge, the impact of this redistribution policy on price has not been analyzed, so that this preference is not necessarily warranted. In particular, the prospect that vouchers could bring a price increase and, consequently, could themselves have a perverse detrimental effect on energy poverty has not been considered and analyzed.

    In our modelization of voucher programs, we adopt a positive approach. The main reason is that economic justifications of vouchers are not a settled issue in terms of the regulator's objective that underlie them and of their efficacy to meet this objective relative to cash transfers. For instance, Bradford and Shaviro (1999) invoke paternalism, externalities and distribution as potential motivations to implement vouchers. We remain agnostic about these motivations and rather observe that vouchers have been implemented for a long time for various commodities, such as food and education, and that there is a recent trend to extend them to new commodities, such as energy. In our case, we take as given the policy of eliminating energy poverty and we model it as a constraint to the regulator. We analyze the price impact of this policy under the assumption that it is pursued at minimum cost. (9)

    In this approach, we first state conditions on individual and aggregate energy demand elasticities that make the choice of vouchers consistent with the elimination of energy poverty. We then model a game between the energy suppliers and the regulator, where firms maximize profit under Cournot competition, while the regulator emits vouchers in quantities that ensure that no consumer spends more than a given share of her income on the targeted good. From a benchmark case with no vouchers, we analyze the impact of their introduction in three settings: one where firms and the regulator make decisions simultaneously, one where firms move first and one where the regulator moves first. The first setting corresponds to a case where neither the industry nor the regulator has a commitment power that enables it to announce its decision first and stick to it. The two others correspond to cases where this commitment power exists for the firms or for the regulator.

    We impose two conditions on individual energy demand elasticities. First, the individual income elasticity is less than one, i.e. energy is a necessary good. Second, the individual price elasticity increases with income. (10) Since a prime cause of energy poverty is high energy prices, (11) the absence of any one of these conditions would make vouchers an inadequate instrument to ensure that low-income consumers do not spend more than 10% of their income on energy. On the one hand, if energy were a luxury good, it is the richest consumers who would be at risk of exceeding this 10% threshold. On the other hand, if the poorest consumers had an elastic demand, a "solution" to energy poverty would be to favor an energy price increase, as it would bring a reduction in the expenditure of energy. This would contradict the perception that high prices, due to either a lack of competition and/or environmental policies, are the sources of the problem.

    On the supply side, we analyze the impact of vouchers on the "overall" market power of the industry, as defined by the difference between the final price paid by the consumer and the marginal cost of producing, transporting and delivering energy to this consumer. (12) We thus abstract from the many complexities of the energy industry markets and of the national regulatory frameworks, including regulations on vertical integration or separation. In practice, market power can be exercised in many different ways at any stage of production, (13) and the exact source of the price markup is immaterial to us. To avoid the intricate difficulties of measuring concentration in the energy industry (14) and to relate the analysis to the simplest industrial organization model possible, we use a Cournot model and represent the industry structure by the number of firms.

    Under these conditions, we show that the implementation of the voucher program reduces the energy price under simultaneous decision making or when the regulator moves first. However, the impact of vouchers on the energy price is ambiguous if firms move first. This scenario's price is above the price of the simultaneous decision scenario's price. The possibility of a price reduction can be surprising at first since diverting the consumption towards energy to a certain extent would seem to increase the market power of energy suppliers. This does not occur because the distribution of vouchers increases the price elasticity of demand of eligible consumers, so that it in fact decreases the market power of suppliers. This reduction of market power can, however, be partially or fully countered by firms when they move first.

    A surprising policy implication of the paper is that vouchers have the potential to partially reinstate price control over a deregulated energy industry in particular or over any oligopolistic industry in general. The literature on public policy suggests the possibility of a causal link between energy market...

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