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Making Consumers Better-off: From Liberalisation to a New Tariff Structure?

The on-going liberalisation of the Portuguese electricity market has entered in its last phase and from January 2013 the prices of electricity will cease to be fixed by the market regulator in all consumer segments. Such liberalisation is associated with an expected increase of competition in the electricity market that can leave the final consumer better-off. But will this really happen? Tariffs can tell.

 

Indeed, in light of the limited number of electricity operators under the new liberalized market, increased competition can provide more hope than a hint that the new electricity tariffs will leave consumers better-off. Ensuring that the consumer will benefit under a new market paradigm could involve convincing operators to adopt a new tariff structure.

 

A swift overview on the way the tariffs are structured by EDP to one of the consumer group segments (http://www.edpsu.pt/pt/EDP%20Docs/Tarifario_2012_BTN.pdf) provides a quick insight on a key characteristic of electricity production: electricity is relatively cheap to produce – and sell – up to the amount of installed capacity. Above this quantity, the costs of generating an extra kilowatt are enormous. From the operator point of view, differentiating prices in peak and low electricity demand periods is thus an effective way to control demand and prevent the expensive costs of installing additional capacity. Yet, such tariff structure – which is widely used in the liberalized marked – could be friendlier to the consumer.

 

Indeed, charging a higher electricity price during peak demand than during low demand implies that the amount of electricity a consumer can afford during peak demand will be lower than the amount of electricity the same consumer can afford during low demand. For those consumers that can vary consumption across demand periods, this tariff structure leaves them equally-off as they will be able to keep their total electricity demand constant by opting to consume more during the low demand period and less during the peak. Yet, for those consumers who cannot avoid consumption during peak demand, they will be worse-off by seeing their electricity bill go up. Could a different tariff structure enable the operator to address the capacity issue while allowing consumers who cannot vary consumption to be equally well-off?

 

A possible solution could be a new tariff structure; one that would rely on a baseline quantity contracted by each consumer at a base price and representing his/her normal usage. In periods of peak demand, any consumption above the baseline quantity would be charged at a higher price, whereas reduced consumption would translate into a rebate on their final bill. In periods of low demand, additional consumption would be charged at the base price and rebates would not take place. This possible structure would leave those consumers that cannot vary consumption equally-off while leaving consumers that can vary consumption better-off. All of this, whilst enabling the operator to avoid the expensive costs of creating additional capacity. Would this be the best tariff structure for the operator? Possibly not, but at least it could increase his competitive position while leaving the consumers equally or better-off.

João Nolasco

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Author: studentnovasbe

Master student in Nova Sbe

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