The module below illustrates our proposed system of indexed discounts. Parameters and retail prices can be entered in the yellow cells below. The module then calculates the value of the energy-bill support and the costs to government. Further explanation and sources below. (Based on joint work with Maarten-Pieter Schinkel).
Our proposal for indexed discounts (“prijszekere kortingen” was introduced in ESB, “Alternatief energieplafond verenigt prijszekerheid met marktwerking“. An English-language version is contained in our article “Energy price ceilings with partial cover: A Dutch master?” in the European Court of Auditors Journal.
This spreadsheet is an illustration of our proposal for an alternative for price caps on surging gas and electricity prices for households. In our proposal energy suppliers keep their incentive to compete, also for households that consume below the ceiling volumes, while still providing the same level of energy-bill support.
In the indexed discounts system, households pay market prices, but receive substantial discounts for all usage up to the ceiling volumes, which are subtracted from their energy bills. Discounts equal the average retail price minus the ceiling price, for gas an electricity separately. This implies that the net prices households end up paying on average are exactly equal to the desired ceiling prices.
For households, implementing these indexed discounts works out almost the same as capped prices on limited consumption volumes, as it provides near price certainty. For example, if the average retail price for electricity is €1.00 (or 100 cents) per kilowatt-hour, the discount is 100 (the average price) – 40 = 60 cents. A household that faces a retail price equal to the average therefore pays 100 (its retail price) – 60 = 40 cents, i.e. the fixed ceiling price. If the average market price rises to 150 cents, the price discount also increases by 50 cents to 110 cents, so the average household still pays 40 cents per kilowatt-hour.
An important benefit of the indexed discounts system is that competition in the energy market remains fully effective. The reason is that households receive the same discount from each provider, but these discounts are subtracted from the actual retail price they pay. Households thus retain the incentive and ability to switch to the provider with the lowest prices. Suppose there are four suppliers, each charging an electricity price of €1.00. The discount is then 100 – 40 = 60 cents. If one of them lowers its price to 92 cents, the average market price becomes 98 cents, and the discount 98 – 40 = 58 cents. Its customers then pay 92 cents (the price of this supplier), minus 58 cents (the new discount), hence 34 cents, for their consumption under the quantity ceiling. A customer of some other supplier pays 100 – 58 = 42 cents. Switching to the price-buster thus implies a saving of 8 cents – exactly the 8 cents by which it lowered its price. Similarly, no supplier can raise its price without losing a significant portion of the households it serves. This keeps suppliers sharp and prices competitive, even for consumption below the quantity ceilings.
Explanation of spreadsheet
Ceiling price and volume
These are the policy parameters. In the baseline, the desired price caps are set at 1.45 per cubic meter for gas, and 0.45 per kWh for electricity, and the limited volumes to which they apply at 1200 cubic meter for gas and 2900 kWh for electricity – the parameters used in the Netherlands in 2023. Different choices result in different subsidy sizes.
Here, the (annual) consumption of a consumer can be entered. In the baseline, these are set equal to the ceiling volumes.
Choice of supplier
Here you can choose which supplier our hypothetical household will use.
Suppliers – retail prices
Here, the price offers of four hypothetical energy suppliers can be entered, that is, their “retail prices”. The “net prices” are those effectively paid by customers of that energy supplier for their energy use below the ceiling volumes. These net prices equal the retail prices minus the discounts, to be determined below.
The average price of the four hypothetical suppliers
This is the discount each household will receive on her energy bill. It equals the average price minus the ceiling price.
Costs below ceiling
These are the effective costs the household has to pay for her energy consumption below the ceiling volumes. It equals the net price of her supplier (“price below ceiling”) multiplied by either her consumption or the ceiling volume, whichever is lower
Costs above ceiling
These are the costs the household has to pay for her energy consumption above the ceiling volumes. It equals the retail price of her supplier multiplied by her actual consumption minus the ceiling volume (provided this is larger than zero).
Costs to government
These are the costs to the government. They equal the discounts given (“indexed discount”) multiplied by total actual consumption below the ceiling.
For questions or comments, you can reach us here.