Effects of Different Tariff Systems on Social Cohesion of Villages

Overview

Tariff structures vary widely across the global energy sector. Many of these are designed specifically to control energy use and manipulate consumer load to match energy supply. Tariff structures are a set of rules that define how energy usage is charged. Often, a supplier will have different tariff structures available to its consumers. Some of these include flat-rate structures, decreasing block tariffs, increasing block tariffs, and many others. Tariff structures are often determined with financial viability and affordability in mind, but tariff rates and structures have deep impacts on social and environmental development.

Different Tariff structures

Tariff rates themselves are determined either by a regulatory body, a national agency, parliament, or a combination of both and other institutions. A good tariff structure will reflect the needs of the consumer through transparency in its development. Tariff structures must also fulfil the government’s goals (energy security, energy efficiency, expansion of access, non-discriminatory, etc.). The most common tariff structures are:

• Flat-rate
• Increasing block
• Decreasing block
• Lifeline
• Time of use

 

Flat-rate

Flat-rate tariffs, as the name suggests, remain flat. This means that any consumption is charged at the same rate regardless of volume (amount of consumption). These tariffs are also subject to fluctuation from time to time due to changing distribution, transmission, or generation charges but still offer the same rate regardless of volume. 

It is also quite common to define flat-rate tariffs as a volumetric rate, wherein a consumer is charged a price per kWh used, and increasing or decreasing consumption is directly reflected in the bill charged to the customer. The rate remains 'flat' as it charges the same price regardless of blocks of use. These rates may still change from time to time and is more heavily affected by market changes as in the Philippines. For this article, the first definition of flat-rate tariffs will be used.

 

Increasing and Decreasing block

An increasing block tariff, also known as inclining block tariffs, has threshold blocks of volumetric consumption, such that consumption beyond each block is charged at an increasing rate. Each block represents a regulation-set volume of energy. The first block is often classified as that volume of energy needed to “ensure a suitable lifestyle”, referred to as the baseline consumption in Fig. 1. Decreasing block tariffs are completely antonymous and instead have lower rates at large volumes of consumption.

As seen on Fig. 1, different consumption volumes are charged at different rates. Each step on the graph signifies a block of electricity consumption, hence the name for the tariff. As consumption increases above the baseline quantity, the tariff charged correspondingly rises as well. Tariffs like these are implemented in Pakistan as well, however, due to an additional connection charge, consumers utilizing the baseline quantity of < 50kwh/month end up paying a higher average cost.

 

Lifeline

Baseline consumption is charged with a lifeline rate that is the minimum cost of electricity, available to consumers with challenging financial situations.

 

Time of use

Time of use (ToU) tariffs, or dynamic pricing, are directly linked to peak demand. These have high rates during peak demand, and low rates all other times. An example of this is the Economy 7 tariff in the UK, offering lower prices at night. Some cities in South Africa have also started employing ToU due to a depleting supply of electricity. The aim in South Africa is to discourage use during peak times—by charging a premium—and even out the fluctuations in their daily consumption.

 

Sliding scale

A very uncommon tariff, this tariff is adjusted based on an associated parameter—most often income. This tariff is highly variable and moves in proportion to the change in the associated parameter. This makes sure that those who have more value (in terms of the associated parameter), will pay more.

Social Cohesion of a Village

Social cohesion is an integral measure of the social development of a community. It is an increasingly prominent political agenda that is pushed to the center of attention by a wide variety of issues. Social cohesion can be measured in a village, or for a whole geographical region. Simply put, Social Cohesion is the ability, or willingness, of a community to come together and engage in ‘positive activities’. These activities are deemed positive if they work towards the development and benefit of the community.

Possible Effects on Social Cohesion

 

Increasing Block tariffs could aggravate fuel poverty  

Increasing block tariffs are most widely used where supply is insufficient. This is because this type of tariff discourages large-scale use from consumers. These are used to allow less consumption-intensive users lower rates. This tariff becomes a problem for fuel poor households as they have higher energy demands and low incomes. Increasing block tariffs aggravates this issue and makes those in fuel poverty even more vulnerable  as they end up in higher tariff blocks, paying more, but continue to have low income.These could also end up being more expensive due to added charges and bad design. Decreasing block tariffs on the other hand does little to discourage excessive use and could arguably encourage it due to lower prices attainable only at a certain volume of use.

 

Time of use (ToU) tariffs could be used to alter consumer behaviour to avoid peak times

Time of use tariffs are aimed more towards changing consumer behaviour and increasing demand side response. These tariffs are seen in grids where supply is limited or already strained. Demand side response serves to help balance the grid and allow all consumers to have access to supply by moving its usage around. An example of this is moving a heating/cooling load to avoid highly constrained times like mornings. This tariff is best used with present-time electricity data via the use of smart-meters. Tariffs that provide variable prices like ToU tariffs drive consumer behaviour that aids in demand side management  Dr. Mary Gillie further suggests that the knowledge afforded by a smart meter-accompanied ToU tariff could inspire consumers to band together and demand energy when and how they need it. This could effectively increase social cohesion as the community works to secure lower rates by bargaining with suppliers.

 

Socialized tariffs widen energy access

Lifeline rates are used in conjunction with other tariffs as a socialised form of providing energy access. Often paired with increasing block tariffs, lifeline tariffs offer the most minimal cost—or none at all—to low-income consumers. This tariff is however set at a limit and only applies for a minimum amount of energy usage. This ensures that lower income households have access to the basic activities that allow survival in the local economic climate.

 

Cross subsidies could lead to higher level of household energy access(at the expense of commercial users)

A form of socialised subsidy exists where the higher costs of a group of consumers is used to subsidize tariffs for a more marginalized group. This allows wider energy access at the expense of industrial users and commercial consumers. This method is called cross-subsidies and is a form of developing a community as well. This may be achieved by eliminating some charges for some consumers such that they pay less overall, or by changing the first block in an inclining block tariff for smaller consumers.

 

Subsidies for lower tariffs could be corrupted: widening wealth gaps within the community

However, this collection of tariff structures can easily disrupt a community if badly designed. A case for this occurred in Indiawhere lower tariffs were provided for farmers to enable higher revenue. Instead, these tariffs were used by wealthier farmers as they were the ones with access to electricity, not the small farmers. This can easily create a social rift and widen the gap between classes. Where electricity is not made available at an affordable cost, energy poverty rates increase and communities are adversely affected. When a whole village/community is energy poor, the locals lose belief in a better future, deteriorating morale and chances for positive growth.

 

Increasing block tariffs could lead to more equity in energy access within a community

Cross-subsidies like those mentioned above have been compared in some studies to reveal how equity can be applied to energy access. Increasing block tariffs were compared against the California Alternate Rates for Energy (CARE) where lower flat-rate tariffs are used to modify current increasing block tariffs for lower income households. Discounts from CARE can reach up to 44% depending on usage and tiers of use. Upon comparison, the study found that CARE was able to improve economic efficiency as opposed to increasing block tariffs. The latter however embodied a higher and moderately significant redistribution impact, allowing for more equity in the affected areas. When used togethe, the CARE reduced an increasing block tariff’s ability to redistribute economic savings.

Increasing block tariffs also have some negative effects. In Ghana, where a lifeline tariff is provided to consumers of less than 50 kWh, small-time enterprises miss out on the subsidy and end up paying more than they are capable of. This mirrors the issue of fuel poverty where low-income consumers use large amounts of energy. This has an obstructive effect on social cohesion in the community as it prevents local enterprise. A study has found that this has also resulted in illegal connections in order to support the business. This further damages social cohesion as illegal-connections often mean that another user ends up paying for the wire-tapper’s consumption, creating an adversarial environment. 

 

Unfamiliarity with tariffs affects decision processes

A more apparent way in which tariff structures have had an impact on societal relations come from studies regarding community-owned energy and the subsequent tariff system employed. The case for community-owned energy reasons that transmission and distribution charges are reduced in a decentralized local grid, allowing its members to pay less and manage their own energy, necessitating more active involvement. These initiatives also involve dynamic pricing or time-of-use tariffs. In these cases, community-owned energy employed a democratic process of decision making and sought out wide involvement among the inhabitants of the area. Studies found that one of the main drivers for a consumer’s decisions were his/her neighbours’ decisions. In general, a consumer who was unsure about a decision sought validation or reinforcement from peers or neighbours. This was often a problem where ToU tariffs were seen to be unfamiliar, resulting in unfavourable take-up of the tariff structure. In this case, applying a new tariff—regardless of which type—resulted in a more uniform decision in the community, scepticism due to uncertainty of the new system.

 

Importance of Tariff Setting and impacts

The Yemeni National Rural Electrification Strategy (NRES) highlights the need to set transparent tariffs in a community-owned energy initiative. NRES also indicates that the tariffs set must be affordable, but allow the sustainability of the energy initiative. These tariffs will however become a burden to the lowest income households and may limit access unless equity measures are applied.

 

A co-operative energy project in Brazil demonstrates that there may be a relationship between tariff structures and social cohesion. Creluz (Co-operativa de Energia e Desenvolvimento Rural do Medio Uruguai Ltd.), the local energy co-operative, offers sliding scale tariffs for majority of its consumers. 600 of them however don’t get charged any tariffs due to socioeconomic status. Another feature of the co-operative is a high involvement rate in the community for decision making processes. This effect demonstrates a high level of social cohesion in that community, however there is no explicit relationship linking the sliding scale tariffs and this behaviour. The study suggests this phenomena could be attributed to a number of factors, the nature of the community, the presence of co-operatives, etc.

 

The following table suggests the most possible effects of tariffs on social cohesion:

Tariff type	Social effects	Effects on social cohesion
Flat-rate	-Unfounded	-Unfounded
Increasing block	-Divides consumption to allow higher-consumption users to shoulder more cost -May aggravate fuel poverty -Small enterprises will often be charged higher rates too -High use low-income users may resort to wire-tapping	-Effects on fuel poverty may further stratify community and affect cohesion -Small enterprise development is limited and hinders community progress -Wire-tapping introduces adversarial attitudes in community
Decreasing block	-Encourages more usage as average price falls with more consumption	-Unfounded
Lifeline	-Enables low-income households a degree of energy access	-Allows low-income households equity and access to more productive activities -Could increase social cohesion by ‘levelling the playing field’ to some extent
Time of Use	-Encourages users to be more energy conscious and know their energy needs	-May be used to nurture community action towards securing energy suited to local demands -Could increase social cohesion if consumers band-together
Sliding scale	-Creates a relationship between an external parameter and the tariff charged	-Could provide transparent equity in energy access -May also disproportionally charge higher for large households with more income, but also more costs
Availability of different tariffs	-Lets consumers choose their tariff structure	-May alienate some users -Could seem unfair to some if information is not properly disseminated -May not find benefit if community is sceptic of new tariff options

 

Conclusion

As electrification remains a challenge in rural and lower-income communities, the social impacts of the economic benefits/misgivings continue to be a hot topic for research and case studies. With this challenge comes the question of how to provide equity in the process, to allow the uniform development of these communities. Tariff systems have been seen as one of the solutions to this problem, spotlighting questions of how tariffs affect consumer energy use, behaviour, and socioeconomic activity. The direct link between tariff systems and the social dynamics in a village/community however remains relatively untouched.
So far, there haven't been studies on that topic. The social impacts of tariffs are becoming more widely studied, but not its effects on social relations in a community. This question will require new ways of research to separate and scrutinize which factors contribute to which effects as highlighted by Benson, 2014. Questions like:

• ‘How much energy-access stratification is there with and without equity tariff systems?’
• ‘How can consumers take advantage of different tariffs to enable energy access?’
• ‘Do tariff systems affect a household’s net income?’
• ‘Does consumer uniformity limit equal access to energy?’

may provide more direct answers to the question at hand but currently, only the impacts of electrification—regardless of tariff selected—have been studied. The Clore Social Leadership Programme recognizes this gap and calls for further development of metrics and methodologies to study direct and indirect impacts.

Case Studies

The Sustainable Eradication of Energy Poverty. A study of micro hydropower in Murung Raya, Indonesia (2014)

• This study outlines the different impacts of electrification on rural communities
• The literature review in this also provides a good reading stepping stone to learning more about the socioeconomic impacts involved in energy access
• The study found that five dimensions must be addressed to ensure the sustainability of community-owned energy schemes:
  • Economic
  • Environmental
  • Social
  • Technical
  • Institutional

 

The Redistributional Impact of Nonlinear Electricity Pricing, USA (2012)

• Highlighted here is a study on providing equity in energy access
• This study compares different socialized modifications on electricity tariffs and their effectiveness or potential to achieve equity
• The study finds that cross-subsidized tariffs offer better equity, but produce more economic inefficiency, whilst increasing block tariffs have an overall lower average cost

Economizing justice: Turning equity claims into lower energy tariffs in Chile (2017)

• A view on how one country is aiming to tackle energy equity and improve energy access
• The report studies the implementation of Chile’s Tariff Equity law
• This report summarizes that the simple economization of energy justice claims—for the sake of providing equity—belittles the value of risks and benefits from specific energy production methods and a more holistic approach must be taken to enable structural reform

Further Information

• Grid portal
• Mini-grid portal
• Community-owned energy projects in Southeast Asia
• Tariff setting and public perception