Comic | Rising prices and energy shortages: how to deal with it? | Nicolas Astier
Using the example of gas stations facing an influx of customers, this panel reminds of the role played by prices in maintaining a match between supply and demand, and outlines possible approaches to mitigate the undesirable redistributive effects of large price increases*.
Based on the work of:
Nicolas Astier and Xavier Lambin, 2019, “Ensuring Capacity Adequacy in Liberalised Electricity Markets”, The Energy Journal, Vol. 40, No. 3
This paper notes that capping prices leaves unanswered the question of how to ration demand “optimally” in times of scarcity. A priority service mechanism allows to keep high opportunity costs implicit and represents in theory an alternative approach to the use of prices. In practice however, reaching an efficient outcome with such a mechanism requires that the ranking of consumers by order of priority is stable and known well in advance.
Nicolas Astier and Thomas-Olivier Léautier, 2021, “Demand Response: Smart Market Designs for Smart Consumers”, The Energy Journal, Vol. 42, No. 3
This paper notes that paying rebates for enegy savings instead of increasing prices supposes to estimate a counterfactual consumption, which is a complex task. By construction, this exercise will induce windfall profits (when counterfactual consumption is overestimated) and possibly moral hazard (if consumers can influence how their baseline consumption is computed), unless consumers buy forward their baseline consumption at its expected price.
Nicolas Astier is Professor at Paris School of Economics and Researcher at the École Nationale des Ponts et Chaussées ParisTech. His main research area is energy and environmental economics, with a deep interest in the on-going transformation of the electricity industry and the decarbonation of fossil-fuel intensive sectors.
Illustrations: Samuel Chich
* This panel was produced before the government’s decision to cap electricity prices and therefore does not claim to capture all the dimensions of the current crisis.
To learn more about Nicolas Astier’s work, read his interview given to PSE in March 2022.
** This comic book panel is part of the new Economics for everybody formula.