Distributional impacts of investment subsidies for residential energy technologies

Abstract

This study analyses the distributional impacts of investment subsidies paid to households that install residential energy technologies based on renewable energy sources. The subsidies, covering a significant part of the total investment, play a considerable role in households' energy decisions. Depending on their design, support measures may provide the most benefits to certain groups of society and thus, may cause increasing inequality. The potential distributional impacts of the investment subsidies are determined by the combination of technologies targeted and their costs, household income, support intensity, subsidy design restrictions, and the availability of additional measures. This study examines the support system for residential renewable energy technologies in the Lithuanian case by employing a microsimulation model. This analysis of existing measures provides more general results and highlights the policy features that cause distributional impacts. Therefore, the results are applicable in other countries as well. The analysis shows that although the support is efficient from an energy point of view, it provides the most benefits to households with higher income and thus, increases inequality. Moreover, the subsidies fail to reduce energy poverty due to the poorest households’ low capacity to invest. To obtain a flatter distribution of benefits, the design of support measures should consider the current situation of lower-income households and affordability issues.