Subsidies or cost-reflective energy tariffs? Alternative pathways for decarbonizing the residential sector and implications for cost efficiency

Abstract

This study assesses alternative energy technologies (i.e., PV and battery systems, electric heat pumps, hybrid gas heating with solar thermal energy) in terms of profitability and CO2 emissions, for the case of two simulated typical households living in detached houses in Germany. Under the status-quo regulatory framework, the energy transition in the heating sector is fostered through grants for replacing old heating systems, whereas PV generation is fostered by feed-in tariffs and indirect subsidies for self-consumption. This study considers an alternative regulatory scenario with a more market-oriented approach, finding that a CO2-oriented reform of energy surcharges and taxes, as well as a reform of network charges, can support a more cost-efficient energy transition in the residential sector. The paper concludes with a discussion of the consistency, cost efficiency and effectiveness of past and current policies underpinning the energy transition in the residential sector.