Work

Why “Energy Price Brakes” Encourage Moral Hazard, Raise Energy Prices, and Reinforce Energy Savings

Year: 2025

Type: article

Abstract: ABSTRACT To help households and firms with exploding energy costs in the aftermath of the Ukraine war, a new policy called the “energy price brake” was implemented. A unique feature of this relief measure is that it provides a transfer that increases in the consumer's contractual per‐unit price of energy. In a formal model, we show that this policy creates incentives for moral hazard of energy providers to raise per‐unit prices. Whereas this moral hazard problem increases the policy's fiscal costs, it also reinforces energy savings. Whether the policy's main beneficiaries are consumers or firms depends on the market structure.

Source: The RAND Journal of Economics

DOI: 10.1111/1756-2171.12489

Authors: Markus Dertwinkel‐Kalt, Christian Wey

Institutions: Max Planck Institute for Behavioral Economics, Heinrich Heine University Düsseldorf

Language: English

Topic: Energy, Environment, and Transportation Policies

Subfield: Renewable Energy, Sustainability and the Environment

Field: Energy

Domain: Physical Sciences

SDG: Affordable and clean energy

Open Access status: hybrid

Estimated APC paid: $3,400