With an "electricity price brake" Austria's black-green government wants to protect consumers from an excessive increase in energy costs this autumn.

The director of the Austrian Institute for Economic Research (Wifo), Gabriel Felbermayr, is to make suggestions.

With his participation, a practicable model will be developed "over the summer" that will ensure basic consumption at prices at the level before the Russian invasion of Ukraine for every household, which should be unbureaucratic and encourage energy saving.

Andreas Mihm

Business correspondent for Austria, Central and Eastern Europe and Turkey based in Vienna.

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Felbermayr outlined how this could work in his institute's "regulatory guidelines".

In 15 paragraphs, the economist and his team describe how a price brake should work and for whom it should apply - only for electricity, not for gas and other fuels and only for households, but not for companies.

At the same time, his ideas for “a basic electricity quota at a fixed price”, outlined on six pages, will become a benchmark against which government decisions will have to be measured.

There are many demands on the "electricity price brake" - and the devil is in the detail here, they say.

Not only in terms of the amount and extent of the “basic electricity quota”, which ultimately “must be determined politically”.

Subsidy for each household

According to Felbermayr's ideas, Austria will in future subsidize every household - initially for one year - for a basic consumption of electricity with a fixed price.

Anything beyond that would be billed as an incentive to save at the higher market price.

That would have to be handled by the energy suppliers.

In fact, they bill the consumer for the lower fixed price share and get some of the lost revenue back from the government.

How high the "basic power consumption" turns out to be should not be based on the respective previous year's consumption, but on average values.

So the frugal would not be penalized.

Different household sizes should also be taken into account.

Since the energy suppliers do not (yet) know this, the subsidy would be calculated for a two-person household.

Everyone else would have to apply.

Households of the same size would receive an identical subsidy, regardless of income.

The authors reject any criticism because poorer households generally use less energy and the subsidy is therefore relatively higher for them.

Those in particular need could still receive a higher subsidy.

Data on this would be available to the suppliers.

Second homes would not be subsidized, and self-generated green electricity would not be counted.

Users of electricity-based heat pumps would also not get a bonus on the higher electricity consumption because they use more efficient heating technology and save other forms of energy.

The question that remains is how the state will compensate the suppliers for the lost share of the revenue, since the fixed price is below the market price.

Here, the economists advise replacing the current procurement or production costs with an imputed profit mark-up or to create historical average values.

"In the case of wind, solar or hydropower operators, these two variants would be at least partially equivalent to skimming off the chance profits," the paper says.

Hydropower accounts for the majority of electricity generation in Austria.

According to the economists' plans, companies should not benefit from the price brake.

As a rule, you would have the opportunity to pass on higher costs.

This applies equally to large and small companies.

In addition, the state could reduce the electricity bill by waiving the high network charges in Austria: "Here the state could assume part of the costs, which would also relieve the burden on industry."

The Wifo experts also warn against fundamentally intervening in the price mechanism of the electricity market.

There, the last used and most expensive (gas) power plant determines the overall market price in the so-called merit order.

Instead of intervening there, it makes more sense to reduce barriers for providers with low production costs such as electricity from wind, photovoltaic or geothermal systems in order to squeeze out expensive providers, say the economists.

Price interventions in the market could mean that gas-fired power plants are no longer economical and the state would have to subsidize them in order to avoid a collapse in electricity generation.