Download - Pierre-Olivier Pineau, HEC Montréal (Canada)

Choosing to Pay More for ElectricityAn experiment to test the level of residential

consumer cooperation in increasing electricity price in Québec

Pierre-Olivier Pineau, HEC Montréal (Canada)Jim Engle-Warnick, McGill University and CIRANO (Canada)

Juan Robledo, McGill University and CIRANO (Canada)

31. Electricity Demand Modeling and Capacity PlanningTuesday, October 11, 2:00 - 3:30 pm, 2011

South American B Room, Capital Hilton30th USAEE/IAEE North American Conference

Pineau / HEC Montréal 2

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Price ¢/kWh

Average 2009 Sales per US Retail Consumer

EIA (2010)

Price¢/kWh

MWh/consumer

Mean 11.18 11.48Min 2.29WA 1.03 TXMax 102.14AK 38.38 ID

# of utilities: 3118

UT

ID


Outline

1. Public Goods2. The Context and the Experiment3. Results


1. Public Goods• Goods for which individual consumption is non-rival

and non-excludable• Voluntary contribution are often observed• Pure public good (Corson, 2007):– N individuals endowed with an initial amount Ei – They can contribute xi (their choice) to the public good, – But only receive a share P of the collective contribution to

the public good, with 1/N < P < 1– Because P < 1: direct loss from all individual contributions– Because P > 1/N: there is a collective gain


Some Known Results on Public Goods

• Reciprocity better explain contributions than commitment or altruism (Corson, 2007)

• Positive framing in the explanation of the situation increases contributions (Andreoni, 1995)

• Contributions decrease when the game is repeated (Andreoni, 1995 and Buckley and Croson, 2006).

• Heterogeneity (in endowment and preferences) increases contributions (Chan et al., 1999)

• Communication as well (Chan et al., 1999).


Experiments in Electricity

• Focus on Market Design and Bidding• Many studies on the willingness to pay for

green-electricity

… nothing on double public goods (economic and environmental)

in low cost electricity jurisdictionsWould people voluntarily accept to pay more if

they were aware of these public goods and offered the possibility?


2. Context of the Experiment• Québec is a province of Canada• Hydro-Québec is a government-owned company

producing about 192 TWh of hydropower every year (US total in 2010: 257 TWh)

• Retail consumers, on average, consumed 16.2 MWh in 2010 (retail price ≈ 7¢/kWh)

• The price is below the export price (NY, NE, ON and NB)

• In export markets, natural gas, coal and even oil are used


The Experiment (1)

• 200 participants in the Fall 2009• $300 of experimental money (value set to ten

times the real Canadian dollar value)• One single choice to make:– “Current Price Option” (same electricity price as in

reality) – “Alternative price option” (a 50% price increase)


The experiment (2): Four groups

• Type A households, detached houses with electric heating (35,472 kWh).

• Type B households, detached houses without electric heating (11,440 kWh).

• Type C households, apartments with electric heating (17,806 kWh).

• Type D households, apartments without electric heating (7,775 kWh)


MonthlyConsumption

(kWH)Fixed

Charge: $12.36

Price of first 912 kWH: $0.0545

Price of Additional

kWH: $0.0746Total

A 2,956 $49.73 $152.45 $214.54 B 953 $49.73 $3.05 $65.14 C 1,484 $49.73 $42.62 $104.71 D 645 $35.31 $0.00 $35.31

Monthly Consumption

(kWH)Fixed

Charge: $12.36

Price of first 912 kWH: $0.0845

Price of Additional

kWH: $0.1046Total

A 2,660 $77.11 $182.83 $272.30 B 858 $72.50 $0.00 $84.86 C 1,335 $77.11 $44.24 $133.71 D 583 $49.27 $0.00 $61.64

Current Price Option

Alternative price option+3¢/kWh-10% kWh


The experiment (3): Payoffs

Ui = $300 - xi + SWhere xi is the amount to pay, S is their share of the economic public good (additional income divided by

the number of participants)

Real purchase of carbon offsets in front of the participants, resulting from additional “hydro” exports

(displacing fossil fuel): environmental public good.


Summary of the Alternative Option

Individual Cost (higher electricity

price)

Per Person Economic Benefit

S

Total Economic

Benefit

Dollar Value of Environmental

Benefit

A $57.76 $22.20 $88.80 $5.92 B $19.72 $7.20 $28.80 $1.88 C $29.00 $11.10 $44.40 $2.96 D $13.96 $4.90 $19.60 $1.32


The experiment (4): Three Settings for the environmental public good• Ambiguity. GHG emission reductions resulting

from their choices happen according to an unknown probability.

• Risk. GHG emission reductions resulting from their choices have a 0.5 probability to be realized, and a 0.5 probability to not be realized.

• Certainty. Their choice would result in specific GHG emission reductions with a probability of 1.


Environmental Gain Resulting from the Alternative Price OptionAbout 0.5 ton of GHG reduction

per 1,000 kWh of electricity saved

Monthly Electricity Saved (kWh): 10%

GHG Reduction(ton of CO2)

Dollar Value of Carbon Offsets

A 296 0.148 $5.92 B 95 0.048 $1.88 C 149 0.074 $2.96 D 62 0.033 $1.32


3. Results: Participants choosing the Alternative option

Type and consumption Certain. Risk Ambig.

# altern. choice n=

A (35,472 kWh) 7 8 7 22 50 44%

C (17,806 kWh) 8 11 8 27 50 54%

B (11,440 kWh) 10 9 9 28 50 56%

D (7,775 kWh) 11 11 5 27 50 54%

# altern. choice 36 39 29 104 200n= 64 68 68 200

52% 56.25% 57.35% 42.65%


44%

50%

63%69%

47%

65%

53%

65%

41%

47%

29%

3.56 $

1.79 $

1.26 $

0.91 $

0.0 $

0.5 $

1.0 $

1.5 $

2.0 $

2.5 $

3.0 $

3.5 $

4.0 $

0%

10%

20%

30%

40%

50%

60%

70%

80%

A(35,472 kWh)

C(17,806 kWh)

B(11,440 kWh)

D(7,775 kWh)

Certainty (56.25%)Risk (57.35%)Ambiguity (42.65%)Difference in Average Payoffs

3. Results: Participants choosing the Alternative option

17

Conclusion

• Evidence that consumers may choose to pay more for electricity

• No endowment effect observed• Ambiguity on the environmental payoff

decreases the “contribution”• Under an adequate policy design, important

welfare improvements could be voluntarily obtained in many jurisdictions.

Pineau / HEC Montréal

Download - Pierre-Olivier Pineau, HEC Montréal (Canada)

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