the willingness to pay for renewable energy sources (res): the case of italy
DESCRIPTION
University of Perugia. Department of Economics Finance and Statistics. The willingness to pay for Renewable Energy Sources (RES): the case of Italy. S. Bigerna (Faculty of Economics, UTIU) P. Polinori (Department of Economics, Finance and Statistics, University of Perugia) - PowerPoint PPT PresentationTRANSCRIPT
The willingness to pay for Renewable Energy Sources (RES): the case of Italy
S. Bigerna (Faculty of Economics, UTIU)P. Polinori (Department of Economics, Finance
and Statistics, University of Perugia)
Washington D.C. October, 9-12 2011
University of PerugiaDepartment of Economics Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Outline
I. IntroductionII. Energy scenarioIII. Method and DataIV. Emprical findingsV. Conclusions
University of PerugiaDepartment of Economics Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Introduction
… today’s economy is mainly based on fossil fuels that are finite and polluting
… consequences regarding the use of fossil energy have become evident
In this context RES are essential to reduce harmful emissions and to conserve no renewable resources
University of PerugiaDepartment of Economics Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Policy ScenarioIn EU the RES Directive (2009/72/CE) known as “20-
20-20”, includes well-known environmental and energy targets for 2020.
20% of emission reduction20% of total energy satisfied by renewable resources, 20% of energy savings ………..…….. in reference to EU Directive 2009/72/CE Italian
goal is to attain the share of 17% in RES
University of PerugiaDepartment of Economics Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
One important feature of the RES is their high supply-generation cost …. Consequently:
….. high cost prevents the widespread uptake of renewable energy systems …..
But If a positive attitude exists to RES:…... it could affect consumers WTP augmenting the
premiums they are potentially apt to pay for such new technology
….. it could potentially reduce the needed amount of public funding.
University of PerugiaDepartment of Economics Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Coherently with this Energy Scenario the primary purpose of this study is to estimate
consumers’ WTP for the development of the RES use in Italy
(We made a National Survey)
University of PerugiaDepartment of Economics Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Green energy and WTP (State of Art)
Several surveys have been performed in the world.These studies are not very comparable because they
differ in terms of:
i) survey periodsii) countries and institutional contextiii) survey typologyiv) elicitation formatsv) applied methodology and econometric techniques
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Batley et al. (2001) [U.K.]Nomura and Akay (2004) [Japan]Ivanova (2005) [State of Queensland]Bollino (2009) [Italy]Zografakis et al. (2010) [Crete]Yoo and Kwak (2009) [Korea]
…. however by analyzing their empirical results all studies estimated a low WTP if compared with the additional cost due to the respective National Renewable Energy Target.
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
MethodLet us consider households direct utility function:
U = U(Xp, Xg, R)
positively related to:the private goods Xp (Xp1, ...., Xpn)
the composite public good Xg the public good R (RES use services)
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Xg is a composite commodity of all the others public goods with unit prices and value equal to the tax charged to the households.
Households maximise U subject to their budget constraint that is:M = PpXp + Xgwhere M is the nominal income and Pp is a price vector of
private goods
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Each household spends all its disposable income by purchasing private goods:
Md = M – Xg
Maximization framework provides a set of conditional demand functions:
di*(Pp, R, Xg, Md)
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
By substituting di* into U we obtain a conditional indirect utility function
V(Pp, R, Xg, Md)
Inverting V for Md we obtain the conditional expenditure function
E* = Md = E*(Pp, R, Xg, U)
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Minimizing both the expenditure relating to private and public goods subject to the utility level we obtain the restricted expenditure function:
E = E(Pp, R, Xg, U)
Conditional expenditure function and restricted expenditure function are related as follows
E = E(Pp, R, Xg, U) = E*(Pp, R, Xg, U) + Xg
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
By changing the energy scenario we assume that the restricted expenditure function varies according to R:
R0 = scenario without RES in the energy portfolioR1 = scenario with RES in the energy portfolio
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
By holding M as a constant the WTP for the use of RES is given by the compensated surplus (CS):
CS = E(Pp, R0, Xg0, U0) - E(Pp, R1, Xg0, U0)CS = [E*(Pp, R0, Xg0, U0) + Xg0] – [E*(Pp, R1, Xg0, U0) + Xg0]CS = E*(Pp, R0, Xg0, U0) – E*(Pp, R1, Xg0, U0)
where U0 is the utility level of the household without RES program.This estimate of compensating surplus is a measure of the
WTP for “RES use” service
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Cont’ d Method
Elicitation formatWe try to deal with two questions:1) Consumers have a range of economic values, or a
valuation distribution in their mind instead of a single point economic value estimation
2) Overestimation of WTP typically occurs in contingent valuation studies
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
To dale with the first question we adopt a variant of the payment card approach…..
1) payment card method is consistent with important guidelines (e.g. U.K. Government guidelines)
2) many scholars assert that this method could be more intensively employed in CV studies (Champ et al. 2003; O'Garra and Mourato 2007; Atkinson et al. 2005).
Payment Card allows us to consider that consumers have a range of economic values in their mind
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
To mitigate hypothetical bias Cheap Talk is often used
… participants are explicitly warned about hypothetical bias and are asked to respond to the valuation question as if the payment were real
However Cheap Talk might have little or no effect on some people
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
In order to reduce the overestimation risk ….
We adopted a “certainty correction method” proposing five types of acceptance intensity:
• “definitely yes” and “definitely no” (DY, DN),• “probably yes” and “probably no” (PY, PN)• “not sure or don’t know” (DK)
Consequently we adopt a SPC approach
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Bid (€) DN PN DK PY DY Interval data0 0% 25% 50% 75% 100% 0 [NO]
0.05 0% 25% 50% 75% 100% 0.001 - 0.0500.1 0% 25% 50% 75% 100% 0.051 - 0.1000.15 0% 25% 50% 75% 100% 0.110 - 0.1500.3 0% 25% 50% 75% 100% 0.151 - 0.3000.5 0% 25% 50% 75% 100% 0.301 - 0.5000.75 0% 25% 50% 75% 100% 0.501 - 0.750
1 0% 25% 50% 75% 100% 0.751 - 1.0001.5 0% 25% 50% 75% 100% 1.001 - 1.5002 0% 25% 50% 75% 100% 1.501 - 2.0005 0% 25% 50% 75% 100% 2.001 - 5.00010 0% 25% 50% 75% 100% 5.001 - 10.00015 0% 25% 50% 75% 100% 10.001 - 15.00020 0% 25% 50% 75% 100% 15.001 - 20.00030 0% 25% 50% 75% 100% 20.001 - 30.00050 0% 25% 50% 75% 100% 30.001 - 50.000100 0% 25% 50% 75% 100% 50.001 - 100.000
200+ 0% 25% 50% 75% 100% 100.001 - 200 [+]
Instruct the respondent to circle an aswer for each of 17 prices
Cont’ d Method
Payment card data may be analyzed in several ways.The choice of which model to use in regression
analysis is mainly affected by the data.Three aspects are relevant (Cameron and Huppert
1989; Whitehead et al. 1995; O’Garra and Mourato 2006): 1) the number of zero responses; 2) the size of the intervals; 3) the percentage of data that is point estimates.
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
• In our case the limited number of zeros and of point estimated WTP jointly to small size of the intervals suggests we use interval regression method
• So …… respondents maximum WTP may lie between the value recorded on the card and the higher value of the next card.
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Cont’ d Method
WTP probability associated with the choice of the respondents is:
P(ti) = P(tli < WTPi ≤ tui )
WTP is non-negative and its distribution is skewed we use a lognormal conditional distribution:
log WTPi = xi' * β + εi [εi ~ N(0, σ)]
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
The probability of choosing ti can be written:
P(ti) = Φ [(log tui − xi'*β)/σ]− Φ[(log tli − xi'*β)/σ]
where Φ is the standard normal cumulative density function.
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
The corresponding log likelihood function can be written:
T log L =∑log[Φ[(log tui − xi'*β)/σ]−Φ[(log tli − xi'*β)/σ]] i= 1
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
We estimate the optimal values of β and σ, and the mean and median WTP (Cameron and Huppert, 1989; Hanemann and Kanninen, 1999):
Median WTP = exp(xi
’β)
Mean WTP = exp(xi'β) exp (σ2/2 )
and we have computed the confidence interval according to Krinsky and Robb’s simulation model.
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
DataIn a typical CV study a policy scenario is proposed to
interviewees and their WTP to attain it is subsequently elicited.
Respondents were asked to consider the benefits to themselves of developing the RES use in Italy.
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Each respondent was confronted with a range of:
(i) general questions concerning RES and their
potential development;
(ii) questions on knowledge about Italian energy
system;
(iii) bids in order to support RES development in Italy
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
In order to derive WTP a national survey with 1.019
interviews was admnistered at the end of
November 2007
This is a very good period because before 2008-2009
…… financial crisis alters the long run consumers
perception
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
The stratified sample is representative of 46.8 million individuals, residents of Italy, and the survey was conducted by Istituto Piepoli.
The sample is highly representative of Italian population in terms of:
male-female ratiogeographical and urban location
demographic characteristicseducation and income distribution
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
The profile of the typical interviewee is:men aged 47
highly educatedmarried family with one child
income is around 35 000 €home owner
About the topic of survey the interviewee believes that the Italian energy scenario will lot worse in the next ten years, he knows the RES, his knowledge is really accurate and he consider RES a strategic opportunity for Italy.
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Empirical findings
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
0.000
0.200
0.400
0.600
0.800
1.000
1.200
Figure 2: WTP Survivor function
DY as yes DY, PY as yes DY, PY, DK as yes
As expected, the results show that:
1) the proportion of respondents who are willing to pay decreases with the amount submitted
2) the proportion is larger when “yes category” includes also PY and DK responses
3) this is especially evident at the right most end of the tail, for amounts greater than € 5
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Main findings:1. knowledge of RES and conviction that RES could
play an important role in Italian energy scenario positively affects the WTP
2. higher level of education and a better employment (which proxies higher income) are associated, coeteris paribus, with higher WTP
3. men are willing to pay less if compared with women4. older respondents are willing to pay less if
compared to younger ones ……
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
5. residents in North and Center Italy exhibit a higher WTP
6. people who live in municipalities greater than 100,000 inhabitants are willing to pay less
7. household size influences negatively the WTP8. “acting consistently” has a negative influence on
the WTP
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Finally• Based on the estimated parameters it is possible to
compute the mean and median WTP of the sample, and then to compute the total WTP for Italy
Tot WTP = WTP(monthly) x 2 x 6(Bimonthly bill) x Nr. households
• The total WTP may be compared with the total annual subsidy needed in Italy to comply with the EU climate change package goals by 2020
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Annual electric Households Total annual Annual subsidy Market sustainability
bill (Nr.) (Nr.) WTP (Euro) cost (Euro) (a)
of RES (%)
No parametric computation LBM 3.47 454,098,274 12.97%
KM 6.01 786,492,977 22.47%
Parametric estimation (median)Interv. Data Regr. (I) model 5.05 660,863,483 18.88%
Interv. Data Regr. (II) model 7.06 923,900,235 26.40%
Interv. Data Regr. (III) model 9.95 1,302,097,357 37.20%
Parametric estimation (mean)Interv. Data Regr. (I) model 12.16 1,591,306,921 45.47%
Interv. Data Regr. (II) model 15.95 2,087,281,693 59.64%
Interv. Data Regr. (III) model 24.14 3,159,058,312 90.26%
(a) The figure is an estimate of the additional costs necessary to achieve 17% of energy produced from renewable
6 21,810,676 3,500,000,000
Table 6: Policy implicationsMean/Median WTP
(Euro)
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
ConclusionsWe can see that a measure of the market
sustainability of RES , i.e. the cover capacity range, lies between 19% and 37%, according to different estimation models….. however:
1) we find a substantial willingness of consumers to partially cover the cost of RES
2) uncertainty plays a crucial role counting for 8% -19% of the annual goal (Choice of the SPC OK)
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
3. in table 6 we consider the full incremental cost that we arbitrarily ascribe entirely to the “small consumers” (eg low voltage clients). Maybe if we consider all the clients, market sustainability could noticeably increase
4. if we consider the current burden paied by italian households we notice that the actual additional cost due actually to renewables is less than all the elicited values in our models
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
This means that:
-- a further margin could exist in the Italian context;-- Italians (Are? Were? -2007-) ready to pay more for RES
according to the European target
Perhaps Italian citizens need appropriate information and education campaigns finalized to:
a) better explaining all the advantages linked to the renewable energy use
b) reducing erroneous evaluations on the costs of renewable energies
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research
Thanks for attention
... suggestions and questions are [email protected]
University of PerugiaDepartment of Economic, Finance and Statistics
30th USAEE/IAEE Conference: Changing Roles of Industry, Government and Research