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Choosing to Pay More for Electricity An experiment to test the level of residential consumer cooperation in increasing electricity price in Québec Pierre-Olivier.

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Presentation on theme: "Choosing to Pay More for Electricity An experiment to test the level of residential consumer cooperation in increasing electricity price in Québec Pierre-Olivier."— Presentation transcript:

1 Choosing to Pay More for Electricity An 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 Planning Tuesday, October 11, 2:00 - 3:30 pm, 2011 South American B Room, Capital Hilton 30th USAEE/IAEE North American Conference

2 Pineau / HEC Montréal2 Average 2009 Sales per US Retail Consumer EIA (2010) Price ¢/kWh MWh/ consumer Mean11.1811.48 Min2.29WA1.03TX Max102.14AK38.38ID # of utilities: 3118 UT ID

3 Outline 1.Public Goods 2.The Context and the Experiment 3.Results Pineau / HEC Montréal3

4 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 E i – They can contribute x i (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 Pineau / HEC Montréal4

5 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). Pineau / HEC Montréal5

6 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 jurisdictions Would people voluntarily accept to pay more if they were aware of these public goods and offered the possibility? Pineau / HEC Montréal6

7 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 Pineau / HEC Montréal7

8 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) Pineau / HEC Montréal8

9 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) Pineau / HEC Montréal9

10 10 Monthly Consumption (kWH) Fixed Charge: $12.36 Price of first 912 kWH: $0.0545 Price of Additional kWH: $0.0746 Total A2,956$49.73$152.45$214.54 B953$49.73$3.05$65.14 C1,484$49.73$42.62$104.71 D645$35.31$0.00$35.31 Monthly Consumption (kWH) Fixed Charge: $12.36 Price of first 912 kWH: $0.0845 Price of Additional kWH: $0.1046 Total A2,660$77.11$182.83$272.30 B858$72.50$0.00$84.86 C1,335$77.11$44.24$133.71 D583$49.27$0.00$61.64 Current Price Option Alternative price option +3¢/kWh -10% kWh

11 The experiment (3): Payoffs U i = $300 - x i + S Where x i 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. Pineau / HEC Montréal11

12 Summary of the Alternative Option Pineau / HEC Montréal12 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

13 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. Pineau / HEC Montréal13

14 Environmental Gain Resulting from the Alternative Price Option About 0.5 ton of GHG reduction per 1,000 kWh of electricity saved Monthly Electricity Saved (kWh): 10% GHG Reduction (ton of CO 2 ) Dollar Value of Carbon Offsets A 2960.148$5.92 B 950.048$1.88 C 1490.074$2.96 D 620.033$1.32 Pineau / HEC Montréal14

15 3. Results: Participants choosing the Alternative option Pineau / HEC Montréal15 Type and consumptionCertain.RiskAmbig. # altern. choicen= A (35,472 kWh)787 22 5044% C (17,806 kWh)8118 27 5054% B (11,440 kWh)1099 28 5056% D (7,775 kWh)11 5 27 5054% # altern. choice363929104200 n=6468 200 52% 56.25%57.35%42.65%

16 Pineau / HEC Montréal16 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 17


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