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One size may not fit all: Welfare benefits and cost reductions with optional differentiated household electricity rates

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  • Daruwala, Farhad
  • Denton, Frank T.
  • Mountain, Dean C.

Abstract

We consider optional time-of-use (TOU) pricing for residential consumers, offered by a publicly regulated electricity supplier, as an alternative to a single TOU or flat rate structure. An equilibrium model explores and quantifies the effects of such pricing on welfare, consumption, and production costs. The supplier offers to each household a menu of possible rate structures obtained by maximizing a collective welfare function subject to three restrictions: Pareto efficiency, incentive compatibility, sufficiency of supplier revenue to cover costs. Simulations based on realistic calibration of the model demonstrate that optional pricing can increase overall consumer welfare and reduce average cost.

Suggested Citation

  • Daruwala, Farhad & Denton, Frank T. & Mountain, Dean C., 2020. "One size may not fit all: Welfare benefits and cost reductions with optional differentiated household electricity rates," Resource and Energy Economics, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:resene:v:61:y:2020:i:c:s0928765519302039
    DOI: 10.1016/j.reseneeco.2020.101160
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    More about this item

    Keywords

    Optional differentiated time-of-use rates; Pareto efficiency; Incentive compatibility; Welfare benefits; Electricity utility; Consumer demand;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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