Energy efficiency pricing in regulated electricity markets

We develop analytical models to investigate the economic behavior of consumers and firms, applying them to assess the welfare implications of an energy efficiency pricing scheme. Our results indicate that consumers’ optimal effort is lower than the level firms seek to induce, with the social optimum falling between these two. Socially optimal consumer participation occurs under conditions of low uncertainty or when high uncertainty is mitigated by the significant environmental value of saved electricity. In contrast, non-participation becomes optimal when high uncertainty coincides with low environmental value. To complement our theoretical results, we estimate the welfare loss resulting from the undervalued effort by the consumer. Empirical results show that low uncertainty encourages participation, enhancing consumer utility. Despite its key role in reducing electricity consumption, continuous participation could result in substantial welfare loss.