Does Increasing Block Pricing Decrease Energy Use? Evidence from the Residential Electricity Market

Many electric utilities in the United States have replaced flat pricing schedules with increasing block prices (IBPs) in an effort to decrease aggregate energy use without imposing costs on low-income households. IBPs are step functions where the price per kilowatt-hour increases as a household uses more electricity. It is not clear, however, in theory or in practice, whether IBPs decrease aggregate energy use and protect low-income households relative to a revenue-neutral flat rate. I use detailed monthly billing records combined with demographic data for 11,745 California households and price differences over time across utility climate zones to estimate price elasticities of energy demand by income. The resulting estimates find that wealthier households are more price elastic than low-income households. I use these elasticities to show that IBPs increase total electricity use relative to a revenue-neutral flat price, therefore failing to achieve their goal of conservation. Finally, this paper finds that IBPs decrease electricity bills for low-income households while pushing costs to high-income households.