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Retail Pricing in Colombia to Support the Efficient Deployment of Distributed Generation and Electric Vehicles

Author

Listed:
  • McRae, Shaun D.
  • Wolak, Frank A.

Abstract

Electricity tariff reforms will be an essential part of the clean energy transition. Existing tariffs rely on average cost pricing and often set a price per unit that exceeds marginal cost. The higher price encourages over-adoption of residential solar panels and under-adoption of electric alternatives to fossil fuels. However, an efficient tariff based on fixed charges and marginal cost pricing may harm low-income households. Households with low demand for electricity may prefer to disconnect from the grid rather than pay an equal share of fixed costs. This paper proposes an alternative methodology for setting fixed charges based on the predicted willingness-to-pay of each household. Household data from Colombia are used to show the fiscal burden and economic inefficiency of the existing tariffs. The paper then shows how the new tariff methodology could improve economic efficiency and create incentives for the adoption of clean energy technologies, while still leaving low-income households better off.

Suggested Citation

  • McRae, Shaun D. & Wolak, Frank A., 2020. "Retail Pricing in Colombia to Support the Efficient Deployment of Distributed Generation and Electric Vehicles," IDB Publications (Working Papers) 10141, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:10141
    DOI: http://dx.doi.org/10.18235/0002192
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    Cited by:

    1. Nicolas Astier, 2021. "Second‐best pricing for incomplete market segments: Application to electricity pricing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1287-1311, December.

    More about this item

    Keywords

    Retail electricity tariffs; Increasing block pricing; Distributed generation; Electric vehicles;
    All these keywords.

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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