Impacts of Block‐Rate Energy Pricing on Groundwater Demand in Irrigated Agriculture

In many regions of the world, energy costs associated with extraction represent the only explicit price for groundwater use. Therefore, energy pricing policies can significantly influence the use of scarce groundwater resources. This article leverages unique well‐level data on groundwater use, electricity prices, and pumping efficiency from the Republican River Basin of Colorado to estimate producer responses to changes in marginal energy prices. Empirical parameter estimates are used to simulate a change in energy pricing policy from existing decreasing block rate structures to a revenue‐neutral uniform marginal price. The simulation results reveal that, on average, uniform energy pricing leads to an 11% decrease in groundwater use than would occur under a decreasing block rate pricing regime. However, a transition to uniform energy pricing diminishes short‐run producer welfare. More broadly, the results illustrate how energy pricing has important implications for groundwater management and informs a more comprehensive understanding of how priced inputs influence the use of unpriced natural resources.