Commercial consumers pay attention to marginal prices or average prices? Implications for energy conservation policies

Abstract

Any energy conservation policy intervention associated with energy price variation needs to consider whether consumers respond to marginal or average pricing. To the best of our knowledge, there is no such evidence for commercial electricity consumers (such as office buildings and malls), although commercial consumers are responsible for nearly 18% of electricity consumption in the United States. This study examines a four-tiered decreasing-block pricing schedule for commercial consumers. Based on individual-consumer-level data, we analyze the daily electricity consumption of 597 commercial accounts in Phoenix metropolitan, Arizona, from May 1, 2013, to December 31, 2016. We run 2SLS models with policy-induced price variation as instrumental variables to estimate the effects of marginal and average prices on commercial electricity consumption at each cutoff point. We also study the heterogenous response across industry sectors. Our analysis shows that commercial consumers respond to both marginal and average prices, but have different responses with respect to how much electricity they consume. Higher-usage consumers tend to respond more to average prices, whereas lower-usage consumers are more sensitive to marginal prices. Our findings indicate that conservation policies should be tailored differently for commercial electricity consumers. Nonlinear electricity pricing structures can reduce energy consumption, particularly for commercial consumers who have lower energy demand if the pricing structure shifts from decreasing to increasing blocks. In contrast, a flat rate with a higher price level can limit the electricity consumption of high-use consumers. As for an industry-wise policy design, nonlinear pricing can be effectively used to reduce aggregate consumption in the construction, manufacturing, real estate, and rental and leasing industries, professional, scientific, and technical services, other services (except public administration), and public administration industries.