Abstract
respond to price changes. This paper develops a model for evaluating the effects of alternative tariff designs on electricity use. The model concurrently addresses several interrelated difficulties posed by nonlinear pricing, heterogeneity in consumer price sensitivity, and consumption aggregation over appliances and time. We estimate the model using extensive data for a representative sample of 1300 California households. The results imply a strikingly skewed distribution of household electricity price elasticities in the population, with a small fraction of households accounting for most aggregate demand response. We then estimate the aggregate and distributional consequences of recent tariff structure changes Recent efforts to restructure electricity markets have renewed interest in electricity demand and pricing. This interest reflects a broad desire to improve the efficiency of electricity markets, and policy-makers' concerns over the impact of price changes on consumers. How new pricing mechanisms would affect households' consumption and expenditures is a matter of considerable uncertainty, however. This uncertainty has provoked controversy and debate in the regulatory policy arena, hampering market reforms. Using econometric methods to assess the effects of electricity price changes presents several challenges. These include the nonlinear structure of tariff schedules, aggregation of metered consumption behaviour over time and appliances, and the interdependence of energy use with longer-term household decisions over appliance ownership and dwelling characteristics. The first two issues introduce complex simultaneity problems between marginal prices and consumption. The third issue imposes high data requirements (information on household-specific appliance holdings and residence features), and creates heterogeneity in consumption responses related to the characteristics of these durable goods. When the researcher's objective is to develop a model for simulating the effects of prospective tariff changes, ignoring these issues will provide an incomplete assessment of demand responses and potentially misleading predictions of a new tariff's consumption and revenue consequences. In this paper, we estimate a model of household electricity demand that can be used
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