Pricing strategy for household energy-saving option (HESO): A novel option-based intervention for promoting household energy efficiency

Abstract

Household energy-saving interventions are essential in reducing energy consumption in residential buildings. One of the effective interventions is Household Energy-Saving Option (HESO). However, the pricing strategy of this innovative intervention has not been explored. This study aims to establish a feasible valuation strategy for HESO to facilitate the application of market-based energy-saving interventions among households. This study first provides a pricing strategy of HESO from a market zero-profit perspective. It continues by developing a price cap and floor for HESO's market price. The theoretical pricing model was validated by a field experiment consisting of two-tiered HESO trading among 67 households in Singapore. The results revealed decisive implications for both environmental policymakers and HESO suppliers. Policymakers are suggested to launch HESO in countries or regions with stable and relatively high electricity prices and low discount rates. HESO suppliers may choose to adjust rewards and duration accordingly when the market price deviates from the zero-profit equilibrium price of HESO. The valuation strategy of HESO also helps quantitative estimation of households' perceived value of HESO.