The increasing cost of ignoring Coase: Inefficient electricity tariffs, welfare loss and welfare-reducing technological change

Abstract

In this paper, I show that not only do distortionary electricity tariffs create welfare loss, they create a platform for growing welfare losses with expected technological change. I estimate the welfare loss attributable to existing British electricity tariffs, finding that they are equivalent to between 6% and 18% of domestic consumption value. Losses are greater than unpriced distributional and environmental counter-effects and therefore common arguments against reform are invalid. Expected technological change will increase this welfare loss. Deployment of distributed energy resources (e.g. solar) benefits adopters at the expense of non-adopters as tariffs are recalibrated to recover fixed costs. Reform on Coasian principles avoids these welfare losses and redistributional effects. The structure of electricity tariffs will therefore determine whether technological change is beneficial to consumers. In providing these estimates, I provide both analytical and numerical insight. I combine household-level micro-data with information on utility cost and tariff structure. I propose a simulation methodology to elicit the welfare effects of technological change. • British tariffs create substantial welfare losses of 6–18%. • These losses are greater than environmental and distributional counter-effects. • Expected technological change will reduce, rather than increase, consumer welfare. • In providing these estimates, I provide both analytical and numerical insight. • I propose a simulation methodology to elicit ex-ante welfare effects.