Residential Electricity Market Research Articles

Measuring Switching Costs in the Italian Residential Electricity Market

Residential electricity markets in European countries are still characterized by low consumer engagement, especially where regulated and liberalized markets coex- ist. Using an original dataset on 2015–2018 prices for the Italian electricity mar- ket, augmented with the number of residential consumers, we study the presence and magnitude of switching costs—i.e., time-based and cognitive-based costs on consumers changing providers—in the liberalized market. We find that switch- ing from the incumbent involves high costs—almost as high as the yearly energy expenditure—while switching from competitors is less expensive. We also carry out two counterfactual analyses. In the first, we show that consumers would have incurred lower average switching costs over the years had the market been less concentrated. In the second, we simulate how switching costs could evolve once regulated prices are phased out, and the market is fully liberalized.

Stackelberg–Nash game approach for price-based demand response in retail electricity trading

This paper studies the price-based demand response problem in a deregulated retail electricity trading, aiming to coordinate the energy consumption behavior of end-users under dynamic retail prices. The challenge here is that in addition to the hierarchical decision-making process between utility company and end-users considered in existing works, the non-cooperative and competitive interdependence among end-users cannot be ignored. To address this issue, we first construct a novel Stackelberg–Nash game, in which the Stackelberg game is used to capture the hierarchical decision-making process between utility company and end-users, while the Nash game is dedicated to describing the interdependence among end-users. Then the existence and uniqueness of the Stackelberg–Nash equilibrium is provided along with theoretical analysis. On the basis of the analysis of equilibrium, we propose a distributed iterative algorithm with an adaptive step size, which is benchmarked with a fixed step-size algorithm. The comparison results on a real-life residential retail electricity market show that our proposed algorithm has better performance in terms of effectiveness and scalability.

A self-selection pricing mechanism for residential electricity: Measures of sustainability and equity to balance market mechanisms and government controls

We design a self-selection-pricing mechanism in which an electricity supplier offers its customers an optimal menu of contracts subject to a price ceiling set by the government, a hybrid model of market mechanism and government controls. We calibrate the model using information from a residential electricity market in China. Our mechanism outperforms the tiered-electricity-pricing system in China in terms of environmental and industrial sustainability but comes at the cost of providing less protection for low-income households (i.e., less equity). We conclude by offering measures of sustainability and equity that governments could use when trying to balance the trade-off between the two.

On the welfare effect of retail electricity subsidy in Vietnam

PurposeThis research investigates how subsidy programs in Vietnam's residential electricity market affect consumers' well-being.Design/methodology/approachTwo perspectives are employed: cash transfer and quantity-based subsidy. The effectiveness of cash transfer is measured in three ways: benefit incidence, beneficiary incidence and materiality. The quantity-based subsidy is established under the increasing block rate pricing, with the first two block rates being lower than the marginal cost. To improve the quantity-based subsidy, the research examines the consumer surplus under four proposals.FindingsThe results show that both types of subsidies are ineffective in supporting the poor.Research limitations/implicationsIn order to achieve a more equal distribution among households, the subsidy program should remove all subsidized blocks and reflect the full marginal cost. Changes should be made to the price structure regarding both marginal price and intervals.Practical implicationsTo mitigate the impact of the quantity-based subsidy, the government should improve the cash transfer by reducing extortion and improving targeting efficiency, especially for poor households living in rented houses.Originality/valueThis paper is the first to discuss the welfare effect of the electricity subsidy in Vietnam. First, it comprehensively evaluates the cash transfer subsidy in Vietnam. Second, it suggests a modification in the residential electricity tariff.

Exploring the participation willingness and potential carbon emission reduction of Chinese residential green electricity market

China officially established a green electricity trading market in 2021. This study investigated the intention of Chinese households to participate in the green electricity tariff and surveyed their acceptable maximum premium; afterwards, the corresponding potential carbon emission reduction is evaluated. The survey shows that 82% of Chinese households support the additional willingness-to-pay (WTP) for green electricity. The mean willingness-to-pay values without protest-zeros are evaluated as RMB14.6 with a gender differential that men prefer to pay more than women. Relative impact factors analysis shows that household' intention of using green-e significantly impacts their participation in extra WTP, but households' income does not show a significant effect. On the other hand, the model for extra expenditure shows the opposite effect of these two factors. Last, the study conducted a scenario analysis to evaluate the potential emission reduction and related welfare transformation efficiency. The scenario analysis reveals that households’ green electricity trading potentially contributes to 30%–54% of the carbon reduction and a reasonable trading mechanism could achieve emission reductions goal with less welfare loss. Finally, some policy implications are proposed, providing theoretical support for policy-makers.

Measuring Switching Costs in the Italian Residential Electricity Market

Following Shy (2002), we develop a simple model to determine consumers’ switching costs in the liberalized residential electricity market. By exploiting an original dataset on electricity prices and consumers in Italy, we use the theoretical predictions to measure consumers’ switching costs across the three main firms acting in the liberalized market. Our empirical results confirm the theoretical prediction that firms in the liberalized market are posting lower prices than the regulated one. Consumer decisions are found to be heavily affected by switching costs; our results show that the number of consumers in the regulated market negatively influences them. Switching costs appear to be particularly relevant for the incumbent firm while they are of lower magnitude for competitors – a result consistent with reputation playing a significant role in influencing customer switching.

Why Have Voluntary Time‐of‐Use Tariffs Fallen Short in the Residential Sector?

We investigate the causes behind the underwhelming adoption of voluntary Time‐of‐Use (TOU) tariffs in the residential electricity market. TOU tariffs are deployed by utilities to better match electricity generation capacity with market demand by giving consumers price incentives to reduce their consumption when electricity demand is at its peak. However, consumers in residential electricity markets are heterogeneous in their consumption preferences. Hence, utilities face a trade‐off when deploying voluntary TOU tariffs—to provide aggressive price incentives that will only appeal to consumers with flatter profiles or milder incentives to appeal to a larger proportion of the market. Using a game‐theoretic model, we identify the key factors that determine the viability of voluntary TOU tariff deployment. On the supply side, the gap between wholesale prices in the peak and off‐peak periods determines how much the utility stands to benefit by inducing demand response. On the demand side, heterogeneity within target consumer sets determines how much demand response the utility can induce with a certain price incentive. We show that misaligned incentives between utilities and regulators lead to underwhelming TOU tariff adoption compared to the socially desirable level, and that this under‐adoption is worse when consumption preferences are uniformly distributed. We also evaluate the degree of cross‐subsidization across tariff structures to identify their implications for equity among the different consumer types, and find that low levels of voluntary TOU adoption are less equitable than the default tariffs.

Nudging the poor and the rich – A field study on the distributional effects of green electricity defaults

Choice defaults are an increasingly popular public policy tool. Yet there is little knowledge of the distributional consequences of such nudges for different groups in society. We report results from an elicitation study in the residential electricity market in Switzerland in which we contrast consumers' actual contract choices under an existing default regime with the same consumers' active choices in a survey presenting the same choice-set without any default. We find that the default is successful at curbing greenhouse gas emissions, but it leads poorer households to pay more for their electricity consumption than they would want to, while leaving a significant willingness to pay for green electricity by richer households untapped.

The behavioural effect of electronic home energy reports: Evidence from a randomised field trial in the United States

Behavioural interventions, such as informational nudges, have become an increasingly popular strategy in demand-side energy management. In particular, home energy reports (HERs) have been used to induce behavioural change among residential consumers. These HERs typically provide peer comparisons of energy use and information about energy savings opportunities. Despite the growing prevalence of HERs and a shift from postal to electronic delivery of HERs, the experimental evidence base of their effectiveness comes primarily from HERs delivered by post from a single vendor (Opower). Whether that evidence generalises to other programmes and to the electronic delivery of HERs is unclear. This paper reports new evidence for HER effectiveness from a 12-month field experiment with approximately 9,000 households that tested electronic HER programme in a deregulated American residential electricity market. Despite high non-compliance with HER delivery, the programme reduced household electricity consumption by 2.9%, 95% CI [-5.0%, −0.76%]. This estimated reduction is consistent with prior estimated impacts of HERs delivered by post and implies electronic HERs are at least as effective as reports delivered by post in reducing electricity consumption, while they are administered at a lower cost.

Liberalization and customer behavior in the Portuguese residential retail electricity market

The final step that Portugal is taking to reach a fully liberalized electricity market is the deregulation of the retail market by phasing-out regulated electricity prices and reducing the administrative burdens in this area. These attempts are done to promote the entrance of companies into the retailing business and to actively engage the end-users in the market. This analysis shows that despite high consumer switching rates during the 2013–2015 period, the retail market in Portugal is still highly concentrated. The retail rates are also not following the changes in the wholesale market price.

Why Have Voluntary Time-of-Use Tariffs Fallen Short in the Residential Sector?

We investigate the causes behind the underwhelming adoption of voluntary Time-of-Use (TOU) tariffs in the residential electricity market. TOU tariffs are deployed by utilities to better match electricity generation capacity with market demand by giving consumers price incentives to reduce their consumption when electricity demand is at its peak. However, consumers in residential electricity markets are heterogeneous in their consumption preferences. Hence, utilities face a trade-off when deploying voluntary TOU tariffs --- to provide aggressive price incentives that will only appeal to consumers with flatter profiles or milder incentives to appeal to a larger proportion of the market. Using a game-theoretic model, we identify the key factors that determine the viability of voluntary TOU tariff deployment. On the supply side, the gap between wholesale prices in the peak and off-peak periods determines how much the utility stands to benefit by inducing demand response. On the demand side, heterogeneity within target consumer sets determines how much demand response the utility can induce with a certain price incentive. We show that misaligned incentives between utilities and regulators lead to underwhelming TOU tariff adoption compared to the socially desirable level, and that this under-adoption is worse when consumption preferences are uniformly distributed. We also evaluate the degree of cross-subsidization across tariff structures to identify their implications for equity among the different consumer types, and find that low levels of voluntary TOU adoption are less equitable than the default tariffs.

Price discrimination and the modes of failure in deregulated retail electricity markets

In Australia, as with Great Britain, governments have shown rising concern with the health of competitive residential electricity markets. A core concern is the practice of price discrimination and the rising dispersion of prices. After almost a decade of Full Retail Contestability, the State of Queensland finally removed its regulated price cap from the residential electricity market in 2016, while almost simultaneously, the two jurisdictions that pioneered this price deregulation reform, Great Britain and Victoria, were questioning their prior policy decision. Queensland makes for a fascinating case study because Southeast Queensland comprises a fully deregulated retail market while Regional Queensland is a regulated monopoly – with common input costs across both zones. Consequently, a regulated monopoly with a uniform tariff and 640,000 customers forms a very large control group, which can be directly compared to the competitive market of more than 1.3 million customers – making such analysis globally unique. Analysis of Queensland market conditions concludes the policy is welfare enhancing, and that British and Victorian concerns regarding price discrimination practices are misguided. To be clear, rising electricity prices are a problem, but price discrimination is not. The deregulated competitive market is, perhaps unsurprisingly, better at regulating the overall average tariff and consumer welfare has been enhanced by $184 million per annum – with some consumer segments very materially better off. However, certain modes of failure remain, viz. an inter-consumer misallocation problem and lack of transparency vis-à-vis the anchoring of discounts – known as the “discounts off what?” problem. The former is currently trivial, and the latter requires further research.

The Role of Attitudes and Marketing in Consumer Behaviours in the British Retail Electricity Market

We examine characteristics associated with consumer (dis)engagement in the residential electricity market, a topic of increasing policy interest and intervention, introducing consumer attitudes and marketing recall as new factors. General attitudes are closely associated with electricity market activity, with considerable variation in the strength and statistical significance of these relationships, indicating very different motivations amongst consumers. Recall of direct marketing routes has little identifiable effect, while advice of family and friends is influential.We identify implications for communication by both suppliers and policy makers seeking to improve the functioning of such markets, including the necessity for a variety of approaches.

Nudging the Poor and the Rich - A Field Study on the Distributional Effects of Green Electricity Defaults

Choice defaults are an increasingly popular public policy tool. Yet there is little knowledge of the distributional consequences of such nudges for different groups in society. We report results from an elicitation study in the residential electricity market in Switzerland in which we contrast consumers’ actual contract choices under an existing default regime with the same consumers' active choices in a survey presenting the same choice-set without any default. We find that the default is successful at curbing greenhouse gas emissions, but it leads poorer households to pay more for their electricity consumption than they would want to, while leaving a significant willingness to pay for green electricity by richer households untapped.

Power to Choose? An Analysis of Consumer Inertia in the Residential Electricity Market

Many jurisdictions around the world have deregulated utilities and opened retail markets to competition. However, inertial decision making can diminish consumer benefits of retail competition. Using household-level data from the Texas residential electricity market, we document evidence of consumer inertia. We estimate an econometric model of retail choice to measure two sources of inertia: search frictions/inattention and a brand advantage that consumers afford the incumbent. We find that households rarely search for alternative retailers, and when they do search, households attach a brand advantage to the incumbent. Counterfactual experiments show that low-cost information interventions can notably increase consumer surplus. (JEL D12, D83, L81, L94, L98, M31)

Estimating the Impact of Time-of-Use Pricing on Irish Electricity Demand

Smart meters, in conjunction with time-of-use (TOU) pricing, can facilitate an improvement in energy efficiency by providing consumers with enhanced information about electricity consumption and costs, and thereby encourage a shift away from consumption during peak hours. In 2009-10, the Irish Commission for Energy Regulation co-ordinated a randomised controlled trial in the Irish residential electricity market. Smart meters were introduced in approximately 5,000 households, divided into control and treatment groups, with treatment groups exposed to a variety of TOU tariffs and information stimuli. This paper analyses the response of Irish households at different times of the day to the introduction of TOU tariffs and information stimuli. We find that these measures have a significant effect in reducing electricity consumption in Ireland, particularly during peak hours. However, while households reduce peak demand significantly after the introduction of TOU tariffs and associated information, there is little incremental response to increasing differentials between peak and off-peak prices.

HOUSEHOLD PREFERENCES FOR TIME-OF-USE RATES IN THE PORTUGUESE ELECTRICITY MARKET

This paper contributes to the debate about peak-load pricing by making an analysis of the residential electricity market in Portugal. The results were built on techniques of logit regression complemented by quantile regression. We estimate the probability of choosing the Time-Of-Use electricity rate and the probability of reducing the Monthly Costs of Electricity by switching the rate for different consumer profiles. Factors such as consumer behaviour and knowledge are determinant when it comes to choosing differentiated rates. Our results suggest guidelines for defining policy measures that will promote an effective change in consumption periods and rate choices.

Potential of Hourly Settlements in the Residential Sector of the Swedish Electricity Market—Estimations of Risk Reduction and Economic Result

Increased demand response is essential in order to boost the effectiveness of the Swedish power market. The all-embracing installation of automatic meter reading systems enables power suppliers to introduce hourly settlements in the residential sector. The aim of the study has been to assess the impact of electricity retailers' physical and financial risk in customer segments with different heating systems as well as to estimate the potential of the electricity contract “Fixed price with the right to return” in terms of economic consequences and risk management. To that end, computer simulations using empirical data have been employed. The results show that the physical price and volume risk, which constitute the greatest risk of suppliers, are most severe in households whose main heating system consists of a geothermal heat pump and less serious in households that are less dependent on electricity for heating. Hourly settlements in the residential electricity market have proven to be advantageous to retailers from both an economic and risk reducing point of view and provide a superior opportunity for customers, and those with an electric heating installation in particular, to lower their electricity expenses substantially.

Corporate Transparency and Green Management

How can firms support their customers’ collaborative, social responsibility initiatives – and especially pro-environmental, firm–customer collaborations? Does corporate transparency affect customers’ willingness to undertake pro-environmental collaborative programs? This study addresses these questions in relation to the US residential electricity market. It focuses on the impact of customers’ perceptions of the utility’s degree of transparency and on the willingness to engage in pro-environmental behavior (PEB) related to electricity consumption. The responses of 1257 interviewees from US households to questions related to their electricity suppliers are analyzed through structural equation models (SEMs) using latent variables. Results show that customers’ perceptions of an electricity utility’s transparency affect their willingness to collaborate in environmental programs, and that the degree of perceived transparency of the utility is related to customers’ environmental awareness.

Change in consumer sensitivity to electricity prices in response to retail deregulation: A panel empirical analysis of the residential demand for electricity in the United States

About ten years have passed since the deregulation of the U.S. retail electricity market, and it is now generally accepted that the available data is adequate to quantitatively assess and compare conditions before and after deregulation. This study, therefore, estimates the changes in price elasticity in the residential electricity market to examine the changes, if any, in household sensitivity (as a result of retail electricity market deregulation policies) to residential electricity rates. Specifically, six types of panel data are prepared, based on three cross-sections—all states (except for Alaska and Hawaii) and the District of Columbia, deregulated states, and non-deregulated states—and two time series—the period before deregulation and the period after deregulation. The panel empirical analysis techniques are used to determine whether or not the variables are stationary, and to estimate price elasticity. We find that there is no substantial difference in the price elasticity between deregulated and non-deregulated states for both periods—before deregulation and after deregulation. Thus, it can be said that the deregulation of the retail electricity market has not made consumers more sensitive to electricity rates and that retail deregulation policies are not the cause of price elasticity differences between deregulated and non-deregulated states.