Choosing to Pay More for Electricity
An experiment to test the level of residential
consumer cooperation in increasing electricity
price in Québec
Pierre-Olivier Pineau, HEC Montréal (Canada)
Jim Engle-Warnick, McGill University and CIRANO (Canada)
Juan Robledo, McGill University and CIRANO (Canada)
31. Electricity Demand Modeling and Capacity Planning
Tuesday, October 11, 2:00 - 3:30 pm, 2011
South American B Room, Capital Hilton
30th USAEE/IAEE North American Conference
Average 2009 Sales
per US Retail Consumer
45
40
Price
¢/kWh
ID
Mean
MWh / Retail Consumer
35
MWh/
consumer
11.18
Min
2.29 WA
Max 102.14 AK
# of utilities: 3118
30
11.48
1.03 TX
38.38 ID
25
20
15
10
UT
5
0
0.00
EIA (2010)
2.00
4.00
6.00
8.00
10.00 12.00
Price ¢/kWh
Pineau / HEC Montréal
14.00
16.00
18.00
20.00
2
Outline
1. Public Goods
2. The Context and the Experiment
3. Results
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3
1. Public Goods
• Goods for which individual consumption is nonrival and non-excludable
• Voluntary contribution are often observed
• Pure public good (Corson, 2007):
– N individuals endowed with an initial amount Ei
– They can contribute xi (their choice) to the public
good,
– But only receive a share P of the collective
contribution to the public good, with 1/N < P < 1
– Because P < 1: direct loss from all individual
contributions
– Because P > 1/N: there is a collective gain
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Some Known Results on Public Goods
• Reciprocity better explain contributions than
commitment or altruism (Corson, 2007)
• Positive framing in the explanation of the situation
increases contributions (Andreoni, 1995)
• Contributions decrease when the game is repeated
(Andreoni, 1995 and Buckley and Croson, 2006).
• Heterogeneity (in endowment and preferences)
increases contributions (Chan et al., 1999)
• Communication as well (Chan et al., 1999).
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Experiments in Electricity
• Focus on Market Design and Bidding
• Many studies on the willingness to pay for
green-electricity
… nothing on double public goods
(economic and environmental)
in low cost electricity jurisdictions
Would people voluntarily accept to pay more if
they were aware of these public goods and
offered the possibility?
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2. Context of the Experiment
• Québec is a province of Canada
• Hydro-Québec is a government-owned company
producing about 192 TWh of hydropower every
year (US total in 2010: 257 TWh)
• Retail consumers, on average, consumed
16.2 MWh in 2010 (retail price ≈ 7¢/kWh)
• The price is below the export price (NY, NE, ON
and NB)
• In export markets, natural gas, coal and even oil
are used
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7
The Experiment (1)
• 200 participants in the Fall 2009
• $300 of experimental money (value set to ten
times the real Canadian dollar value)
• One single choice to make:
– “Current Price Option” (same electricity price as in
reality)
– “Alternative price option” (a 50% price increase)
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The experiment (2): Four groups
• Type A households, detached houses with
electric heating (35,472 kWh).
• Type B households, detached houses without
electric heating (11,440 kWh).
• Type C households, apartments with electric
heating (17,806 kWh).
• Type D households, apartments without
electric heating (7,775 kWh)
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Current Price Option
A
B
C
D
Monthly
Consumption
(kWH)
2,956
953
1,484
645
Fixed
Charge:
$12.36
Price of first 912
kWH: $0.0545
$49.73
$49.73
$49.73
$35.31
Price of
Additional
kWH: $0.0746
$152.45
$3.05
$42.62
$0.00
Total
$214.54
$65.14
$104.71
$35.31
Alternative price option
+3¢/kWh
-10% kWh
A
B
C
D
Monthly
Consumption
(kWH)
2,660
858
1,335
583
Fixed
Charge:
$12.36
Price of first 912
kWH: $0.0845
$77.11
$72.50
$77.11
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$49.27
Price of
Additional
Total
kWH: $0.1046
$182.83
$272.30
$0.00
$84.86
$44.24
$133.71
10
$0.00
$61.64
The experiment (3): Payoffs
Ui = $300 - xi + S
Where xi is the amount to pay, S is their share of
the economic public good (additional income
divided by the number of participants)
Real purchase of carbon offsets in front of the
participants, resulting from additional “hydro”
exports (displacing fossil fuel):
environmental public good.
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Summary of the Alternative Option
Individual Cost
Per Person
(higher electricity Economic Benefit
price)
S
Total
Economic
Benefit
Dollar Value of
Environmental
Benefit
A
$57.76
$22.20
$88.80
$5.92
B
$19.72
$7.20
$28.80
$1.88
C
$29.00
$11.10
$44.40
$2.96
D
$13.96
$4.90
$19.60
$1.32
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The experiment (4): Three Settings
for the environmental public good
• Ambiguity. GHG emission reductions resulting
from their choices happen according to an
unknown probability.
• Risk. GHG emission reductions resulting from
their choices have a 0.5 probability to be realized,
and a 0.5 probability to not be realized.
• Certainty. Their choice would result in specific
GHG emission reductions with a probability of 1.
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Environmental Gain Resulting from the
Alternative Price Option
About 0.5 ton of GHG reduction
per 1,000 kWh of electricity saved
A
B
C
D
Monthly Electricity
Saved (kWh): 10%
GHG Reduction
(ton of CO2)
Dollar Value of
Carbon Offsets
296
95
149
62
0.148
0.048
0.074
0.033
$5.92
$1.88
$2.96
$1.32
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3. Results: Participants choosing the
Alternative option
Type and
consumption
Certain.
# altern.
Risk Ambig. choice
n=
A (35,472 kWh)
7
8
7
22
50
44%
C (17,806 kWh)
8
11
8
27
50
54%
B (11,440 kWh)
10
9
9
28
50
56%
D (7,775 kWh)
11
11
5
27
50
54%
# altern. choice
36
39
29
104
200
64
68
68
200
n=
56.25% 57.35% 42.65%
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52%
15
3. Results: Participants choosing the
80%
Alternative option
4.0 $
70%
3.5 $
3.56 $
65%
63%
69%
65%
60%
3.0 $
50%
50%
2.5 $
47%
47%
44%
40%
53%
41%
2.0 $
1.79 $
30%
1.5 $
1.26 $
20%
10%
Certainty (56.25%)
Risk (57.35%)
Ambiguity (42.65%)
Difference in Average Payoffs
29%
0.91 $
1.0 $
0.5 $
0%
0.0 $
A
(35,472 kWh)
C
B
Pineau
/ HEC Montréal
(17,806
kWh)
(11,440 kWh)
D
(7,775 kWh)
16
Conclusion
• Evidence that consumers may choose to pay
more for electricity
• No endowment effect observed
• Ambiguity on the environmental payoff
decreases the “contribution”
• Under an adequate policy design, important
welfare improvements could be voluntarily
obtained in many jurisdictions.
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