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Choosing to Pay More for ElectricityAn 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 PlanningTuesday, October 11, 2:00 - 3:30 pm, 2011
South American B Room, Capital Hilton30th USAEE/IAEE North American Conference
Pineau / HEC Montréal 2
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MW
h /
Reta
il Co
nsum
er
Price ¢/kWh
Average 2009 Sales per US Retail Consumer
EIA (2010)
Price¢/kWh
MWh/consumer
Mean 11.18 11.48Min 2.29WA 1.03 TXMax 102.14AK 38.38 ID
# of utilities: 3118
UT
ID
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Outline
1. Public Goods2. The Context and the Experiment3. Results
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1. Public Goods• Goods for which individual consumption is non-
rival 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).
Pineau / HEC Montréal 6
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 jurisdictionsWould 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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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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MonthlyConsumption
(kWH)Fixed
Charge: $12.36
Price of first 912 kWH: $0.0545
Price of Additional
kWH: $0.0746Total
A 2,956 $49.73 $152.45 $214.54 B 953 $49.73 $3.05 $65.14 C 1,484 $49.73 $42.62 $104.71 D 645 $35.31 $0.00 $35.31
Monthly Consumption
(kWH)Fixed
Charge: $12.36
Price of first 912 kWH: $0.0845
Price of Additional
kWH: $0.1046Total
A 2,660 $77.11 $182.83 $272.30 B 858 $72.50 $0.00 $84.86 C 1,335 $77.11 $44.24 $133.71 D 583 $49.27 $0.00 $61.64
Current Price Option
Alternative price option+3¢/kWh-10% kWh
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The experiment (3): Payoffs
Ui = $300 - xi + SWhere 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 (higher electricity
price)
Per Person Economic Benefit
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 OptionAbout 0.5 ton of GHG reduction
per 1,000 kWh of electricity saved
Monthly Electricity Saved (kWh): 10%
GHG Reduction(ton of CO2)
Dollar Value of Carbon Offsets
A 296 0.148 $5.92 B 95 0.048 $1.88 C 149 0.074 $2.96 D 62 0.033 $1.32
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3. Results: Participants choosing the Alternative option
Type and consumption Certain. Risk Ambig.
# altern. 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 200n= 64 68 68 200
52% 56.25% 57.35% 42.65%
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44%
50%
63%69%
47%
65%
53%
65%
41%
47%
29%
3.56 $
1.79 $
1.26 $
0.91 $
0.0 $
0.5 $
1.0 $
1.5 $
2.0 $
2.5 $
3.0 $
3.5 $
4.0 $
0%
10%
20%
30%
40%
50%
60%
70%
80%
A(35,472 kWh)
C(17,806 kWh)
B(11,440 kWh)
D(7,775 kWh)
Certainty (56.25%)Risk (57.35%)Ambiguity (42.65%)Difference in Average Payoffs
3. Results: Participants choosing the Alternative option
17
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.
Pineau / HEC Montréal