As U.S. policymakers consider how to tackle the challenge of greenhouse-gas constraints, the U.K.’s approach to the problem offers instructive examples.
Inclining for the Climate
GHG reduction via residential electricity ratemaking.
1. Jeff Zeleny, “ Obama Proposes Capping Greenhouse Gas Emissions and Making Polluters Pay ,” The New York Times , Oct. 9, 2007 .
2. Filed in February 2008, BC Hydro’s Residential Inclining Block Rate Application is available at: http://www.bchydro.com/etc/medialib/internet/documents/info/pdf/info_2008_residential_inclining_block_application.Par.0001.File.info_2008_residential_inclining_block_application.pdf.
3. Revenue-neutrality is calculated prior to any consideration of price-induced changes in consumption.
4. James A. Espey and Molly Espey, “Turning on the Lights: A Meta-Analysis of Residential Electricity Demand Elasticities,” Journal of Agricultural and Applied Economics , April 2004, Vol. 36, No.1, pp.65-81. See also: Ahmad Faruqui, "Inclining Toward Efficiency: Is Electricity Price-Elastic Enough for Rate Designs to Matter?" Public Utilities Fortnightly , August 2008, Vol. 146, No. 8, pp.22-27
5. Charles F. Phillips. The Regulation of Public Utilities , Public Utilities Reports, Arlington, Virginia, 1993, p.434.
6. DOE EIA-0348 , 2007 .
7. DOE EIA Form 861. EIA-861 does not provide DSM expenditures by customer class; we assume that utilities with high overall DSM expenditures include residential programs in their portfolio.
8. We defined “high” DSM expenditures as $0.75/MWh or greater, which results in a “high” label for energy providers with DSM expenditures in roughly the upper quartile of our sample. Where utilities did not report a value for DSM expenditures on EIA-861, we assume expenditures were, in fact, zero.
9. Applied microeconomics typically models customer responsiveness based on marginal price changes, see Jerry A. Hausman, "The Econometrics of Nonlinear Budget Sets," Econometrica, Vol.53, No.6, pp.1255-1282.
10. Percentage change in total sales = (share of sales with marginal rate at tier-1 rate * price elasticity for small users * percentage of tier-1 rate change) + (share of sales with marginal rate at tier-2 rate * price elasticity for large users * percentage of tier-2 rate change). Thus, (25 percent * -0.05 * -15 percent) + (75 percent * -0.10 * +25 percent) = 1.7 percent. Changing the tier-1 sales share assumption to 50 percent would result in a total sales change of -0.9 percent.
11. The U.S. average based on EIA 2006 sales and emissions data.
12. The total emissions reduction requirement is estimated based on EIA and EPA sources: http://www.eia.doe.gov/cneaf/electricity/epa/epat5p1.html; EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2006 , Apr. 15, 2008, pp.2-4.
13. For a discussion of time-varying pricing options, see C.K. Woo, Eli Kollman, Ren Orans, Snuller Price and Brian Horii, “Now that California Has AMI, What Can the State Do with It?” Energy Policy , April, 2008, Vol. 36, pp.1366-74.
14. For empirical evidence on customer response to time-varying pricing, see: Chris King and Dan Delurey, "Efficiency and demand response: twins, siblings, or cousins?" Public Utilities Fortnightly , March 2005, 58-61; and DOE (2006) “Benefits of Demand Response in Electricity Markets and Recommendations for Achieving Them,” Department of Energy, Washington D.C. (Available at: http://www.oe.energy.gov/DocumentsandMedia/congress_1252d.pdf).