Consequences of a price incentive on free riding and electric energy consumption

Abstract

This article shows that a simple monetary incentive can dramatically reduce electric energy consumption (EEC) in the residential sector and simultaneously achieve a more desirable allocation of EEC costs. The analyses are based on data from a policy experiment conducted in 2011 and 2012 by a private housing company in about 1,800 apartments. Roughly 800 of the tenants (treatment group) were subject to a change from having unlimited EEC included in their rent to having to pay the market price for their own EEC. This change was achieved by installing EEC meters in each apartment. Tenants in the other 1,000 apartments (control group) experienced no policy change and were subject to apartment-level billing and metering during the entire study period. Using a quasiexperimental research design and daily data on EEC from 2007 to 2015, we estimate that apartmentlevel billing and metering permanently reduce EEC by about 25%. Moreover, we show that households reduce EEC immediately after being informed that they will be billed for EEC, the reduction is larger when the production cost is higher, and the reduction in EEC comes almost exclusively from households with very high EEC before the policy change. Finally, we show that apartment-level billing and metering are cost-effective, with a cost per reduced kilowatt hour of US$0.01, and for each invested dollar, the social value of reductions in air pollution, including CO 2 emissions, is $2.sub metering | environment | smart meters | energy conservation | quasiexperiment L imiting adverse effects on individuals and societies from climate change requires effective governance of the global environment (1). Because current private incentives to reduce energy consumption are weaker than the collective incentives to prevent global warming (and other negative side effects of energy consumption), the problem can be described as a tragedy of the commons (2). Societies throughout history have used different strategies to overcome the commons problem (3). Although it has proved easier to develop effective strategies for management of local public goods (commons) than global public goods, like the climate, ineffective management at the local level still contributes to massive overuse of energy.In this article, we evaluate the effectiveness of a well-defined strategy-apartment-level billing and metering-to handle this local commons problem. Tenants in many housing areas are allowed to consume unlimited electric energy without paying the costs of their own consumption. With this type of contract between the tenant and the landlord, the landlord typically pays the utility bills and adds a fixed share of the total costs to the rent of each tenant. When unlimited consumption of electric energy (or other resources; e.g., water or heating) is included in the rent for tenants, they have no monetary incentive to reduce consumption, because the cost of their consumption is typically shared among a large number of tenants.As shown below, solving this local problem can help us manage global probl...

Utilities Included: Split Incentives in Commercial Electricity Contracts

“…The intensive margin margin effect dominates among the largest firms. This heterogeneous response is consistent with a setting in which the bill savings from changing consumption do not cover the adjustment costs for small firms, and is in line with recent evidence from the residential sector (Elinder et al (2017)).…”

“…Furthermore, the savings occur at times when the value of electricity is likely to be high: during the hottest days of the year. Our finding that the largest customers are most responsive to contract type corroborates recent evidence from the residential sector in Sweden (Elinder et al (2017)). In contrast, contract type does not measurably impact consumption decisions for the smallest 90 percent of commercial customers.…”

Environmental Externalities and Free-Riding in the Household

“…6 We thus add to literature on misperceptions of price (Ito 2014;McRae and Meeks 2016), lack of information about the price (Jessoe and Rapson 2014;Kahn and Wolak 2013), and lack of salience (Allcott 2011;Allcott et al 2014) as factors that dampen the price elasticity of demand. The incentive mis-alignment within the household that we study resembles the incentive problem between landlords and tenants, which has been shown to lead to over-consumption of electricity (Levinson and Niemann 2004;Elinder et al 2017) and underinvestment in efficiency (Gillingham et al 2012;Myers 2015). 7 Intrahousehold inefficiencies might be especially important in poor countries, where gender roles are particularly imbalanced.…”

Community Energy Preferences and Residential Occupant Behaviour of the MoCreebec Eeyoud

“…Indeed, the increasing focus on occupant behaviour has shown that "behaviour change is fundamental to the success of energy efficiency schemes" because without proper use of technologies or knowledge of energy use by the people who use the technology, the full gains from the technology cannot be achieved (Fylan et al, 2016). Addressing this split incentive, especially in units that do not pay for their own utilities, can possibly save up to 25% in energy reductions (Elinder, Escobar, & Petré, 2017). It is worth noting, however, that the study's largest customers were the main cause of reductions of 25% from the above study and the same savings may not be realized if there is not a large heterogeneity in the size of customers.…”

“…One study observed that when residents who previously had utilities included in their rent were required to pay for utilities, energy usage decreased by 25% (Elinder et al, 2017).…”