The Incentive to Overinvest in Energy Efficiency: Evidence from Hourly Smart-Meter Data

Most consumers of electricity pay a marginal price that far exceeds the marginal social cost of providing that electricity. We show that such pricing schemes provide a large subsidy for energy efficiency investments. Using hourly smart-meter data for consumers that face increasing block pricing, we estimate the effect of an air conditioner upgrade on the timing and magnitude of residential electricity use. We estimate that the average participating household saved $7.36 per month during the summer, but the 25% of households that were the heaviest electricity users saved $27 per month. Most of the savings occurs after 7pm and therefore after the system peak. The bill savings to households exceed the benefits to society of avoided generation and pollution costs by more than 150% and thus represent a large subsidy to energy efficiency. We show that this subsidy would be cut in half if consumers faced any one of three alternative pricing plans with lower marginal price but the same average price.

Speaker: Aaron Smith, University of California, Davis