Household Electricity Demand, Revisited

Recent efforts to restructure electricity markets have renewed interest in assessing how consumers respond to price changes. This paper develops a model for evaluating the effects of alternative tariff designs on residential electricity use. The model concurrently addresses several inter-related difficulties posed by nonlinear pricing, heterogeneity in consumer price sensitivity, and consumption aggregation over time. We estimate the model using extensive data for a representative sample of 1,300 California households. The results imply a strikingly skewed distribution of household electricity price elasticities in the population, with a small fraction of households accounting for most aggregate demand response. We then estimate the aggregate and distributional consequences of recent tariff structure changes in California, the consumption effects of which have been the subject of considerable debate. ∗Graduate School of Business, Stanford University, Stanford, CA 94305-5015, and NBER. E-mail: [email protected] or [email protected]. We thank Jerry Royer of the California Public Utilities Commission for valuable help in accessing and interpreting Commission records, and Brent Goldfarb for research assistance. White gratefully acknowledges the hospitality and support of the George J. Stigler Center at the University of Chicago.