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Electricity pricing and equity Friesen, Robert Stewart

Abstract

Our society has become heavily dependent on inputs of energy. Recently, however, concern has been expressed that the future supply of energy will be inadequate to meet our demands. It seems that future supplies of energy will be available only at relatively high cost. Moreover, conscious public policy attempts to reduce consumption may be attempted by raising the price of energy. A problem arises in the equitable distribution of our energy resources. To understand the equity issue and the price elasticity of demand question, a study was undertaken of the patterns of electricity consumption among residential consumers in Vancouver. The hypotheses proposed are that the proportion of income devoted to electricity consumption declines as income increases; the demand for electricity is price elastic; and, the ability to reduce electricity consumption increases with income. The methodology used to study these questions involved two steps. Firstly, a questionnaire was administered to 291 Vancouver households to identify variables potentially significant in determining, residential electricity consumption. Questions were also asked to determine perceptions of the ability or willingness to reduce or increase electricity consumption patterns under various hypothetical price intervention policies. Secondly, electricity consumption histories were obtained from B.C. Hydro and Power Authority for these 291 respondents. The study shows that absolute electricity consumption is not significantly affected by income. Hence, the proportion of income devoted to electricity declines as income increases. Secondly, it was found that the demand for electricity is sensitive to price increases, but not to price decreases. Thirdly, low income consumers are less responsive to price increases in electricity. They are less willing/able to switch from electricity to natural gas as a fuel source, and are less willing/ able to reduce electricity consumption levels when the price is increased. The results indicate that across the board price increases in electricity will bear very heavily on the poor. Various price schemes were examined with respect to their implications for equity, allocative efficiency and environmental quality. The preferred scheme sets allocative efficiency and environmental quality as constraints. Included in the package is a redistribution of income to achieve equity. The second best alternatives are pricing based on income and increasing block pricing.

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