How do households choose electricity contract? Mattias Vesterberg Mattias.vesterberg@umu.se SAEE 2016 Centre for Environmental and Resource Economics
Background • Serious concern about lack of capacity during specific periods over the year – Larger share of intermittent (uncontrollable) power – Shut down of nuclear power – Electricity consumers appears ”non - flexible” • Demand flexibility has been viewed as the key solution to the capacity problem. • Flexibility/price responsiveness differ across contracts (from hourly prices to fixed prices. • To understand electricity demand, important to understand electricity contract choice.
This study • What are the determinants of electricity contract choice? – Effect of prices? – Household characteristics? – Previous choices? • Actual data on choice between fixed and variable price are used. • If households respond to price variation by choosing fixed-price contracts – few households will choose real-time pricing in the future, implying ” unflexible ” electricity consumption (?)
The market • Approx 40% is on a fixed price contract 1 • The share on fixed price contracts is higher for large consumers 1 “fixed price contract is here defined as contracts when the price is fixed one year or more. A variable price is a monthly fixed price.
The market • Variable price on average lower, but more variation, than a fixed price contract • A fixed price contract may be economically beneficial if price spikes occur in high use periods, and vice versa.
Data • Unique data from one of the larger electricity suppliers in Sweden • Monthly data for 40 000 households over the period 2010-2014 • Include data about contract choice and prices (no RTP contracts), • Data on electricity consumption • Socio-economic data (income, age, education) is on the zip-code level
Data issues • Self-selection: households choose supplier (and limited geographical variation). • Only zip-code level data for socio-economic characteristics • Few (relatively) transitions between contracts (share of households on fixed price almost constant over time). • Most transitions are from variable to fixed
Data • 75% of the customers are located in the same postal area as the supplier • There are customers in all postal areas in Sweden, except one .
Data • 39 385 housholds in total over the period July 2010 to June 2014 • 29 000 are villa customers • 10 000 flats • 9 000 – 15 000 households per month, unblanced panel. • Positive trend of the share with fixed price contracts. • Volatile (relative) price
Data • Most transitions of contracts occurred in 2010 and 2011. • Transitions peaked in October (before the winter) • The number of transitions is still small, around 4% of the sample • Households switch to fixed price the winter season after a previous high price season
Econometric model (short version) Probability of choosing a fixed-price contract ( 𝑧 𝑢 = 1 ) at time 𝑢 is Pr( 1 , , , ) y y c p z i t , i t , 1 i t L , t i t , 𝑧 𝑢−1 = 1 if household i have fixed-price contract in the previous period, 𝐪 𝑗,𝑢−𝑀 is a price vector (incl lagged prices) facing household i, 𝒜 𝑢 is a vector of observable household characteristics, and c i,t is unobserved household characteristics. Initial condition treated as endogenous (Wooldridge, 2010).
Econometric model • Choice periods: When do households choose contract? • Fixed price: When current contract ends? • Variable price: Once a year? Twice a year? Every month? • Results similar across definitions.
Results, preliminary • Households respond to previous prices • High price previous winter, higher probability of choosing fixed price for the coming winter. • On average small effects of price: A price increase of 50 öre/kWh increase the probability of choosing fixed price with only two percent. • Households homogenous in price responsiveness, villas with electric heating responding slightly more. • Small effects of household characteristics (e.g., income).
Results, preliminary • On the other hand, large effect of previous choice • Probability of choosing fixed price is 70 percent higher if the household previously had a fixed-price contract.
Conclusions • Relatively few households switch between contracts: the average household respond little to prices. • It appears as if households stick to their contract, irrespective of prices. • Lack of price responsiveness similar across households.
Conclusions Implications for demand flexibility? • Households and inertia? Not likely to switch to RTP? • Households are insensitive to prices? Perhaps price variation in the future is less of a problem? • More research needed!
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