electricity contract? Mattias Vesterberg Mattias.vesterberg@umu.se - - PowerPoint PPT Presentation

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 contract1
• 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

• ccur 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
• n 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
• ver 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 (𝑧𝑢 = 1) at time 𝑢 is

𝑧𝑢−1 = 1 if household i have fixed-price contract in the previous period, 𝐪𝑗,𝑢−𝑀 is a price vector (incl lagged prices) facing household i, 𝒜𝑢 is a vector of observable household characteristics, and ci,t is unobserved household characteristics. Initial condition treated as endogenous (Wooldridge, 2010).

, , 1 , ,

Pr( 1 , , , )

i t i t i t L t i t

y y c

 

 p z

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
• f 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!