Headwinds and Tailwinds: Implications of Inefficient Retail Energy Pricing for Energy Substitution
Electrification of transportation and buildings to reduce greenhouse gas (GHG) emissions requires massive switching from natural gas and refined petroleum products. All three end-use energy sources are mispriced due in part to the unpriced pollution they emit. Natural gas and electricity utilities also face the classic natural monopoly challenge of recovering fixed costs while maintaining efficient pricing. We study the magnitude of these distortions for electricity, natural gas, and gasoline purchased by residential customers across the continental US. We find that the net distortion in pricing electricity is much greater than for natural gas or gasoline. Residential customers in much of the country face electricity prices that are well above social marginal cost (private marginal cost plus unpriced externalities), while in some areas with large shares of coal-fired generation, prices are below SMC. Combining our estimates of marginal price and SMC for each of the fuels with a large survey of California households' energy use, we calculate the distribution of annual fuel costs for space heating, water heating, and electric vehicles under actual pricing versus setting price at SMC. We find that moving prices for all three fuels to equal their SMC would significantly increase the incentive for Californians to switch to electricity for these energy services.
For outstanding research assistance and very helpful comments, we thank Sara Johns, Jenya Kahn-Lang and Dan Mazzone. For valuable comments and discussions, we thank Mohit Chhabra, Alejandra Meija Cunningham, Lucas Davis, Tatyana Deryugina, Ari Gold-Parker, Catherine Hausman, Matthew Kotchen, Matthew Lewis, Amber Mahone, Erin Mansur, Nicholas Muller, Allison Seel, James Stock, and participants in presentations at The Energy Institute at Haas-UC Berkeley and the 3rd Annual National Bureau of Economic Research Conference on Environmental and Energy Policy and the Economy. We also thank Catherine Hausman and Matthew Lewis for sharing data. This research was supported in part by a grant from the California Public Utilities Commission to the Energy Institute at Haas. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
James B. Bushnell
Prof. Bushnell is a member of the Market Surveillance Committee (MSC) of the California Independent System Operator (CAL ISO). The MSC is an independent advisory committee to the Governing Board of the Cal ISO.
From July 2009 to June 2011, Prof. Bushnell was director of the Biobased Industry Center at Iowa State University. The Biobased Industry Center is supported by research gifts from companies and organizations involved in various aspects of the Biobased Industries. A full list of BIC sponsors can be found at http://biobasedindustrycenter.iastate.edu/leadership/members/ : ADM, Boeing, Ceres, DuPont/Pioneer, General Motors, Iowa Corn Growers Association, Monsanto, Toyota, Virent, West Central. None of Prof. Bushnell's research has been directly funded by BIC.
Biobased Industry Center Members
The Biobased Industry Center’s advisory board is composed of representatives from industry and non-government organizations. Industry partners that provide financial support for the center have a representative on the board.
The board meets twice per year with the center’s leaders and principal investigators to identify and prioritize research areas as well as provide advice and guidance regarding issues, challenges, and opportunities of concern and importance to the industry. The board also develops the request for proposals, the selection process for center research projects, and linkages with additional industry partners.
Ian Purtle, Chair, Cargill
Tom Binder, Vice-Chair, Archer Daniels Midland Company
Ted Crosbie, Member, Monsanto
Martha Schlicher, Member, Monsanto
Kyle Althoff, Member, DDCE
Charles Brummer, Member, Samuel Roberts Noble Foundation
Russ Sanders, Member, Pioneer
Bryan Schramm, Member, Sundrop Fuels, Inc.
Jeff Stroburg, Member, West Central
Spencer Swayze, Member, Ceres
Scott McQueen, Member, ConocoPhillips
Candace Wheeler, Member, General Motors
Rodney Williamson, Member, Iowa Corn Growers Association
Bob Wimmer, Member, Toyota
Greg Keenan, Member, Virent
Andrew Held, Member, Virent
Headwinds and Tailwinds: Implications of Inefficient Retail Energy Pricing for Energy Substitution, Severin Borenstein, James B. Bushnell. in Environmental and Energy Policy and the Economy, volume 3, Kotchen, Deryugina, and Stock. 2022