The Mispricing of Energy – Implications for Electrification
Energy Institute Webinar
Tuesday, August 24, 2021
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E.T. Grether Professor at Berkeley Haas and
Energy Institute Faculty Director
University of California, Berkeley
Professor of Economics
University of California, Davis
Severin Borenstein and James Bushnell will discuss their new research on retail prices of electricity, natural gas and gasoline, and the implications for the electrification of transportation and buildings.
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. The authors study the magnitude of these distortions for electricity, natural gas, and gasoline purchased by residential customers across the continental US. They 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 their estimates of marginal price and SMC for each of the fuels with a large survey of California households’ energy use, the authors calculate the distribution of annual fuel costs for space heating, water heating, and electric vehicles under actual pricing versus setting price at SMC. The authors 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. Full Paper
- The authors’ presentation will be followed by Q&A.
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