Abstract:
“The Customer Economics of Residential Building Electrification Under Alternative Rates”
Severin Borenstein (University of California, Berkeley), Meredith Fowlie (University of California, Berkeley), and James Sallee* (University of California, Berkeley)
Economic theory suggests that the efficient volumetric (per unit) price of energy should be equal to social marginal cost (SMC)—the cost of generating and delivering one more unit of energy to an existing customer, inclusive of pollution impacts. In practice, the need to recover system fixed costs tends to push volumetric rates above this benchmark while the underpricing of pollution tends to reduce volumetric rates compared to SMC. Setting volumetric energy prices above—or below—SMC distorts incentives for usage and electrification (fuel choice). We estimate how reforming rates for both residential natural gas and electricity would influence incentives for electrification by altering the relative operating cost of gas versus heat pump electric space and water heating for US residential structures. Depending on the social cost of carbon (SCC), efficient rate reform could favor gas or electricity. At an SCC of about $100 per ton, efficient rate reform would increase the incentive to install electric heat pump space and water heating in about half of the U.S. At a lower SCC, rate reform would tilt choices towards natural gas, but at the federal benchmark SCC of $190, reform would create a significant national boost for electrification. In many parts of the country, this reform would rival or exceed the incentive for electrification created by federal tax credits and would be sufficient to counteract equipment and installation cost premia for heat pumps. Efficient rate reform would thus make electrification the economical choice for many households, even without other policy.
*Denotes presenter