Essays on Retail Electricity Pricing and Markets

In this thesis, I investigate economic inefficiencies related to residential electricity pricing and rate design. Two papers focus on firms’ pricing behavior in restructured retail markets, and one focuses on the impact of electric rate design on consumers’ incentives to make greenhouse gas-reducing investments./nThe first chapter studies the causes and consequences of pricing heterogeneity in markets for residential electricity, a nearly homogeneous good. I uncover adverse efficiency and distributional impacts of competition when consumers face heterogeneous search frictions. I show that consumers pay different prices for electricity in the same market, with low-income households and marginalized communities paying systematically higher electricity prices than their higher-income counterparts. These pricing patterns are consistent with a model of firms price discriminating on search frictions through marketing. Using data from Baltimore, I estimate a structural model that shows that this marketing leads to an annual welfare loss of 14% of industry-wide variable costs. Despite having only slightly larger search frictions, low-income households pay substantially higher prices than high-income households primarily due to lower marketing costs in low-income communities. Auxiliary analyses rule out alternative explanations, such as differing underpayment risks or preferences for differentiated product attributes. The model demonstrates that policy implications are nuanced: while marketing restrictions can increase consumer surplus, they may also increase average market prices by reducing consumers’ attention to their own prices./nThe second chapter analyzes two key components of consumer welfare under government versus market provision of a private good: price levels and price uncertainty. The electricity sector provides a policy-relevant setting to plausibly causally estimate the directional effect of ownership on retail prices. Specifically, this paper investigates the question: Do residential consumers face higher retail price levels and greater exposure to wholesale prices when supplied electricity by their local government or by a private electricity supplier subject to competitive forces? Using 2005-2017 data from 13 U.S. states that had both local government and retail electricity markets, with the former’s geographic locations determined decades earlier and the latter entering the leftover markets, I compare within-state differences in price levels and pass-through of marginal costs across the two supplier types. I find evidence that retail prices and price pass-through of volatile wholesale prices were lower under government electricity provision than competitive retail provision during this timeframe./nThe third chapter summarizes joint work with Andrew Satchwell and Chandler Miller on an under-studied impact of increasingly popular time-based rates. While time-based electricity rates can improve the economic efficiency of short-run consumption decisions, they can also have unintended consequences on consumers’ incentives to make long-run investments in greenhouse gas-reducing technologies. This chapter quantifies the impacts of time-based rates on a diverse set of energy efficiency, rooftop solar, and electrification investment incentives. We capture heterogeneity across households, geographies, and real-world rate designs using National Renewable Energy Lab’s ResStock database and 14 implemented electric rate schedules. Our analysis broadly shows that the average rate level matters more for bill savings and economically efficient investment signals than the rate design. We also find that time-based rates have highly heterogeneous effects on bill savings and welfare across investments, geographies, and households. Our analysis also provides some uplifting results for policymakers aiming to electrify buildings. Contrary to conventional wisdom, we find that electrification can reduce consumer bills, especially when paired with energy efficiency investments.

Advisor: Fowlie, Meredith