… he just doesn’t realize it, or doesn’t know that it’s an established regulatory concept. Recently in his Undercover Economist blog, Tim Harford picked up on an idea floated by another FT columnist:
… we need tariff schemes that encourage conservation.
One option is “reverse pricing”, a simple framework that would increase the marginal cost of energy without introducing new taxes or raising average prices. This is important because marginal prices affect our behaviour, but total expenditure affects our wealth. So if we can increase one but not the other, we will create incentives to consume less without leaving households worse off overall.
Actually, what we need is retail competition, retail choice, and the removal of sclerotic and obsolete entry barriers that prevent motivated suppliers from providing innovative electricity-related products and services to residential retail customers. But I digress.
The pricing structure to which Tim alludes in his post is called “inclining block” pricing. When it emanates from a regulatory procedure, it is an inclining block rate. Inclining block pricing means that you price intervals of consumption, and the price per unit for each interval increases. For example:
- Block 1: 0-1000 kilowatt hours $0.06/kwh
- Block 2: 1001-1750 kilowatt hours $0.10/kwh
- Block 3: 1751- kilowatt hours $0.15/kwh
A few things to note. First, this logic is similar to that underlying David Zetland’s “some water for free, pay for more” proposals for water pricing. Second, the devil’s in the details when these rates are set by regulatory fiat; where do you draw the dividing lines, and what price per unit do you charge?
One of the best electricity economists, Ahmad Faruqui at the Brattle Group, has written extensively about the economic efficiency and conservation effects of inclining block pricing. In that list of resources I’d also recommend this NRRI report for regulators on how and why to consider “economic rates”, including inclining block pricing.