Effect of Moving from Fixed to Metered Heating Pricing in Tianjin, China
The seasonal heating-period start and end dates are inconsistent across years. To make data consistent across years, only Dec., Jan., and Feb. are represented for each annual “heating period.” Shaded bars represent 95% confidence intervals. Source: Researchers’ calculations using data on from a regulated heating provider in Tianjin
How a household is charged for its energy use can have a significant impact on a community’s energy use, and ultimately, it’s air quality, finds a study by Harris Public Policy’s Koichiro Ito and his co-author Shuang Zhang from the University of Colorado at Boulder. Ito and Zhang analyze Tianjin, China, where authorities replaced a fixed-priced system of charging for heating with a metered, use-based system. Four years after the installation of the meters, heating demand was down by about a third.
Under the old system, a household paid $397 per 100 square meters of floor space each winter for heat, no matter how much heat was used. Under the new system, the household paid a reduced fixed charge of $198.50 plus a variable charge based on actual usage. For example, if the annual usage was 10,000 kWh of heating, the variable charge for this household was $140, resulting in the total payment of $338.50, which implies an annual saving of about $60.
The researchers found that most consumers understood the difference in pricing schemes and made beneficial choices. By turning down the thermostat on warmer winter days, consumers saved. The researchers found that the average unit with the new meters—some of which were still under the old pricing scheme—used 13 percent less energy the first year, 21 percent less in the second year, 27 percent less in the third year, and 31 percent less in the fourth year. Among those who adopted the new pricing system, the decline in energy use was even more pronounced: 36.3 percent by the fourth year.
Consumers, especially relatively poorer people, learned over time when and how much to turn down the thermostat. In contrast, richer households’ heating demand did not change much after the first-year drop. Nevertheless, the rich saved more from the reform than the poor, because under the old system the fixed charge was proportional to households’ floor space and richer households tend to live in larger units. Under that allocation of charges, the fixed costs of low-income households were partly subsidized by better-off households.
In addition to the cost saving for consumers, there were social benefits of lowering heating demand. The researchers estimate that the welfare gains from improvements in economic efficiency and reductions in air pollution were worth an additional $61.29 per household per year, on average. Since Tianjin paid a onetime charge of $99.22 per household to install the meters, this investment was recouped in just 18 months.
The study provides direct evidence of how consumers in developing nations respond to energy pricing. That’s key, the researchers argue, because most of the world’s future emissions will come from these nations.
Adapted from June 2020 NBER Digest found here