A self-selection pricing mechanism for residential electricity: Measures of sustainability and equity to balance market mechanisms and government controls

Abstract

We design a self-selection-pricing mechanism in which an electricity supplier offers its customers an optimal menu of contracts subject to a price ceiling set by the government, a hybrid model of market mechanism and government controls. We calibrate the model using information from a residential electricity market in China. Our mechanism outperforms the tiered-electricity-pricing system in China in terms of environmental and industrial sustainability but comes at the cost of providing less protection for low-income households (i.e., less equity). We conclude by offering measures of sustainability and equity that governments could use when trying to balance the trade-off between the two.