How Consumers Choose the Green Electricity Product Instead of Conventional Electricity? A Welfare Analysis Approach

Abstract

The aim of this article is to analyze theoretically whether changes in an access charge pricing policy can promote green electricity use. The model considers two hypothetical firms: One firm offers green electricity product, and the other firm provides conventional electricity. Each firm pays an access charge to the natural monopoly in order to have access to the transportation network. Through using a vertical differentiation model, we try to analyze the link between the access charges paid by the two firms and the qualities offered. We also attempt to explain why the consumers do not often choose green electricity. Finally, we suggest a new policy that can lead the consumers to choose the green electricity product instead of conventional electricity. Our model shows that changes in the access charge pricing policies can constitute a relevant component in the reforms of the electricity sector and can have impacts on the consumption of the green electricity. A differentiating access charge policy could allow a better penetration of the green electricity product and an increase in the social welfare when consumers have greater preferences in environmental qualities. Otherwise, their preservation at a uniform level is desirable in order to maintain the competition. JEL Classifications: B21, C72, L13, Q21, P28