Home Retail Why Are Low-Income Customers Paying Higher Prices in Retail Choice Markets? – Energy Institute Blog

Why Are Low-Income Customers Paying Higher Prices in Retail Choice Markets? – Energy Institute Blog

by Ozva Admin

Five surprising facts from a new Energy Institute working paper.

Consumer choice is generally a good thing. For much of the consumption that takes place in my house (coffee, lego, bike parts), we understand our preferences and our choices are not very complicated. This makes it easier to make good decisions. Other categories of consumption are not so simple. For example, it is difficult to keep track of how much electricity we are consuming and what price we are paying for it.

Many of us have no choice when it comes to electricity providers. But several jurisdictions (including 13 US states and DC) support “retail choice.” In these markets, the incumbent utility provides the transmission and distribution services for everyone. But households can choose to buy electricity from the utility at a predetermined (regulated) utility rate or sign up with one of the many retail providers that offer to purchase electricity and provide retail services.

Map source: RESA

Early advocates of retail choice expected that allowing for-profit retailers to compete with the incumbent utility would bring innovations in customer service and lower costs to the consumer. We’ve seen some consumer-friendly innovations. And a significant number of residential customers in these markets are already exercising their right to choose.

But there is growing concern about confused customers, high retail prices Y deceptive marketing practices. Some states have begun to regulate these markets more strictly. Massachusetts has considered close retail choice entirely.

As regulators deliberate on retail market reforms, we could really use some careful and objective analysis of how electricity consumers are faring in these markets. cue this new working paper per Energy Institute graduate student (and exceptional job market candidate) Jenya Kahn Lang. Jenya combines loads of consumer-level data, a survey of retail choice customers, and some intuitive economic models to explain what we’re seeing in retail choice markets (and why we should care).

A short blog post cannot do justice to Jenya’s awesome job market article. My goal here is to bring to your attention five surprising facts from the paper, summarize some high-level insights from its economic model, and get people talking about this important topic.

Fact 1: Holy Batman Retail Price Variance

Unlike coffee beans and bicycle parts, electricity is fairly homogeneous. My laptop charges the same regardless of who sells me the kilowatt-hours. Therefore, it is to be expected that the electricity prices offered by competing retailers will be very similar…

These graphs show the distribution of billed retail electricity prices in the Baltimore Gas and Electric Company service area (Sept. 2019 data) and the Eversource Connecticut service area (Sept. 2018 data).

In fact, Jenya finds that consumers in the same retail options market pay vastly different prices. These figures plot the distribution of retail electricity prices (measured in dollars per kWh of electricity) that retail customers paid in two of the markets Jenya studies. In case you were wondering, only a small part of this variation can be explained by different attributes (such as differences in renewable energy content).

Fact 2: Low-income households pay higher retail prices on average

These retail electricity price data can be broken down by income group. The chart below shows the average prices paid by residential consumers for electricity in Baltimore.

You can see that low-income households (light blue) pay higher electricity prices on average. Similar price patterns appear in the other retail options markets that Jenya studies.

What’s going on here? Jenya rules out a couple of possibilities. Some retail providers sell “green energy” based on the purchase of renewable energy. This comes at an additional cost, but she finds that wealthier households have a higher demand for green power, so the price gap should be inverse.

Another possibility is that the higher rates reflect the additional costs of serving customers who might not pay their bills. But in Baltimore, retail providers get paid even when customers are late, and the utility smooths late payments to providers generally, so this cannot explain the gap.

Jenya offers three additional facts that do provide some clues.

Fact 3: Prices go up (if you’re not paying attention)

When households sign up with a new retail electricity provider, they typically sign a contract at a fixed retail price for 2-3 months. After that, it’s pretty standard for these supply contracts to automatically renew on a month-to-month basis at an up-to-date retail price.

Let’s assume that most consumers are not paying attention to their electricity bills. If for-profit retailers understand this, they can increase their prices over time. Some attentive customers will notice. But for most customers who don’t pay close attention, it could take months or years to figure out.

Jenya documents patterns in the data that are consistent with this story. Using detailed billing data from the Baltimore market, she can see how long a customer has been with a given provider and track the movement of contract renewal prices over time. The figure below shows how retail prices increase for customers who don’t notice (or don’t care).

Notes: This chart is constructed using estimates from a regression of the price of electricity supply on time-fixed effects, the number of unique prices a consumer has faced since the last provider change, and income group. On average, consumers pay higher electricity prices the longer they go without switching providers.

Fact 4: Search (online) and you will find… a lower retail electricity price

To help consumers navigate this complex environment, regulators have created comparison websites. If you’re an active finder type, you may have used one of these websites to help you find the retailer that’s best for you.

Notes: This is a sample website for Massachusetts.

Who wants to spend Saturday night going through contract term lists? I do not. Among Jenya respondents, the most commonly reported method of signing up with an electricity provider is through an in-person marketing interaction. In other words, retailers are actively involved in direct marketing to potential customers.

Herein lies another potential opportunity for retailers to price discriminate between active searchers and the rest of us. Jenya compares the prices on comparison websites with the prices offered through other registration methods (eg direct marketing). The figure below shows that customers who sign up through the comparison website pay substantially lower prices.

Fact #5: Retailers are more active in low-income neighborhoods

Given the facts we’ve reviewed so far, it’s clear that direct marketing plays an important role in attracting some types of customers. Jenya collects data on these marketing activities by zip code to better understand how efforts are allocated. In both the marketing data and her consumer survey, she finds significantly higher marketing activity in low-income neighborhoods.

Why do low-income households pay higher electricity prices?

To understand the market forces that lead to these events, Jenya builds an economic model of market supply and demand. On the demand side of the model, consumers do not pay much attention to their bills. A fraction of consumers find it costly to search for the best price. On the supply side, smart retailers understand this. Direct marketing allows them to recruit customers with high search costs and charge them higher prices. Marketing is expensive, so retailers focus their direct marketing efforts in areas with relatively low marketing costs.

Jenya brings this economic model to real world data to investigate why low-income neighborhoods end up paying more. She finds that lower marketing costs in low-income areas (for example, these neighborhoods are more densely populated) have an important role to play. In general, the price gap can be mainly attributed to differences in supply-side trading costs, although differences in demand-side choice behavior also play a role.

Do electricity consumers benefit when they have the power to choose?

Overall, this research leaves me wondering if the benefits of opening up retail electricity markets to competition can justify the costs. On the benefits side, there is evidence that some retail options customers are willing to pay more for premium product attributes (eg, “green” energy options) that might not have been provided without retail options. But on the cost side, it seems that many households that sign up with a retailer end up paying more than the regulated rate. If low-income households are particularly susceptible, this raises both efficiency and equity issues. I’m interested to hear what our blog readers think about the trade-offs between consumer protection and retail innovation highlighted in this excellent paper.

Keep up with the Energy Institute’s blog posts, research and events on Twitter @energyathaas.

Suggested citation: Meredith Fowlie, “Why are low-income customers paying higher prices in select retail markets?”, energy institute blog, University of California at Berkeley, November 21, 2022,

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