Chapter 2 GHG EMISSIONS and THEIR
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POLITECNICO DI TORINO Corso di Laurea Magistrale in Ingegneria Gestionale Tesi di Laurea Magistrale BEHAVIOURAL ECONOMICS ANALYSIS OF INNOVATIVE TARIFFS: THE CASE OF ELECTRICITY Relatore: Candidato: Prof. Carlo Cambini Marco Milan To my parents, who are a constant source of encouragement. To my sister, who is the cornerstone of all my successes. Acknowledgement First of all, I would like to express my gratitude to my supervisors Carlo Cambini and Carine Staropoli for giving me the opportunity to live an international experience and discover the amazing world of the Behaviour Economics. Then, I would like to thanks to Lise Rochaix who introduced me in her team allowing me to know special people and create wonderful friendships. Finally, I am most grateful to all my friends who shared with me the best moments of my university career. I could not ask for more. III ABSTRACT Nowadays, one of the main problems in the world is the air pollution caused by the emissions of the greenhouse gases (GHG), such as carbon dioxide, ozone, and nitrous oxide. These emissions are generated by several factors, including the energy sector, whose emissions due to electricity and heat, in 2016, constituted 42% of the total emissions with serious effects on climate change. In order to overcome the problem of the pollution there are essentially 4 types of “prevent actions”: tax on CO2, development of renewable energy, new tariff structures and nudge techniques. This thesis focuses on the role of the new tariff structures in encouraging people to be more aware of their behaviours and aims to understand if the different pricing policies are able to modify customers’ habits. Regarding this topic, literature suggests that the structure of tariffs would be one of the most efficient techniques to encourage customers to have a pro-environment behaviour. In fact, in a theoretical world, a rational individual would change his habits in according to the new tariff in order to gain a profit. However, in the last years the Behavioural Economics has highlighted that in the real world, people are characterized by some bias, including irrationality, which influence their decisions and make some new tariff structures ineffective. In this context it is important to look into the issue of consumer perception of tariff. For this purpose, we carried out a lab experiment with a sample of 238 people in which we compared a linear tariff with two non-linear tariffs to analyse people's preferences and perceptions of the electricity tariffs. A second objective of the experiment was to investigate if people are able to adapt their choices once given the information necessary to adopt a more environmentally friendly behaviour. The results confirm the main cognitive biases identifies in the literature and show both that consumers prefer the tariff with the simplest structure and that they are characterized by some bias which does not allow them to adapt their choices with the most profitable tariff. IV Contents Abstract..................................................................................................................III 1 THE ELECTRICITY SECTOR ................................................................ VII 1.1 History of Electricity in Italy ............................................................... 1 1.2 Types of contracts in the retail sector ................................................... 4 1.2.1 A general vision .................................................................... 4 1.2.2 Protected market ................................................................... 9 1.2.3 Free Market ......................................................................... 15 1.2.4 Safeguard Market ................................................................ 20 1.2.5 The level of competition in the retail sector ........................ 21 1.3 The Tariff Structure ........................................................................ 22 1.3.1 Domestic customers ............................................................ 22 1.3.2 No-household users ............................................................. 25 1.3.3 Free market ......................................................................... 27 1.3.4 Protected market ................................................................. 30 1.4 Liberalization ................................................................................. 32 1.4.1 Issues ................................................................................... 34 2 GHG EMISSIONS AND THEIR CONSEQUENCES ............................... 42 3 THEORY VS REALITY .............................................................................. 59 3.1 Limitations of people ..................................................................... 61 3.1.1 Bounded rationality and the consequent algorithms ........... 61 3.1.2 Inertia .................................................................................. 62 3.1.3 Inattention ........................................................................... 64 3.2 Possible solutions ........................................................................... 65 3.2.1 Pricing CO2 ......................................................................... 65 3.2.2 Renewable Energy Sources (RES)...................................... 70 3.2.3 Tariff schemes..................................................................... 80 3.2.4 The Nudge Theory .............................................................. 91 V 4 CONSUMER PERCEPTION OF THE ELECTRICITY TARIFFS: AN EXPERIMENTAL STUDY ....................................................................... 109 4.1 Experimental design ........................................................................ 110 4.1.1 The first phase .................................................................. 112 4.1.2 The second phase ............................................................. 113 4.1.3 The third phase................................................................. 116 4.1.4 The conclusion phase ....................................................... 119 4.2 Experimental Results ...................................................................... 120 4.2.1 Tariff perception analysis ............................................... 126 4.2.2 Ability to adapt ............................................................... 150 5 CONCLUSION ............................................................................................ 159 6 BIBLIOGRAPHY ....................................................................................... 162 VI List of figures 1.1 N. of domestic customers who buy energy in the protected service and in the free market since 2017 (numbers expressed in thousands)........................................................................................... 7 1.2 Electricity sales to the final market by region and type of market..... 8 1.3 Consumption and customers in the protected market in 2017............ 13 1.4 Operators in the safeguard market...................................................... 20 1.5 Variation in the final prices of electricity for domestic use................ 23 1.6 Final prices of electricity for domestic use in the main European countries.............................................................................................. 25 1.7 Final prices of electricity for no-domestic use in the main European countries.............................................................................................. 27 1.8 Number of offers offered to customers by suppliers.......................... 28 1.9 Percentage composition of economic conditions for a consumer in the protected market with annual consumption equal to 2700 KWh and power equal to 3KW.................................................................... 31 1.10 Economic conditions for a domestic consumer in the protected market with annual consumption equal to 2700 KWh and power equal to 3KW (c€/KWh; 2015-2018)................................................. 31 1.11 Evolution of retail tariff components over time, 2011- 2013............. 32 1.12 Switching rate from 2012................................................................... 39 2.1 Earth’s average energy balance.......................................................... 43 2.2 Global temperature change and global CO2 emission pathways........ 45 2.3 Fossil CO2 emissions......................................................................... 46 2.4 EU15 GHG emission.......................................................................... 47 2.5 Change in CO2 emissions, 2017/2016 (estimated)............................. 49 2.6 Emissions per capita of GHG............................................................. 50 2.7 Trend of the gross domestic energy consumption per capita.............. 50 2.8 GHG emissions per unit of gross domestic energy consumption....... 51 2.9 GHG emissions per unit of gross domestic energy consumption....... 51 2.10 Subdivision of final energy consumption for the different sectors..... 53 2.11 Annual variation of the final energy consumption............................. 54 2.12 GHG emission by sector..................................................................... 55 2.13 Allocation of GHG emission by sector............................................... 55 2.14 Percentage change with respect to 1995 of final energy consumption and of GHG emissions of energy origin for the industry, services and agriculture sectors..........................................