Electricity user connection pricing strategy: The incomplete contract theory perspective

• Published in: Energy economics Vol. 132; p. 107431
• Main Authors: Xie, Li, Kong, Chun
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-04-2024
• Subjects: Adverse selection; Connection price; Dedicated grid; Moral hazard; Ownership; Social welfare; Dedicated grid; Social welfare; Adverse selection; Ownership; Connection price; Moral hazard
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2024.107431

With the development of the global electricity market and the continuous improvement of China's electricity market mechanism, China's transmission and distribution price policy reform has also entered a critical period. Exploring the electricity user connection price policy's implementation plan has become an essential trend in the transmission and distribution price policy reform. To further examine China's electricity user connection pricing strategy, this paper introduces the incomplete contract theory into connection pricing strategy and designs a “quality-marginal cost” (Q-MC) pricing method considering the electricity supply quality and marginal cost under the rate of return regulation, then compares it with the allowed revenue pricing method currently adopted, and analyzes the impact of the two pricing strategies on consumer surplus, grid enterprise profit, and social welfare when moral hazard and adverse selection exist or not under different ownership conditions. The results of theoretical modeling and simulation show that compared to the allowed revenue pricing method, when there is no moral hazard or adverse selection, using the Q-MC pricing method to set connection price can produce higher consumer surplus, grid enterprise profit, and social welfare; when there is moral hazard or adverse selection, the Q-MC pricing method has a minor impact on consumer surplus, grid enterprise profit, and social welfare. Therefore, if China implements the electricity user connection price policy, it may consider adopting the Q-MC pricing method.
•Introducing incomplete contract theory into the study of connection price.•Proposing a connection pricing method (Q-MC) reflecting electricity quality and cost.•The Q-MC can improve consumer surplus, grid enterprise profit and social welfare.•The Q-MC can reduce adverse selection and moral hazard of grid enterprise and users.