A Pareto superior incentive scheme for residential electricity conservation

Responding to the imminent threat of climate change, the United Nations urges its members to achieve net zero by 2050. China leads the world in energy consumption and CO2 emissions and has committed to carbon neutrality before 2060. As a special administrative region of China, Hong Kong aims to cut 50% of its 2005 level of CO2 emissions by 2035. Decarbonizing Hong Kong's electricity sector entails conservation, energy efficiency improvement, displacing coal-fired generation with natural-gas-fired and renewable generation and increasing import of carbon-free energy from Mainland China. Illustrated through Hong Kong's inclining block rates, this paper proposes an incentive scheme with voluntary participation (“Scheme” for short) to promote residential electricity conservation. The Scheme is Pareto superior because its implementation benefits participating customers without harming the local utilities and non-participating customers. Despite its Hong Kong residential focus, the Scheme's design principle informs all electric utilities worldwide on how to develop Pareto superior per kWh incentives for electricity conservation, notwithstanding that these utilities may have highly nonlinear residential and non-residential tariffs. Hence, the Scheme merits consideration for pilot testing to determine its customer acceptance and conservation effectiveness.