The utility of quality: An estimation of the willingness to pay for electricity

The electricity market has developed under a government dominated setting. Consequently, the electricity market suffers from several market failures. The electricity end-use price has had virtually no connection to costs or scarcity. Supply has never felt the need to accommodate to demand, neither in terms of technical quality, nor in terms of quality of service. The decisions to invest in power quality have not been optimal from the welfare economic point of view. The liberalisation of the electricity sector urges power suppliers to transform their product mix from a task-drive level to a marketable product assortment: they have to measure the true demand curve for electricity, and estimate the driving forces of the location of the demand curves. In this paper we present a study in which the demand curve for electricity is estimated, and the indirect utility of a range of electricity product elements is measured. We apply a combination of a conjoint measurement interview technique with an econometric model (rank-ordered Legit) to quantify the determinants of image, quality perception and willingness to pay for electricity. It turns out that sharp market segments can be made: easily identifiable groups of customers are motivated by different drivers. The willingness to pay for higher quality of service for instance is notably higher than the WTP for power quality, except for some industries.