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Contracts with aftermarket substitution: The case of PG&E and electricity batteries

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  • Rasouli, Mohammad
  • Somaini, Paulo

Abstract

We study the electricity retailer’s contract design problem when an electricity battery provider enters the market to provide storage services to end-users. For a social planner or perfectly informed retailer, batteries have no impact on retailer pricing or end-user consumption. For rent-seeker retailers with imperfect information, we model the screening problem in a principal–agent setting in which the monopolist offers a menu of consumption bundles and transfers. The incentive compatibility restrictions take into account the agents’ option to access a substitution technology in the aftermarket. In the absence of both arbitrage opportunities and dis-economies of scale, agents do not rely on the battery technology in either the first-best or the second-best allocations. Also, even without dis-economies of scale, substitution technology reduces the retailer’s surplus under the second best. Furthermore, we show that agents’ surplus and social welfare may increase or decrease with batteries.

Suggested Citation

  • Rasouli, Mohammad & Somaini, Paulo, 2024. "Contracts with aftermarket substitution: The case of PG&E and electricity batteries," Applied Energy, Elsevier, vol. 374(C).
    • Handle: RePEc:eee:appene:v:374:y:2024:i:c:s0306261924011784
    DOI: 10.1016/j.apenergy.2024.123795
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