Smart power limits: Designing shortage mechanisms for extreme events

Abstract

As shortages of resources like water and electricity due to extreme weather events become more frequent, high prices alone may fail to curb demand, making shortages more common. We examine a power limit policy for residential electricity households that rations electricity consumption rather than setting it to zero, as in a traditional rolling blackout. We find that power limits can provide equivalent savings to large blackouts, even when generous. Additionally, due to selection, power limits reduce the number of households affected by a shortage event. We conclude by discussing the welfare consequences of power limits and their heterogeneous impact across households. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.