Cascading Disconnections: The Dynamics of Building Electrification When Gas Network Costs are Fixed – Matthias Paustian

Speaker

Matthias Paustian (Board of Governors of the Federal Reserve System)

Abstract

Several local and state governments require all-electric equipment in new and heavily renovated buildings. This paper models the dynamic process by which electrification in those buildings cascades into voluntary electrification of existing buildings. The key transmission channel is the rising price of piped gas: because gas distribution systems have high fixed costs, a shrinking customer base drives up per-customer costs of gas, making electrification increasingly attractive for the remaining gas users. We incorporate heterogeneous upfront electrification costs across buildings and show that the resulting dynamics depend crucially on how building owners form expectations about the future path of gas prices. We model bounded rationality in expectations formation using a level-k thinking framework and show that even modest forward-looking behavior can substantially accelerate the decline in gas throughput—and hence the electrification of the broader building stock. We calibrate the model using building-level microdata from the NREL ResStock and ComStock databases and illustrate the dynamics using a representative sample of buildings in Washington, DC.

Authors

Vivek Narayan (University of Oxford) – Matthias Paustian (Board of Governors of the Federal Reserve System)

Room

Media Room (A-211)