Pricing in the shadows of inattention: An information-theoretic model of prosumer inattention in residential solar tariff

Abstract

As distributed solar energy reshapes the dynamics of residential electricity markets, traditional pricing mechanisms are increasingly strained by behavioral realities on the ground. This article advances the field by integrating prosumer inattentiveness, a factor too often omitted from prevailing models, into a unified pricing framework grounded in information theory. Drawing on Shannon’s entropy to represent bounded attention, the paper present a generalized model that evaluates the welfare, prosumers’ utility and electric company’s profitability outcomes of three widely used solar tariffs: Feed-in Tariff (FIT), Net Metering (Net M), and Net Purchase and Sale (Net P&S). The findings are analytically rigorous and empirically validated using real-world data from Texas, revealing that behavioral frictions materially affect tariff performance. In particular, Net M and Net P&S outperform FIT in terms of social welfare under finite attention, while FIT offers greater revenue stability for electrical retail companies. These insights are timely and policy relevant, underscoring the imperative to align solar pricing strategies with actual user behavior. For regulators, electrical retail companies, and scholars alike, this work makes a compelling case for incorporating behavioral economics into energy tariff design. This is a necessary step toward achieving equitable, efficient, and resilient energy transitions.