The Economics of Conservation Programs

Demand side management (DSM) is one of the most topical issues in regulating electric utilities, both in the United States and internationally. What is DSM? It consists of various measures at the level of demand (households, commerce, industry, others), which are at least partially financed by electric utilities and which should either conserve energy or reduce the peak load. The practice of DSM originates from The Public Utility Regulatory Policy Act of 1978 (PURPA) that provided the political and legal framework to set energy conservation as a national goal, which encouraged regulatory commissions to initiate utility conservation programs; see e.g., Nowell-Tschirhart (1990) and Fox-Penner (1990). Moreover, integrated resource planning, which must account for DSM on a level playing field with supply, is written into the 1992 Energy Policy Act as the U.S. Government's preferred method of electric power planning. Although PURPA set energy conservation as a national priority, its implementation was left to the states with the consequence of considerable differences concerning efforts and rules. By 1993 16 states had already implemented integrated resource planning, 9 were in the process of doing so and further 9 considered implementation, (EPRI 1993b). Due to the Clean Air Act of 1990, 24 states are considering to include external costs in integrated resource planning.

Klappentext

The objective of this book is to review and to analyze the economics of conservation programs in theory and in practice. Demand side management (DSM) is one of the most topical issues in regulating electric utilities, both in the United States and internationally. DSM consists of various measures at the level of demand (households, commerce, industry, others), which are at least partially financed by electric utilities and which should either conserve energy or reduce the peak load. br/ DSM rests on two pillars: efficient regulation and environmental concern. While regulatory aspects dominated the past debate, environmental issues are now becoming more and more important. This shift is largely due to the recently substantiated evidence on the greenhouse effect. Therefore, lowering greenhouse gas emissions, in particular of carbon dioxide, which is an inevitable by-product of burning fossil fuels, seems an important environmental objective. Given the contribution of carbon dioxide emissions, energy conservation, whatever that means in detail, becomes highly important. Indeed, DSM and related conservation programs are considered as a low cost option, or as a no regret strategy, independent of whether or not DSM improves the power industry's economic efficiency. Therefore, conservation programs have to be considered among the first instruments to be implemented in any efficient carbon dioxide emission reduction plan. Just how cheap such programs will turn out to be is the subject of this study. br/ Although DSM covers load management as well as conservation, this book, like the public debate, focuses on conservation. The emphasis of this book is on electricity demand, including the exposition, jargon, empirics, etc., but the basic idea of DSM and many of the issues addressed in this book can be extended to utilities other than energy (gas and district heat), also to water, garbage collection and others. However, the intention of the book is not to pretend to generality but to develop the basic ideas with respect to an environment with which the author is sufficiently familiar.

Inhalt
1 Introduction.- 2 Economic analysis of energy conservation.- 2.1 Consumers.- 2.2 Firms.- 2.3 Estimation of price elasticities and assessment of the rebound effect: an application to transportation.- 2.4 The energy efficiency of supplied technologies.- 2.5 Derivation of an intertemporal R&D strategy.- 2.6 Energy demand, technology and taxes.- 3 The normative case for demand-side conservation.- 3.1 Market failures.- 3.2 The first best social optimum.- 3.3 Second best efficiency standards for electricity price regulation.- 3.4 Imperfect capital markets.- 3.5 Subsidies when the electricity price is regulated and capital markets are imperfect.- 3.6 Assessment of the social gain from conservation.- 4 Least cost planning.- 5 Incentives to the utility.- 5.1 Shared savings.- 5.2 Mark-ups.- 5.3 Bonus.- 5.4 Optimal conservation incentives to utilities.- 6 Incentives for consumers.- 6.1 A constant investment bonus.- 6.2 Linear bonuses for financial outlays.- 6.3 Conservation bonus according to Lovins.- 6.4 Energy service and third party conservation companies.- 6.5 Bidding for negawatts and price differentiation.- 7 Asymmetric information and strategic consumer reactions.- 7.1 Adverse selection among program participants.- 7.2 Negawatt auctions induce moral hazard.- 7.3 Moral hazard induced by conservation programs.- 7.4 Moral hazard under least cost planning DSM.- 7.5 Standards.- 7.6 United States experience.- 8 Optimal conservation incentives under asymmetric information.- 8.1 Socially optimal incentives.- 8.2 Optimal least cost planning conservation incentives when efficiency is observable.- 8.3 Optimal conservation incentives when efficiency is not observable.- 9 Rate-of-return regulation and incentives.- 9.1 Rate-of-return regulation, no incentives.- 9.2 Rate-of-return regulation plus incentives (shared savings).- 9.3 Review of literature.- 10 Efficiency of DSM and positive explanations.- 10.1 Impact of United States DSM on electricity demand.- 10.2 Problems on the demand side.- 10.3 Regulation.- 11 Summary and concluding remarks.- 12 References.