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Optimal Energy Efficiency Policies and Regulatory Demand-Side Management Tests: How Well Do They Match?

Author

Abstract
Under conventional models, subsidizing energy efficiency requires electricity to be priced below marginal cost. Its benefits increase when electricity prices increase to finance the subsidy. With high prices, subsidies are counterproductive unless consumers fail to make efficiency investments when private benefits exceed costs. If the gain from adopting efficiency is only reduced electricity spending, capping revenues from energy sales may induce a utility to substitute efficiency for generation when the former is less costly. This goes beyond standard “decoupling” of distribution revenues from sales, requiring complex energy price regulation. The models’ results are used to evaluate tests in the 2002 California Standard Practice Manual for assessing demand-side management programs. Its “Ratepayer Impact Measure” test best conforms to the condition that electricity price is too low. Its “Total Resource Cost” and “Societal Cost” tests resemble the condition for expanded decoupling. No test incorporates optimality conditions apart from consumer choice failure.

Suggested Citation

  • Timothy J. Brennan, 2009. "Optimal Energy Efficiency Policies and Regulatory Demand-Side Management Tests: How Well Do They Match?," UMBC Economics Department Working Papers 09-109, UMBC Department of Economics, revised 01 Jan 2009.
    • Handle: RePEc:umb:econwp:09109
    as

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    File URL: http://www.umbc.edu/economics/wpapers/wp_09_109.pdf
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    References listed on IDEAS

    as
    1. Timothy J. Brennan, 2004. "Market Failures in Real-Time Metering," Journal of Regulatory Economics, Springer, vol. 26(2), pages 119-139, September.
    2. Brennan, Timothy, 1998. "Demand-Side Management Programs Under Retail Electricity Competition," RFF Working Paper Series dp-99-02, Resources for the Future.
    3. Brennan, Timothy J., 2009. "Energy Efficiency: Efficiency or Monopsony?," RFF Working Paper Series dp-09-20, Resources for the Future.
    4. Brennan, Timothy J., 2008. "Is the Benefit of Reserve Requirements in the “Reserve” or the “Requirement”?," RFF Working Paper Series dp-08-33, Resources for the Future.
    5. Brennan, Timothy J., 2003. "Electricity Capacity Requirements: Who Pays?," The Electricity Journal, Elsevier, vol. 16(8), pages 11-22, October.
    6. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 24(1), pages 11-32.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Electricity; energy efficiency; demand-side management; utility regulation;
    All these keywords.

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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