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Energy Efficiency and Price Regulation

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This paper examines the incentives embedded across different regulatory regimes – price cap, rate of return and mandated target regulation – for investment in energy efficiency programs at the supplier’ end of the network. In our model, s a monopolist chooses whether or not to undertake an investment in energy efficiency, which is not observable by the regulator. We explore how the monopolist’ s choice of effort changes under different regulatory regimes. We show that, in equilibrium, the monopolist chooses to exert positive effort more often under price cap regulation than under no regulation or mandated target regulation and that she exerts no effort under rate of return regulation. In terms of expected welfare, however, the results are ambiguous and complex. In particular, we provide a full characterisation of the optimal effort, optimal prices (regulated or unregulated) and expected welfare for the different regimes and show the trade-offs between rent extraction and incentives.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 495.

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Date of creation: 04 Nov 2013
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Handle: RePEc:qld:uq2004:495

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  1. Hunt Allcott & Michael Greenstone, 2012. "Is There an Energy Efficiency Gap?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 3-28, Winter.
  2. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
  3. J. Daniel Khazzoom, 1980. "Economic Implications of Mandated Efficiency in Standards for Household Appliances," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 21-40.
  4. Eto, Joseph & Stoft, Steven & Belden, Timothy, 1997. "The theory and practice of decoupling utility revenues from sales," Utilities Policy, Elsevier, vol. 6(1), pages 43-55, March.
  5. Leon Chu & David Sappington, 2013. "Motivating energy suppliers to promote energy conservation," Journal of Regulatory Economics, Springer, vol. 43(3), pages 229-247, June.
  6. Wirl, Franz, 1995. "Impact of Regulation on Demand Side Conservation Programs," Journal of Regulatory Economics, Springer, vol. 7(1), pages 43-62, January.
  7. Leon Chu & David Sappington, 2012. "Designing optimal gain sharing plans to promote energy conservation," Journal of Regulatory Economics, Springer, vol. 42(2), pages 115-134, October.
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