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Three Biases in Cost-Efficiency Tests of Utility Energy Efficiency Programs

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  • Steven Braithwait
  • Douglas Caves

Abstract

Electric utilities in a number of American states devote significant portions of their resources to demand-side management (DSM) programs designed to reduce their customers' electricity consumption. As other jurisdictions consider similar programs, the public policy cost-efficiency criteria for determining how much utilities should pay for DSM remain controversial. This paper develops the appropriate measure of the economic benefits and costs of DSM, using a conventional economic welfare framework, and compares it to the standard cost-effectiveness tests used in most jurisdictions today. The standard tests are found to be incomplete, suffering from three potential biases. Modifications to the standard tests are suggested to address each of the biases. A numerical example is used to illustrate the nature and potential magnitude of the bias in the current tests.

Suggested Citation

  • Steven Braithwait & Douglas Caves, 1994. "Three Biases in Cost-Efficiency Tests of Utility Energy Efficiency Programs," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 95-120.
    • Handle: RePEc:aen:journl:1994v15-01-a06
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    Cited by:

    1. Marilyn A Brown & Frank Southworth, 2008. "Mitigating Climate Change through Green Buildings and Smart Growth," Environment and Planning A, , vol. 40(3), pages 653-675, March.
    2. Gillingham, Kenneth & Newell, Richard G. & Palmer, Karen L., 2004. "Retrospective Examination of Demand-Side Energy Efficiency Policies," Discussion Papers 10477, Resources for the Future.
    3. Sutherland, Ronald J, 1996. "The economics of energy conservation policy," Energy Policy, Elsevier, vol. 24(4), pages 361-370, April.
    4. Eto, J. & Stoft, S. & Kito, S., 1998. "DSM shareholder incentives: recent designs and economic theory," Utilities Policy, Elsevier, vol. 7(1), pages 47-62, March.
    5. Helle, Christoph, 1997. "On energy efficiency-related product strategies--illustrated and analysed using contracting approaches in Germany as an example," Utilities Policy, Elsevier, vol. 6(1), pages 75-85, March.
    6. Sorrell, Steve & Harrison, David & Radov, Daniel & Klevnas, Per & Foss, Andrew, 2009. "White certificate schemes: Economic analysis and interactions with the EU ETS," Energy Policy, Elsevier, vol. 37(1), pages 29-42, January.
    7. Franz Wirl & Wolfgang Orasch, 1998. "Analysis of United States' Utility Conservation Programs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(4), pages 467-486, August.

    More about this item

    JEL classification:

    • F0 - International Economics - - General

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