Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match?
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.
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- Brennan, Timothy, 1998. "Demand-Side Management Programs Under Retail Electricity Competition," Discussion Papers dp-99-02, Resources For the Future.
- Brennan, Timothy J., 2003.
"Electricity Capacity Requirements: Who Pays?,"
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- Timothy J. Brennan, 2009.
"Energy Efficiency: Efficiency or Monopsony?,"
UMBC Economics Department Working Papers
09-110, UMBC Department of Economics, revised 01 May 2009.
- R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," Review of Economic Studies, Oxford University Press, vol. 24(1), pages 11-32.
- Brennan, Timothy J., 2008. "Is the Benefit of Reserve Requirements in the “Reserve” or the “Requirement”?," Discussion Papers dp-08-33, Resources For the Future.
- Timothy J. Brennan, 2004. "Market Failures in Real-Time Metering," Journal of Regulatory Economics, Springer, vol. 26(2), pages 119-139, 09.
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