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Energy Efficiency and Price Regulation



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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  • Flavio Menezes & Joisa Dutra & Xuemei Zheng, 2013. "Energy Efficiency and Price Regulation," Discussion Papers Series 495, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:495

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    References listed on IDEAS

    1. Wirl, Franz, 1995. "Impact of Regulation on Demand Side Conservation Programs," Journal of Regulatory Economics, Springer, vol. 7(1), pages 43-62, January.
    2. 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.
    3. 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.
    4. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    5. 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.
    6. 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.
    7. Leon Chu & David Sappington, 2013. "Motivating energy suppliers to promote energy conservation," Journal of Regulatory Economics, Springer, vol. 43(3), pages 229-247, June.
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    Cited by:

    1. Rod Tyers, 2015. "Service Oligopolies and Australia's Economy-Wide Performance," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, pages 333-356.
    2. Zubelzu, Sergio & Álvarez, Roberto, 2016. "A simplified method to assess the influence of the power generation mix in urban carbon emissions," Energy, Elsevier, vol. 115(P1), pages 875-887.

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