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

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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
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    References listed on IDEAS

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    1. Brennan, Timothy J., 2009. "Energy Efficiency: Efficiency or Monopsony?," Discussion Papers dp-09-20, Resources For the Future.
    2. 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.
    3. Brennan, Timothy, 1998. "Demand-Side Management Programs Under Retail Electricity Competition," Discussion Papers dp-99-02, Resources For the Future.
    4. Timothy J. Brennan, 2004. "Market Failures in Real-Time Metering," Journal of Regulatory Economics, Springer, vol. 26(2), pages 119-139, September.
    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," Review of Economic Studies, Oxford University Press, vol. 24(1), pages 11-32.
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    Citations

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    Cited by:

    1. David P. Brown & David E. M. Sappington, 2017. "Optimal policies to promote efficient distributed generation of electricity," Journal of Regulatory Economics, Springer, pages 159-188.
    2. Brennan, Timothy J., 2011. "Energy efficiency and renewables policies: Promoting efficiency or facilitating monopsony?," Energy Policy, Elsevier, vol. 39(7), pages 3954-3965, July.
    3. repec:eee:rensus:v:77:y:2017:i:c:p:617-635 is not listed on IDEAS
    4. Torriti, Jacopo, 2013. "The significance of occupancy steadiness in residential consumer response to Time-of-Use pricing: Evidence from a stochastic adjustment model," Utilities Policy, Elsevier, vol. 27(C), pages 49-56.
    5. Salies, Evens, 2013. "Real-time pricing when some consumers resist in saving electricity," Energy Policy, Elsevier, vol. 59(C), pages 843-849.
    6. Laura Abrardi & Carlo Cambini, 2014. "Tariff Regulation with Energy Efficiency Goals," IEFE Working Papers 65, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.
    7. Brennan, Timothy J., 2013. "Holding Distribution Utilities Liable for Outage Costs: An Economic Look," Discussion Papers dp-13-16, Resources For the Future.
    8. Abrardi, Laura & Cambini, Carlo, 2015. "Tariff regulation with energy efficiency goals," Energy Economics, Elsevier, vol. 49(C), pages 122-131.
    9. Wang, Dong, 2014. "A dynamic optimization on economic energy efficiency in development: A numerical case of China," Energy, Elsevier, vol. 66(C), pages 181-188.
    10. Chandrashekeran, Sangeetha & Zuckerman, Julia & Deason, Jeff, 2015. "Raising the stakes for energy efficiency: A qualitative case study of California's risk/reward incentive mechanism," Utilities Policy, Elsevier, vol. 36(C), pages 79-90.
    11. Raugei, Marco & Leccisi, Enrica, 2016. "A comprehensive assessment of the energy performance of the full range of electricity generation technologies deployed in the United Kingdom," Energy Policy, Elsevier, vol. 90(C), pages 46-59.
    12. Palmer, Karen L. & Grausz, Samuel & Beasley, Blair & Brennan, Timothy J., 2013. "Putting a floor on energy savings: Comparing state energy efficiency resource standards," Utilities Policy, Elsevier, vol. 25(C), pages 43-57.
    13. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    14. Wang, Dong, 2012. "A Dynamic Optimization on Energy Efficiency in Developing Countries," MPRA Paper 43749, University Library of Munich, Germany.
    15. Brennan, Timothy J., 2014. "Behavioral economics and policy evaluation," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 5(01), pages 89-109, January.
    16. Brennan, Timothy J., 2015. "Holding distribution utilities liable for outage costs," Energy Economics, Elsevier, vol. 48(C), pages 89-96.
    17. 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.
    18. Leon Chu & David Sappington, 2013. "Motivating energy suppliers to promote energy conservation," Journal of Regulatory Economics, Springer, vol. 43(3), pages 229-247, June.
    19. Brennan, Timothy J., 2011. "Energy Efficiency Policy: Surveying the Puzzles," Discussion Papers dp-11-27, Resources For the Future.
    20. Timothy J. Brennan, 2013. "Energy Efficiency Policy Puzzles," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).

    More about this item

    Keywords

    Electricity; energy efficiency; demand-side management; utility regulation;

    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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