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Price and Cost Impacts of Utility DSM Programs

More U.S. utilities are running more and larger demand-side management (DSM) programs. Assessing the cost effectiveness of these programs raises difficult questions for utilities and their regulators. In particular, should these programs aim to minimize the total cost of providing electric-energy services or should they minimize the price ofelectricity?Most of the debates about the appropriate economic tests to use in assessing utility programs do not address the magnitude of the impacts. As a result, questions remain about the relationships among utility DSM programs and acquisition of supply resources and the effects of these choices on electricity prices and costs. This study offersquantitative estimates on the tradeoffs between total costs and electricity prices. A dynamic model is used to assess the effects of energy-efficiency programs on utility revenues, total resource costs, electricity prices, and electricityconsumption for the period 1990 to 2010. These DSM programs are assessed under alternative scenarios for three utilities: a "base" that is typical of U.S. utilities; a "surplus" utility that has excess capacity, few planned retirements, and slow growth in fossil-fuel prices and incomes; and a "deficit" utility that has little excess capacity, many planned retirements, and rapid growth infossil-fuel prices and incomes. Model results show that DSM programs generally reduce electricity costs and increase electricity prices. However, the percentage reduction in costs is usually greaterthan the percentage increase in prices. On the other hand, most of the cost benefits of DSM programs can be obtained without raising electricity prices.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electric utilities, DSM, US, Energy efficiency, Electricity prices, Diamond model

DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No4-4

Published in Volume 13, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.