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Lessons from Utility Conservation Programs

Abstract:
This paper considers the design, incentives and effectiveness of U.S. demand side management (DSM) programs and tries to explain why this ambitious, almost unanimously embraced initiative failed. Problems on the demand side result from consumers' private information that implies that substantial principal-agent slippage must accompany any conservation incentive the utility offers to the consumer. Moreover, the regulatory incentives induce the American utility to select inefficient programs. Therefore, the utility has little to gain from deterring such strategic reactions and cheating by consumers. As a consequence, the reported conservation exists largely on paper but not in reality. This ex-post assessment is important for two reasons. First, European countries (Scandinavia, Germany, Austria and others) have been eager to repeat this American regulatory 'success'. Second, the problems addressed in this paper would apply to another round of conservation programs induced by the concern about global warming.

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Energy Specializations: Energy Efficiency; Electricity – Policy and Regulation

JEL Codes:
Q55 - Environmental Economics: Technological Innovation
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Energy policy, electric utility conservation programs, Demand Side Management (DSM)

DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No1-4


Published in Volume21, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.