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Where Did the Money Go? The Cost and Performance of the Largest Commercial Sector DSM Programs

Spending on electricity energy-efficiency programs was responsible for most of the growth (and decline), and almost all of the energy savings from U. S. utility demand-side management (DSM) programs between 1990 and 1998. As a result of restructuring, utilities may never again assume such an important role in promoting electricity energy efficiency. However, as governments consider future domestic policies to promote energy efficiency in response to global environmental commitments, the potential of large-scale energy efficiency programs will likely be discussed. This article presents new information on a critical issue that will surely arise in these discussions: how much does it cost to save energy through programs that use monetary incentives and targeted information to influence individual customer decisions? We present findings from a detailed examination of the complete costs and measured energy savings from the largest commercial sector DSM programs operated by U.S. electric utilities in 1992. We extend the methodological considerations first identified by Joskow and Marron (1992) regarding differences among utility cost accounting conventions and savings evaluation methods. We quantify the impact of missing and incomplete data and, to the extent they can be assessed, demonstrate that our assumptions to address them are conservative in that they err on the side of overstating the apparent cost of saved energy. We find that the programs, as a whole, have saved energy at a cost of 3.2c/kWh. When compared to the cost of the energy they allowed the sponsoring utilities to avoid generating or purchasing (in the absence of these programs), we find that the programs, as a whole, are cost effective.

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

JEL Codes:
Q55 - Environmental Economics: Technological Innovation
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: DSM, energy conservation, energy efficiency, electricity policy

DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No2-2

Published in Volume21, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.