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The "Most Value" Test: Economic Evaluation of Electricity Demand-Side Management Considering Customer Value

What measure of economic efficiency is appropriate for evaluating demand-side management (DSM) programs sponsored by electric utilities? Most regulatory commissions in the United States require that utilities assess the efficiency of alternative programs as part of their planning process. A criterion based upon maximization of consumer surplus is proposed. This, the "most value" test not only counts the avoided supply cost and environmental benefits of such programs, but also the changes in customer value that result from rebound/takeback and changes in electric rates. The test can be viewed as an extension of the "least cost" test, which many commissions now require utilities to use. Among the "most value" test's practical implications is the fact that the net benefits of DSM will often be decreased if free riders are present or if electric rates must increase to fund the program. The "least cost" test wrongly assumesthese effects to be merely matters of income transfer. Consequently, some programs that are desirable from a "least cost" standpoint will not be beneficialfrom a most value"point of view. However, if rebound effects are large enough, the opposite can happen: some DSM programs which are apparently too costlywill actually have positive net benefits. These conclusions apply not only to programs for conserving electricity, but also to water and natural gas conservationefforts and programs that promote energy use.

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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: Electricity conservation, DSM, Electric utilities, "Most value" test

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-5

Published in Volume 12, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.