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Cost-Effectiveness of Electricity Energy Efficiency Programs

Abstract:
We analyze the cost-effectiveness of electric utility ratepayer–funded programs to promote demand-side management (DSM) and energy efficiency (EE) investments. We specify a model that relates electricity demand to previous EE DSM spending, energy prices, income, weather, and other demand factors. In contrast to previous studies, we allow EE DSM spending to have a potential long-term demand effect and explicitly address possible endogeneity in spending. We find that current period EE DSM expenditures reduce electricity demand and that this effect persists for a number of years. Our findings suggest that ratepayer funded DSM expenditures between 1992 and 2006 produced a central estimate of 0.9 percent savings in electricity consumption over that time period and a 1.8 percent savings over all years. These energy savings came at an expected average cost to utilities of roughly 5 cents per kWh saved when future savings are discounted at a 5 percent rate. Keywords: Energy efficiency, Demand-side management, Electricity demand

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

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, L94: Electric Utilities, L95: Gas Utilities; Pipelines; Water Utilities, Q54: Climate; Natural Disasters and Their Management; Global Warming, C51: Model Construction and Estimation

Keywords: Energy efficiency, Demand-side management, Electricity demand

DOI: 10.5547/01956574.33.2.4

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Published in Volume 33, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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