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Energy Efficiency Policy Puzzles

Promoting energy efficiency (EE) has become a leading policy response to greenhouse gas emissions, energy dependence, and the cost of new generators and transmission lines. Such policies present numerous puzzles. Electricity prices below marginal production costs could warrant EE policies if EE and energy are substitutes, but they will not be substitutes if the energy price is sufficiently high. Using EE savings to meet renewable energy requirements can dramatically increase the marginal cost of electricity. Rejecting "rationality" of consumer energy choices raises doubts regarding cost-benefit analysis when demand curves may not reveal willingness to pay. Decoupling to guarantee constant profit regardless of use contradicts findings that incentive-based mechanisms outperform cost-ofservice regulation. Regulators may implement EE policies to exercise buyer-side market power against generators, increasing consumer welfare but reducing overall economic performance. Encouraging utilities to take over potentially competitive EE contradicts policies to separate competitive from monopoly enterprises.

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Energy Specializations: Energy Efficiency; Electricity – Markets and Prices ; Electricity – Policy and Regulation; Renewables – Policy and Regulation; Energy and the Environment – 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
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

Keywords: Energy efficiency, Energy policy, Decoupling, Monopsony, Vertical integration

DOI: 10.5547/01956574.34.2.1

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Published in Volume 34, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.