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The Effects of Electric Utility Decoupling on Energy Efficiency

Abstract:
Most economists agree that revenue decoupling eliminates utilities' incentives to encourage overconsumption of energy, but critics argue that decoupled utilities have no incentive to promote energy efficiency. This paper models the repeated game between regulator and utility and shows that decoupled utilities have greater equilibrium utility demand-side management (DSM) investment in the presence of DSM-related shareholder incentives. It then shows empirically that decoupling is historically associated with significant residential electricity consumption reductions, augmented DSM spending levels, and increased DSM investment efficacy. Keywords: Decoupling, Demand-side management, Energy efficiency, Electric utility regulation

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Energy Specializations: Energy and the Economy –Economic Growth and Energy Demand; Renewables – Hydroelectricity; Electricity – Markets and Prices ; Petroleum – Markets and Prices for Crude Oil and Products; Natural Gas – Markets and Prices; Nuclear Power – Markets and Prices

JEL Codes:
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q01 - Sustainable Development
D42 - Market Structure, Pricing, and Design: Monopoly
L13 - Oligopoly and Other Imperfect Markets

Keywords: Decoupling, Demand-side management, Energy efficiency, Electric utility regulation

DOI: 10.5547/01956574.37.4.jkah

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Published in Volume 37, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.