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Vintage Capital, Technology Adoption and Electricity Demand-Side Management

Abstract:
Demand-side Management (DSM) programs by electricity utilities report substantial energy savings that often receive little support from empirical studies. We argue that this discrepancy results from an inherently static view of technology adoption by utilities when estimating future energy savings. We illustrate this through a simple model of technology adoption, in which households operate different vintages of appliances and have heterogenous forecasts about the rate of future technological progress. An "energy efficiency gap" arises when households under-estimate the true rate of technological progress. We parameterize the model using data on refrigerators and show that a DSM program that subsidizes adoption of energy-efficient refrigerators yields small energy saving that, in most cases, do not justify the cost of the subsidy.

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Energy Specializations: Energy Efficiency –  Policy Issues; Electricity – Policy and Regulation; Electricity – R&D and Emerging Technologies

JEL Codes:
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
O32 - Management of Technological Innovation and R&D

Keywords: Demand-side management, vintage capital, technology adoption

DOI: 10.5547/01956574.39.2.wcai

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Published in Volume 39, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.