Energy Efficiency: Policy Puzzles Tim Brennan Professor, Public Policy and Economics, UMBC Senior Fellow, Resources for the Future, Washington, DC [email protected]

Energy Efficiency: Policy Puzzles

Tim BrennanProfessor, Public Policy and Economics,

UMBCSenior Fellow, Resources for the Future,

Washington, DC

[email protected]

30th USAEE/IAEE North American Conference

Washington, DC October 12, 2011

Paper available: http://www.rff.org/RFF/Documents/RFF-DP-11-

27%20revised.pdf

mailto:[email protected]

30th USAEE/IAEE N. A. Conf., 10/12/11

Brennan: Energy Efficiency Puzzles

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Energy efficiency definition, backdrop• More energy service per unit of energy

consumedo CFL, high “efficiency” air conditioner/furnace, etc.

• Long-time interest increasingo Excessive energy use due to lack of effective real-time

pricingo Greenhouse gas emissionso NIMBY concerns regarding generator, transmission

expansion

• Types of energy efficiency programs (MD, BGE)o EmPOWER MD – 15% reduction by 2015 (rhymes?)

o Incentives for replacing old HVAC equipment

o Energy audits and residential retrofits; low interest loans

o Small commercial, low income subsidies



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What makes energy efficiency interesting?• Does energy efficiency really reduce use?

o “Rebound effect”: Possible or inevitable?

• Interactions with related policies, esp. RPS

• Consumer choice failure as subsidy rationaleo MD: People use too much, and price too high--Yikes!o Evaluation when revealed preference doesn’t reveal

benefit?

• Decoupling: Bring back guaranteed-profit regulation?

• Could energy efficiency really about monopsony? o Consumer or total welfare? What do regulators do?

• Should utilities be involved with energy efficiency?o Separating competitive sectors from regulated monopolies



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1. Is energy efficiency a substitute for energy?• Presumably, efficiency increases

consumer benefit from a given quantity of energy used

• Marginal benefit (“willingness to pay”) must go up for some values of energy

• Implies demand curve pivots, not falls

Less efficiency

Q

P

More efficiency

Less efficiency

Q

P

More efficiency



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Could real-time pricing, EE conflict?• Need to assume, can’t conclude, that

efficiency, use are substitutes, BUT …

• With real-time pricing increasing critical peak prices by a factor of 10-20, could energy efficiency lead to more energy use?

Less efficiency

Q

P

More efficiencyLess efficiency

Q

P

More efficiency



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2. Energy efficiency and related policies• Use energy efficiency savings to count toward

renewable requirement

• Policy substitute, not complement!!

• Convert the requirement to a fossil fuel permito Should nuclear count as a renewable?o Should hydro not count as a renewable?

• Crucial issue—the baselineo How to calculate what energy use would have been

to get credito (Also problem with selling savings into capacity

market)

• Increased energy use at margin counts multiplies marginal RPS compliance costo Palmer: Use hypothetical rather than actual

savings?



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• Necessary assumption for EE if energy price too high

• Invoking behavioral economics: Negative cost

• WTP to avoid unobserved quality degradation?

• Or look at all the $20 bills on sidewalk?

3. Efficiency policy: “2nd best” or consumer error?



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What do we do for policy evaluation?• Not defending or advocating, but part of the

debate

• Gillingham, Newell, Palmero Information, capital market failureo Or just can’t figure it out?o [If not this, what can consumers do?

• What to count? Full increase in consumer surplus? o Even though that would have implied adoption with no

subsidyo With that effect, can get net benefits even if price too

higho Develop endogenous subsidy effect on electricity price

• Measuring net effects of energy efficiency policies:“free riders”



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4. Which brings us to decoupling• Divorce distribution utility profits from energy

deliveredo Raise Y’s and Z’s rates if X reduces useo Not lump-sum payment

• Decoupling’s advocates’ positionso Utilities “lose revenue and profits from sales not made

as a result of successful energy programs”o Political economy: Shifts risk from utility to customer

• Opponents’ responseso When to adjust revenues, profits? By customer class?o ELCON: “Promotes mediocrity”; get prices right

insteado OPCs: Should public have right to intervene?

• Guaranteed revenue reduces incentive to restore power?



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Decoupling’s challenge to regulatory economics • Profit-control regulation => distortions,

inefficiencyo Replace profit control with price capso “Night of the Living Dead”?

• How do decoupling’s challenges hold up?o Price-capped utility will withhold demand-reducing infoo May subsidize complements to boost demando Neither holds if utility sells energy, when peak price too

lowo Enhances EE reductions if reduced use raises energy price

• Real rationales political, not economico Covering utility's cost so it does not oppose energy

efficiencyo This was what stranded cost recovery was about in the 90so Not necessarily bad; make policy closer to uniformly

beneficial



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5. Speaking of politics – could it be monopsony?• Getting around the monopsony rationing

problem?

• Increases consumer (not total) welfare to subsidize electricity efficiency : reduce price and ration demand

price P

marginal cost MC

demand

quantity Qefficient

Qmonopsony Q

P = MC

comp Pmonopsony

P

consumer surplus loss from rationing

consumer surplus gain from lower prices



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Multiple caveats• “Capture” theory of regulation is that

regulator works for firm, not the consumers

• A consumer-oriented regulator might set p and q together, choose q to maximize total surplus and then choose p = AC to transfer all surplus to consumers

• Could a consumer-oriented regulatory monopsonize?

• Is electricity susceptible to monopsony?o General picture: “hockey stick” pricingo Misleading portrait of “marginal cost”o But would monopsony then be legal?

• Nevertheless, actual “buyer market power” allegations in New England capacity markets



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6. Should utilities handle energy efficiency?• Huge in the US

o Demand-side management programso EERS utility obligationso Energy efficiency subsidy programs (CFLs,

weatherizing)o Remote HVAC control (more for peak load)o Energy audits

• Financing feed-in tariffs, renewable obligations

• Obama administration: Utilities as “engines of economic progress” through green jobs



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Is utility involvement a good idea?• Decades-long dedication to providing energy

o Changing utilities from “energy” to “energy services”

• Energy services, energy efficiency, look competitiveo Are there huge fixed costs that make these natural

monopolies?o Entrepreneurial ideas, start-ups (vs. stodgy utilities?)

• Main risk: Discrimination against downstream rivalso Issue not just “foxes guarding the henhouse” or “cost of

changing the business plan”o Denying or providing inferior access to regulated

serviceso Delayed transmission lines, noisier connectionso Create artificial competitive advantage to capture

excess profits denied by regulation



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Separation policy, and what may be different here• History

o 1970s: Keeping oil pipelines from being owned by shippers

o 1980s: :US v. AT&T Getting regulated local telephone monopolies out of competitive long distance, equipment, information services markets

o 1990s: Orders 888, 2000: Separating control of electricity transmission, distribution, from ownership of generation

• Why? Taxation through the regulatoro Utilities justify expenses through of cost recoveryo The PUC approves rate increases to cover the costo Legislatures don’t have to get involvedo Let utilities collect the money, fund competitive

efficiency programs via auction?



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Overall …• Energy efficiency important, but puzzles remain

• Greater efficiency need not reduce electricity use

• Interaction with “complementary “ policies

• Subsidize with high prices => consumer choice failure

• Decoupling: Justification more politics than economics

• Efficiency policy could be a monopsony deviceo Consumer vs. total welfare debate may matter more for

regulation

• Having utilities manage efficiency could allow regulated monopolies to distort competitive markets

• Politics of financing efficiency subsidies?