Abstract
This paper studies the effect of electricity prices on state commitment to energy efficiency in the USA. Using panel data we find that electricity prices have a significant positive effect on state energy efficiency expenditures. Moreover, we find that this effect is particularly pronounced beyond a certain threshold level of prices. The rationale for these findings is that higher prices increase the cost-effectiveness of energy efficiency programs. These findings have important implications for state expenditures on energy efficiency if electricity prices rise in response to carbon and other stringent environmental regulations.
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Notes
The fact that energy efficiency forms a core component of the current administration’s economic recovery plan has contributed to this growing interest.
See Business Roundtable (2007).
State expenditures on energy efficiency include support for various programmatic initiatives such as efficient lighting, high-efficiency motors for heating and ventilation, replacement or renovation of boilers and chillers, lighting occupancy sensors, insulation and energy management systems, etc. Support is typically offered through financial incentives that cover a certain percentage of the total program cost. These incentives come in various flavors. States may cover upfront project costs (such as equipment, labor, and engineering costs) through rebates or may offer performance-based incentives (calculated as the product of energy savings and a predetermined rate). In the latter case, the energy savings are measured and verified. States also provide funding to offset the additional costs associated with incorporation of energy efficiency measures into the design, construction, and operation of new and substantially renovated buildings (both private buildings as well as state and local government facilities). Finally, support is provided for research (e.g., funding for studies used to support project implementation), consumer outreach and education programs, marketing initiatives and training (such as training of energy auditors, building operators, etc.). The Database of State Incentives for Renewables and Efficiency (available at http://www.dsireusa.org/) is a good source of information on state expenditures on energy efficiency programs.
One of the biggest concerns facing the industry is the uncertainty surrounding carbon regulation. Most experts concur that some form of national carbon regulation is forthcoming, most likely in the form of a cap-and-trade program. With the imposition of carbon regulation the industry will likely witness many fundamental changes. Production from coal plants will become relatively more expensive. This could also lead to higher demand for natural gas, thereby increasing its prices, all else equal. These higher costs will in turn lead to higher electricity prices. According to some estimates, tariff impacts could be as high as 40% in certain parts of the country (see Wall Street Journal, February, 27, 2009, interview of Jim Rogers, CEO of Duke Energy Corp.).
The average price of electricity accounts for the price for all electricity consumers—residential, commercial, and industrial. Similarly, the expenditure on energy efficiency also includes all sectors, i.e., residential, commercial, and industrial. For example, Massachusetts, over the 2002–2005 timeframe, spent 43% of its energy efficiency budget on residential and low income programs, and the remaining 57% on commercial and industrial programs. Indeed, the state ensured that the funds were “equitably allocated among customer sectors.” See Massachusetts Saving Electricity: A Summary of the Performance of Electric Efficiency Programs Funded by Ratepayers Between 2003 and 2005 (2007), Executive Office of Energy and Environmental Affairs, Massachusetts Division of Energy Resources, pp. 2–8. As another example, Vermont’s 2008 energy efficiency budget allocated 34% of the funds to the residential sector, with the remaining 66% allocated to commercial and industrial programs. See Efficiency Vermont (2008) Annual Report, p. 26.
State GDP is perhaps a better indicator of state level economic activity than per capita income. However, BEA strongly cautions against appending the pre- and post-1997 data into a single time-series. For this very reason, Metcalf (2008) has also used per capita income instead of GDP. Also, to account for the possibility that per capita income may not capture very well the extent of electricity use, we also ran regressions with lagged per capita electricity usage as one of the explanatory variables. This variable was, however, insignificant, and did not affect our other conclusions. Hence, we do not report it.
States may also pursue energy efficiency due to environmental concerns. However, data that account for such concern are not available. Nevertheless, it should be noted that environmental concern is unlikely to be correlated with electricity prices, and hence, our estimates regarding the effect of electricity prices on state commitment to energy efficiency should be unaffected by our inability to directly control for this variable. Moreover, state fixed effects, to a certain degree, capture state level differences such as state commitment to solve environmental problems.
Retail price of electricity depends on a number of factors such as type of fuel used, the regulatory structure in the state, construction of new generation units, transmission and distribution costs, etc. Nonetheless, one of the crucial factors in the determination of retail electricity prices is type of generation used. For instance, generation from coal tends to be cheaper than generation from oil/gas units. In our analysis we use the proportion of type of generation as instruments for electricity prices.
See, for example, Wooldridge (2003).
See, for example, National Action Plan for Energy Efficiency (2006), p. 1–6.
Prices are in real 2004 dollars.
We find a similar negative relationship between state GDP and expenditure on energy efficiency. But for the reasons noted in footnote 5, we do not present these results.
Note that these are also states in which a larger pool of programs is cost-effective.
References
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We are grateful to the Editor-in-Chief, Paolo Bertoldi, Associate Editor, Adriaan Perrels, and three anonymous reviewers for their valuable suggestions. We are also thankful to Javier Espinosa, Brid Gleeson Hanna, George Katsigiannakis, David Pickles, and Judah Rose for their comments. The views expressed are those of the authors and do not necessarily reflect those of their employers.
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Bhole, B., Surana, S. Electricity prices and state commitment to energy efficiency in the U.S.. Energy Efficiency 4, 9–16 (2011). https://doi.org/10.1007/s12053-010-9085-3
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DOI: https://doi.org/10.1007/s12053-010-9085-3