Abstract
A utility’s profit-maximizing level of investment in energy efficiency or demand-side management (DSM) programs and mix of programs is affected by natural load growth, the frequency of rate cases, program costs, and the structure of any mechanism designed to either compensate the utility for foregone profits or sever the link between sales and profits. Under a range of reasonable assumptions, decoupling can incent a utility to invest in DSM. However, a utility experiencing high natural load growth and little inflation is likely to resist the imposition of a decoupling mechanism, as it would tend to lower profits. A utility with low growth in per-customer sales will tend to favor decoupling, as it will tend to lead to higher profits than under traditional regulation. The results presented here are quite sensitive to the assumptions made regarding natural load growth, regulatory lag, the frequency of price changes, price elasticity of demand, and other factors. This suggests that there is not a single approach to promoting energy efficiency without penalizing utility profits that will work in all situations for all utilities.
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Notes
Of course, non-economic motives may be considered in addition to the economic benefits and costs considered here. These may include customer service goals and corporate sustainability commitments.
The GAMS code used in this analysis is available from the author upon request.
Efforts to permit demand to adjust to contemporaneous price changes resulted in convergence problems. Consequently, a lagged response is modeled here.
A wide range of long-term price elasticities are reported in the literature. Espey and Espey (2004) report a range from −2.25 to −0.04.
Attempts to explicitly model federal income taxes as a function of profits (and, thus, implicitly, a function of all other variables in the model) resulted in convergence problems. These problems persisted even when rates were set so as to include taxes paid in the previous year. Provided that profits remain positive and the tax rate is a fixed percentage of profits, after-tax profits will be proportional to pre-tax profits. And optimization based on pre-tax profits should yield the same result as optimization based on after-tax profits.
Because utility investments in infrastructure can have very long accounting lives and the model presented here examines only a 10-year planning horizon, some of the results presented here may be understated.
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Acknowledgments
The author benefited from earlier exchanges with C.K. Woo and I. Horowitz on this topic. Michele Chait, Parviz Adib, and George Mentrup provided valuable comments on earlier versions. Three referees provided exceptionally detailed and invaluable suggestions on the initial submission, resulting in significant improvements to this paper.
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Zarnikau, J. The many factors that affect the success of regulatory mechanisms designed to foster investments in energy efficiency. Energy Efficiency 5, 393–410 (2012). https://doi.org/10.1007/s12053-011-9139-1
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DOI: https://doi.org/10.1007/s12053-011-9139-1