Utility Energy Efficiency Initiatives Are Good Policy: These programs address important market failures and have been shown to be cost-effective.

Author:Kushler, Martin

Researchers have been evaluating and documenting the effects of utility energy efficiency programs for decades, and nearly every state in the nation now has policies providing for utility energy efficiency programs. The research shows that these programs have been generally cost-effective and are well-justified as a way to address market failures such as imperfect information, split incentives, externalities such as environmental costs, and regulatory concerns that arise from utility monopoly power.

From the outset, some critics leveled three arguments against these programs. Those arguments are:

* If these energy efficiency measures are really so beneficial, then consumers would adopt the measures on their own.

* The methods used to evaluate these programs are flawed.

* There are insufficient evaluation data to demonstrate that energy efficiency programs are cost-effective.

Perhaps the most-cited example of these arguments is Paul Joskow and Donald Marron's 1992 Energy Journal article "What Does a Negawatt Really Cost?"

Immediately following the appearance of that article, and in the quarter-century since, energy efficiency program supporters have responded to those arguments. For example, in the same journal in 1994, Amory Lovins authored "Apples, Oranges, and Horned Toads: Is the Joskow & Marron Critique of Electrie Efficiency Costs Valid?" In another article in that journal in 1996 titled "The Total Cost and Measured Performance of Utility-Sponsored Energy Efficiency Programs," Joseph Eto et al. examined 20 resource-oriented utility programs and confirmed the cost effectiveness of those programs and their viability as a utility resource option.


Those responses and many years of subsequent field testing and program evaluation have persuaded energy regulators. Total annual utility spending on energy efficiency programs has increased seven-fold since 1996. However, given that the old criticisms have resurfaced in recent years, this brief article offers some updated responses.

Consumer choices?/ With respect to the argument that consumers would adopt energy-saving measures on their own if the measures were truly efficient, the obvious response is, "Then why haven't they?" There is plenty of cost-effective energy efficiency improvement available to be captured by energy efficiency programs year after year.

Considerable research has identified the market failures and obstacles to customer implementation of energy efficiency measures, e.g., lack of information, lack of easy access in the local market, lack of capital, etc. For examples of this literature, see the 2015 U.S. Department of Energy Report to Congress Barriers to Industrial Energy Efficiency and the Lawrence Berkeley National Laboratory report Market Barriers to Energy Efficiency by William Golove and Joseph Eto.

Flawed research? / With respect to the criticisms of evaluation methods, some of those concerns had some...

To continue reading