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No free lunch with energy efficiency

April 21, 2019 GMT

How often have we heard how wonderful utility and government-mandated energy efficiency initiatives are? Many energy efficiency supporters claim it is the most cost-saving way to reduce carbon emissions — that by reducing energy consumption along with emissions, these initiatives more than pay for themselves. These are the premises underlying House Bill 291, which the Legislature passed earlier this year and the governor signed into law April 3.

Yet these free lunches should seem suspicious to anyone. They do to many analysts who have studied the benefits and costs of energy-efficiency initiatives.

Policymakers attribute the “low” adoption of investments in energy efficiency to market failure or consumer-behavioral problems: Consumers are incapable of making the correct calculations from a societal perspective or make decisions contrary to their self-interest. This presumption provides the raison d’etre for utility initiatives.

But, just because market problems exist that might hinder energy efficiency investments does not mean that utility intervention is socially desirable.

Academic reviews of energy efficiency programs conclude that such programs are not the “low-hanging” fruit that many people believe. They show that utilities grossly overstate energy savings from energy efficiency programs because they rely on ex ante engineering estimates that neglect to account for consumer behavior in using, say, their air conditioners and heating systems more intensively because of lower operating costs for the energy-efficiency technologies.

Studies also find “free riders.” These are individuals who would have purchased lower-energy-use appliances or heating and air conditioning systems regardless of the existence of the energy-efficiency programs.

Studies also note that utilities often fail to consider “hidden costs” for consumers from the time and effort spent on both energy audits and investments. The combination of these factors, according to some academic studies, have led to utilities understating the true costs of energy-efficiency programs by as much as 50 percent or more.

The problem with most utility evaluations of energy-efficiency programs is that they are unreliable — in some instances grossly unreliable — in measuring the actual energy savings from individual energy-efficiency programs.

Despite the negative evaluations of energy-efficiency programs by academics, these programs are politically popular. Legislatures, governors and state public utility commissions want utilities to promote energy efficiency with subsidies. Some utilities may initially balk at this, but public utility commissions then offer support to ensure the utilities’ profitability isn’t hurt by reduced sales. For instance, about half the states have adopted “revenue decoupling” for gas utilities, and they have grown in number for electric utilities. (HB 291 authorizes revenue decoupling for New Mexico electric utilities.) This mechanism permits utilities to raise their rates to compensate for lower sales.

Everyone’s happy, right? Well, someone has to pay for these initiatives, and it is almost always the utility’s customers. Many of these initiatives benefit only a relatively few customers, most of whom can afford to pay for energy efficiency without any financial assistance. Besides, these consumers are quite capable of making rational decisions, just like they do when they invest in other activities. So, why should utilities offer these customers subsidies and why should other customers bear the costs?

Regretfully, the best evidence has had little effect on these programs because the public is unaware of the transfers, energy efficiency is widely popular, and utilities can enjoy their support — for example, gaining goodwill with regulators — without suffering any financial consequences.

For many observers, energy-efficiency programs transmit good feelings about using less energy. But for those programs with a negative effect on society and the majority of utility customers, it is time to kill them for the sake of the public good.

Kenneth Costello is a regulatory economist/independent consultant living in Santa Fe. He moved here from Ohio in 2008.