An Evaluation of the Impact of Demand-Side Management Expenditures on State-Level Electricity Efficiency

Abstract

Global climate change has become a topic of increasing importance to political leaders, policymakers, and the general public. Roughly one third of US greenhouse gas (GHG) emissions come from electricity generation. Improved energy efficiency in electricity end-uses offers the promise of reductions in GHG emissions and other benefits. Market failures have prompted federal and state governments to intervene to promote energy efficiency. One of the largest interventions has been in the form of demand-side management (DSM) programs run by electric utilities, state agencies, and third parties. Given policymakers& considerations of further investments in energy efficiency through expanded DSM and other programs to help mitigate climate change, it is important to evaluate how effective DSM expenditures have been in improving energy efficiency. Proponents of expanded energy efficiency programs point to a large 'efficiency gap' between the current level of energy efficiency and the socially optimal level while citing market failures and barriers as justification for DSM and other programs to promote greater energy efficiency. Critics point out at least theoretical concerns about the efficacy of DSM. Previous empirical studies have come to divergent conclusions regarding the effectiveness of DSM while also revealing shortcomings in the evaluation methods applied to date. In particular, previous work highlights the need to take into account changes in energy efficiency from market transformation, positive spillover, and shifts in economic activity. This study analyzes a state-level panel data set to estimate the effect of DSM expenditures on state-level electricity efficiency controlling for relevant factors and employing a Fisher Ideal index measure of efficiency that distinguishes changes in electricity usage due to changes in electricity efficiency from those due to changes in economic activity. Regression results do not indicate that DSM expenditures improve efficiency; however, electricity price is found to have a strong impact on electricity efficiency.