Electric utility conservation programs: Empirical studies of impacts and cost-effectiveness

Electric utility conservation programs have always been controversial--suffering conflicting perceptions about their cost-effectiveness and ability to affect customer loads. The decline in electricity production costs and the movement toward electric utility industry restructuring raise questions about their future.;Because of the inherent difficulty in measuring conservation impacts and because utilities have had clear economic incentives to overestimate those impacts, the conservation impacts reported by utilities have been viewed with skepticism. The first part of this study uses econometric techniques to examine the aggregate commercial and industrial conservation impacts reported ex post by 39 utilities in the Northeast and California through 1993. The study finds that 99.4% of the reported conservation impacts are statistically observable in system level sales after economic and weather effects are accounted for. The results indicate that utility-run conservation programs have, indeed, been effective in reducing customer loads. It finds no evidence that utilities have systematically overstated conservation impacts.;Estimates of conservation costs in the late 1980s and early 1990s were incomplete and optimistic. Better accounting suggests that conservation costs may not be lower than generation costs--which have fallen dramatically since 1981. The second part of this study uses utility plant data reported in annual regulatory filings to estimate marginal production costs since 1980 for 9 utilities in California, Massachusetts and New York. The study also examines projected costs of new generating capacity including environmental externality costs. Comparing conservation costs to generation costs, the study finds that only 12% to 37% of conservation potential appears cost-effective in the 1995-2000 period without externality costs. Median estimates of externality costs for combined cycle gas plants make 35% to 73% of conservation potential cost-effective. The study concludes that the economics of conservation are much more sensitive to the valuation of environmental externalities than they were in 1980.