Analysis of United States' Utility Conservation Programs

This paper reviews the United States' experience with utility sponsored energy conservation programs. Such programs are central to the recent discussions about electric utility regulation in the United States and elsewhere. First it is shown that these programs are exposed to three problems on the consumers' side – rebound, adverse selection and moral hazard – which lower the effectiveness of conservation incentives and impede in most practical cases a reliable quantification of the achieved conservation. Moreover, the utilities have under the regulatory practice an incentive to invest in conservation measures but to limit factual conservation through a proper design of the program. Reviewing the recent literature shows that these four crucial points, which affect many of the applied conservation programs, are either insufficiently covered (rebound and adverse selection) or neglected entirely (moral hazard and regulated utilities' interest in little conservation). We conclude, that this undertaking has resulted in insignificant conservation and doubt the adequacy of these programs to reduce external social costs from energy use.