The "Most Value" Test: Economic Evaluation of Electricity Demand-Side Management Considering Customer Value

Abstract

What measure of economic efficiency is appropriate for evaluating demand-side management (DSM) programs sponsored by electric utilities? Most regulatory commissions in the United States require that utilities assess the efficiency of alternative programs as part of their planning process. A criterion based upon maximization of consumer surplus is proposed. This, the “most value” test, not only counts the avoided supply cost and environmental benefits of such programs, but also the changes in customer value that result from rebound/takeback and changes in electric rates. The test can be viewed as an extension of the “least cost” test, which many commissions now require utilities to use. Among the “most value” test’s practical implications is the fact that the net benefits of DSM will often be decreased if free riders are present or if electric rates must increase to fund the program. The “least cost” test wrongly assumes these effects to be merely matters of income transfer. Consequently, some programs that are desirable from a “least cost” standpoint will not be beneficial from a “most value” point of view. However, if rebound effects are large enough, the opposite can happen: some DSM programs which are apparently too costly will actually have positive net benefits. These conclusions apply not only to programs for conserving electricity, but also to water and natural gas conservation efforts and programs that promote energy use.