Good for You, Bad for Us: The Financial Disincentive for Net Demand Reduction

Abstract

This Article examines a principal barrier to reducing U.S. carbon emissions — electricity distributors’ financial incentives to sell more of their product — and introduces the concept of net demand reduction (“NDR”) as a primary goal for the modern energy regulatory system. Net electricity demand must decrease substantially from projected levels for the United States to achieve widely-endorsed carbon targets by 2050. Although social and behavioral research has identified cost-effective ways to reduce electricity demand, state-of-the-art programs to curtail demand have not been implemented on a widespread basis. We argue that electric distribution utilities are important gatekeepers that can determine whether these programs succeed in reducing demand, but regulatory incentives in most states discourage utilities from exploiting the full potential of these programs. We identify two conceptual barriers that stand in the way of changing utilities’ regulatory incentives to favor demand reduction. First, policy makers frequently conflate NDR with demand-side management (“DSM”). By NDR, we mean reductions in the total demand for energy, including electricity. In contrast, DSM typically involves load management to reduce electricity generation costs, such as shifting the timing of usage. DSM enables a subtle shift in energy debates and policies from how much electricity is used to when it is used, yet by expanding net electricity use and shifting the mix of power generation sources DSM also can increase carbon emissions. Second, in utility rate proceedings firms, regulators, and consumer advocates emphasize low per-unit rates, rather than low total costs to consumers. This focus on low electricity rates leads to policies that may achieve lower prices per unit, but that also steadily increase demand and overall consumer costs. We examine a range of instruments that can overcome these conceptual barriers and create incentives for NDR, including social cost approaches, performance standards, and decoupling utilities’ revenues and profits. We conclude that although no silver bullet exists for NDR, the imperative of reducing energy demand argues for greater deployment of imperfect tools.