Abstract
An increase in the efficiency of natural gas fired residential appliances allows users to realize the same level of service, heating water for example, while using less natural gas. In addition to this technological benefit to the residential sector, the reduced demand for natural gas depresses the price of natural gas, resulting in pecuniary gains to other energy consumers and pecuniary losses to energy producers. The question we address in this study is whether purely pecuniary effects, those that follow from the price changes elicited by lower usage of natural gas, should enter the debate concerning the implementation of energy efficiency programs. To that end, we explore the price and social welfare impacts of natural gas energy efficiency standards by evaluating the impacts of a specific efficiency standard using the National Energy Modeling System. Our analysis indicates that purely pecuniary losses to producers are largely offset by pecuniary benefits to consumers. Our analysis also provides useful insight into the sources of these benefits and losses. Although our results are based on a specific model and efficiency standard, we believe that the results generalize to other efficiency programs and would be reproduced using other energy models.
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Notes
Standard deviation of USA heating degree days is 4.34 % of the mean and the elasticity of residential consumption is 0.9, so the standard deviation of consumption due to weather variation is approximately 4 % of its mean. Reduction for the water heater standard used for our analysis is 0.45 % of residential usage, almost an order of magnitude lower than weather induced variation. Source: EIA 1999, 2006.
More than one-quarter of all residential customers in New England pay a retail supplier other than the regulated utility for the generation of their electricity. Customers of both full-service utilities and restructured retail suppliers have experienced similar rate increases of just under 12 % so far this year (Source: http://www.eia.gov/todayinenergy/detail.cfm?id=17791).
This estimate is approximately equal to the change in consumer surplus where consumers are assumed to spend the entire savings from the price change on additional quantities of the same good. The change in consumer surplus can be calculated as \( \left({p}_0-{p}_s\right){q}_0+\frac{\left({p}_0-{p}_s\right)\left({q}_0-{q}_s\right)}{2} \). Our formulation omits only the last term which, for small changes in p and q is extremely small.
This is equivalent to a 75 percent government take − the average determined by Kepes et al. (2011) − where production costs are one third of revenue. . I.E. 3/4 of 2/3 of revenue is ½ of revenue.
Here, the term “reserves” is used as defined in the NEMS model rather than exactly complying with the SEC or other definitions.
Because the decrements are very small we apply multiples (4×, 6×, and 8×) of the decrements to three separate runs of NEMS and construct the results actually used as a linear interpolation between the results of those three runs and the reference run. Other, larger multiples were also run but not used because the estimated responses did not form a linear set with the lower multiples.
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Carnall, M., Dale, L. & Lekov, A. The economic effect of efficiency programs on energy consumers and producers. Energy Efficiency 9, 647–662 (2016). https://doi.org/10.1007/s12053-015-9390-y
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DOI: https://doi.org/10.1007/s12053-015-9390-y