Demand-Side Management Programs Under Retail Electricity Competition

Demand-side management programs comprise subsidies from franchised electric utilities for the purchase of high-efficiency appliances; e.g., air conditioners. Competition in power generation threatens the viability of these programs. However, it should also reduce the warrant for them. Under regulation, the justification for such programs depends, somewhat paradoxically, on below marginal-cost pricing. Eliminating regulation should permit pricing flexibility to discourage excessive on-peak energy use. It should also eliminate the assurance of returns that may have encouraged overbuilding of generation capacity. Entrants and incumbent utilities should find it easier to offer "energy services," i.e., to bundle electricity with appliances, if consumers are too myopic to realize the benefits of increasing energy efficiency. Environmental degradation remains a problem, but competition can improve the performance of incentive-based regulations (e.g., permit trades), reducing the value of DSM as a supplemental, second-best alternative.