FOUR REVOLUTIONS IN ELECTRIC EFFICIENCY

Abstract

Demand prospects for electricity are being altered profoundly by four synergistic types of revolutionary change: new technologies for improved end‐use efficiency, new ways to finance and deliver those technologies to customers, cultural change within utilities, and regulatory reforms to reward efficient behavior.Dramatic energy savings achieved so far have been largely in direct fuels and not in electricity, mainly due to price distortions and unique market failures. Resulting inefficient use of electricity is misallocating some $60 billion a year to unnecessary expansions of U.S. electric supply. Yet the best technologies now on the market could save about 92 percent of U.S. lighting energy, about half of motor energy, and much of the electricity used for other purposes. Complete retrofit could deliver equal or better services with only a fourth of the electricity now used. The levelized cost of that quadrupled end‐use efficiency averages about 0.6 cents/kWh– well below short‐run marginal cost. Analogous oil‐saving potential from the best demonstrated technologies is about 80 percent of present oil consumption at an average cost below $3/bbl, partly because two of the 9–10 prototype cars already tested at 67–138 miles per gallon are said to cost nothing extra to make.Many utilities already save large amounts of electricity very quickly and cheaply by financing customers' efficiency improvements through loans, gifts, rebates, or leases. Even more promising is an emerging “negawatt market” making saved electricity a fungible commodity subject to competitive bidding, arbitrage, derivative instruments, secondary markets, etc.Utilities can make more money selling less electricity and more efficiency. They can earn a spread on the difference in discount rates between themselves and their customers. They can save operating and capital costs while avoiding the associated risks and, under emerging regulatory reforms, can even keep as extra profit part of what they save. They also can generate tradeable emissions rights under the new Clean Air Act. Some utilities now properly ignore sunk costs and seek to minimize marginal variable costs. These utilities, driven by economic– not accounting–principles, find this approach both profitable and operationally advantageous.