Restraining energy demand: The stick, the carrot, or the market?

Abstract

Following the 1973 Arab oil embargo and continuing through the 1980s, the US regulators at both the state and federal levels tried a number of schemes to encourage energy conservation in all sectors of the economy, particularly in the electric power sector. Although these efforts resulted in significant energy-efficiency improvements, the utilities were not overly enthusiastic because of the negative impact of lower sales on their revenues and profits. From 1989 several trend setting states in the USA introduced generous profit incentives to reward utilities financially for undertaking aggressive DSM programmes. The impact of these new DSM incentives has been quite noticeable and they are expected to produce significant reductions in the growth rate of demand for electricity in states where they are available. This paper reviews the success and some of the problems associated with DSM incentive mechanisms in the USA and provides some policy options for overseas countries interested in learning from the US experience.