Decoupling + Energy Efficiency Programs = Corporate Welfare?
Posted by Rich Sweeney on January 28, 2008
N-dot’s assertion that “Cap-and-trade = Carbon tax + Corporate welfare” seems to have resonated with policymakers in DC . It’s been mentioned at just about every cap-and-trade talk I’ve attended in the past few months. While I sense that the tide is turning towards a full (or at least close to full) auctioning of permits, listening to people talk about what we should do with all this revenue raises some new concerns about corporate welfare. In particular, as the title indicates, I’m a little concerned that we may overcompensate utilities in our quest for energy conservation.
Decoupling refers to severing the link between increased electricity sales and utilities’ profits. Since a large portion of electricity costs are fixed, a producer’s profitability increases with output. This, in turn, creates a disincentive for utilities to invest in energy conservation/ efficiency. If electricity revenue is set independent of output, many groups believe that utilities will invest in programs to help their customers reduce consumption.
At the same time, many groups, such as the environmental departments of the RGGI states, are calling for the government to literally go out and buy energy efficiency. The idea is that there is some supply curve out there of mega-watts to be saved, and the government could subsidize or actively substitute consumers’ purchases of the necessary efficient capital (Imagine the DOE literally coming to your house and swapping out all of your incandescent light bulbs).
Which brings me to the corporate welfare part. Decoupling works by projecting what energy consumption would have been and then compensating utilities for the difference between that projection and the actual amount. This makes sense as long as the projections are accurate and the utility actually plays an important role in reducing consumption. Yet if a government sponsored efficiency initiative was going on at the same time, it would be difficult to identify how much of the decline in electricity use the utility should really get credit for. Seems like both over and under compensation are possible, with the former being much much more likely. Either way these programs appear to have quite a bit of overlap, which suggests that the policymakers should either pick one or find a way to merge the two.