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Demand-side Management: Mitigate, Don't Eliminate

Fortnightly Magazine - October 1 1995

ozone (smog). These environmental effects can significantly affect utility operations by imposing high costs for compliance with the requirements of Title I and Title IV of the Clean Air Act Amendments of 1990 (CAAA). One study found that PSI Energy of Indiana could use aggressive DSM programs to reduce its acid-rain compliance costs under the CAAA by $96 to $131 million.2 Elsewhere, the 13 states in the Northeast Ozone Transport Region have agreed to reduce NOx emissions from utility and large industrial boilers 75 percent by 2003. These reductions represent costs far in excess of the Act's better-known acid rain provisions.

Reduced overall fuel use also mitigates pollution effects associated with extraction of coal, oil, natural gas, and uranium; fuel processing; and fuel transportation. Moreover, DSM-induced fuel savings can offset U.S. dependence on foreign oil.

The Economy. DSM produces both micro- and macro-economic benefits. At the micro level, participating businesses can improve their profits and competitive position, both nationally and internationally, because their total electricity prices fall relative to a "no-DSM" situation. At the macro level, DSM reduces the amount of income wholesale and retail consumers are forced to spend on electricity bills. That frees up money that can be spent or saved, increasing national consumption and total Gross National Product.

Moreover, numerous studies on the employment impacts of full-scale DSM programs have shown that overall employment effects are unchanged or show slight overall increases, making the jobs versus environment debate a non-issue in this context. One recent study concluded:

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"The environmental and welfare benefits of DSM are unambiguous (em reduced use of electricity means lower emission levels and the reduction in the overall costs of electric energy leads to higher levels of consumption of other goods and services. These environmental and welfare gains are obtained with no loss in overall employment and no long-term increase in price levels."3

Utility-sponsored DSM programs can also influence consumer behavior by jump-starting the market for energy-efficient products, both directly and by raising consumer awareness. A good example of this phenomenon is the "free driver," an indirect result of a utility-sponsored DSM program. For instance, participants in a DSM program to install energy-saving compact fluorescent light bulbs may be so satisfied with the product that they install additional bulbs at their own expense. Such indirect benefits are not quantified in standard cost/benefit analyses, but can be significant.

Finally, DSM programs can transform markets, increasing consumer demand for energy efficiency. Increased demand spurs suppliers to improve production techniques; resulting economies of scale help lower costs; energy-efficiency companies can more rapidly develop and deliver services. All these developments help lower the costs of energy efficiency, ultimately benefiting all consumers.

Given these benefits, it would appear foolish for utilities (em and certainly their regulators (em to abandon TRC programs unless the impact on nonparticipants is enormous. Yet recent studies indicate that the rate impact of DSM programs is minimal.

A review of 10 evaluations of DSM rate impacts found a 1.7-percent median increase in electric rates from DSM. Moreover, 90 percent of study samples encountered rate impacts of