Changes in regulatory requirements, market structures, and operational technologies have introduced complexities that traditional ratemaking approaches can’t address. Poorly designed rates lead to...
The Trouble with Freeriders
The debate about freeridership in energy efficiency isn’t wrong, but it is wrongheaded.
truth, the energy efficiency community holds no common view about a precise definition of what constitutes net savings or how to quantify it. Even the relevance of freeridership lacks consensus. Advocates of ratepayer-funded conservation have regarded freeridership as irrelevant and have dismissed it as a mere distraction. 31 Some skeptics, on the other hand, have singled out freeridership as a fundamental flaw in energy-efficiency policy; a byword for everything that’s wrong with ratepayer-subsidized conservation.
Freeridership and the broader question of attribution are legitimate concerns when ratepayer funds are used for what’s presumed to be a socially optimal outcome. Efficient allocation of resources must be a part of the process of making policy decisions and designing programs to implement them. 32
But the lack of progress and the resulting uncertainty have surely inhibited creativity and innovation in program design and delivery. Program administrators have tended toward risk aversion, encouraged to focus on performance targets and to avoid regulatory penalties, instead of experimenting with potentially better programs.
An even more important reason for taking these seemingly conceptual and methodological disagreements seriously is this: If the concept of NTG and its measurement are perceived by policymakers and much of the public as dubious and inherently problematic, then political support for energy efficiency and, critically, its role in addressing larger global environmental issues, could dissipate.
Of course, measuring program performance remains a challenge. The measurement of NTG remains, as some experts have noted, an art rather than a science. 33
But what if the measurement itself turns out to be the problem? Certainly, program administrators should avoid programs where freeridership is known to be high and discontinue offering the programs when high freeridership is suspected. But insisting on measuring freeridership with tools of questionable reliability isn’t the answer.
A Modest Proposal
Knowing whether a program is likely to attract freeriders may be easier than it’s made to appear. Simple rules might well do.
First, regulators could establish a series of hurdles, or tests, that a program has to pass to avoid high freeridership. The exact nature of the tests would vary depending on the program, but the amount of the incentive relative to the cost of the measure is a good general gauge. When very low incentives appear to attract a large number of participants, or net benefits to participants are very high, chances are the majority of participants will be freeriders.
Second, program administrators should monitor product markets closely to see if a transformation has occurred and exit the market when it has. Expected savings and costs of conservation measures should be revised periodically based on actual saturation of energy-efficient products. In this way, research and evaluation resources are invested in improving programs, rather than merely proving compliance.
For this approach to work, regulators would have to recognize such obvious, albeit hard-to-quantify, benefits, and be willing to credit program administrators with the results by lowering their saving targets accordingly, or even reward them. These ideas already seem to be taking hold in several states, where gross savings, adjusted for a deemed level of freeridership, are