Some green-energy policies disregard the value of energy use, risking market distortion and consumer backlash.
Carl Danner is a director with Wilk & Associates/LECG LLC in San Francisco. Contact him at firstname.lastname@example.org. The author acknowledges the helpful comments of Mitch Wilk.
Imagine a regulatory commission orders a utility to charge some customers high electricity prices to finance rebates for the commissioners’ friends and family members.
As absurd as this scenario might seem, it could qualify as a conservation program under California’s cost-benefit analysis because overcharged customers presumably would reduce their energy usage.
Similarly, a blackout might also score well in California by reducing energy consumption and consumer utility bills.
The problem is California’s cost-benefit analysis overlooks how consumers benefit from energy use. Such consumer-surplus benefits are a staple of modern economics, which consider the value of goods and services—not just their cost1 (see sidebar, “Econ 101: Surplus Value”). Some value is lost if higher prices force usage cutbacks, or if less attractive ways to use energy are mandated for the sake of conservation. A corresponding measure, producer surplus, recognizes the value sellers get from market transactions.
Measuring changes in consumer and producer surplus is a necessary step in proper cost-benefit analysis.2 But California’s approach omits this step.