Discussion Paper

Cost-Effectiveness of Electricity Energy Efficiency Programs

May 2, 2011 | Toshi Arimura, Shanjun Li, Richard G. Newell, Karen L. Palmer


We analyze the cost-effectiveness of electric utility rate payer–funded programs to promote demand-side management (DSM) and energy efficiency investments. We develop a conceptual model that relates demand growth rates to accumulated average DSM capital per customer and changes in energy prices, income, and weather. We estimate that model using nonlinear least squares for two different utility samples. Based on the results for the most complete sample, we find that DSM expenditures over the last 18 years have resulted in a central estimate of 1.1 percent electricity savings at a weighted average cost to utilities (or other program funders) of about 6 cents per kWh saved. Econometrically-based policy simulations find that incremental DSM spending by utilities that had no or relatively low levels of average DSM spending per customer in 2006 could produce 14 billion kWh in additional savings at an expected incremental cost to the utilities of about 3 cents per kWh saved.

After nearly three decades of experience with utility-run electricity energy efficiency programs, a good deal of controversy remains over how effective these programs have been in reducing electricity consumption and at what cost. Estimates of the cost-effectiveness, or cost per kilowatt hour saved, of past energy efficiency demand-side-management programs range widely—from just below 1 cent per kWh saved to more than 20 cents.

A new RFF Discussion Paper by RFF Senior Fellow Karen Palmer, Fellow Shanjun Li, and their colleagues examines over 15 years’ worth of data from utility and electric rate-payer-funded state energy efficiency programs and finds:

  • Utility and state programs funded by utility rate payers produced an estimated 1 percent savings in electricity consumption over 1992–2006 and almost 2 percent cumulative savings over all years.
  • The energy savings came at an expected average cost to utilities of roughly 5 cents per kWh saved when future electricity savings are discounted at a standard discount rate of 5 percent.
  • Electricity efficiency programs have roughly constant returns to scale, at least for the levels of program spending observed in the data.
  • The programs appear to be more effective in regions that employ decoupling regulation to separate utility revenues for distribution services from the amount of electricity that the utility sells.
  • In strong housing markets, more stringent building codes can successfully reduce electricity demand.