What do Instacart, Juul vapes, and wireless earbuds have in common?
They were virtually unheard of just ten years ago. Consumer choice is just one of those things that cannot be fully predicted by models and analyses. Did you ever think that we’d have self-driving cars or delivery robots?
As Freidrich Hayek said, “If a man is not to do more harm than good, he will have to learn that…he cannot acquire full knowledge which would make mastery of all events possible.”
Here in Mississippi though, the Public Service Commission forces publicly owned utility companies to engage in “demand-side management” whereby customers are incentivized to modify their level and pattern of electricity usage.
In essence, instead of building more plants to meet demand, utility companies opt to alter the demand.
These demand calculations are based on the erroneous assumption that we can quantify consumer preferences, which in reality are subjective.
Before we discuss the ramifications of demand-side management, let’s backup a step and contextualize what we are talking about.
In the aftermath of the failed Kemper project, the Public Service Commission sought to create more transparency and stakeholder engagement in utility companies. In 2019, Mississippi became one of the 30+ states to mandate integrated resource plans. Although well-intentioned, the utility companies immediately fought back, attempting to bar third parties from submitting data requests.
An IRP serves as a roadmap for a utility company, analyzing how it plans to respond to inflation, capital costs, environmental externalities, and changes in consumer load. The system is called “integrated” because it analyzes both supply and demand, unlike traditional plans which exclude the latter.
In Mississippi, utility companies are required to use twenty-year planning periods and must submit an updated IRP every three years.
Have IRPs achieved their intended goal of meeting consumer needs and providing more transparency?
Well, the supply-side reporting makes sense, but demand-side planning actually causes harm to consumers.
Demand-side management is advertised as a way to save consumers money but is actually a thinly veiled political tool. DSMs began in the 1980s as a response to climatologists' warning of manmade climate change.
In fact, the theory of IRP is not grounded in any kind of scholarly work - it wasn’t researched and then implemented but implemented and then researched.
Had the bureaucrats done this in the proper order, one of the problems they would have found is that “efficient” energy is neither cheaper nor more efficient.
It’s not cheaper because, as Matthew Hoffman says, utility companies lose revenue by incentivizing consumers to install green technology. For example, if electricity for an incandescent bulb is $15 per year, a DSM planner may estimate that the same energy can be provided by a fluorescent bulb for $5 a year, plus the $8 cost of the bulb, totalling $13. Seems like a win-win situation, right?
Not exactly. Whereas the company used to generate $15 per customer per year, it now makes $5 (a loss of $10). It also spent $8 on the bulb, so its net loss is $18. No company would willingly plan to lose profits so the Public Service Commission allows them to raise their rates.
Pye and Nadel (1994) discovered that DSM programs increase electricity prices by a median of 1.7% per year. Proponents say that’s negligible, but isn’t that for the consumer to decide?
What ends up happening is that every consumer, whether he installed a fluorescent light bulb or not, pays more for electricity. Efficient electricity serves as a hidden tax, forcing consumers to pay more in order to feel good about themselves. DSM costs are significantly higher than projected costs.
In a free market, we would call this a sham.
And of course, the Total Resource Cost test (which measures efficiency) leaves out this hidden cost, making DSMs seem cost-effective. A shocking example of this is Camden Wire which “received $740 is DSM rebates” but incurred $150,000 in DSM charges.
Other hidden costs include imperfect information, infrastructure, two-way communication systems, smart meters, and a multitude of non-monetary losses.
Hoffman provides two examples of this: insulation worsens humidity which leads to increased ventilation and “efficient” air-conditioners reduce the dehumidification function which leads to one of two things: decreased comfort or longer usage. This is what we call the rebound effect.
So either, the efficiency will be completely offset, or the consumer will suffer in the 100-degree Mississippi summers.
Just like solar energy, DSMs are just a way for energy companies to make profits while inviting customers to feel good about fulfilling some social responsibility.
In a free-market, such scams would be shut down instantly. Instead of reducing government oversight, both Republicans and Democrats are championing its continuance, believing that the government knows what’s best for ratepayers.
