Subsidized Conservation, or Negawatts: "Our Dirtiest Resource"

If the renewable fuel sources considered in this study begin to be rejected for environmental concerns, energy efficiency is left as the "renewable" energy resource of consequence. Conservation as a "supply" of energy has been popularized by many writers, including Daniel Yergin, who in the late 1970s spoke of "conservation energy" as "no less an energy alternative than oil, gas, or nuclear."²²⁰ Yergin then argued that a "serious commitment" to conservation in the United States could result in a 30 to 40 percent reduction in energy usage with "the same or a higher standard of living" as a result.²²¹

Pacific Gas & Electric, one of the largest electric utilities in the country, called energy conservation in 1990 the "largest, least costly untapped resource option."²²² The California Energy Commission in 1995 estimated that California alone could displace more than 6,800 megawatts of capacity by the year 2005 through energy efficiency.²²³ Nationally, capacity savings of approximately 11,000 megawatts is expected between 1995 and 1999.²²⁴

"Negawatts" (a termed coined by energy conservation guru Amory Lovins to describe the potential of conservation as a resource) in place of megawatts has become a multibillion dollar taxpayer- and ratepayer-subsidized industry. Between 1989 and 1995, the nation's utilities spent an estimated $13.7 billion on ratepayer-subsidized electricity conservation programs (known in the industry as "demand-side management," or DSM). Adding pre-1989 expenditures (DSM programs began as early as the mid-1970s), the total is around $16 billion in today's dollars.²²⁵ The U.S. Department of Energy has spent $8 billion to $9 billion out of its total conservation expenditures of $12.4 billion on state and federal electric-usage reductions programs since inception.²²⁶

California has led the nation with a $3 billion to $4 billion DSM commitment. PG&E has accounted for over $1.5 billion alone.²²⁷ Those massive subsidies, which have been reevaluated as too much too soon,²²⁸ have contributed to the state's abnormally high electricity rates and virtually ensures a nonsustainable level of energy conservation investment in the future. The historic "Blue Book" proposal of the California Public Utilities Commission, in fact, substituted a new public-policy goal -- reducing high rates -- for the previous one of lowering total bills through conservation.²²⁹

Like wind and solar farms, utility demand-side management programs are susceptible to environmental review from a total fuel-cycle basis. One planner at a major California electricity provider has called DSM "our dirtiest energy source" since gasoline-powered vehicles traverse the countryside to service the thousands of residential and commercial program participants.²³⁰ Motor gasoline, in effect, is being substituted for natural gas-fired electricity generation in the provider's service territory.

Energy is also expended to manufacture the new energy-saving appliances marketed by DSM programs, and the disposal of traded-out energy assets (such as refrigerators) is an environmental liability that should be accounted for in the DSM environmental equation.

Environmental tradeoffs aside, economic problems threaten the future of utility-provided, ratepayer-subsidized DSM. The law of diminishing returns suggests that the supply of negawatts is a "depletable" resource. Declining benefit/cost ratios of utility DSM programs are a fact of life in California,²³¹ not to mention other states. The debate is really one about how great the cost savings overestimates have been, not how much cost-effective energy conservation really remains.

Of note are two particularly rigorous studies published by the Illinois Commerce Commission and the Energy Information Administration (EIA) of the Department of Energy.²³² The former examined the full costs of state DSM-type programs for natural gas from their inception in 1985 through 1994. The commission found no program in which benefits exceeded costs.²³³ In fact, most programs demonstrated benefits that were only a mere 25 percent of costs.

The latter study examined the total costs and benefits of DSM programs nationwide. The EIA concluded that from 1991 to 1995 approximately $12 billion (nominal) was spent on DSM programs that yielded 215.6 billion kilowatt hours of energy savings. The cost of DSM programs over that period averaged 5.58 cents per kilowatt hour, but fossil fuels produced electricity at 2.35 cents per kilowatt hour. Thus, subsidized energy conservation was twice as expensive as generated power.²³⁴

If there was ever an economic honeymoon period for ratepayer-subsidized energy efficiency (most academic and many professional economists doubt that, based on empirical investigation and the pure logic of consumer choice, DSM ever had an efficient phase), those days have passed.²³⁵

The impending industry restructuring, which will deliver to the market excess generating capacity and cause rates to fall significantly absent a new round of reregulation, will likely make the "production" of "negawatts" as unnecessary as the construction of new wind, solar, biomass and geothermal capacity, not to mention higher-cost fossil fuel capacity. In fact, increased electricity usage to better utilize underperforming (often gas-fired) power plants will be a key strategy to bring average costs down toward the marginal costs of generation in states like California that are trying to be competitive with other jurisdictions.

The new era of constrained electricity conservation has already begun. Soon after the California Public Utilities Commission's "Blue Book" proposal, two of the nation's and California's largest DSM utilities announced $206 million in DSM cutbacks for the following year (1995). Consumer groups in the state that were signatories to accelerating DSM investments in 1990 testified against further ratepayer cross-subsidies. This coalition put environmental groups in the awkward position of arguing that DSM spending was good for consumers whether their self-styled consumer representatives knew it or not.²³⁶ In an article in Environmental Action, David Lapp also noticed

the emerging conflict between environmentalists and ratepayer advocates, particularly those representing low-income consumers. Although advocates for low income ratepayers support energy conservation programs, many are raising questions about who benefits from the programs, how much they cost, and how those costs are distributed.²³⁷