In recent years, U.S. energy policy efforts have been primarily driven by state governments. In the absence of a firm commitment on energy policy by the national government, several state governments have designed innovative policies for low-carbon energy development, renewable energy portfolio standards, demand side management (DSM), and regional carbon trading agreements. The degree of state involvement suggests significant potential for increased energy efficiency, energy security, carbon mitigation and economic development. Yet our ability to predict the effects of state policies, or measure whether actual outcomes resemble the theoretical potential of these policies, is poor. This paper addresses this shortcoming, and presents the results of using an econometric model of the Indiana economy and an optimization model of energy technology to evaluate the impacts of changes in the energy sector on state economic performance. 

We have recently constructed an econometric, simultaneous equation, dynamic, multi-region energy and economy model of Indiana, designed for use in evaluating alternative energy development and management scenarios.  This model describes the state economy, with an emphasis on the connection between energy demand, energy prices and economic activity at the state level and selected economically and geographically homogenous sub-state regions. The model links natural gas, motor gas, and electricity across four end use categories (residential, commercial, transportation, and industrial) and ten economic sectors. Standard economic indicators are used for these sectors, including employment and earnings. The exogenous variables in the model include national GDP; national employment by sector; energy prices for motor gas, natural gas, and electricity; and climate change indicators such as heating and cooling degree days, average temperatures, and temperature variances.  We have also developed detailed estimates of energy consumption for the multi-county sub-state regions included in the model.

In order to represent Indiana’s energy system, we are using the MARKAL energy technology model to provide state-level outputs of technological mix, total system cost, energy services, environmental emissions and energy commodity prices. These variables become exogenous inputs to the Indiana econometric model.  MARKAL is a technology-intensive, linear programming model used extensively for modeling energy systems.

This paper reports the results of a policy analysis using these combined models.  An Indiana Utility Regulatory Commission (IURC) order in 2008 required that Indiana jurisdictional utilities file three-year DSM plans to achieve a two percent electricity savings goal by 2019. Jurisdictional utilities are to implement core programs that address residential lighting, home energy audits, low-income weatherization, energy efficient schools and a commercial and industrial program.  We assume that all utilities in the state achieve their two percent energy efficiency mandates and end-users achieve a 30 percent improvement in energy efficiency by 2019.  We show the impacts of this policy by running a reference scenario based on rising energy prices and slow growth in GDP, and a policy scenario reflecting the successful implementation of the IURC mandate.  The paper also discusses how these results can be used by other states, particularly in the Midwest, and reviews the implications of the findings about DSM effects on a sub-national economy.