Association for Public Policy Analysis & Management

Market deregulation has massively restructured the United States electricity markets, with legacy of full or partial competition in generation and retail markets in many states. Currently, some states remain fully regulated, while others have experimented, suspended, or even reversed market restructuring. Transmission access reforms have led to the creation of Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) that allow power producers access to transmission grid. Restructuring of retail services provides customer access to deregulated rates driven by the marginal fuel cost of power providers. The wave of market restructuring efforts and rules have resulted in different status of generation, transmission, and retail markets in American states. The impact of market deregulation is mixed and varies greatly around the U.S., especially when the current electricity markets are actively pursuing reliable, affordable, efficient, and low-carbon energy solutions for their customers. Energy efficiency policies, particularly the policies that enable and engage utility companies, play an important role in exploring demand-side resources to provide low-cost energy services. However, it is still unclear how market restructuring affects energy efficiency.

This study uses empirical evidence of policy adoption across states to examine the influence of transmission reforms and retail restructuring. Energy efficiency policies that enable and engage electricity utilities include decoupling, performance incentives, and Energy Efficiency Resource Standard (EERS). Since efficiency improvements reduce electricity sales, Decoupling mechanisms allow utilities to recover lost revenue through rate cases and adjustments. Performance-based incentives reward utilities with monetary benefits if a pre-set efficiency goal is achieved. Together with program cost recovery, decoupling and performance incentives enable and motivate utility companies in delivering energy efficiency to customers. Unlike financial incentives, EERS mandates state-wide energy saving target to engage investor-owned utilities in end-use efficiency. Electricity markets react to these energy efficiency policies differently because they affect the business models of utilities. To answer how deregulation affect energy efficiency policy, state panel data from 1999-2014 are used to quantify the effect of market restructuring by controlling for state internal and diffusion factors. The results illustrates the different extent to which electricity market structures embraces energy efficiency policies. The findings shed lights on the dynamic governance of electricity supply markets and demand-side resources.