Demand-side Mismanagement: How Conservation Became Waste

Here is a study I had a chance to co-author with Univerity of Guelph Professor of Economics Dr. Ross McKitrick. The study examines the value proposition behind the billions of dollars of public money that have been expended on energy conservation programs over the last more than 25 years in Ontario.

The paper is an effort to look at the real costs and benefits of conservation from the perspective of consumers and the environment.

Ontario’s energy conservation programs are so obviously phony junk, the ever-useful question presses — why?

I’ll throw out four observations and invite people to shoot them down:

Like the designers of casino games, conservation program marketers are looking for common exploitable misperceptions. Conservation programs play with people’s good intentions. Every sensible person favours conservation and efficiency. Conservation programs sound nice, especially for those not doing the math.

Another pernicious psychological element playing off people’s perception is that when you buy less of something, you normally pay less. Buy less electricity = saving. This seems self-evident. The reality is something different. Ontario’s total power system revenue requirement is rising. Whatever is causing demand to drop — demand elasticity or conservation programs — a rising total bill divided by a declining volume of equals rising rates.

Another driver for conservation program decisions appears to be the irresistible attraction to government and benefiting interest groups of unaudited accounts, particularly when these accounts are off the government’s general revenue books. Here is a look at some of the beneficiaries of conservation program spending, including WWF-Canada when headed by former McGuinty Chief of Staff Gerald Butts. Conservation programs are paid not through taxes, which are almost real dollars for government, but through rates, which is nothing but play money. Notice that even in the Auditor General’s otherwise excellent reports on energy in 2015, no effort is applied to investigate whether any officially claimed savings are real or not, nor was any effort made to consider the impacts of programs on a mark to market basis for claimed saved energy. I have previously argued that:

Ontario electricity consumers would be better off if the money now being spent on electricity conservation programs was incinerated rather than used to build bigger networks of interests groups feeding off programs whose real purpose is simply to raise rates.

Finally, governments desire conservation programs as happy talk to respond to concerns over rising rates. Some consumer complaining their rates have gone up by hundreds of dollars can be mollified with $5 coupons for LED bulbs. The customers grabbing the coupons are unlikely to ask how much the coupons really cost or who is paying. Looking at the ebb and flow of official enthusiasm for conservation subsidies since 1988, when governments are trying to sell unpopular rate increases, conservation programs become more fashionable.

Many thanks to the Fraser Institute for giving me another chance to work with Dr. McKitrick.

7 Comments

  1. Tom, good for you and Ross for writing on this.

    I have to admit that so far I’ve really only skimmed the paper. One thing I believe could be added is a discussion of free riding and the assumed free rider rate. This is hard to find in the Ontario CDM context but I believe an initial assumption of ~ 35% is quite common. This IMO is quite low. A few years ago I was in a meeting with a Union Gas CDM person and I asked him what their finding had been. He said 52%. The lower the free rider assumption, the easier it is to justify CDM expenditures …

    As for conservation being the panacea for rising rates, we know that can’t apply if everyone conserves. If say 90% of costs are fixed, everyone conserved 10% and costs/rates were immediately rebalanced, everyone would save 1%.

    • Wading through the mountains of justification produced by the Ontario government’s conservation bureaucrats and their high-priced consultants, they usually wave away serious consideration of free ridership by claiming massive “spillover” — customers investing in non-subsidized DSM because the subsidy programs opened their eyes to benefits they would not have understood. If there was any interest by official Ontario in understanding objectively the costs and benefits of conservation programs, these various factors could be measured. While consultants are directed, as part of the Evaluation, Monitoring and Verification process, to ensure that their findings confirm that DSM is cost effective, I am not confident that we will get closer to the real story.

      • Enbridge said in a recent application at the OEB that:

        “Enbridge applied for approval of a freeridership rate for industrial projects in this proceeding at the 50% level.”

        That’s only for the industrial users.

  2. Pingback: Ontario energy Conservation con benefactors | Tom Adams Energy - ideas for a smarter grid

  3. Thanks very much for the fascinating read. If you could elaborate a bit on the “free rider ” concept I would appreciate it! Does it represent someone who would have taken the desired action even without the incentive?

    • You’ve got a good definition of a free rider. The IESO, in the “Cost Effectiveness Guide” we discuss in the study, defines a free rider as conservation program “participants that (sic) would have implemented the CDM measure or conservation action even without the CDM program”. But the IESO says there is no need to worry that program costs are being wasted because free riders are offset by “spillover” effects. Spillovers are “Actions taken by consumers to implement CDM measures without an incentive because they are influenced by the CDM program. Note that both participant and nonparticipant spillover exists”. Note that the IESO provides no evidence to support the assertion that that spillover exists, much less the actual impact of the effect.
      Tom

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