Mind the Gap: Coordinating Energy Efficiency and Demand Response

40 Pages Posted: 26 Sep 2016 Last revised: 20 Aug 2018

See all articles by Eric Webb

Eric Webb

University of Cincinnati, Lindner College of Business

Owen Q. Wu

Indiana University - Kelley School of Business

Kyle Cattani

Indiana University Kelley School of Business

Date Written: September 5, 2017

Abstract

Problem definition: Energy efficiency programs and demand response programs, two popular approaches to energy demand management, are typically designed and evaluated independently. Breaking with tradition, we study the interactions between energy efficiency investment decisions and participation in incentive-based demand response programs in the context of an industrial firm. We re-examine the energy efficiency gap in light of demand response participation. We also illustrate how to coordinate the programs to maximize their combined benefits. Academic/practical relevance: Billions of dollars are spent annually in the U.S. on both energy efficiency incentives and demand response payments. Without coordination, the incentives from one program could undercut the effectiveness of another program. We examine how these two incentives affect an industrial firm’s operations and the ways to coordinate the incentives. Methodology: We use a sequential optimization model which accounts for the difference in time scale between long-term energy efficiency investments and daily demand response participation and minimizes discounted economic costs to the industrial firm as well as to society. Results: A larger demand response incentive typically leads to a reduced investment in energy efficiency. Even if the energy efficiency gap is closed by taxes or subsidies, the firm’s impact on societal costs is not minimized unless the demand response incentive is properly set. Both energy efficiency and demand response programs contribute significantly to the reduction of societal costs. Managerial implications: Policies aiming to close or reduce the energy efficiency gap, such as investment subsidies and ecological taxes, may fail to achieve their desired outcomes when firms participate in demand response. We provide theoretical support for jointly determining energy efficiency and demand response incentives, in both unconstrained and constrained policy situations, to maximize the combined benefits of both demand management programs.

Keywords: Energy efficiency investment, energy efficiency gap, demand response, production management

Suggested Citation

Webb, Eric and Wu, Owen Q. and Cattani, Kyle, Mind the Gap: Coordinating Energy Efficiency and Demand Response (September 5, 2017). Kelley School of Business Research Paper No. 16-68. Available at SSRN: https://ssrn.com/abstract=2843798 or http://dx.doi.org/10.2139/ssrn.2843798

Eric Webb (Contact Author)

University of Cincinnati, Lindner College of Business ( email )

2925 Campus Green Drive
PO Box 210130
Cincinnati, OH 45221
United States
5135567131 (Phone)

Owen Q. Wu

Indiana University - Kelley School of Business ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

Kyle Cattani

Indiana University Kelley School of Business ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
116
Abstract Views
530
rank
236,018
PlumX Metrics