On the unprofitability of utility demand-side conservation programmes

Abstract This paper analyses the economic prospects of demand-side conservation programmes. The essence of various proposals is that conservation measures should be a part of least-cost planning, at least if marginal production costs are high and consumers' decisions are distorted (market failures). The weakness of this literature is that it assumes that the consumers remain passive when the utilities invest in conservation. This paper remedies this deficiency and considers strategic interactions between consumers and a public utility (Stackelberg equilibria). It will be shown that strategic interactions render unprofitable demand-side conservation programmes that appear profitable by conventional criteria. The reason is that rational consumers will respond strategically to the prevalence of utility sponsored conservation programmes by minimizing their own expenses for energy efficiency.