Posted by: brian | February 13, 2009

Incentivizing efficiency

This afternoon I heard part of Science Friday on NPR, and one of the guests was talking about ways to incentivize utilities to improve efficiency. Under the current system, the more electricity they sell, the more money they make. So why should they care about efficiency? The proposed solution is to require each utility to estimate its output for a given year, and then they receive a lump sum payment for that energy (from the govt, I suppose? And we all pay the govt for our electricity?) If they produce more than the estimate, the cost per kilowatt hour is less; if they produce less than the estimate, the cost per kwh is higher. At least, that’s what I got out of what the guy said.

How is that supposed to encourage efficiency? The utility gets one amount of money no matter how much they produce, so who cares? I think a better option would be to include a bonus based on how far under the estimate their production is. In either of these cases, of course, the utilities could just come up with outrageous estimates – there’d need to be some kind of oversight on how they arrive at their estimates to ensure that the estimates are reasonable. But I think throwing in a bonus would do more to encourage efficiency than just restricting how much money the utility gets.

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