Friday, July 11, 2008

Myths of demand side management

Some of you may have noticed businesses offering to install new efficiency light bulbs in your house for free. One example is A lovely lady asked me at the local shopping centre lately whether I had heard about such opportunities. I had not. I took the brochure and continued my enquiries online. It seems that to be able to offer such amazing deals to residents, the company is actually producing greenhouse gas abatement certificates through these measures which they sell to other business to offset their own emissions. Such a system is based on principles of demand side management. But does this system have sound foundations?

A short story may highlight some flaws of this program. Joe is on a budget, and is known as the guy who is careful not to waste anything. He always turns the lights out when not in a room, and always switches off appliances. The offer of free efficient lighting seems irresistible. He arranges to have his all his light bulbs replaced by Envirocare. Now, that lighting costs him only one fifth of the price it used to, he leaves a light on out the front when he goes out and is much less concerned about turning lights around them home. Since he is now saving so much on electricity, he buys a bigger television, which he leaves on most of the day, and small bar fridge to make space for his beer. A year after the new light bulbs Joe’s electricity consumption is twenty percent higher than before. Where is the energy saving for which supports these abatement certificates?

The short answer is there is no energy saving in this story. If not for the reduction in electricity costs Joe would not have been able to expand his consumption to the new television and bar fridge. More precisely, there is a direct causal link from the efficient lighting and the increased electricity consumption. In this story, greenhouse gas abatement certificates have been created from nothing!

Demand side management is fundamentally flawed. It relies on the assumption that demand for electricity will remain fixed even when prices change. This assumption is false. When the price of lighting is reduced, demand for it will rise – Joe’s did. Also, as incomes rise demand for energy rises. Neither of these issues are considered relevant by demand side advocates, yet there is growing evidence that it is just as effective as doing nothing.

So where does this leave us? Is doing nothing an option? If doing nothing is better than doing something why can’t that be a conscious choice?

Personally, the I feel that clear relief is coming. Remaining reserves of oil and coal are depleting, and in due course, the rising costs of these energy sources will result in reductions in energy consumption. But it won’t be a pleasant and productive period. It will result in radical economic slowdown – there is simply no alternative.

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