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The Design of Optimal Conservation Programs by Electric Utilities Considering Strategic Consumer Behavior

Author

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  • Franz Wirl

    (Economics Department, Chair Utility Economics, University of Magdeburg, P.O. Box 4120, D-39016 Magdeburg, Germany)

Abstract

The practice of utility demand side conservation programs, one of the most topical issues of utility management, provokes strategic reactions of consumers. As a solution of this moral hazard, optimal conservation programs are characterized when the consumers differ either with respect to their subjective time preference or with respect to the level of demand. In particular, we derive incentive compatible conservation schemes that mitigate strategic behavior. These incentives differ starkly from actual programs. First, the costs of conservation may exceed the avoided costs, yet accepting such high costs (at the margin) need not imply a large conservation. Second, such incentive scheme should bypass the inefficient consumers (e.g., the "poor") but should instead target consumers who act efficiently and have a high demand (e.g., the "rich").

Suggested Citation

  • Franz Wirl, 1996. "The Design of Optimal Conservation Programs by Electric Utilities Considering Strategic Consumer Behavior," Management Science, INFORMS, vol. 42(3), pages 404-414, March.
    • Handle: RePEc:inm:ormnsc:v:42:y:1996:i:3:p:404-414
    DOI: 10.1287/mnsc.42.3.404
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    Cited by:

    1. Chenavaz, Régis Y. & Dimitrov, Stanko & Figge, Frank, 2021. "When does eco-efficiency rebound or backfire? An analytical model," European Journal of Operational Research, Elsevier, vol. 290(2), pages 687-700.
    2. R. Amit & Parthasarathy Ramachandran, 2010. "A Fair Contract for Managing Water Scarcity," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 24(6), pages 1195-1209, April.

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