South-Western College Publishing - Economics  
Why Buy a New Machine When You Can Make Your Current One Better?
Topic Environment and the Economy
Key Words electricity, incentive programs, decoupling, efficiency
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Reference ID: A164137940

News Story Much talk about environmentally friendly practices has focused on replacing current fossil fuels with alternative energy sources, such as solar or wind power. However, there is an alternative: making your current machines use less electricity.

Granted, this does sound revolutionary. But some dreamers are out on the front lines, doing exactly that. Green Mountain Coffee, in Vermont, is making a one-time $150 adjustment for each of 40 machines it uses in its production processes, and for that $6,000 investment, it expects to save about $8,000 annually in electricity. Not much, but it does serve to reduce demand for electricity.

Consumers may be reluctant to spend additional funds for greater efficiency, since the time horizon for their return on the investment may be too long for their consideration. In other words, we may choose not to spend an additional $1,000 on a $10,000 investment in a new air conditioner to get greater efficiency, because that 10% cost increase must then be spread over a time period much longer than they will remain in the home. How can we get them to participate?

Some utility companies will purchase the product for them, and charge them a monthly fee to recuperate the upfront expense. Why? If a utility can convince me to become more efficient, it can loosen up demand for electricity – without having to spend additional funds for infrastructure and electrical lines. The more people that choose to save, the lower the demand for electricity, and the lower the impact of fossil fuels on the environment.

The focus here is on “decoupling” electrical rates. Rates are currently set by determining how much is needed for a fair return for the utility, arriving at a per-kilowatt-hour rate, and charging accordingly. Such a scheme doesn’t allow for efficiency incentives. Incentive programs would be funded by all customers, regardless of whether they take advantage of the program itself. But many firms are opposed to such incentives, since they would effectively be paying for their competitors to become more efficient.

The goal in New York is to reduce electricity demand by 15% from what it would have been in 2015 at current increases. This would amount to demand remaining roughly constant relative to today. While increases in solar and wind power can help fuel this, so can programs as simple as getting you to add additional insulation to your home.

Discussion Questions:
1. As more utilities incorporate incentive programs for the purchase of an efficient appliance (washing machine, for example), what is the impact on total consumption? Use a graph of marginal costs/marginal benefits to illustrate your answer.
2. As people become more energy efficient, what is the impact on the market for electricity? Use a graph of supply and demand to illustrate your answer.
3. Assuming that demand for electricity falls as a result of these incentive programs, what will happen to those who don’t take advantage of the incentive programs? Why?
Multiple Choice/True False Questions:
1. Which of the following is an example of increasing efficiency, as argued in the article summary?
  1. Rebate for purchasing a high-efficiency air conditioner
  2. Purchasing a hybrid automobile
  3. Tax refund for insulating your home
  4. A and C
2. An incentive provided by a utility to help increase the efficiency of a purchase can best be described as a(n)
  1. Sunk cost
  2. Externality
  3. Tax
  4. Subsidy
3. True/False. When electrical rates are decoupled from consumption, one consumer may pay more/less than another for the same level of usage.
Source Wald, Matthew, “Efficiency, Not Just Alternatives, Is Promoted as an Energy Saver,” The New York Times, May 29, 2007.
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