Incentive mechanisms to promote energy efficiency programs in power distribution companies

Abstract

Power distribution companies (DISCOs) play an important role in promoting energy efficiency (hereafter EE), mainly due to the fact that they have detailed information regarding their clients’ consumption patterns. However, under the traditional regulatory framework, DISCOs have disincentives to promote EE, due to the fact that a reduction in sales also means a reduction in their revenues and profits. Most regulatory policies encouraging EE have some embedded payment schemes that allow financing EE programs. In this paper, we focus on these EE-programs’ payment schemes that are embedded into the regulatory policies. Specifically, this paper studies two models of the Principal–Agent bi-level type in order to analyze the economic effects of implementing different payment schemes to foster EE in DISCOs. The main difference between each model is that uncertainty in energy savings is considered by the electricity regulatory institution in only one of the models. In terms of the results, it is observed that, in general terms, it is more convenient for the regulator to adopt a performance-based incentive mechanism than a payment scheme financing only the fixed costs of implementing EE programs. However, if the electricity regulatory institution seeks a higher level of minimum expected utility, it is optimal to adopt a mixed system of compensation, which takes into account the fixed cost compensation and performance-based incentive payments.