By Eric Hirst

When we think about our local electric utility (and most of us do that only rarely), we likely envision power plants, transmission lines, the meter on the side of our house, and, of course, our monthly electric bill. Mostly, we view utilities as providers of electric power. However, more and more utilities now provide both electricity and related services to help customers reduce their electric bills. Such services also have a social benefit: because energy demand is controlled, emissions of carbon dioxide are reduced, slowing global warming. These services are provided by demand-side management (DSM) programs. Using DSM, utilities can affect the amount and timing of customer electricity use. They can reduce the amount of electricity use by improving the technical and operational efficiency with which customers use electricity. The timing of electricity use can be influenced by direct-load control programs in which the utility controls equipment at the customer site and by electricity-pricing options that vary the price of electricity with time of use. Research on utility DSM programs has been conducted in ORNL's Energy Division and supported by the Department of Energy and its predecessor agencies since 1970. Here I give examples of some technologies promoted by these programs, explain why utilities are running such programs, and mention other forces that affect electricity use.

DSM Examples

All public buildings, including all ORNL facilities, contain exit signs. These signs use electricity 24 hours a day, every day of the year. The typical exit sign has two 20-W incandescent bulbs. These bulbs last only 2000 hours, so they must be replaced four times a year. Compact fluorescent bulbs, however, last four times longer and use much less electricity. Light-emitting diodes need to be replaced only once every 5 years and consume only 2 W per exit sign. Although each exit sign uses only a small amount of electricity, the total potential savings are large because about 40 million such signs exist in the United States.

The annual cost of owning (capital and labor) and operating (electricity) different kinds of exit signs depends on whether they are illuminated by incandescent lights, compact fluorescent lights, or light-emitting diodes.

The 12 large commercial and industrial customers participating in Florida Power and Light's load-control program experienced a reduction in summer demand for electricity. At 3 p.m., for example, the demand for power was 36 megawatts lower than it was on comparison days when customers were not required to cut demand.

The exit sign represents only one small example of the many energy-efficiency opportunities surrounding us. We can improve the efficiency with which we use electricity for every major use, including heating, lighting, air conditioning, office equipment, motors, and industrial processes. These improvements involve the use of new, more efficient technologies as well as better operating practices. For example, improved operation of heating, ventilation, and air-conditioning systems in commercial buildings can often cut electric bills, with no capital investment, by 10 to 15%. Typical operational changes include cleaning air filters, lubricating dampers, and ensuring that controls work properly.

The cost to produce electricity varies enormously by season and hour of the day. Therefore, utilities are interested in reducing demands at critical times, when it is expensive to generate electricity. To encourage customers to cut demand or shift loads to other times of the day, utilities offer interruptible rates (lower rates in exchange for giving the utility the right to interrupt electrical service), time-of-use pricing, or direct-load control programs. The second figure on p. 55 shows the demand reductions that Florida Power and Light obtained from some of its largest commercial and industrial customers. These customers agreed to reduce demands during certain critical times in return for a lower electric bill.

Types of DSM Programs

Utilities run different kinds of DSM programs. Early programs during the 1970s focused on providing general information, primarily through flyers, newspaper ads, and workshops. Then, around 1980, utilities began to offer site-specific information, in which a utility staffer inspects the customer's facility (home, office building, or factory) and offers specific suggestions along with estimates of installation costs and savings for each measure. Many utilities now help their customers pay for the extra cost of energy-efficiency measures through rebates or low-interest loans. In some cases, it is cheaper (for low-cost measures, in particular) for the utility to install the measures during the energy audit, so these utilities run direct-installation programs. Because the structure of electricity prices (charges for energy and demand) affect customer usage, modifying these pricing schedules can be considered a form of DSM.

Costs and effects (energy and demand reductions) of electric
-utility DSM programs from 1989 through 1993 and early-
1994 projections to 1998.

The cost-effectiveness of DSM programs depends on the
environmental costs of using a particular fuel for electricity
production. The numbers in parentheses beneath each bar
are the assumed capacity factors for each type of power plant.

Finally, some utilities are now running so-called market-transformation programs. Rather than dealing one-on-one with individual customers, these utilities are moving "upstream" in an effort to influence the actions of contractors, builders, retailers, distributors, and even manufacturers. For example, instead of offering a $50 rebate to every customer who buys an efficient refrigerator, why not get the manufacturer to produce only more efficient units? That was the response of a group of about 25 utilities. In what is informally known as the Golden Carrot program (and officially known as the Super-Efficient Refrigerator Program), these utilities pooled about $30 million and ran a competition to select a manufacturer who could develop a refrigerator at least 30% more efficient than the 1993 federal standard. Whirlpool won the competition and its new, highly efficient refrigerators are now in stores in the service areas of the participating utilities.

Between 1989 and 1994, electric-utility expenditures on DSM programs more than tripled, the potential reduction in peak demand doubled, and the energy savings tripled. In 1994, U.S. electric utilities spent about 1.5% of their total revenues on DSM programs; in return, these programs cut annual sales by 1.9% and cut peak demands by 7.3%, reducing the need to construct power plants. Furthermore, the utility projections as of early 1994 show continued growth in DSM spending and effects. Recently, many utilities have reduced their planned DSM expenditures, and, to a lesser extent, their planned energy and demand reductions in response to growing competition in the electricity industry. These data and projections make two points. First, DSM is a nontrivial utility activity that is having a measurable effect on utility sales, demand, and revenues. Second, even though DSM effects are increasing, DSM alone will not meet the growing demand for electricity in the United States. The nation will continue to need new power plants, transmission lines, and distribution systems.

These national figures mask substantial regional variation in DSM activity. The majority of DSM utilities are in seven states—California, Florida, Massachusetts, North Carolina, New York, Washington, and Wisconsin. The leading utilities are concentrated along the east coast (especially the Northeast), west coast, and upper Midwest. In the Southeast, the Florida utilities, Duke Power (in North and South Carolina), and Georgia Power are among the leaders.

Why Utilities Run DSM Programs

At first glance, it seems ridiculous for a company to encourage its customers to use less of its product. Does General Motors urge us to carpool and keep our cars longer? Does Pizza Hut tell us to eat more vegetables and fruits and avoid fatty cheeses and meats?

Electric utilities are different in three ways. First, they are regulated monopolies. If you don't like Sony stereos, you can always buy from Zenith or Panasonic. But if you don't like your local utility, you have to move outside its service area to be able to buy electricity from another entity. Because of utilities' monopoly status, they are regulated by state agencies, the public utility commissions. Second, electricity is considered a necessity "clothed with the public interest." Third, the production and transmission of electricity cause serious environmental problems, including emissions of greenhouse gases.

Utility experience during the past several years shows that DSM programs provide resources that cost-effectively substitute for power plants. That is, direct-load-control programs and interruptible rates provide the same types of services that a combustion turbine does but at lower cost. Similarly, energy-efficiency programs are often low-cost alternatives to the construction and operation of baseload coal and nuclear plants.

The recognition that DSM is a "resource," analogous to power plants, led to a new way of planning for electric utilities, called integrated resource planning (IRP). IRP involves utility consideration of a broad array of ways to meet customer energy-service needs, rather than only building and operating power plants. Utilities now consider purchasing electricity from other utilities and from nonutility entities, repowering and extending the life of existing plants, DSM programs, transmission and distribution improvements, and pricing as alternative ways to meet the growing demand for energy services.

Utilities and their regulators recognize also the environmental benefits of DSM programs. Because these nonpolluting programs substitute for power plants, we can keep our homes and offices cool in the summer and warm in the winter with fewer air-pollution emissions. The bottom figure on pg. 56 shows the direct and environmental costs for three types of power plants: a baseload coal plant, an intermediate combined-cycle gas-fired plant, and a peaking simple-cycle combustion turbine. The bottom portion of each bar shows the direct economic cost of building and operating each plant. The upper two bars show the range of estimates of damages caused by the air pollution produced by these plants plus the damages associated with carbon dioxide emissions. (I show a range because there is considerable uncertainty about the costs to society of power-plant emissions.) DSM avoids these emissions. Therefore, it is more cost effective than would appear from consideration of the direct economic costs only.

In addition, utilities run DSM programs because they and their regulators recognize that utilities can help overcome the market barriers that keep customers, in all sectors of the economy, from adopting what would otherwise be cost-effective energy-efficiency measures (see table below). For example, in tenant-occupied buildings, the occupants have no incentive to install efficiency measures because they don't own the building. The owner, on the other hand, has no incentive to install such measures because he doesn't pay the utility bills. Utilities can help cut the "transaction costs" associated with selecting and installing suitable measures. Utilities are well situated to assist here because of their long-standing relationships and monthly contacts with all customers. Utilities have substantial technical competence and are generally regarded as reliable sources of information. And utilities have intimate knowledge of electricity consumption patterns and trends and of the costs of providing electrical services.

Barriers to improving U.S. energy efficiency
Structural barriers—conditions beyond the control of the end user

  • distortions in electricity pricing
  • supply infrastructure limitations
Behavioral barriers—conditions that characterize end users

  • efficiency attitudes and awareness
  • perceived riskiness of efficiency measures
  • obtaining and processing information
  • limited access to capitol
  • misplaced incentives
  • inconvenience, loss of amenities

Other Forces That Affect Electricity Use

The U.S. electric sector now accounts for 36% of U.S. primary energy consumption. This share is increasing as our homes and economy become more electrified. Consider, for example, the proliferation of electricity-using office equipment that barely existed a decade ago, including personal computers, printers, modems, and fax machines.

A recent study for the Electric Power Research Institute examined the various forces likely to affect electricity use between 1990 and 2010. The primary factor that will increase electricity use is growth in population, households, businesses, and industry. In addition, changes in the structure of the economy (especially electrification of industry) will also increase electricity use. Offsetting some of this growth are normal market forces and government efficiency standards, as well as utility DSM. Government standards have had substantial effects already. The efficiency of new refrigerators in 1993 was almost triple the efficiency of new refrigerators sold in 1972. In addition, the fraction of new homes built in the Pacific Northwest that meets the region's Model Conservation Standards grew from about 5% in 1984 to more than 90% a decade later.


What is the future for utility DSM programs? Positive factors include the development and commercialization of new technologies (including those developed at ORNL) that provide improved services at lower cost, utility experience in marketing such programs, and growing pressures to protect the environment and slow global warming by limiting emissions from fossil-fuel plants. Offsetting these positive factors are concerns that the actual performance of DSM measures is generally less than engineers predict and the effects of increasing competition in the electric industry. Increasing competition is driving down the cost of new supply options, which makes DSM less cost effective and exerts strong pressure to keep retail prices low.

I think that DSM's substantial benefits, both to individual consumers and to society as a whole, imply a bright future for energy efficiency. These programs provide capacity and energy resources that can defer construction of new power plants and transmission lines. They are cost effective, they improve environmental quality, and they provide better customer service.


Eric Hirst is a corporate fellow with ORNL.

ERIC HIRST, a research engineer with ORNL since 1970, is a corporate fellow in ORNL's Energy Division. His research focuses on competition and restructuring in the electricity industry, resource planning for electric utilities, and demand-side management. Hirst spent a year (1992-93) with the Land and Water Fund of the Rockies, an environmental center in Colorado. He worked with the LAW Fund to encourage electric utilities to adopt integrated resource planning and demand-side management programs in the Rocky Mountain states. Previously, Hirst was on assignment with Puget Sound Power & Light, in Bellevue, Washington, in 1986-87, helping Puget staff prepare their initial resource plan. Hirst was also on assignment with the Minnesota Energy Agency in 1979. Earlier he spent 15 months as director of the Office of Transportation Research in the Federal Energy Administration. He holds a Ph.D. degree in mechanical engineering from Stanford University. Hirst is author of a book on energy efficiency in buildings. He is a member of the board of directors of the American Council for an Energy-Efficient Economy and of several editorial boards for energy journals.

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