Motivating energy suppliers to promote energy conservation

We examine the design of regulatory policy to induce electric utilities to deliver the surplus-maximizing level of energy efficiency services, e*. The rebound effect (whereby increased energy efficiency stimulates the demand for energy) typically renders revenue decoupling insufficient in this regard. The additional financial incentive required to induce e* is shown to vary with such factors as the prevailing price of energy, the magnitude of the rebound effect, the extent of observable energy efficiency investments, and the utility's objective.