Negawatt Trading and Energy Efficiency in Adjustment Markets

Author Name KURAKAWA Yukihide (Waseda University) / TANAKA Makoto (Faculty Fellow, RIETI)
Creation Date/NO. January 2018 18-J-003
Research Project Study on Markets and Policies in the Power System Reform
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This paper investigates the impacts of demand side energy efficiency on cost efficiency in an adjustment market which includes negawatt trading. Comparative statics about the determinants of optimal energy efficiency is also carried out. It is shown that improvements in energy efficiency increase consumer benefit in energy use, but, on the other hand, raises negawatt cost and consequently lowers cost efficiency in an adjustment market. In the presence of externality of fossil fuel power generation, a declining proportion of fossil fuel generation in electricity for baseline demand increases the relative impact of thermal generation in an adjustment market, and decreases the optimum level of efficiency in energy use. For the same reason, higher externality costs decrease the optimum level of energy efficiency if the rate of fossil fuel generation for the baseline demand is sufficiently low. Finally, comparing the case where an optimal carbon tax is implemented with the case where a carbon tax is not implemented reveals that the latter induces an excessive level of energy efficiency.