Energy Efficiency and the Spectre of Free-Ridership

Stephen Heins, Orion Energy System

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Abstract

Applying a “best practices” analysis to the sacred cow of “free-ridership” as it relates to public benefits and utility energy-efficiency programs yields some important results. This analysis is all the more important, because energy efficiency with a measurement, verification, and sustainability protocol is emerging as the single best investment option for economic development and emission reduction in such diverse economies as the European Union, Canada, China, New England, and the western U.S. One of the most vexing problems surrounding the issues of free-ridership is definitional.

To the economic purist, the textbook definition of free-ridership is a person who consumes a good without paying for it. For a variety of reasons, the working definition of free-ridership as it pertains to public benefits and utility energy-efficiency programs is significantly different. In this case a free-rider is someone who would install an energy-efficiency measure without any program incentives because of the return on investment of the measure, but receives a financial incentive or rebate anyway. This definition has been adopted by utilities, program directors, and regulatory bodies that are currently discussing energy-efficiency programs.

These two definitions have very little to do with each other. In fact, the useful economic concept of free-ridership has been appropriated and re-interpreted for the needs of policymakers. While it is true that utilities and regulators need a way to distinguish the actual impact of their energy-efficiency programs on the market, employing the concept of free-ridership to do this is both confusing and inappropriate.