Energy system optimization models (ESOMs) are designed to examine the potential effects of a proposed policy, but often represent energy-efficient technologies and policies in an overly simplified way. Most ESOMs include different end-use technologies with varying efficiencies and select technologies for deployment based solely on least-cost optimization, which drastically oversimplifies consumer decision-making. In this paper, we change the structure of an existing ESOM to model energy efficiency in way that is consistent with microeconomic theory. The resulting model considers the effectiveness of energy-efficient technologies in meeting energy service demands, and their potential to substitute electricity usage by conventional technologies. To test the revised model, we develop a simple hypothetical case and use it to analyze the welfare gain from an energy efficiency subsidy versus a carbon tax policy. In the simple test case, the maximum recovered welfare from an efficiency subsidy is less than 50% of the first-best carbon tax policy.
@article{arxiv.2111.04769,
title = {Improving the Representation of Energy Efficiency in an Energy System Optimization Model},
author = {Neha Patankar and Harrison G. Fell and Anderson Rodrigo de Queiroz and John Curtis and Joseph F. DeCarolis},
journal= {arXiv preprint arXiv:2111.04769},
year = {2021}
}