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Devra Wang’s Blog

California Makes Progress Rewarding Utilities for Energy Efficiency

Devra Wang

Posted September 5, 2013

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California utility regulators unanimously approved an incentive mechanism today to reward electric and natural gas utilities when they help customers upgrade their homes and businesses to be more energy efficient. That’s good news for all of us who want to pay lower utility bills and breathe cleaner air. 

The California Public Utilities Commission’s move is part of a growing trend around the nation to reward utilities for helping customers save energy, not just for building power plants.

The commission’s new incentive mechanism improves upon past efforts by rewarding utilities for maximizing longer-term energy savings, such as helping customers improve the efficiency of their entire home, rather than just focusing on their cheapest immediate savings (like those from installing more efficient light bulbs, for example).  This new approach should spur more comprehensive and innovative approaches, and provide greater air quality improvements and greenhouse gas pollution reductions.

Getting Our Priorities Straight

State policy calls for efficiency to be the utilities’ top priority, since it is cleaner and costs significantly less to invest in energy-saving programs that help avoid the need for power generation than to build and operate traditional power plants and other infrastructure. Yet, this year the California Public Utilities Commission (CPUC) was only allowing the utilities to earn profits from investing in dirtier and costlier alternatives like power plants, wires, and pipelines.

The CPUC issued a ruling today that corrects that imbalance by providing utilities with earnings for successful energy efficiency programs (like appliance upgrades and home weatherization), too. These programs already are saving Californians billions of dollars in lower energy bills by avoiding the need for a large power plant every year, as well as millions of tons of carbon pollution.

The CPUC’s decision provides a “carrot” to encourage utilities to implement even more pollution-reducing and money-saving programs like these. And it better aligns the commission’s policy priorities with the financial incentives it provides to utilities. As Commissioner Ferron (who led the CPUC’s work on this issue) noted, today’s ruling represents a significant advance in promoting energy efficiency.

Refocusing Utilities

The California PUC’s ruling is a key part of a broader effort to reorient utilities away from their historic focus on selling more and more energy and building ever-more infrastructure and  toward helping customers get the energy services they want (like light, heat, and hot food) in an affordable, clean, and reliable way.

Opponents say utilities shouldn’t be rewarded for selling less of their “product.” But as Art Rosenfeld, former member of the California Energy Commission, noted, “That’s like saying we shouldn’t pay doctors to vaccinate our children because it deprives them of future visits from sick kids. What we want from our physicians is good health; and what we want from our utilities is affordable and reliable energy services – not kilowatt hours that we can avoid using and paying for.”

As regulated businesses, the utilities are different from other entities since their potential profits are determined primarily by their regulators. Regulatory reform to align the utilities’ profit opportunities with society’s interests are increasingly seen as both necessary and inevitable, as technology (such as solar, efficiency and “smart” grid) and business innovations change the energy landscape. More than half the states in the nation now offer utilities incentives for energy efficiency progress, as you can see in the chart below.

                Energy Efficiency Performance Incentives for Electric Providers

IEE EE Incentives Map July 2013.jpg

                     Source: Institute for Electric Efficiency

California’s New Approach to Efficiency Incentives

With the start of the new school year as the main focus in my household these days, here’s my “report card” on how California’s new approach measures up. First, the “excellent” grades, then, the parts that “need improvement.” And for “extra credit” you can keep reading to learn about the details of the CPUC’s new mechanism.


  • A Renewed Commitment: The commission’s ruling reaffirms its commitment to provide incentives to make energy efficiency a core part of the utilities’ businesses. The new incentive mechanism will spur superior performance on energy efficiency both for the current program cycle (2013-2014), and continuing into the future. After many years of delay, uncertainty, and late rulings, this provides some welcome certainty.
  • Spurring Long-Lived Savings: The commission has adopted a variety of incentive mechanisms since 2006, and continues to learn from experience. The most important change in this new approach is rewarding utilities for maximizing long-lived energy savings, rather than the historic focus on highly cost-effective (but easier to attain) savings. California needs to dramatically ramp up energy efficiency efforts in order to reach the state’s long-term carbon pollution reduction goals, and this new incentive structure will better encourage those long-term savings.  

Needs Improvement

  • Reducing Controversy: The incentive mechanism appropriately ties much of the potential reward to the utilities’ performance at saving energy. However, retroactive adjustments to some energy saving estimates may result in considerable controversy (as it did when the commission tried such an approach before). We urge the commission, utilities, and stakeholders to focus on the higher priority effort of building an evaluation system that provides all parties with greater confidence in the energy saving estimates to enable continuous updates in the future.
  • Upgrading Minimum Efficiency Standards:  Minimum efficiency standards for new buildings and appliances are an extremely cost-effective way to save energy, and the utilities’ programs have been critical to advancing both California and national standards. But today’s ruling would stop rewarding the utilities for saving energy through these efforts, and instead simply reward them for spending money on them during 2013 and 2014. However, the commission stated that it will reevaluate this and consider changes to reward savings in the future. 
  • Earnings Level: At a time when California needs to dramatically increase energy efficiency, the new mechanism sends a somewhat weak signal. The expected earnings are:
    • at the lower end of the national range,
    • only half of the profits utilities would earn for dirtier and costlier supply-side investments, and
    • less than 2 percent of the utilities’ recent earnings. 

          California’s Maximum Potential Efficiency Earnings Compared to Other States

cap comparison graph updated.jpg

            Source: American Council for an Energy-Efficient Economy

While the hope is that the relatively low level of earnings allowed utilities will reduce controversy in the near term, the commission should reconsider the potential earnings level going forward to ensure it is sending a signal consistent with its policy that efficiency is the state’s top priority.

Extra Credit

If you’re still reading and just can’t get enough, here’s a summary of some of the key details of the CPUC’s new mechanism.


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