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Making Energy Efficiency Work for Utilities: New Findings

Ralph Cavanagh

Posted December 12, 2013

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How can utilities be persuaded to help their customers use less electricity and natural gas? It’s entirely possible, starting with regulatory reforms that remove any linkage between the financial health of our hometown utilities and the amount of electricity and natural gas they sell.  NRDC and diverse allies have dedicated literally decades of effort to getting such measures adopted, and a new study by the American Council for an Energy Efficient Economy provides new insights on progress across the United States. ACEEE looked at utilities in half a dozen states whose management and regulators had made a concerted effort to promote energy efficiency and came to some important conclusions about what works best. 

Alternative regulatory mechanisms can be adopted that work well for both utilities and their customers, without appreciably changing the overall profitability of the utility business.   

The report released yesterday looked at six utilities with large-scale efficiency programs:  National Grid in Massachusetts, Northeast Utilities in Connecticut, Xcel Energy-Minnesota, Xcel Energy-Colorado, DTE Energy in Michigan and Idaho Power Company. But the study’s conclusions can be a beacon to other utilities to pursue more energy efficiency policies to help their residential , business, and industrial customers waste less energy and save more money on their energy bills, while reducing the amount of electricity that must be generated by fossil-fuel plants that pollute our air and harm our health.

ACEEE makes clear that the most important and effective policy here is so-called “revenue decoupling,” which uses small annual rate adjustments to ensure that utilities will recover their authorized costs of service, no more and no less, regardless of any short-term sales fluctuations associated with energy efficiency improvements (or anything else).  Some of the states involved also created new earnings opportunities for their utilities, based on achieving energy-savings targets set by their regulators.

Can efficiency be profitable?

The report’s authors include financial analysts who were interested in two important questions:  (1) have states with leadership roles in energy efficiency effectively protected utility shareholders from harms associated with reduced energy sales, and (2) do such measures actually increase the overall profitability of the utilities themselves?  Some opponents of efficiency-oriented regulatory reforms have tried to create a “poison pill” in the form of a reduction in utilities’ authorized earnings, on the ground that companies that adopt revenue decoupling automatically become more profitable and should incur offsetting financial penalties in order to make customers whole.  Reform proponents like NRDC have argued, generally successfully, that there is no evidence justifying such penalties and in fact, they serve only to slow progress in delivering more energy efficiency benefits to utility customers.

ACEEE’s findings come down unambiguously on NRDC’s side in this debate. The authors concluded that “nothing in our findings supports suggestions by some parties that utility commissions should adjust risk factors associated with utility earnings (e.g., prospective return on equity reductions) as a condition of adopting revenue decoupling and related business model reforms.” Yet the study authors also determined that the policies under review do “appear to help protect utility investors from being financially harmed ,” and that thanks to those policies, excellence in energy efficiency is entirely compatible with strong financial performance by the utilities involved. 

In other words, helping customers waste less energy can be entirely consistent with utility shareholders’ interests.

Keys to energy efficiency program success

The report, for which I and NRDC colleagues Devra Wang and Dylan Sullivan were among the reviewers, also emphasizes  the value of

  • Strong commitments to energy efficiency by regulators and utilities,
  • Ongoing collaboration among utilities and stakeholders,
  • Shared sense of purpose and common goals, and
  • Willingness to experiment and learn from experiences.

The diversity of the states under review suggests that these are robust conclusions, with representation from New England, Colorado, Minnesota and Idaho.  Massachusetts and Idaho don’t agree on much, but they can celebrate together a leadership legacy on energy efficiency for their utility customers, and the rest of the states have much to learn from ACEEE’s review of how it was accomplished.

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Comments (Add yours)

Sid AbmaDec 16 2013 03:27 PM

This topic started out mentioning natural gas end electricity, and in the end focused on electricity. Ever notice when the 2 words Energy Efficiency are mentioned, eyes go to the ceiling looking for another light bulb to change?
Our governments and utilities have done a great job at promoting Flex your Power and NegaWatt, but what has been done by the utilities and our governments and even the natural gas association to promote how efficiently natural gas can be consumed?
What can make the biggest changes to battle Climate Change? How many chimneys are blowing Hot exhaust into the atmosphere? How many electricity producing power plants have big chimneys blowing Hot exhaust into the atmosphere?
Natural gas can be consumed to near 100% energy efficiency. Many homes have high efficiency water heaters and condensing boilers.
Why not the large commercial buildings and industries? We don't hear the utilities talking about the big difference Increased Natural Gas Energy Efficiency can have on our environment.
How many jobs could be created applying the technology of condensing flue gas heat recovery to these locations?
What natural gas is not wasted today, will be there to be used another day.
Could this be good for our environment?
Would this be good for our economy?

SteffenDec 17 2013 04:51 AM

Dear Ralph, thanks a lot for your interesting post! In my opinion it can be profitable but today the people don't know how they can save money at home. Every company only talk about they own product which you have to buy! After this point i change my point of view. The question now: How i can save money with the things i had? The solution for me is called "smart building".. (her some informations: Now i same money without expensive equipments because i think before i waste my money :)

Georgina WalkerDec 19 2013 05:19 AM

That was a very interesting post. I have noticed that other than people themselves now institutions are coming forward to promote energy saving. Last day I read some blog about some libraries and schools in New York city promoting energy efficiency.
The library utilized some cutting edge solar techniques and the school was using lights that reduces carbon emission. Such acts by prominent institutions are really appreciable, they help in generating an awareness to a great extent.

Andy FrankDec 22 2013 03:08 PM

Ralph, decoupling misses the point. Nobody does anything because they are neutral. Even utilities that aren't decoupled have an incentive to do energy efficiency if they get lost revenue recovery and a return on investment for program / EE investment costs.

Utilities usually have a ROE cap, which means in effect their financial health isn't effected by energy sales unless they also own dereglulated generation (e.g. Exelon).

So what utilities care about is putting larger amounts of rate-based capital, which is why they are all so excited about smart grid / smart meters. Same goes for investments in energy efficiency.

The primary regulatory issue has nothing to do with the utilities directly, but rather has to do with the fact the PUCs are trying to use regulatory strategies designed to solve centralized problems (e.g. building T&D infrastructure) with a distributed problem (energy efficiency).

The challenge therefore is to push the PUCs to adopt regulations that reduce barriers to entry among third parties that can be more nimble and innovative (e.g. white tag markets).

I'd love to see folks like NRDC focus more on this challenge.



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