The American Council for an Energy Efficient Economy (ACEEE) released a report today examining the impact of incentive structures for sparking greater utility investment in energy-efficiency programs. The press release opens:
The ability for utilities to profit from their energy efficiency programs provides strong motivation to create, support, and deliver successful programs …
My initial reaction: ‘duh … so, what else is new?’
From the ACEEE report,
there is wide agree among the industry experts that we interviewed that shareholder incentives influence utility decision-making
Okay, there should be a rash of shareholder lawsuits if the “industry experts” were to argue that “shareholder incentives” didn’t “influence utility decision-making”. In other words, yet again, ‘duh …’
That reaction, of course, did a form of disservice to the report and the importance of this message. The truth is quite simple: too many utilities’ financial structures undermine the ability to make meaningful progress in achieving a more prosperous energy-efficiency economy.
For most of America’s utilities there is, in essence, a rather simple calculation for profit that is termed ‘the throughput model’: more energy usage translates to greater revenue streams. And, for most, greater revenue translates into increased profits. As long as a utility operates with this paradigm, serious attention to fostering energy efficiency actual operates to the detriment of shareholder value.
One of the key paths around this is termed “profit decoupling” which separates the transmission and distribution (T&D) system from the energy use for profit decision-making. In essence, the rate commission will provide a specific revenue stream for the T&D provider to ensure services to their customers. If it is less expensive (more efficient) to build more power lines and deliver more power in response to customer demand, then that will be more profitable for the utility. If, on the other hand, it will be more efficient to foster greater energy efficiency and avoid building more transmission lines (and transformers and …), then that will be more profitable for the utility.
Profit decoupling decouples profit from the ‘throughput model’.
What ACEEE has documented is that this works. If the shareholders’ best interests are best served by maximizing the number of delivered kilowatt hours, then the utility will serve those interests and suboptimize energy efficiency. If, however, the shareholder interests are best served through investing to cut demand, expect the utility to become efficiency pushers.
Not surprisingly to me … but important to document with verifiable research … is that incentivized utilities are actually blowing through the energy efficiency targets. As the authors put it,
the record indicates that when these targets have been established, utilities have tended, thus far, to consistently meet or exceed them.
Setting serious targets — with incentives to meeting them — has led to aggressive and innovative practices that lead utilities “to consistently meet or exceed” those targets. And, in the process, to provide greater return to their shareholders while lowering their customers’ bills.
And, they say you can’t have your cake and eat it too …
Going back to the opening title, “Duh …” The ACEEE has done a service in documenting what should simply have been self-evident to all. And, well, ‘duh’ … this is good policy that merits being the law of the land across the entire nation rather than in just a few markets.
1 response so far ↓
1 David, Energy Heretic // Jan 24, 2011 at 6:01 pm
I remember having this same discussion in 1992. I’m by no means against improving efficiency and increasing conservation, but I’m still skeptical of this working well as a focus for electric utilities over the long term. Their primary business, and thus their major incentives, will remain delivering power to consumers.