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Why Utilities Should Promote Energy Efficiency: Addressing the problem of lost earnings and profit from energy efficiency programs

Posted by John Bailes

Traditional regulations do not give utilities much incentive to promote energy efficiency. In fact, up until recently, regulations were an obstacle to energy efficiency, because falling energy sales equated reduced revenues, an effect called “lost revenues” or “lost sales.” Utilities earnings are measured by capital invested and electricity sold, meaning incentives tend to push for increased electricity sales and expanding supply-side systems.


So how do you make energy efficiency an attractive proposal to utilities? The answer is three key policy strategies that make sure utility incentives are congruent with efficiency.

On a most basic level, the first requirement is to ensure utilities can easily recover the financial outlay of implementing energy efficiency programs. Every state has provisions for such program cost recovery, with varying degrees of success. The second approach is fixed cost recovery, which includes decoupling—separating a utility’s revenues from its sales—and lost-revenue adjustment mechanism (LRAM). Decoupling makes utilities neutral regarding their sales. Although decoupling does not automatically translate into increased enthusiasm for energy efficiency programming, it does remove a significant barrier. While both decoupling and LRAM have their place in defusing the threat of “too much of a good thing” vis a vis energy efficiency, a recent report from ACEEE states that decoupling is the preferred long-term solution to the problem.

The third strategy, performance incentives (financial incentives for reaching program goals), is rapidly gaining in popularity. States appreciate how these kinds of incentives can encourage more comprehensive, longer-term performance criteria beyond saving energy. The ACEEE report found that “28 states offer a performance incentive for at least one major electric utility, and 19 states have incentives for natural gas energy efficiency programs. Thirty states have addressed disincentives for investment in energy efficiency for electric utilities.” Internal changes to the industry are happening from both within and without, putting pressure on utilities to view energy efficiency as a resource instead of as a liability.

In the future energy landscape, utilities will need to harness low-carbon, distributed and sustainable energy resources. There are many advantages to befriending efficiency rather than seeing it as a financial detriment. Efficiency is a low-cost resource and can reduce the need for power generation. It’s a low-risk option when compared to other resource options—it reduces emissions, helps support the local economy by channeling savings into other projects and creating energy infrastructure jobs, and makes energy systems more secure and less prone to fluctuations.

Perhaps most importantly, energy efficiency is increasingly linked with improved customer engagement and satisfaction. Customers are becoming better educated about the importance of reducing carbon emissions and the necessity of pushing environmental agendas at the state as well as federal level. As the political climate changes, customers may become more savvy about how to advocate for sustainability with their wallets and their choice of utility. Now more than ever, the onus is on each state to establish regulatory policies that can help support large-scale efficiency.

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