Energy Efficiency and Calling in the Dogs

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My dogs came in immediately when I called them tonight. The cookies I’ve recently begun serving up upon their return seem be making an impression. At last they see a reason to leave behind all the fun things to chase in the woods.

Yes, I’ve been slow to understand – or at least enact – the basic principle of reward as incentive. The same problem exists in the utility industry when it comes to energy efficiency. For years investor-owned utilities have resisted energy efficiency, seeing themselves as dragged into it for no good reason, at least no good reason from the perspective of an entity charged with earning a return for shareholders.

Utilities earn profit based on energy sales. Efficiency reduces sales. Why come when called?

Policymakers, however, in many states are recognizing this inherent disincentive to utility investment in energy efficiency. They are beginning to institute “decoupling” programs, which delink revenue from sales. Regulators in these states set up mechanisms to ensure the utilities earn fair revenue despite decreased energy sales.

But this is not enough to really get the dogs to come running home, according to a recent report issued by the American Council for an Energy Efficiency Economy, called “Carrots for utilities: Providing financial returns for utility investments in energy efficiency.”

Decoupling only takes away the disincentive to energy efficiency; it does not create incentives, according to the report.

“This arguably leaves an IOU agnostic or neutral to energy efficiency as a resource option; while it will no longer lose revenues from improved customer energy efficiency, it also will not earn a positive return,” the report says.

When utilities build power plants or transmission, they receive a return on their investment. This encourages them to build more power plants and transmission. Efficiency needs the same type of reward, according to ACEEE.

To that end, the organization recently looked at experiments in 18 states where utilities can earn financial rewards for shareholders by saving energy. While ACEEE says more research is necessary, the initial findings indicate a strong willingness by utilities to invest in efficiency, if they can earn a return on that investment.

In interviews with utilities, the organization found that the “ability to assign a dollar value to efficiency investments significantly contributed to ‘buy in’ by corporate management” and “levelled the playing field between efficiency investments and investment in new energy supply capacity.”

Even more striking, ACEEE found the pace of utility investment in energy efficiency grew twice as fast in states with shareholder incentives than those that used other types of policies to encourage efficiency. As of 2009, utilities with shareholder incentives spent $14.63/person on efficiency, while utilities with other incentive policies spent $8.48.

That’s not to say shareholder incentives are not without their problems; nor are they the Holy Grail of energy efficiency (or the only kind of cookie). But they appear to work, based on the ACEEE findings, which are detailed here.

Elisa Wood is a long-time energy writer whose work appears in many of the industry’s top magazines and newsletters. She is publisher of the Energy Efficiency Markets podcast and newsletter.

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About Author

Elisa Wood is an editor at EnergyEfficiencyMarkets.com. She has been writing about energy for more than two decades for top industry publications. Her work has been picked up by CNN, the New York Times, Reuters, the Wall Street Journal Online and the Washington Post.

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