Are Efficiency and Electrification Policies in Conflict?

Experts agree we must massively increase energy efficiency savings to help avert the worst impacts of climate change. The same experts also agree we must massively increase the use of clean electricity to power our cars, trucks, buses, buildings, etc. Are these two necessary actions inherently in conflict?

The answer is decisively, “No.”

Electrifying Vehicles and Buildings is a Form of Energy Efficiency

Electrifying vehicles and buildings may increase electricity consumption, but it can reduce total energy use because electric motors, heat pumps, and induction stovetops are vastly more efficient than burning fossil fuels. In sum, building and transportation electrification done right should improve overall energy efficiency and provide significant emissions reductions.

We need to think beyond our traditional boxes in the utility sector to consider energy efficiency in broader terms. The Energy Information Agency tracks “household energy insecurity” and documents that “nearly a third of U.S. households reported facing a challenge in paying energy bills or sustaining adequate heating and cooling in their home in 2015.” Utility regulators, consumer advocates, and environmentalists have a robust history of working together to reduce utility bills, especially for low-income households.

But it’s time for utility policy to target the total household energy bill. We should not focus on the average American household's $1,300 annual electric bill while ignoring the $2,000 to $3,000 that the average household spends every year on gasoline.

For the last 40 years, driving on electricity has been the cost equivalent of driving on dollar-a-gallon gasoline, and it’s projected to stay that way for the next 30 years. In contrast, no one knows what the price of gasoline will be next week. Because electricity is generated from a diverse set of domestic fuels and because it is carefully regulated by state agencies, its price is inherently more stable, delivering energy cost savings households can bank on.

Utility Policy Can Both Promote Energy Efficiency and Beneficial Electricity Consumption

It has been repeatedly demonstrated that to deliver the energy efficiency savings that reduce household electric bills, regulators must break the connection between a utility’s ability to recover its authorized costs and the total volume of electricity sold. This removes the disincentive for utilities to help their customers use less electricity.

States that have “decoupled” electric sales from the recovery of authorized revenue requirements by automatically adjusting electric rates marginally up or down to correct for inevitable errors in forecasted electricity sales consistently deliver greater energy efficiency savings to utility customers. Revenue decoupling makes utilities agnostic as to the number of kilowatt-hours they sell, which means they can pursue energy efficiency without harming their bottom line.

Some have asked if “recoupling” (linking utility revenues to the total volume of electricity sold) is needed to encourage utilities to aggressively pursue transportation and building electrification that reduces global warming emissions and consumer costs. NRDC conducted an informal survey of utilities across the nation and found no correlation between “decoupling” and a utility’s actions in pursuing investments that advance beneficial electrification. This is because all utilities (regardless of whether they are vertically integrated, restructured, or decoupled) have an opportunity to earn a return on capital investments that accelerate beneficial electrification. In fact, decoupled utilities are leading the charge to electrify the transportation sector, and they’re not doing it just because it’s good for the world. Those capital investments present a real earnings opportunity.

Diverting billions of dollars that would otherwise go to oil companies into the electric sector can also reduce electric rates and bills for all customers. For example, because electric vehicles (EVs) are generally charged during hours of the day when there is plenty of spare capacity in the grid (e.g., in the middle of the night when people are sleeping), the additional revenue that comes from those electricity sales exceeds associated costs. This spreads the costs of the grid over more kilowatt-hours sold, reducing the price per kilowatt-hour, putting downward pressure on utility rates and bills for all customers.

NRDC has commissioned analysis to quantify this benefit in eight states across the country, and the results demonstrate widespread EV adoption could reduce collective utility bills in those eight states by $58.3 billion by 2050. Decoupling mechanisms ensure those billions of dollars are returned to utility customers. You don’t have to trust utility executives or even utility regulators. In states with decoupling in place, those dollars will automatically flow back to customers in the form of reduced rates and bills.

 “Recoupling” is the Wrong Answer to a Good Question

 “Recoupling” is not necessary to encourage the electric industry to pursue beneficial forms of electrification because even decoupled utilities, their shareholders, and their customers stand to benefit from beneficial electrification. “Recoupling” would also undermine the energy efficiency gains we need to continue to reduce customer electric bills and to avert the worst impacts of climate change. It would also be counterproductive because increasing traditional energy efficiency savings creates more headroom in the electric system to electrify vehicles and buildings. Driving on “negawatts” is a beautiful thing and it saves money.

This is not to say it’s wrong to ask if our regulatory framework needs to be revisited to encourage utilities to aggressively pursue beneficial forms of electrification. It does, but we don’t need to undermine the foundation of energy efficiency in the process. Recoupling would return utilities to a commodity-based business model, which would not only undermine traditional energy efficiency programs, it would discourage utilities from pursuing the most efficient forms of transportation and building electrification.

Instead, state regulators and legislatures should direct utilities to aggressively pursue beneficial electrification just as they direct utilities to pursue energy efficiency and renewable energy. Policy-makers should also consider additional performance-based incentive mechanisms that would ensure utilities don’t just pursue capital investments upon which their shareholders earn a rate-of-return, but consider providing an earnings opportunity on investments in a broader portfolio of consumer incentives and education and outreach needed to meet environmental goals and reduce total household energy bills.