This weekend, Kate Galbraith of the New York Times wrote an excellent piece on the change in strategy at Idaho Power. The article noted that Idaho breaks the expected “red state/blue state” mold by aggressively pursuing energy efficiency. Idaho Power is grasping that customers don’t care at all about energy per se, they care about the services energy provides (as Amory Lovins famously quipped: people don’t care about BtUs, they care about cold beer and hot showers). It turns out that utilities like Idaho Power can provide energy services (cold beer and hot showers) a lot less expensively by helping their customers become more energy efficient than they can through building and running new power plants. As a cheaper resource, efficiency leaves more money in customer pockets, leaving more room for spending and saving- and helping create jobs in other sectors.
Efficiency programs can benefit all classes of customers, from home owners and small businesses to large industrial customers. At home, efficiency offers more comfortable, affordable homes. For business and industry, efficiency offers opportunities and support for equipment improvements, innovation and energy bill savings. Far from competition to economic development, efficiency is an engine for economic growth at lower cost.
The trouble with efficiency, as readers of Ms. Galbraith’s piece may have noted, is it doesn’t fit too well in the traditional regulatory structure of utilities. There are three basic problems:
- Efficiency may be cheaper than coal or gas (often one third to one fourth the cost!), but it still has to be paid for. Idaho has implemented one way of doing this: Idaho Power covers the cost of their efficiency programs through a 4.5% efficiency rider. If efficiency is going to be a viable alternative to building new coal plants, regulators need to make sure that utilities can invest in it. Other regulators have opted to cover the costs by including them in volumetric rates. Allowing utilities to cover the costs of efficiency can lower customer bills (even if it raises rates), since participants in programs will use less energy and others will be stuck paying for fewer power plants.
- Efficiency reduces energy sales: “Wait!” says the utility executive, “How am I going to cover my costs!” Under traditional ratemaking rates are set to cover costs based on expected sales volumes. If a utility sells less than expected, they fall short on fixed costs; if they sell more than expected, they take home more bacon. Under this structure, higher sales have a big upside and no downside. The solution is a regulatory fix discussed in Ms. Galbraith’s article: instead of setting rates purely on expected sales volumes, rates are adjusted to cover allowed non-fuel costs (upward or downward) based on actual sales volumes. This is called decoupling.
- Efficiency isn’t profitable under traditional ratemaking, unlike wires and power plants where utilities can make “reasonable rates of return” (plus any extra they can make by keeping costs down). Again, regulators can change the game by allowing utilities to keep a small percentage of the savings customers see from efficiency programs. This means utilities only earn as their utility programs provide benefits to their customers. A utility should have a constant incentive to replace consumption with cost effective efficiency.
Utility regulation needs to turn a corner and Idaho is on the cusp of leading the way. Idaho’s utility regulator has already adopted the first two policies. The third is being discussed in Idaho now. Let’s hope Idaho continues its leadership by adopting an incentive mechanism to encourage even greater savings from Idaho Power.