Making Energy Efficiency Work for Utilities: New Findings

How can utilities be persuaded to help their customers use less electricity and natural gas? It’s entirely possible, starting with regulatory reforms that remove any linkage between the financial health of our hometown utilities and the amount of electricity and natural gas they sell.  NRDC and diverse allies have dedicated literally decades of effort to getting such measures adopted, and a new study by the American Council for an Energy Efficient Economy provides new insights on progress across the United States. ACEEE looked at utilities in half a dozen states whose management and regulators had made a concerted effort to promote energy efficiency and came to some important conclusions about what works best. 

Alternative regulatory mechanisms can be adopted that work well for both utilities and their customers, without appreciably changing the overall profitability of the utility business.   

The report released yesterday looked at six utilities with large-scale efficiency programs:  National Grid in Massachusetts, Northeast Utilities in Connecticut, Xcel Energy-Minnesota, Xcel Energy-Colorado, DTE Energy in Michigan and Idaho Power Company. But the study’s conclusions can be a beacon to other utilities to pursue more energy efficiency policies to help their residential , business, and industrial customers waste less energy and save more money on their energy bills, while reducing the amount of electricity that must be generated by fossil-fuel plants that pollute our air and harm our health.

ACEEE makes clear that the most important and effective policy here is so-called “revenue decoupling,” which uses small annual rate adjustments to ensure that utilities will recover their authorized costs of service, no more and no less, regardless of any short-term sales fluctuations associated with energy efficiency improvements (or anything else).  Some of the states involved also created new earnings opportunities for their utilities, based on achieving energy-savings targets set by their regulators.

Can efficiency be profitable?

The report’s authors include financial analysts who were interested in two important questions:  (1) have states with leadership roles in energy efficiency effectively protected utility shareholders from harms associated with reduced energy sales, and (2) do such measures actually increase the overall profitability of the utilities themselves?  Some opponents of efficiency-oriented regulatory reforms have tried to create a “poison pill” in the form of a reduction in utilities’ authorized earnings, on the ground that companies that adopt revenue decoupling automatically become more profitable and should incur offsetting financial penalties in order to make customers whole.  Reform proponents like NRDC have argued, generally successfully, that there is no evidence justifying such penalties and in fact, they serve only to slow progress in delivering more energy efficiency benefits to utility customers.

ACEEE’s findings come down unambiguously on NRDC’s side in this debate. The authors concluded that “nothing in our findings supports suggestions by some parties that utility commissions should adjust risk factors associated with utility earnings (e.g., prospective return on equity reductions) as a condition of adopting revenue decoupling and related business model reforms.” Yet the study authors also determined that the policies under review do “appear to help protect utility investors from being financially harmed ,” and that thanks to those policies, excellence in energy efficiency is entirely compatible with strong financial performance by the utilities involved. 

In other words, helping customers waste less energy can be entirely consistent with utility shareholders’ interests.

Keys to energy efficiency program success

The report, for which I and NRDC colleagues Devra Wang and Dylan Sullivan were among the reviewers, also emphasizes  the value of

  • Strong commitments to energy efficiency by regulators and utilities,
  • Ongoing collaboration among utilities and stakeholders,
  • Shared sense of purpose and common goals, and
  • Willingness to experiment and learn from experiences.

The diversity of the states under review suggests that these are robust conclusions, with representation from New England, Colorado, Minnesota and Idaho.  Massachusetts and Idaho don’t agree on much, but they can celebrate together a leadership legacy on energy efficiency for their utility customers, and the rest of the states have much to learn from ACEEE’s review of how it was accomplished.