If utilities worldwide could implement aggressive energy efficiency programs without suffering automatic financial penalties, there would be far less need for fossil fuels and the $1 trillion in subsidies that encourage the continued use of these dirty resources. Most people would be surprised to hear that such penalties are almost universal, wholly unintended, and eminently reversible.
Representatives from the 194 countries attending the Rio+20 Earth Summit are grappling with a number of substantial and far-reaching issues this week, but the phase-out of fossil fuel subsidies by 2015 is paramount to the global campaign against climate change and for advancing clean power.
Efforts to push the G20 countries to fulfill their previous commitments to phase out these fossil fuel subsidies could be greatly enhanced and supported through simple modifications in the ways they regulate their energy utilities.
We already know that all societies waste copious amounts of energy, and that we must reverse this to reduce global warming. Consider the potential impact of a universal conversion from inefficient incandescent light bulbs to more efficient ones, such as compact fluorescent lights (CFLs), alone: it would avoid the equivalent of 136 coal-fired plants at a small fraction of the cost.
But how do we spur a massive light bulb conversion and other consumer energy savings efforts across the earth?
We need governments and their utilities to promote and support efficiency, just as the United States has begun to combine policy and regulation to push for more energy savings. One result is that the efficiency program budgets for just U.S. electric utilities more than doubled between 2007 and 2011, reaching almost $7 billion.
However, this has not been an easy adjustment. When there is a strong connection between utilities’ financial health and how much electricity and natural gas they sell, what incentive is there to enthusiastically adopt and support energy-savings programs that will reduce those sales?
This conflict-of-interest is not restricted to the for-profit utilities, because even publicly owned entities must be concerned about bond ratings and financial health. In the United States, such publicly owned utilities represent one-fourth of all electricity sales.
Therefore, alterations in the way countries regulate all their utilities will be necessary to inspire the energy efficiency efforts that will allow them to reduce the number of plants and the pollution-causing fossil fuels to power the ones that remain. The highest priorities are:
- Breaking the link between energy sales and financial health, ensuring that both for-profit and public utilities are able to cover their substantial fixed costs for providing service even as energy efficiency efforts decrease their sales. This is known as “decoupling.”
- Giving for-profit utilities the opportunity to share the societal gains that result when they perform well in improving efficiency. If earnings are available only for investing in power plants and transmission lines that is where management’s attention and resources inevitably will go in the long run.
In the U.S. and worldwide, utilities may well be the most important investors in a clean energy future, particularly as government budgets tighten. Utilities that do this well should end up more robust financially than those that ignore opportunities for cost-effective energy efficiency. Everyone involved in the Rio Summit should keep that principle firmly in mind as they look for climate solutions that can work for everyone.
More on decoupling
Most utilities, whether publicly or privately owned, operate under a system of price regulation that treats them like commodity distribution businesses whose principal rewards lie in boosting unit sales and reducing average unit costs.
Since both for-profit and nonprofit utilities recover most of their fixed costs of providing service through charges on electricity and natural gas use, increases or reductions in consumption will affect fixed cost recovery.
Under “decoupling,” a simple system of regular small adjustments in base rates either restores to the utility or gives back to customers the dollars that were under- or over-recovered as a result of fluctuations in energy sales. In systems with decoupling, these adjustments have been almost invisible in practice, averaging less than seven cents a day for electricity (up or down) and five cents a day for natural gas. Yet this is enough to correct for any disparities between the utility’s actual fixed cost recovery and the fixed-cost revenue requirements approved by utility regulators in setting rates, eliminating any incentive to promote higher energy use.