The Evidence Is In: Decoupling Spurs Energy Efficiency Investment

With opportunities abounding to cut energy waste, reduce pollution and save consumers money, we find ourselves asking now more than ever: should we continue the old model of tying a utility's financial health to increased electricity sales?

Not at a time when power plants are the largest source of carbon pollution, when energy efficiency holds huge untapped potential for cutting energy use and when dangerous climate change is an urgent threat. Consequently, utilities and their regulators are increasingly looking to a rate mechanism known as "decoupling" to remove the disincentive for utilities to cut energy use.

The good news is that it's working.

This month in Electricity Journal, NRDC and Fresh Energy co-authored a paper that expands upon a credible and extensive body of research finding that, along with energy efficiency resource standards and performance incentives, decoupling elevates efficiency up the ladder of utility priorities. In reviewing data across five utilities in California, Idaho and Oregon, we identified a link between decoupling policies and elevated energy efficiency savings levels and program investment.

"The traditional utility business model and the regulatory system that supports it are in need of realignment,'' my colleague Will Nissen, program director with Fresh Energy, a Minnesota-based nonprofit, and I wrote in examining the success of decoupling in driving utilities' investment in energy efficiency.

"Rate mechanisms – such as decoupling – are more critical than ever to square utility interests with state and federal energy and environmental policies, changing customer opportunities and expectations, and the need to maintain and modernize our electric grid in a way that supports reliability, affordability, innovation, and a low-carbon future.''

While revenue decoupling can often be seen as an arcane subject, it offers an exciting opportunity to promote utility-run energy efficiency programs like insulating homes and offering rebates for purchase of energy-efficient appliances or more efficient light bulbs.  

Energy efficiency has gained urgency because it is widely recognized as the cheapest and fastest way to combat climate change and strengthen the grid. It also is a proven way to save consumers significant amounts of money on their energy bills.

Decoupling has drawn increased interest as a way to cut energy use and costs, making it more critical to better understand its impact on power companies and their customers. As of January, 2016, 23 states have implemented gas decoupling and four are considering it. Electric decoupling has been implemented in 15 states and is under consideration in eight more.

States that have implemented gas and/or electric decoupling as of January 2016.
Source: Natural Resources Defense Council

The old business model serves as disincentive for a more efficient grid

You may be wondering at this point: just what is decoupling?

Utilities under the traditional business model make more money by selling more electricity. This presents an inherent conflict with energy conservation efforts, as our article points out, and it deprives customers of valuable energy and cost savings.

This is where decoupling comes in. It severs the link between a utility's profits and the amount of electricity it sells, thereby removing the disincentive for power companies to help their customers become more energy efficient.  It allows utilities to even out the ups and downs in revenue, using modest rate reconciliations every year to compensate for under- or over-collection of fixed costs during the previous year.

As our article notes, decoupling renders utilities "indifferent to fluctuations in sales, freeing them to run more effective programs that yield deep energy savings.'' 

This means that when their customers do the right thing and use less energy, utilities can still recover the amount of money approved by regulators to cover grid maintenance and modernization.

"While decoupling does not guarantee that a utility will conserve more energy, it removes the structural disincentive to do so,'' as we pointed out.

Study of five utilities in three states confirms the significant benefits 

The current research was prompted by questions raised about decoupling during our work in Minnesota last year when the state's largest electric utility, Xcel Energy, with the support of NRDC and Fresh Energy, implemented Minnesota's first electric decoupling mechanism.

To better understand the link between decoupling and utility spending on energy-efficiency programs and energy savings, we studied five utilities in three states --- California, Oregon, and Idaho. In each instance, the utility significantly increased both its efficiency program spending and its energy savings in the years following adoption of decoupling.

In California, with a number of policies in place to promote energy efficiency, the average annual expenditures for efficiency programs increased by up to 207 percent (San Diego Gas & Electric) and average annual program savings ramped up by up to 80 percent (Southern California Edison) after electric decoupling was put in place in 2004 for all major investor-owned utilities.

In Oregon, average annual program expenditures in Portland General Electric's territory nearly quadrupled, and average annual program savings nearly doubled following adoption of decoupling.

And in Idaho, Idaho Power increased its annual average energy efficiency spending by 425 percent and its annual average efficiency savings by 438 percent since decoupling was put in place in 2007. 

Analysis of utility savings and spending performance across five utilities in California, Oregon, and Idaho.
Source: Fresh Energy (Electricity Journal)

As the electric industry continues to rapidly transform, it is crucial for utilities, regulators, and other stakeholders to evaluate ways to harmonize the business model with that transformation. The flat, and in some cases declining, demand for utility-delivered energy necessitates policies like decoupling that can remove the traditional disincentive for utilities to invest in energy efficiency.

The significant increase in energy efficiency program performance across five utilities that NRDC and Fresh Energy uncovered in our research confirms that decoupling—while not the only strategy for promoting energy efficiency--can be an effective piece of the efficiency puzzle and a worthy mechanism to help accommodate the rapidly transforming utility sector.  

About the Authors

Samantha Williams

Director, Midwest Region, Climate & Clean Energy Program

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