Perhaps you haven’t spent much time thinking about your local electric utility’s business model. Admittedly, it doesn’t come up much in casual conversation. On the other hand, for those of us who are trying to accelerate a transition to a clean energy economy, adapting the utility business model to serve the needs of our modern civilization is among the highest priorities.
Last week the American Council for an Energy Efficient Economy (ACEEE) weighed in on the subject with a white paper called, The Old Model Isn’t Working: Creating the Energy Utility for the 21st Century. http://www.aceee.org/white-paper/the-old-model-isnt-working In short, the paper points out that the traditional utility regulatory model rewards our electric companies for selling ever more electricity, and penalizes them for reducing sales volumes through energy efficiency . So, while energy efficiency could be used by utilities to make our electric system less costly, more reliable and more sustainable, we should not be surprised to see that utilities in states that have retained the traditional business model are generally reluctant to engage in aggressive efficiency efforts.
Nowhere is this more relevant than in the Midwest, where, after decades of ignoring efficiency, many electric and gas utilities are now required to ramp up their efforts to help their customers save energy. The results have been great so far. In 2010, Illinois electric utilities saved 600,000 MWh of electricity, avoiding more than $2.84 dollars in costs for every dollar spent to achieve the savings. Similar programs in Ohio and Michigan have been equally successful.
This shows that utilities can be very effective at helping residents and businesses become more efficient. But, as the savings targets get more aggressive over time, the financial penalties the utilities face as a result of lower sales that result from the programs will become a serious barrier to progress.
ACEEE endorses a three-pronged approach to changing the financial regulation governing utilities, so that their incentives are aligned with the critical public policy goal of making our homes and businesses as efficient as they can be. The three prongs include ensuring timely cost recovery for efficiency programs, providing financial incentives to reward successful efficiency efforts, and “decoupling” or removing the link between utility profits the volume of energy they sell. According to the ACEEE paper, 30 states have adopted some form of decoupling for at least one utility.
Rewarding utilities for building more power plants and selling more power might have made sense 100 years ago, when the objective was to build out an electric system to serve the nation. Today, we face vastly different challenges and we need our electric utilities to be partners in responding to those challenges. A leaner, smarter, more reliable, more affordable and more sustainable electric system is within our grasp, but as ACEEE points out, the traditional utility business model points in the wrong direction.