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How Should Regulators Encourage Energy Efficiency? | Energy Efficiency and Conservation

Finding the right regulatory framework to reward investor-owned utilities for energy efficiency has been a holy grail in the electricity business.  In many areas of the world, utility revenue is still tied to electricity sales.  In this situation, why would investor-owned utilities want their customers to be more efficient and use less electricity?  It’s like expecting McDonald’s to sell less food or Apple to sell fewer iPods.

Decoupling is the logical answer for many in the industry.  In decoupled states, utility revenue does not depend on the amount of electricity sales.  For example, investor-owned utilities in California are rewarded for energy efficiency and various other metrics (i.e. reliability, customer satisfaction).  None of these metrics are tied to the amount of electricity sales.  If California utilities sell more electricity than expected, that extra revenue goes back to the customer in the form of lower rates.

This regulatory framework has been quite successful in California.  It is the only state in the country to keep per capita energy use constant over the past few decades.  Even as new technologies like computers and plasma televisions have become available, energy use for the average Californian has not changed.  Decoupling has played a key role in accomplishing this feat.

One drawback with this framework is that it takes a lot of time and effort to determine the impact of utility efforts on the energy efficiency of its customers.  To reach an agreement, the utilities and the California Public Utilities Commission (CPUC) carry out lengthily studies.  Not surprisingly, the utilities often claim more credit for energy efficiency improvements than the CPUC is willing to give.  Consider this excerpt from a May 4, 2010 Reuters article:

“[California investor-owned utilities] achieved only 70 percent of the targeted energy savings in the 2006-2008 period, according to an independent consumer advocacy division of the CPUC, the state’s energy regulator.

In stark contrast, the utilities had reported they achieved 160 percent of their goals, the commission’s Division of Ratepayer Advocates (DRA) said, adding that the investor-owned utilities should not be entitled to any shareholder bonus payments from the CPUC.”

The process is a bit contentious because the numbers are so far apart and much deliberation will ensue in order to arrive at an agreement.  It is also a bit cumbersome because of all the studies and deliberation that must be done.  Why do you think the utilities and CPUC are still discussing energy efficiency in the 2006-2008 time period?

This article is meant to raise questions and start discussion about regulatory frameworks in general.  There are pros and cons of every system in existence today, and perhaps no holy grail out there.

What do you think?  How should regulators encourage energy efficiency?  Is there an ideal system?  How do regulators encourage energy efficiency in your state or country?  What are the pros and cons of those systems?

I am particularly interested in the latter two questions because I am most familiar with the California system and would like to learn more about other parts of the world.

I would like to thank the Prenova Energy Blog for the link to the Reuters article.