Making the Utility Business Case for Energy Efficiency

Transcription

1 Making the Utility Business Case for Energy Efficiency Dan York, Ph.D., Fellow American Council for an Energy-Efficient Economy

2 The American Council for an Energy- Efficient Economy (ACEEE) ACEEE is a 501(c)(3) nonprofit that acts as a catalyst to advance energy efficiency policies, programs, technologies, investments, & behaviors 50 staff; based in Washington, D.C. Focus on end-use efficiency in industry, buildings, & transportation Other research in economic analysis; behavior; energy efficiency programs; & national, state, & local policy Funding: Foundation Grants (52%) Contract Work & Gov t. Grants (20%) Conferences & Publications (20%) Contributions & Other (8%)

3 The fundamental problem with traditional utility regulation and energy efficiency: It s really a growth model for raising capital and building the electric power system we have in place. 3

4 Financial disincentives for energy efficiency under traditional regulation Program costs: if not recovered, are financial losses Throughput incentive: energy saved by programs doesn t reduce nearterm fixed costs of service Lack of return: money spent on EE programs doesn t provide financial returns to investors

5 Overcoming these barriers: 3 Legs of the financial stool for utility EE programs to fix the business model 1. Cost recovery of program costs through rate structure or designated fees 2. Addressing throughput incentive by revenue decoupling (preferred) or other mechanisms, such as lost-revenue adjustment mechanisms (LRAM) 3. Providing an opportunity to earn on energy efficiency investments 5

6 As energy efficiency goals and budgets increase, there is new attention to developing and applying new business models for utilities: The inherent conflicts between utility financial interests and energy efficiency program objectives become more pronounced; financial disincentives become greater. 6

7 $ million Annual EE Program Spending

8 Regulatory/utility business framework is key to support and sustain utility energy efficiency programs 17 states have revenue decoupling in place for at least one electric utility. 21 states have it in place for at least one natural gas utility. 27 states have performance incentives established for energy efficiency programs (electric or natural gas). Additional states have lost revenue adjustment mechanisms (LRAM) or similar in place: 18 (+1 pending) for electric; 16 for natural gas. Program cost recovery is nearly universal; only 5 states do not have it in place (AK, NE, ND, TN, WV) 8

9 Supportive regulations for EE in the Midwest (from 2013 State Scorecard) State Decoupling or LRAM? Performance Incentives? Electric Nat Gas Electric Nat Gas Illinois No Yes No No Indiana Yes Yes Yes No Iowa No No No No Kansas Yes No No No Kentucky Yes Yes Yes Yes Michigan No Yes Yes Yes Minnesota No (proposed) Yes Yes Yes Missouri Yes Yes Yes Yes Nebraska No No No No North Dakota No Yes No No Ohio Yes Yes Yes Yes South Dakota Yes Yes Yes Yes Wisconsin Yes Yes Yes Yes 9

10 Case studies: How do utilities fare under new business models? ACEEE selected 6 utilities with relatively large, robust energy efficiency program portfolios. We examined financial performance and energy efficiency program trends. We also interviewed utility managers and executives, as well as key stakeholders (including regulators). 10

11 6 utilities selected for this research National Grid, Massachusetts Northeast Utilities, Connecticut Xcel Energy-Minnesota Xcel Energy-Colorado DTE Energy, Michigan Idaho Power Company, Idaho Each has a unique regulatory structure; not all 3 legs of the financial stool are in place. 11

12 Financial Performance 12

13 While financial performance looks good: There are too many other factors and dynamics at play in utility financial markets to be able to isolate and attribute specific regulations to performance. However: We found no evidence that energy efficiency programs have had negative effects on shareholder value. Policies that support robust investment in energy efficiency do appear to help protect utility investors from financial harm. 13

14 Interviews revealed common characteristics of successful energy efficiency programs: Strong commitments to energy efficiency by regulators and utilities Supportive utility regulation addressing utility financial objectives Ongoing collaboration among utilities and stakeholders A shared sense of purpose and common goals A willingness to experiment and learn from experience 14

15 Recommendations For utilities to push for higher energy savings through energy efficiency programs, regulators will have to establish frameworks that align savings targets with financial goals. While the best business model addresses 3 legs of the financial stool, significant success can be achieved with a partial model in place. 15

16 Number of Decoupling Adjustments Towards new business models: additional notes Residential/All Commercial Other Total Total Utility Decoupling Adjustment Rate Impacts Refunds Surcharges Over -5-4 to -5-3 to -4-2 to -3-1 to -2 0 to -1 0 to 1 1 to 2 2 to 3 3 to 4 4 to 5 Over 5 0 Percentage Rate Impacts Source: Pamela Morgan, A Decade of Decoupling for US Energy Utilities: Rate Impacts, Designs and Observations. May Graceful Systems LLC 16 Available at:

17 Mechanisms to align utility financial and energy efficiency program objectives do make a difference EE program spending per capita States with States with Source: ACEEE Research Report U111: Carrots for Utilities: Providing Financial Returns for Utility Investments in Energy Efficiency 17

18 So while regulatory changes can seem small and slow, the cumulative impact can be large. 18

19 For more information: Making the Business Case for Energy Efficiency: Case Studies of Supportive Utility Regulation Dan York, Martin Kushler, Sara Hayes, Stephanie Sienkowski, and Casey Bell, ACEEE, and Steve Kihm, Energy Center of Wisconsin December 2013 Report Number U

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