Glad Tidings for Utilities: Energy Efficiency Programs and Utility Profits Can Go Hand in Hand

Dec. 12, 2013
Does energy efficiency hamper utility profits? Not necessarily. ACEEE found that utilities with strong energy efficiency programs can perform well financially when the right regulatory mechanisms are in place. Dan York, ACEEE Utilities Program Director, explains here.

Dan York, ACEEE

(This post originally appeared on the ACEEE Blog.) One of the foundations of ACEEE’s work is that energy efficiency has proven to be typically the cheapest, cleanest energy resource available. Most households, businesses and industries have existing opportunities for a variety of investments in energy-efficient technologies that yield strong “pay-backs”—money saved by saving energy. But for a variety of reasons individual energy consumers do not make all the improvements that would yield such positive financial returns. This is where utility energy efficiency programs come in. Such programs arose over 30 years ago in order to help utilities and other groups work with customers to encourage them to take the actions necessary to save energy through improved energy efficiency, often by providing financial incentives and information.

As much as such improvements can provide positive financial returns to utility customers, the utilities themselves face some very real financial barriers to offering customer energy efficiency programs. A basic premise of utility rate design is that rates need to be structured to allow utilities to be profitable businesses capable of attracting and rewarding investors. However, the rate structures in place for the vast majority of utilities today place customer energy efficiency programs directly at odds with utility business objectives. In other words, most utilities earn money through selling more energy and investing in new assets to produce or deliver that energy. Reducing energy use through improving customer energy efficiency reduces utility revenues and, in turn, utility profits. Also, money invested by utilities in energy efficiency is money unavailable for alternative utility investments that can yield positive financial returns, such as in new power plants or transmission lines.

The inherent conflict between a utility’s business objectives and the objectives of customer energy efficiency programs has long been recognized. Alternative regulatory mechanisms can be implemented that not only make utilities indifferent to the amount of energy they sell, but that also can provide positive earnings from their customer energy efficiency programs. Alternative regulatory mechanisms such as “decoupling,” (separating an utility’s revenues from the amount of energy it sells to customers) are in place in a growing number of states.

Since the premise of these alternative regulatory mechanisms is that they can protect utilities from suffering financial harm from energy efficiency programs, ACEEE examined the experiences of a selected group of utilities to find out how well such regulations have worked. The utilities we selected all have relatively large-scale energy efficiency programs that serve all types of customers. We interviewed utility program managers and executives as well as clean-energy advocates and regulators. We also examined the financial performance of these utilities as represented by their stock performance.

What we found is that these utilities all have performed well financially. We found no evidence to suggest that energy efficiency programs have had negative effects on shareholder returns. While addressing utility business concerns with energy efficiency programs is clearly important, doing so is really just one part of comprehensive policies and regulations that support customer energy efficiency programs. Other keys to successful energy efficiency programs include:

  • Strong commitments to energy efficiency by regulators and utilities,
  • Ongoing collaboration among utilities and stakeholders,
  • Shared sense of purpose and common goals, and
  • Willingness to experiment and learn from experiences.

This time of year bustles with business activity. While we may not associate our utilities with Black-Friday specials and holiday promotions, they are businesses as much as Amazon or Walmart are. Our research demonstrates that we can structure business models for utilities that enable them to please their shareholders at the same time they are helping their customers save money through energy efficiency. This is an outcome that even Scrooge would appreciate.

Dan York is the Utilities Program Director at the American Council for an Energy-Efficient Economy.

About the Author

Kevin Normandeau | Publisher

Kevin is a veteran of the publishing industry having worked for brands like PC World, AOL, Network World, Data Center Knowledge and other business to business sites. He focuses on industry trends in the energy efficiency industry.