More States Leading Utilities to Energy Efficiency–And Controversy Over Funding Them

State Energy Efficiency Programs Grow, Says Lisa Wood, IEE Executive Director

More state regulators are backing energy efficiency, and the amount of money flowing into state-mandated utility budgets is growing.  What’s more, we’re seeing more states adopt three mechanisms ensuring utilities recover the costs of the programs, says a new report from the Institute for Electric Efficiency (IEE).

But with the cost-recovery mechanisms comes controversy, says Lisa Wood, IEE’s executive director.

Utility company energy-efficiency budgets in 2012 totaled $6.9 billion—mostly due to state mandates such as renewable portfolio standards that call for efficiency. That’s a 27 percent increase above 2010 levels. By 2025, IEE predicts that energy efficiency budgets will exceed $14 billion.

In July 2013, 31 states had some type of fixed-cost recovery mechanism to help utilities recover the fixed costs associated with their investments in energy efficiency programs. That’s up from 27 states in 2012, says the report, “2013 State Electric Efficiency Regulatory Frameworks.”

It’s all due to regulators’ interest in getting more energy efficiency on the ground through regulatory measures, says Wood. As a result of state action, utilities are implementing more programs, using three important mechanisms to pay for them.

That’s where the controversy comes in. It’s common for stakeholders involved in such programs to haggle over how to recover the costs.

The three mechanisms include direct cost recovery, which provides recovery for expenditures by utilities. The second is fixed cost recovery, which makes utilities whole for their fixed costs, often involving paying the utilities for lost revenues. A third mechanism involves performance incentives, which reward the utility for meeting energy efficiency goals.

These three cost-recovery mechanisms are critical in order for utilities to treat energy efficiency in the same way they treat supply-side investments, from a financial perspective, Wood says. But it’s not always easy to prove that energy savings comes from a utility program.

“Let’s say in one state, there’s one utility doing all the programs and they achieved 1,000 mWh. Is all of that due to utility efforts? That’s the attribution question. Some people say some would have done that anyway,” Wood explains. “There’s a lot of discussion around attribution, a lot of tension around this.”

All states with ratepayer-funded EE programs have direct-cost recovery of program expenditures, the report found. Since its last update in July 2012, IEE found that 31 states have some type of fixed-cost recovery mechanism to align utility fixed costs with investments in energy-efficiency programs, up from 27 states in 2012. As for performance incentives, 28 states have them in place, up from 23 states in 2012.

This means that more utilities are treating energy efficiency in the same way they’d treat supply-side investments, from a financial point of view. However, this big step forward comes with its downside: The more things change, the more they stay the same, from a haggling-over-costs point of view.