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.
Renewable energy and energy efficiency partnership (reeep) has a great study on Sharing Local and State Successes in energy efficiency and renewable energy from the united State Compendium of Best Practices.
I’m in the Sustainable building arena and very familiar with energy efficiency methods.
I like Vermont’s efficiency which is a statewide energy efficiency
utility created with Public benefit funds. In 2007 and 2008, the projected underlying load growth was exceeded by gains in energy efficiency—in
other words, the state of Vermont achieved negative load growth. (see report)
And, I like Seattle’s Energy Code DPD code Implementation the result of Seattle’s code implementation process is that the city has instilled in its building industry community a culture of acceptance of the energy code
requirements and enforcement. Unlike other cities, where the industry may get away with not complying with aspects for code, they were not adequately proactively educating themselves on the requirements and enforcement, in Seattle the construction industry knows that they must comply with the energy code. From the beginning stages until the end. DPD staff works with the builders and contractors to assure that their buildings comply with the Sec.
When it doesn’t benefit certain builders especially the “Master Builders Association” or costs too much, they will fight it all the way! It has to be backed by policy and enforced.
My above post was mostly how I felt about regulation and forcing individuals to conserve. This one is about one of my pet peeves – AIR CONDITIONERS.
Air conditioners and heat pumps are wonderful; they make you comfortable and can save tons of money if you purchase an energy efficient model. So what don’t I like?
The refrigeration industry seems to living in the stone age in the U.S. and run by CEO’s and CFO’s who seem to care less about the environment. If they did, they would change the way they were doing business.
The Federal government passed legislation about 3/4 years ago that set the minimum efficiency level at 13 SEER [a higher SEER # is better]. The industry cried and wined like a bunch of babies, you are forcing us out of business. Two weeks after the law went into effect the industry introduced 15 SEER units and some companies were well on their way to 18 SEER units.
I hate to say this, but in Europe and Asia, 20+ SEER units have been common place for years and yet we are still selling the American people the 13, 14 and 15 SEER junk.
Every units has the same components. A compressor, and evaporator and a condenser, some valves and wiring. This is no longer rocket science. For the same 3 ton unit you can pay anywhere from $1000-3000.00 depending on name brand and efficiency you desire. However the cost difference to manufacturers is probably about $200 dollars.
EVERY manufacturer in the U.S. know how to build an Inverter style unit today – heck most of the compressors come from China. These inverter style units are currently about 20-23 SEER. The only real change is a different type of compressor and a printed circuit board.
Where is government regulation when you need it. We should not even be building 13, 14, or 15 SEER junk. If we were serious about conservation the only units you could buy would be 20+ SEER inverter units.
Bottom line is this – WE ARE NOT SERIOUS ABOUT CONSERVATION IN THE U.S.
Also posted on Renewable Energy . com
I guess the best way to start this post is to tell everyone I worked for a public utility in California before retiring to Arizona – we love the desert. There is a considerable difference between the two states.
In CA you have tiered rates – a flat rate in AZ
In CA you have a very high delivery charge – in AZ it is variable but only about $10/month
In CA my son HATES to run his AC – in AZ, not so much.
So these are just a few of the differences. I guess if you live in CA you are motivated by cost to conserve. If you live in AZ it is still about the money because we use more electricity in the summer but almost nothing in the winter.
My son live in CA and has an electric bill of about $140.00/mo for a family of 4 living in an all electric home.
My electric bill for my all electric home in AZ is $120/mo on a level pay plan. Not a big difference is it? My son is in the process of replacing his single pane windows with Low E dual pane and so am I. I just added more insulation to my attic and he is planning to next year.
I am just guessing, but we are probably pretty typical American families. I am of the belief that if you try to regulate something some people will fight it. If incentives are provided more adopt it. I would recommend forgetting more mandates or artificially raising rates to encourage HOMEOWNERS to conservation.
Conservation is all about the money in my not so humble opinion. I can talk all day long about the environmental benefits of conservation but if it won’t pay for itself in a reasonable time period it just isn’t going to happen. Regulation, penalties, rate increases, carbon caps and trading credits are all negative incentives to most Americans.
If you want people to conserve, make whatever technology you pick cost effective and affordable and people will respond. Of course a little more LEADERSHIP from Washington wouldn’t hurt either.
One of my biggest gripes is below.
Tom G.
The gap between what the CA utiltiies reported for savings and what the CPUC found for savings is not uncommon – this is why it is a good idea to have a 3rd party auditing the reporting. I think energy efficiency programs work better when the utility is not the one managing/reporting on their own progress.
On the implementation side, I’d like to make a technical comparison. Memory upgrades for computers used to be challenging work. Now you can go to the website of your PC manufacturer, plug in your make and model, and they give you choices of what memory you can buy for an upgrade. I’d like to see the US, or any country, get that good at energy efficiency. We’re there with lightbulbs and we’ve got so much more to cover. I’ve been managing an energy efficiency retrofit at a business. We identified gear that uses alot of kilowatt hours and it took months to find a replacement solution. If we take that example and include the labor/effort of finding the solution within the payback calculation, there is no payback. (Ouch !) How about we incent the utilities to make energy efficiency solutions as easy to come by as the memory upgrades are?
I also observe in the US that people use electricity in such a commonplace way they don’t think about where the electricity came from (ie is my power source nuclear, or coal, or something else?). If we can people to think about that aspect a bit more (ie when you turn on the lights, you’re touching West Virgina’s coal, and towns/mountains are going missing in that state) would we see other changes in electrical consumption/behavior and regulation?
There are two sides to every transaction. Lowering rates may create disincentives for utilities to sell more, but lower rates incents customers to buy more. In my analysis, since utilities are common carriers, obligated to take on all comers, the bigger driver in the transaction is the customer. So why not let utilities make obsene profits. That’s the solution. Well no one will accept that. The real solution is to get the government out of the way. When energy efficiency truely becomes cost effective in reducing a customer’s bill, the free market forces will cause the customer to implement the energy efficiency measures. Until such time, destorting markets is not the solution.
Encouraging depends on the place you are. As electric cars need to be charged, there is a potential to sell more electricity. And if those batteries can only be charged at off-peak hours the utilities do have a great way of balancing load, shifting up the load (and efficiency) of their base-load power plants.
If electric companies are rewarded for selling saving lights (or give it away to new customers), many suppliers of green technology do have an excellent new channel to promote their products.
In the Netherlands saving packages (light bulbs mainly) are offered by some of the utilities for new customers. Sure they have some deal with the producers of those products. For other measurement I do have suggestions but I am almost sure those can not or will not be executed: the first 10.000 kWh used has an extra tax. Usage above is free from that tax. Govrnment could remove that limit, but in return offer a payback to those customers who can save more than the target in energy savings. Utilities do know the usage record of each and everyone for a period of 5 years, so early adopters can be rewarded as well by checking their efforts in savings for the last 5 years. The tax money is to be collected by the distributors which still are the same ones as the generators.
Ideal system. One with electrical storage in each and every house, be it an electrical (second shopping) card, be it a reflow battery. With electronics to be charged at the cheap-rate hours or at the low-use hours of the base plants.
Energy Conservation is still in the nascent stage in India. Although the Government has realized its importance the Corporates are not evincing much interest.
The challenges faced in implementation of DSM Projects are many -
1. Lack of Organized Regulatory System.
2. Lack of Faith / Trust.
3. Lack of Interest due to self-financing.
Coming back to the topic., Regulation is indeed important. For success of EE & EC Projects some of the steps that could be taken (some in place) are -
a. Mandatory Energy Audits for all Industries and Commercial Establishments – once every 2 years or so.
b. Appropriate Financing mechanism with well-defined nodal agencies supporting the cause.
c. Incentives and Subsidies for Business undertaking regular audits and investing in DSM Projects.
d. Inviting bids for investment and execution of certain DSM Projects by Regulators to set an example for others to follow.
e. Introduction of Certificates like CERs at local and national level which could be traded in open exchanges.
f. Grading of existing Industrial Plants and Commercial Establishments to improve credibility.
g. Mandatory and Strict guidelines for new projects in Construction to follow Green Building Principles.