31 States Support Utilities' Energy Efficiency Investments

With 31 states now encouraging energy efficiency investments by electric utilities with supportive regulatory framework, the utilities'  efficiency program budgets rose by 27 percent last year to $6.9 billion, compared to 2010, says a report.  By 2025, it predicts that electric efficiency budgets will exceed $14 billion.

The report from Innovation Electricity Efficiency institute, which is part of the Edison Foundation, finds that more states are adopting policies that enable electric utilities to promote energy efficiency as a sustainable business. Since July 2012, 31 states now enable electric utilities to recover their fixed-cost investments in energy efficiency programs, up from 27 states. The report also notes that 28 states now have in place performance incentives for energy efficiency providers, up from 23 states. It finds that all states with ratepayer-funded electric efficiency programs have direct cost recovery of program expenditures.

This type of supportive regulatory framework helps utilities seamlessly integrate electric efficiency programs into their long-term financial and system planning, says IEE. It highlights three types of regulatory mechanisms that encourage utilities to give equal importance to efficiency programs as they do for investments in energy sources —

• Direct Cost Recovery is a mechanism for the recovery of costs related to the administration, implementation costs such as marketing and the actual cost of product rebates.
• Fixed Cost Recovery refers to decoupling and lost revenue adjustment mechanisms that enable the utility to get back the marginal revenue associated with fixed operating costs. Rate setting practices tie the recovery of fixed costs to volumetric consumption charges with rates set upon an assumed level of energy sales. The purpose of electric efficiency programs is to reduce the consumption of electricity — decoupling and lost revenue mechanisms allow for timely recovery of fixed costs.
• Performance Incentives  reward utilities for reaching certain electric efficiency program goals, and, in some cases, impose a penalty for performance below the agreed-upon goals. Performance incentives allow for utilities to earn a return on their investment in electric efficiency, typically similar to the return on supply-side investments.

In contrast, an Environmental Law article published in June says that utilities aren’t rewarded for adopting energy efficiency programs, and reforms are needed to make energy efficiency as attractive as renewables. The author Inara Scott, an assistant professor at Oregon State University, examines key differences between energy efficiency projects and renewable resources and outlines ways to increase the amount of energy utilities save each year through efficiency programs.

According to Scott, the current system actually discourages utilities from building programs to increase efficiency. Scott’s study makes four key recommendations: redesigning rate structures, setting hard targets, streamlining cost-effective tests and addressing market barriers.