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Saving Gigabucks with Negawatts (1985)

In an age of costly electricity and cheap efficiency, smart utilities will sell less electricity and more efficiency.

Fortnightly Magazine - March 21, 1985

is equally vital. Consider the electricity needed to run, say, refrigerators in 2000. The number of refrigerators is only slightly less certain than population, since the market is highly saturated. But a utility which does not know whether its customers will buy 1,500- or 25-kWh-per-year refrigerators (both are now available) must assume the worst and buy extra, very costly capacity as “insurance.” Programs like appliance efficiency rebates, or (at no cost to the utility) federal or state appliance standards, at least knock the worst refrigerators out of the market and at best actively encourage customers to buy very efficient models. The more they do so — and utility experience now makes their behavior under such incentives fairly predictable — the more potential demand is eliminated and the less hedge must be bought against it.

Reducing the cost of hedging against remaining uncertainty requires utilities to acquire options which are small, modular, and incremental, and which have short lead times, relatively low capital intensity, and high velocity of cash flow. These keys to planning flexibility — buying options which are small, fast, and cheap — are now endorsed by every successful utility manager. Improved end-use efficiency meets these criteria best; central stations, worst; cogeneration and most dispersed renewable, in between (and better than combustion turbines).

There are many ways in which a utility can encourage and enable its customers to invest in efficiency on their side of the meter: information, example, targeted education of key groups, purging of institutional barriers, truthful prices, economic incentives, direct financing, and mechanisms for making a market in saved electricity. The appropriate blend and details of each of these instruments will be unique to each utility. I shall discuss here only the last three of them — the financial and market measures a utility can use — because as long as it is cheaper to save electricity than to make it, both utilities and ratepayers can benefit from properly structured utility financial participation in efficiency. After all, a kilowatt-hour saved is just like a kilowatt-hour generated, only cheaper, and can be resold to someone else, so they should be treated alike: Utilities should dispatch negative loads, and aggressively market negawatts, because they are thereby acquiring the cheapest resources for their system and helping their customers get the cheapest energy services.

Many smart utility managers are now using innovative financing concepts. Loans for saving electricity are now commonplace: Since I suggested them in 1976-’77, utilities with over half of national generating capacity have begun making them. Few such loans are well structured: Most are restricted to a list of approved measures (a list which is incomplete and usually becomes obsolete before the ink is dry), have a fixed and generally short repayment period, and bear low or zero interest requiring cross-subsidy. Nonetheless, the better loan programs, even though they also tend to promote obsolete technologies, have saved large amounts of electricity at about 1 to 2 cents per kWh. An even better system — full financing (gifts rather than loans) is preferred by some utilities, especially in the