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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

broker,” making both spot and futures markets in saved electricity.

Third-party shared savings financing can give cheap power to industry without cross-subsidy: factories can finance savings by other customers, then buy back the saved kilowatt-hour at an arbitrated intermediate price (as is being tried in New Jersey). Shared savings financing is also simply a profitable venture, at which more than 11,000 energy service companies are currently succeeding in Europe. Under another exciting concept, a customer could sell the utility, as part of its resource plan, a covenant promising that his or her premises will never use more than x MWe. Such a covenant could even be resold, just as certificates of decrement of air pollution are now marketed and brokered under the Environmental Protection Agency’s “bubble concept.”

I assume here, conservatively, that utilities will follow a short-run avoided-cost criterion of buying all efficiency cheaper than operating the costliest marginal plant in service. This is simply the principle of economic dispatch: whenever efficiency beats thermal plants in the merit order, it should be dispatched first. Efficiency backs out the costliest plants first, reducing all customers’ bills just as a cheaper fuel contract would. The same fixed costs must be paid whether sales go up or down; if fixed costs are spread over smaller sales, electric rates may rise, but energy service bills will fall. Moreover, major savings are not achieved instantaneously, but over a period ordinarily comparable to the depreciation lifetime of power plants. If sales fall at the same rate at which net plant in-service depreciates, fixed charges per kWh sold will not change. In a practical case, doubled end-use efficiency could typically cut both electric bills and energy service bills in half while increasing the utility’s net for common (in absolute terms) by several-fold via halved operating costs. A utility should not fear reduced revenues, provided costs drop at least as fast; if they drop faster, absolute earnings will thereby increase.

If that basic criterion is followed — if utilities’ mission becomes, not selling more kilowatt-hours, but supplying, financing, or facilitating customers’ access to least-cost means of obtaining energy services — then utilities can once more become a declining cost industry, as they were before about 1970 — the good old days when regulators’ task was to allocate savings, not costs. As old, cheap hydropower comes to dominate supply of greatly reduced national demand, there will be enormous savings — ultimately over $50 billion per year — to allocate. Regulators can and should give a substantial portion of them to investors. Utility managers are far more likely to pursue least-cost investment strategies with vigor and imagination if they believe such behavior will gain a higher return. Regulators should therefore create and fulfill an expectation that sound, successful, entrepreneurial management which cuts effective operating costs will be amply rewarded.

Whatever direct financial incentives a utility offers should be:

  • across-the-board (not tied to any list of approved measures);
  • flexible (to elicit types of savings not anticipated);
  • open-ended (so that the more people save, the more they earn);
  • designed to reward people for saving