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The Color of Money

Wall Street sees “green” in demand response, energy efficiency, and distributed generation. Will the industry step up?

Fortnightly Magazine - October 2007

area of energy efficiency and distributed generation, to reduce the risk of non-recovery of earnings on existing assets associated with EE and DG options, regulators will have to provide fixed costs and revenue recovery that is independent from sales. In the area of demand response, implementing innovative DR solutions will require new technologies and advanced metering infrastructure (AMI). Regulatory support for prudent infrastructure investments will be required to achieve sustainability. Moreover, legislators and regulators will have to provide guidance to address the heightened concern regarding energy costs, security and reliability issues, and environmental protection. Aligning regulatory and legislative policies will reduce confusion and improve the speed of implementation. That way, establishing clear rules will reduce the financial risk for investors and attract capital. In addition, new regulatory frameworks will be required as a result of these new options, including carbon cap and trading, and carbon and solar markets—just to mention a few. Regulators and legislators will be the key to establishing an effective platform so that utilities can execute and deliver value.

There are new risks associated with DR, EE, and DG options, such as price increases to support infrastructure investment, experiments with new products and services ( e.g., real time and critical peak pricing), investment in innovative technologies ( e.g., AMI and communications protocol), and the use of market-based solutions ( e.g., solutions where customers have a participation choice) to meet projected firm load growth. The regulator will play a key role in determining how much risk the consumer is willing and able to accept. That risk level will be critical in determining whether DR, EE, or alternative DG options become sustainable or just remain programs like they were in the late 1980s. The risk level also will determine the amount of innovation introduced into the market through a regulatory environment.

Regulators should be interested in supporting DR, EE, and alternative DG options because they provide value to a utility’s customers. This value comes from giving customers a choice in the way they consume and manage their energy, reducing their energy bill and providing customers with more environmentally friendly products. These are all very important attributes in this time of rising energy prices, concerns about resource adequacy, and climate change. But the first hurdle to overcome to achieve sustainability for DR, EE, and alternative DG options is to create a level playing field for the consideration of both innovative and traditional investments. This will attract capital and ensure the proper allocation of capital among these options.

The Way Forward

How does the industry create a level playing field for green investments? Decoupling earnings on existing assets from sales levels to reduce the risk associated with future earnings of EE and DG activities, that reduce sales, is one idea.

For utility employees and customers, it is somewhat confusing to have a business that produces energy, and sends messages to reduce the use of energy. This confusion comes about because customers normally associate the sale of a product with increased earnings. This is a good thing. Decoupling provides clarity in