Earning on Conservation

Deck: 

An earnings-equivalence model helps utilities and regulators calculate appropriate returns for conservation investments.

Fortnightly Magazine - December 2007
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Traditionally, utility shareholders and their utilities have a bias toward supply-side resources as opposed to demand-side reduction programs. The reason for this bias is obvious—supply-side resources, such as new production facilities, add to the utility’s rate base, generating additional earnings.

Conversely, decreased sales (from energy efficiency) reduce the need for supply-side assets, thereby diminishing the utility’s earnings opportunities and possibly leading to under-earnings between rate cases. Furthermore, reductions in demand may result in excess supply-side resources that are likely to be excluded from rate base because they do not meet the “used and useful” standard.

Consequently, energy utilities place a great deal of emphasis on sales or throughput. In short, increased sales increase the need for supply-side assets and more earnings.

However, there is a solution: Allow energy utilities to benefit from earnings rewards for demand-side reduction. From an earnings perspective, such a solution would place demand-side alternatives on par with supply-side projects.

The DOE recently recommended this solution in a March 2007 report.1 However, the department did not offer a methodology for calculating a supply-side earnings equivalent for a demand-side energy efficiency program. Such a methodology will help utilities develop effective conservation incentive programs.

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