Low carbon prices might not produce sufficient incentives for firms to innovate and reduce emissions in the long run. But relatively high carbon prices can be politically unacceptable and invite...
Duke's Fifth Fuel
Conservation investments benefit participants and non-participants alike
Americans once again are debating how to redirect consumers toward energy efficiency in the form of conservation, demand-side management (DSM) and renewables. In the past, such efforts mostly failed once high energy prices abated or Americans lost interest in conservation. Americans also seem unwilling to spend time and money on energy efficiency, despite no loss in quality and rather significant cost reductions.
Until recently, California was a notable exception to this declining interest in utility-sponsored conservation. California consumers use about 50 percent less electricity per person than the rest of the nation. The two political factors that make energy efficiency work for California are: 1) a political/consumer willingness to pay utilities to achieve strong energy-efficiency goals and targets ( e.g., 20 percent renewables in utility supply portfolios before 2015); and 2) acceptance of a “wires and pipes” public-goods charge to finance California’s green efforts and to provide opportunities for utility companies to earn additional income from energy efficiency as a utility service.
While California has been very successful, much of the nation has distanced itself from the state and its seeming refusal to consider more conventional supply-side alternatives. Regardless, California demonstrates that energy efficiency works and can be relied upon to satisfy consumer needs (see “ Mandating Demand Response ”). That said, other proposals like Duke’s “Save-a-Watt” plan that do not have the stigma of the California crisis are beginning to create momentum toward for-profit energy-efficiency programs. Duke’s proposal is contributing to the renewed national discourse on the need for utility-sponsored energy efficiency—and quantifying the external benefits of such a program demonstrates an attractive payoff for all utility customers.
Duke’s proposals could profoundly change the regulatory landscape for energy efficiency, environmental improvement, and power-station investment. The core concept underlying the Duke plan is to align shareholder and retail customer interests behind an expanded least-cost approach.
This contrasts significantly with historic approaches. In the past, when regulators attempted to expand conservation and DSM, their primary concern was preventing harm to non-participants. Additionally, regulators attempted to treat utility conservation as a new product that would replace traditional energy sales. This raised such questions as how the plan would be implemented, who would pay, and who would benefit. The answers are complex and often derailed regulatory support.
Moreover, utility investors often were given little or no consideration in terms of how they would earn a return on these programs. Two issues were problematic: How to price conservation products; and how to set a utility’s earnings.
The traditional regulatory approach based utility income entirely on the amount invested, not the value of