Price-Responsive demand, EPA regulations, and merger policy will be on the agenda for the coming year as the Federal Energy Regulatory Commission works its way through the list of key cases that...
Inclining Toward Efficiency
Is electricity price-elastic enough for rate designs to matter?
face the same problems that plagued the first-generation programs. The first problem is inadequate and delayed recovery of DSM expenditures. This can be redressed through better regulatory treatment of DSM spending. The second problem is the adverse effect of falling sales on utility earnings. This can be overcome by decoupling utility earnings from sales. The third problem is the lack of an incentive for engaging in what many on Wall Street find to be a counter-intuitive activity—reducing sales. This can be overcome by providing utility owners a small share of the net societal benefits created by DSM, as California has done, or by providing them a large share of the gross avoided costs, as envisioned in Duke Energy’s Save-a-Watt program.
Many experts who have spoken at national conferences during the past year foresee a surge of DSM programs. They are of the opinion that one quarter to one half of the 30-percent growth in energy consumption the U.S. Energy Information Administration predicts will occur between 2008 and 2030 can be offset by utility energy-efficiency programs. This will require spending as much as 5 percent of utility revenues on DSM programs by 2030. But is that the only way of achieving energy efficiency?
A multi-faceted, portfolio approach likely will be more effective in promoting energy efficiency than will any single avenue. In the past, much DSM activity was centered on utility-funded programs that provided cash rebates to participating customers to reduce the incremental cost of buying expensive equipment. In some cases, customers also were provided zero- or low-interest financing. For a variety of reasons, DSM programs failed to reach all eligible customers and even the best programs failed to reach the vast majority. This created cross-subsidies from non-participants to participants that invariably became quite contentious. Arguably cross-subsidies were among the most important reasons the DSM industry collapsed in the mid 1990s.
A portfolio approach might prevent a recurrence of these problems and yield a least-cost solution. Such an approach may involve five lines of attack:
• DSM: Rebates and low-interest financing for buying efficient equipment (the traditional approach);
• Information: Information about efficient usage accessible to all customers through multiple channels such as the mass media, talk shows, kiosks, in-home displays and Web sites;
• Mandates: Governmental codes and standards set at the local, state and federal levels for efficient residential and commercial appliances, homes and commercial buildings and industrial processes;
• Technologies: Efficient technologies and building designs coming to fruition via research, development and commercialization; and
• Rate design : Intelligent rate designs that provide an incentive to use energy wisely.
In the fifth category, dynamic-pricing options are receiving widespread consideration today, especially as more and more utilities decide to pursue advanced metering infrastructure (AMI) and find difficulty justifying all the investment costs with operational benefits. 5 Dynamic pricing lowers peak-period demands and avoids expensive peaking capacity, which otherwise sits idle for all but a few hundred hours a year. One recent study quantified at $31 billion the national savings that would accrue from just a 5-percent reduction