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Efficiency Close-Up

Setting the stage for conservation.

Fortnightly Magazine - July 2010

through 2035, requiring 250 GW of additional generating capacity during the period, after accounting for the expected retirement of 45 GW of existing capacity.

To complement its efficiency programs, the industry already has begun building a full suite of climate-friendly technologies to ensure a reliable, affordable, and environmentally-sensitive electricity supply in the future. These technologies include renewables, advanced coal and new nuclear, and carbon capture and storage.

Last year in fact, non-hydro renewables––although still small in an absolute sense by contributing 3.6 percent of total generation last year––accounted for almost two-thirds of new power plant announcements in 2009, according to the Energy Information Administration. And for the second year in a row, the industry last year added about as much renewable energy capacity as it did natural gas capacity.

New Regulatory Models

The path for the industry to do more with energy efficiency starts with outreach to state regulators. Across the country, electric utilities and regulators are building a framework that enables energy efficiency to become a sustainable and scalable business for utilities. The goal is to treat energy-efficiency investments in the same way as generation, transmission, and distribution investments.

One issue to address is supporting the utility’s financial responsibility for its fixed costs—that is, finding a mechanism to compensate for the energy sales, or throughput, that are lost due to successfully promoting the efficient use of electricity.

Because regulators, policy makers, and utilities have different kinds of experience, regulatory precedent, cultures, and willingness to adopt progressive ratemaking, two approaches are being taken to compensate utilities for the sales lost as a result of encouraging energy efficiency; full revenue decoupling and a simpler lost-revenue recovery mechanism that solely accounts for lost revenue due to efficiency programs.

In April 2010, the District of Columbia joined the 12 states that have adopted revenue decoupling and broken the link entirely between a utility’s revenues and its sales—California, Connecticut, Hawaii, Idaho, Maryland, Massachusetts, Michigan, Minnesota, New York, Oregon, Vermont, and Wisconsin. States now considering some form of decoupling are Delaware, Indiana, Nevada, New Hampshire, New Jersey, and New Mexico. Seven states have enacted lost-revenue adjustment mechanisms to compensate a utility for those revenues that are estimated to be lost as a result of its efficiency programs—Colorado, Kentucky, North Carolina, Ohio, Oklahoma, South Carolina, and Wyoming. Utah is currently deciding between either decoupling or a lost-revenue mechanism.

Addressing the throughput issue removes the disincentive for promoting energy efficiency. But it does not put energy efficiency on a level playing field with supply-side investments. As of June, 21 states have taken the additional step and set incentives, as well as penalties, for achieving efficiency performance goals; several others are pending. And three states—North Carolina, Ohio and South Carolina—have adopted Duke Energy’s “save a watt” model, which combines cost recovery, lost-revenue recovery, and incentives into an avoided-cost charge. Duke also has proposed this model in Indiana. Such approaches to creating incentives can allow utilities to realize a return from their investments in energy efficiency.

One other aspect of a successful business model that utilities are emphasizing is that it