New Report Finds Utilities Don't Need a Free Lunch, a Cup of Coffee Will Do

Blog | February 07, 2013 - 4:00 am
By Sara Hayes, Sr. Manager and Researcher, Policy and Utilities

Energy efficiency is good for the environment, electric reliability, and customers’ pocketbooks, and yet some utilities continue to balk. A new report on decoupling shows that utilities can collect revenues lost due to energy efficiency measures without harming customers. First, a bit of background is helpful….

The bulk of most people’s energy bills is based on the volume of electricity or gas they buy. In most cases, that volume—in kilowatt hours (kwh) or therms—is multiplied by an electric or gas rate. Energy efficiency helps customers to reduce the kwh or therms they need to operate their homes and businesses, reducing their utility bills.

Meanwhile, most utilities have shareholders and with that comes an obligation to try and make a profit. One can quickly see how reducing customers’ consumption might be at odds with utilities that want to sell more product. Since utilities often implement and fund energy efficiency programs, this isn’t good news for saving energy. 

Fortunately, regulators can take action to properly align utility financial incentives so that energy efficiency doesn’t hurt the utility’s bottom line. These policies include program cost recovery, performance incentives, and decoupling. ACEEE refers to this combination of policies as the “three legged stool.” Implementing all three of these policy solutions creates a balanced approach that aligns the financial interests of a utility and utility shareholders with the interests of utility customers. Aligning these multiple interests helps the utility evolve from a power generator to a more dynamic and diversified energy services provider, able to meet the needs of customers and succeed in a competitive financial market.   

These policies have now been implemented by a majority of states, many of which have decades of experience. Almost every state allows utilities to collect back the money they invest in energy efficiency. Twenty-eight states allow performance incentives for natural gas utilities, electric utilities or both, and twenty-five states currently allow decoupling for natural gas utilities, electric utilities, or both.

Decoupling works by allowing a utility to adjust its rates so that it doesn’t experience a shortfall in revenues needed to cover fixed costs if its energy efficiency programs result in significant savings. Decoupling may require a utility to return an over-collection or windfall, or it may allow the utility to adjust rates upward and recover a shortfall. A new report looked closely at the financial impacts decoupling policies might have on customers. The report, by Pamela Lesh, a former utility executive and author of earlier definitive research on decoupling, looked at over 1,200 such rate adjustments between 2005 and 2012 to see how the policies were impacting customers’ bills. The author found that most rate adjustments made as part of a traditional decoupling policy have been very small—changing customers’ bills by plus or minus two percent. Two percent of an average American utility bill amounts to about $2.30 per month for electricity and about $1.40 per month for natural gas.

That’s less than a cup of coffee. Since these adjustments go both ways, some months customers will pay a little bit extra and other months they will pay a little less. There are no free lunches, but a free cup of coffee now and then isn’t so bad.