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Carrots for Utilities: Providing Financial Returns for Utility Investments in Energy Efficiency


January 24, 2011

Research Report U111

Authors:

Sara Hayes, Steven Nadel, Martin Kushler, and Dan York

Description:

This report examines state experiences with shareholder financial incentives designed to encourage investor-owned utilities to provide energy efficiency programs that reduce customer energy use. This is an important reform because traditional regulation provides significant opportunities for earnings from supply-side investment, but historically has provided no financial incentive for utilities to help customers reduce energy use. This report presents a framework for understanding recent developments and experiences in this area, and is intended as a resource for policymakers, regulators, utilities, and other interested parties.

The report includes detailed discussion of the trends, successes, and challenges states have faced in the implementation of shareholder incentives. The research drew upon interviews with industry experts across the nation and makes recommendations for policymakers seeking to establish or modify shareholder incentives in their states. The report includes individual state summaries of the incentive mechanisms, conclusions regarding common practices, and approaches across states, as well as analysis on how shareholder incentive mechanisms are working in these states. It also discusses the issue of how these policies may affect utility decisions regarding energy efficiency activities and spending levels. The report concludes that the results to date suggest that these policies are working and that both consumers and utilities are benefiting from these energy efficiency shareholder incentive mechanisms.

Eighteen states were examined in the report: Arizona, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, Texas, Washington, and Wisconsin.