Making the Business Case for Energy Efficiency: Case Studies of Supportive Utility Regulation

Under traditional utility regulation and rate structures, utilities face financial disincentives for investing in customer energy efficiency programs. Unless these disincentives are addressed, utility investments in customer energy efficiency programs work against their shareholders’ interests. Regulators, utilities and stakeholders can overcome these barriers by implementing well-tested policy solutions to align regulation with energy efficiency. Decoupling revenues from energy sales addresses one of these major barriers, the “throughput incentive.” Providing shareholder incentives for investments in energy efficiency programs addresses the other major barrier. A number of states have these regulatory mechanisms in place, but they are not yet predominant among U.S. utilities.

Addressing these financial disincentives helps create a new business model for utilities. This report examines a set of six selected utilities that provide relatively large-scale customer energy efficiency programs in states with decoupling and/or shareholder incentives in place. The research focuses on (1) financial and program impacts, and (2) organizational and managerial impacts. Through interviews and analysis of program data, we found that supportive regulatory frameworks have been critical in elevating the role of energy efficiency within utility business models. Having such a framework in place, however, needs to be part of a comprehensive set of policies that support customer energy efficiency programs. Though analysis of utility financial data we found no evidence that energy efficiency programs have had negative effects on shareholder value. When coupled with supportive ratemaking practices, strong portfolios of customer energy efficiency programs do not appear to affect utility financial performance adversely.