Allowing Utilities to Earn More for Helping Customers to Consume Less Benefits Both

January 24, 2011

Media Contact(s):

Dan York, 608-243-1123 , Utilities, State, and Local Policy Program Fellow
Sara Hayes, , Program Manager, Health and Environment

Washington, D.C. —  The ability for utilities to profit from their energy efficiency programs provides strong motivation to create, support, and deliver successful programs according to a report released today by the American Council for an Energy-Efficient Economy (ACEEE). Research conducted by ACEEE found that electric and natural gas utilities able to earn a financial return on their achievements with customer energy efficiency programs are likely to be industry leaders in terms of their financial support for customer energy efficiency programs.

“The traditional utility business model doesn’t provide opportunities to earn financial returns on energy efficiency comparable to the opportunities that exist for investments in new power plants,” observes Dan York, ACEEE Utilities Program Director and a co-author of the study.

Sara Hayes, ACEEE Senior Associate and primary author of the study, notes: “These companies are responsible to their shareholders for earning profits. States that are still using the traditional utility business model have policies that discourage utility investments in customer energy efficiency programs.”

To address this fundamental problem, regulators and policymakers in a growing number of states have revised the traditional utility business model and adopted “shareholder incentive mechanisms” that allow utilities to earn financial rewards from successful energy efficiency programs. ACEEE’s new report, Carrots for Utilities: Providing Financial Returns for Utility Investments in Energy Efficiency, highlights 18 states that have adopted and implemented shareholder incentive policies and also provides guidelines for what is working and what isn’t. Some of the key findings include:

  • When states have set energy savings goals for utilities under a shareholder incentive structure, the utilities have thus far consistently met or exceeded them;
  • There is widespread agreement among industry experts that shareholder incentives are making efficiency programs a more attractive investment opportunity for utility decision-makers; and
  • States are rewarding utility programs that are cost-effectively producing energy savings.

While a shareholder incentive policy does increase earnings opportunities for utility shareholders, the data to date indicates that these incentives are not excessive relative to the benefits provided by the programs. Steven Nadel, ACEEE Executive Director and co-author of the report, points out: “In states where the amount of the incentive a utility may earn is based on program benefits, such as energy savings, utility shareholder incentives are equivalent to an average of 11% of program benefits. That means that the vast majority of the benefits of these programs are passed on to utility ratepayers.”

While these types of policies are very important, the report stresses that a suite of complementary policies need to be in place to properly encourage utility commitment to energy efficiency. “Shareholder incentives are a powerful and important tool available to states. However, capturing the full economic and environmental benefits of energy efficiency requires policymakers to look carefully at how all of their regulations combine to influence utilities,” concludes Martin Kushler, ACEEE Senior Fellow and co-author of the study.

The full report includes detailed discussion of the trends, successes, and challenges states have faced in the implementation of shareholder incentives. It draws upon the expertise of industry experts across the nation and makes recommendations for policymakers seeking to design or modify shareholder incentives in their states. States surveyed in the report include Arizona, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, Texas, Washington and Wisconsin.

The American Council for an Energy-Efficient Economy is an independent, nonprofit organization dedicated to advancing energy efficiency as a means of promoting economic prosperity, energy security, and environmental protection.