Designing Utility Regulation to Promote Investment in Cost-Effective Energy Efficiency

Dale S. Bryk

Natural Resources Defense Council

dbryk@nrdc.org

Pennsylvania PUC Discussion

December 7, 2006

Overarching Goals

Safe, reliable, affordable energy service

Minimize environmental impacts

Economic efficiency– Customers and utilities invest in all cost-effective energy

efficiency

Policy Context

Rate Regulation/ Decoupling

Portfolio Management– Portfolio Standards

System Benefit Charge Programs– Secure minimum amount of energy efficiency

– Market Transformation

Codes and Standards

Transmission and Distribution System Planning

Emerging Policy Context

Regional Greenhouse Gas Initiative

CA Emissions Cap on Electricity Sales/ Procurement

New Requirements to Manage Carbon Risk

Traditional Regulation

Rewards sales / encourages consumption

Discourages utility support for efficiency

Recovery of fixed costs uncertain

Decoupling

Severs link between profit and sales– Modest true-ups in both directions vs. rate cap– Assures recovery of fixed costs– Removes incentive to increase sales

Rewards safe, reliable service; public goals– Customizable to reward/ penalize based on performance

Decoupling Objectives

Align consumer and shareholder interests

Promote investment in least cost efficiency

Assure recovery of fixed costs

Reduce gas prices by reducing demand

Energy Efficiency: Benefits & Barriers

Cost-effective efficiency investments– 5:1 cost benefit ratio– likely to reduce load by 1%/ year

Market barriers– Lack of knowledge, access to efficient products– Split incentives– Customers require 40-100% return, < 3 yr payback

Energy Efficiency PotentialExisting and New EE Strategies Can Offset ISO

Forecasted Energy Requirements (GWH) and Beyond

100,000

105,000

110,000

115,000

120,000

125,000

130,000

135,000

140,000

145,000

150,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GW

h

ISO GWh Forecast (w/out DSM) 1.2% Avg. Annual Increase at

Marginal Avoided Energy Supply Cost of 9.4¢/kWh

Actual Energy Requirement (2003)

Existing EE Programs at

3.1¢/kWh

Building Codes at 2.9¢/kWh

Standards at 1.0 ¢/kWh

Addt'l EE Can Offset Growth (at 3.1¢/kWh)

Total Achievable Energy Savings Potential -1.38% Avg. Annual Reduction

Addt'l Savings Opport. Beyond

Offsetting Growth (at 3.1¢/kWh)

Total EE Potential in 2013 Can Reduce

Energy Req. to 1993 Level

Decoupling Objectives

Environmental Benefit– Energy efficiency competes directly with supply– Reduced consumption = reduced environmental impact– Lower gas prices put more competitive pressure on coal

Consumer Benefit– Utilities more likely to help customers reduce demand, lower bills – Reducing demand reduces electric and gas prices for all (ACEEE study)

Utility Benefit– Guaranteed fixed cost recovery– Reduced risks associated with economy, weather, efficiency standards – Better service to customers

Improved Reliability– More efficiency means less strain on system

Alternatives to Decoupling

Increase fixed customer charges – Reduces reward for end-use efficiency– More disruptive to rate structures than modest true-ups that decoupling would require

Lost revenue recovery mechanisms– Asymmetrical; fails to recapture “found” revenues from excess sales– Does not address disincentive to promote efficiency beyond programs (e.g., codes and

standards)

Codes and standards; SBC programs– Current regulation discourages utility support – Funding uncertain

Massive subsidies for coal gasification; LNG– Much more expensive than promoting efficiency