Energy Efficiency & Utility Financial Incentives, A Southeastern Perspective

John D. Wilson | March 10, 2009 | Energy Efficiency

One of the far-reaching provisions of the American Recovery and Reinvestment Act of 2009 (Public Law 111-5, link may not work yet), is the energy efficiency policy included in Section 410, Part D of Title III of the Energy Policy and Conservation Act. There are a number of energy efficiency provisions in the economic recovery bill. Notable, national policy now conditions the receipt of certain grants to states on their commitment to policies that will foster energy efficiency, including building codes and utility regulatory policies.

The building code requirements are pretty straightforward. While enacting and enforcing energy efficiency building codes isn’t necessarily easy, the codes are specified as the International Energy Conservation Code (or an equivalent in terms of energy savings), and there isn’t a lot of ambiguity as to when such a code is or is not enacted.

The utility regulatory policies, however, are a more complex question – and perhaps the most consequential over time.

The applicable State regulatory authority will seek to implement, in appropriate proceedings for each electric and gas utility, with respect to which the State regulatory authority has ratemaking authority, a general policy that ensures that utility financial incentives are aligned with helping their customers use energy more efficiently and that provide timely cost recovery and a timely earnings opportunity for utilities associated with cost-effective measurable and verifiable efficiency savings, in a way that sustains or enhances utility customers’ incentives to use energy more efficiently. (Public Law 111-5, Section 410)

What all this legal mumbo-jumbo sets out to accomplish is to prod states into reconsidering the relationship between utilities and their customers.

Recall that utilities are regulated because they are monopolies – it would be downright wasteful, not to mention ugly, if we had dozens of utilities trying to sell electricity to us every day, or even every few years. So utilities are regulated because the public needs to be protected from overpricing and poor service, at least that’s the basic idea.

Energy efficiency is different. There’s no natural monopoly – indeed, anyone can go out and hire a contractor or company to provide energy efficiency services. There may be quite a vigorous market, depending on who or where you are. Large commercial, government or industrial operations can turn to energy services companies, or ESCOs, for services on a pay-for-service or pay-for-performance basis, no government involved.

The reason that government gets involved is that energy efficiency is a benefit to the public. It simply costs less to save energy than to generate energy. Since utilities collect revenues from customers, states often require utilities to either collect funds for a state administered energy efficiency program, or operate those programs themselves. Thus, utilities effectively have a monopoly over paying for energy efficiency, not delivering it.

A revenue monopoly, rather than a service monopoly, is very unusual to say the least. This is the main reason that Congress has inserted itself into the business of encouraging utilities to lead on energy efficiency: without encouragement, most utilities would rather encourage energy use even if it is wasteful. Business is business.

This is particularly important in the southeast. Energy efficiency has been AWOL in the southeast for decades. Other than a few progressive municipal utilities and some modest programs by large Florida utilities, most of the programs have been educational encouragement and some other token efforts. Will these “financial incentives” be the ticket to changing attitudes in the Southeast?

Over the next couple of weeks, I’ll be posting some thoughts exploring these issues. As others weigh in on this subject, I’ll post links to interesting commentary in this blog.

A big P.S.
It isn’t clear that Section 410 will actually require anything. The law states,

The Secretary shall make grants under this section in excess of the base allocation established for a State under regulations issued pursuant to the authorization provided in section 365(f) of such Act only if the governor of the recipient State notifies the Secretary of Energy in writing that the governor has obtained necessary assurances that each of the following will occur: [the text copied above & building codes]

The governor’s assurance is not precisely the same thing as actual policy change.

John D. Wilson
For more than a decade, John has directed SACE’s research activities and led SACE’s utility reform campaigns. He often represents SACE in formal or informal stakeholder engagement with utilities, and…
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