Increasing Energy Efficiency Through New Utility Business Models

Stephanie Levine

The utilities, companies, and nonprofit partners that I work with understand that energy efficiency is more than the sum of incremental savings—it’s the single most cost-effective energy resource that we have. Efficiency saves utility customers money, and, with assistance from state utility commissioners1, can generate revenue for utilities as well. Though traditional utility business models have historically tied utility revenue directly to the quantity of their sales—that is when more electricity is sold, more revenue is generated—key industry stakeholders have recently embraced alternative models that award efficiency instead.

The Edison Electric Institute (EEI), the trade association for the nation’s investor-owned utilities, recently announced a new partnership with the Natural Resources Defense Council (NRDC), one of the nation’s largest grassroots environmental organizations. The partnership is driven by the potential threat that energy efficiency and “distributed generation,” like rooftop solar could pose to the traditional utility business model. In January 2013, EEI published a widely discussed paper focused on how “disruptive technologies” that allow consumers to generate their own electricity and reduce their energy consumption might affect utilities themselves. Under utilities’ traditional business models, customer-owned generation and increased energy efficiency reduce the revenue a utility earns. That lost revenue causes the rates other customers pay to increase in order to recoup the cost for the utility’s fixed assets (transmission and distribution wires, power plants, etc.).

Increasing rates consequently improve the value proposition of energy efficiency and consumer-owned generation for the remaining customers, causing more and more people to invest in efficiency and rooftop solar. A vicious cycle begins, resulting in additional lost revenues for the utility and higher rates for the customer base that cannot afford to participate. The paper argues that the utility industry must adapt their business models in response to these trends or else they risk the same fate as the landline telephone industry as cell phones grew in popularity. EEI and NRDC’s partnership is designed to avert this risk. The two organizations issued a joint agreement directed at state commissioners with a very clear message: adopt policies that allow utilities to promote energy efficiency, distributed generation, and demand side management without the risk of undercutting their own financial performance.

In a list of recommendations, EEI and NRDC write “It is appropriate to consider expanding investor-owned utilities’ earnings opportunities to include performance based incentives tied to benefits delivered to their customers by cost-effective initiatives to improve energy efficiency, integrate clean energy generation and improve grids.” Such “performance based incentives” allow utilities to receive a return on investments they make to reduce the amount of energy their customers use, a sea-change from traditional utility regulation. Though many state commissioners have already implemented such policies,utilities in thirty-two states still operate under a traditional business model in which profitability is directly tied to sales; when more electricity is sold, more profit is made. In these states, utilities may have a regulatory incentive to pursue energy efficiency, but they have no financial incentive. The alternative models EEI and NRDC are pursuing would allow a utility to earn profits by increasing the amount of energy it saves rather than sells.

What’s so exciting about the new partnership between EEI and NRDC is that it is designed to help overcome this financial hurdle so that efficiency isn’t only the cheapest resource, it’s also a profitable one for consumers and utilities alike. Ecova continues to demonstrate the cost-effectiveness of our services, generating more than $10 billion in utility customer savings over the last ten years. We’re eager to continue working with our clients to maximize these opportunities and find more ways to save resources and create value through efficiency.

1State utility commissioners, generally appointed by a state’s governor, oversee the rate-setting process for regulated utilities. Commissioners are tasked with making sure that utility rates are “just and reasonable,” and in return customers receive safe and reliable services.

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