Report: Utility Spending on Energy Efficiency Soars as Supportive State Policies Are Expanded

Electric utility spending and budgets for customer-funded energy efficiency programs have seen a 30% boost compared to 2010 levels and could double by 2025, thanks to expanding state policies, an updated report from the Institute for Electric Innovation (IEI) suggests.

The report, “State Electric Efficiency Regulatory Frameworks,” outlines policy developments that support utility investments in electric efficiency programs, including how several states have updated their existing regulatory frameworks for energy efficiency since July 2013.

The report focuses on three regulatory mechanisms that relate to investments in energy efficiency. The first involves direct cost recovery, which refers to the recovery of costs related to the program administration, implementation, and actual costs through rate cases, system benefit charges, and tariff rider/surcharges.

The second involves fixed-cost recovery, which refers to decoupling and lost revenue adjustment mechanisms that help utilities recover marginal revenue associated with fixed operating costs. “Rate making practices tie the recovery of fixed costs to volumetric consumption charges with rates set based on an assumed level of energy sales,” the report explains. “The purpose of electric efficiency programs is to reduce the consumption of electricity; decoupling and lost revenue adjustment mechanisms allow for timely recovery of fixed costs.”

Finally, the report focuses on performance incentives, which reward utilities for reaching certain electric efficiency program goals, but which also impose a penalty for performance below agreed-upon goals.

The report shows that to date, 32 states have approved fixed-cost recovery mechanisms: 14 of these have revenue decoupling, and 19 have lost revenue adjustment mechanisms. That includes Mississippi, which recently approved a lost revenue adjustment mechanism, and Wisconsin and Connecticut, which updated their existing decoupling mechanisms. Meanwhile, 29 states have performance incentives in place, up from 28 states in 2013. Mississippi recently approved performance incentives, and California, Colorado, Georgia, New Hampshire, and New Mexico have all updated their existing mechanisms. An additional two states—Montana and West Virginia—are evaluating performance incentives, the report notes.

According to the IEI—a nonprofit organization that represents about 70% of the U.S. electric power sector—utility company electric efficiency budgets in 2013 totaled $7 billion. By 2025, it predicts that electric efficiency budgets will exceed $14 billion.

About 126 TWh was saved by electric utility efficiency programs in 2012, the IEI says. In October, the Northwest Power and Conservation Council reported that energy efficiency was the second-largest power resource in the Pacific Northwest region, ranking only behind hydroelectricity.

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)