Area Descriptions:
Page Description - this page contains information related incentive
mechanisms associated with utilities implementing energy efficiency measures.
An issue with incentive programs is the cost of administration compared to
alternatives like enabling a free market at the customer for demand side
management programs.
Care must be taken when setting and measuring incentives - see > "It is
premature to discuss the overall effectiveness of the RRIM at this time since
impact evaluations of the 2006-08 as still in process. But observations can be
made relative to the costs and certain impacts. The only certain data point is
that RRIM provided an $82 million payment to the four utilities for 2006 – 07,
which was paid for by rate increases in January 2009. Whether the payment was a
reward for great performance, or an unjustified corporate handout depends on who
you ask. The utilities reported that they had achieved 118% of the CPUC’s goals,
but 4-78 ©2009 ACEEE Summer Study on Energy Efficiency in Industry independent
evaluators calculated that they had achieved only 82% of goals in the best-case
scenario (CPUC, 2009a, Table ES2a, p.9). The final arbitration of this issue of
performance will come in the middle of 2010, when the ex post evaluation of
2006-08 programs will be completed and actual savings achieved will be
verified." See
http://www.EnergyCollection.us/Energy-Regulators/California-Shareholder-Incentive.pdf
at page 4.
Shareholder Incentives:
-
Aligning Utility Incentives with Investment in Energy Efficiency -
A resource of the National Action Plan for Energy Efficiency - November
2007 - This report on Aligning Utility Incentives with Investment in Energy
Efficiency is provided to assist gas and electric utilities, utility
regulators, and others in the implementation of the recommendations of the
National Action Plan for Energy efficiency (Action Plan) and the pursuit of
its longer-term goals. The Report describes the financial effects on a
utility of its spending on energy efficiency programs, how those effects
could constitute barriers to more aggressive and sustained utility
investment in energy efficiency, and how adoption of various policy
mechanisms can reduce or eliminate these barriers. The Report also provides
a number of examples of such mechanisms drawn from the experience of
utilities and states. The primary intended audiences for this paper are
utilities, state policy-makers, and energy efficiency advocates interested
in specific options for addressing the financial barriers to utility
investment in energy efficiency -
http://www.EnergyCollection.us/Energy-Efficiency/Aligning-Industry-Incentives.pdf
See summary page - Study
02
- Barriers and Incentives: Enabling Energy Efficiency - 77
pages - Presented to: Coalition for Clean Affordable Energy October 29, 2007
by The Regulatory Assistance Project
- RAP - Wayne Shirley -
http://www.EnergyCollection.us/Companies/RAP/Barriers-Incentives-Enabling.pdf
- California's Shareholder Incentive Mechanism: A Ratepayer Perspective -
2009-07-28 - State policy makers and regulators need to consider the costs and potential problems when the shareholders of energy utilities are allowed to earn financial rewards as incentives for achieving energy efficiency goals. The basic premise of a shareholder incentive mechanism is that regulated utilities will only excel at delivering energy efficiency measures if they have a financial incentive to do so, because reducing energy use is not otherwise in their best interest. There are two types of incentives in California's energy efficiency programs: those given to customers to encourage adoption of energy efficient measures and those given to utility shareholders when the energy efficiency program meets a percentage of the state's targets for energy saving goals. In 2007, the California Public Utilities Commission (CPUC) adopted a new incentive mechanism known as the Risk Reward Incentive Mechanism (RRIM), which will increase the cost of California's $2 billion energy efficiency program by up to $450 million. These financial incentives are in addition to full program cost recovery. This paper provides background relative to the current mechanism, describes its impact to date, discusses how it is evolving, and highlights specific attributes of California's mechanism that could be improved by other states who are considering similar financial incentive programs. Alternatives to California's "shared savings" incentive mechanism are also provided.
http://www.EnergyCollection.us/Energy-Regulators/California-Shareholder-Incentive.pdf
- DSM Shareholder Incentives: Current Designs and Economic Theory -
by Berkeley Labs - 88 pages - 1995-01-01 - This report reviews recent DSM
shareholder incentive designs and performance at 10 U.S. utilities and
identifies opportunities for regulators to improve the design of DSM
shareholder incentive mechanisms to increase the procurement of
cost-effective DSM resources. We develop six recommendations: (1) apply
shared-savings incentives to DSM resource programs; (2) use markup
incentives for individual programs only when net benefits are difficult to
measure, but are known to be positive; (3) set expected incentive payments
based on covering a utility's "hidden costs," which include some
transitional management and risk adjusted opportunity costs; (4) use higher
marginal incentives rates than are currently found in practice, but limit
total incentive payments by adding a fixed charge; (5) mitigate risks to
regulators and utilities by lowering marginal incentive rates at high and
low performance levels; and (6) use an aggregate incentive mechanism for all
DSM resource programs, with limited exceptions (e.g., information programs
where markups are more appropriate) -
http://www.EnergyCollection.us/Energy-Efficiency/DSM-Shareholder-Incentives.pdf
- Empirical Assessment of Shareholder Incentive Mechanisms Designs
under Aggressive Savings Goals: Case Study of a Kansas "Super-Utility" -
2009-08-01 - 15 pages - Achieving significant reductions in retail electric
sales is becoming a priority for policymakers in many states and is echoed
at the federal level with the introduction of legislation to establish a
national energy efficiency resource standard. Yet, as the National Action
Plan on Energy Efficiency (NAPEE) pointed out, many utilities continue to
shy away from seriously expanding their energy efficiency program offerings
because they claim there is insufficient profit motivation, or even a
financial disincentive, when compared to supply-side investments. In
response to an information request from the Kansas Corporation Commission
staff, we conducted a financial analysis to assess the utility business case
in Kansas for pursuing more aggressive energy efficiency that complies with
recent state legislation. Kansas’ utilities are vertically integrated and
don’t face retail competition. With historically low retail rates and modest
experience with energy efficiency, the achievement of rapid and substantial
sales reductions from energy efficiency will require a viable utility
business model. Using a conglomerate of the three largest utilities in
Kansas, we quantitatively illustrate the tradeoff between ratepayer and
shareholder interests when a 1% reduction in incremental sales is achieved
through energy efficiency both with and without the impact of future carbon
regulation. We then assess if the utility can be compensated in a manner
that produces a sufficient business case but leaves an adequate amount of
net resource benefits for ratepayers at a cost that is not overly
burdensome. Finally, we show how several common shareholder incentive
mechanisms would be designed to achieve this balance.
http://www.EnergyCollection.us/Energy-Regulators/Imperical-Assessment-Shareholder.pdf
- Financial Analysis of Incentive Mechanisms to Promote Energy
Efficiency: Case Study of a Prototypical Southwest Utility - 83
pages - Lawrence Berkeley National Labs
- 2009-03-01 - In this study, we modeled a prototypical
vertically-integrated electric investor-owned utility in the southwestern US
that is considering implementing several energy efficiency portfolios.1 We
analyze the impact of these energy efficiency portfolios on utility
shareholders and ratepayers as well as the incremental effect on each party
when lost fixed cost recovery and/or utility shareholder incentive
mechanisms are implemented. A primary goal of our quantitative modeling is
to provide regulators and policymakers with an analytic framework and tools
that assess the financial impacts of alternative incentive approaches on
utility shareholders and customers if energy efficiency is implemented under
various utility operating, cost, and supply conditions.
http://www.EnergyCollection.us/Energy-Efficiency/Financial-Analysis-Incentive.pdf
See summary page - Study
01
- History of Shared-Savings Incentive Mechanisms For Energy
Efficiency Programs [in California] -
http://www.EnergyCollection.us/Energy-Efficiency/History-Shared-Savings.pdf
- Quantitative Financial Analysis of Alternative Energy Efficiency
Shareholder Incentive Mechanisms - Lawrence Berkeley Labs -
2008-08-01 - 15 pages - Rising energy prices and climate change are central
issues in the debate about our nation’s energy policy. Many are demanding
increased energy efficiency as a way to help reduce greenhouse gas emissions
and lower the total cost of electricity and energy services for consumers
and businesses. Yet, as the National Action Plan on Energy Efficiency (NAPEE)
pointed out, many utilities continue to shy away from seriously expanding
their energy efficiency program offerings because they claim there is
insufficient profit-motivation, or even a financial disincentive, when
compared to supply-side investments. With the recent introduction of Duke
Energy’s Save-a-Watt incentive mechanism and ongoing discussions about
decoupling, regulators and policymakers are now faced with an expanded and
diverse landscape of financial incentive mechanisms, Determining the “right”
way forward to promote deep and sustainable demand side resource programs is
challenging. Due to the renaissance that energy efficiency is currently
experiencing, many want to better understand the tradeoffs in stakeholder
benefits between these alternative incentive structures before aggressively
embarking on a path for which course corrections can be time-consuming and
costly. Using a prototypical Southwest utility2 and a publicly
available financial model, we show how various stakeholders (e.g.
shareholders, ratepayers, etc.) are affected by these different types of
shareholder incentive mechanisms under varying assumptions about program
portfolios. This quantitative analysis compares the financial consequences
associated with a wide range of alternative incentive structures. The
results will help regulators and policymakers better understand the
financial implications of DSR program incentive regulation -
http://www.EnergyCollection.us/Energy-Efficiency/Quantitative-Financial-Analysis.pdf
- Shareholder Incentives for Utility-Delivered Energy Efficiency
Programs in California - The State of California has committed an
unprecedented sum of $2.2 billion in ratepayer funds to utility-delivered
energy efficiency programs from 2006 through 2008; the State finalized in
2007 the determination of the shared-savings incentive mechanism for the
2006-2008 programs and beyond. This study seeks to examine whether the
adopted incentive mechanism would ensure an efficient delivery of the
programs, and what reforms, if any, could be proposed to meet this end. We
develop an economic model for the implementation of the programs, in which a
regulator adopts an energy savings target and a shared-savings incentive
mechanism before a utility firm proposes program funding, gets it
authorized, and begins to manage it. The study reveals that each utility
firm requires a certain minimum incentive rate to ensure that the firm will
be encouraged to achieve the energy savings target, eventually bringing
non-negative bill savings to its customers. It also reveals that depending
on market and regulatory circumstances, a higher- than-minimum incentive
rate can be warranted to achieve not only a greater net social benefit but
also greater bill savings for customers. Model-based analysis of California
energy efficiency programs suggests that a higher-than-adopted incentive
rate is warranted and that social efficiency would be improved by
customizing incentive mechanisms for individual utilities and updating them
on a regular basis.
http://www.EnergyCollection.us/Energy-Regulators/Shareholder-Incentives-Utility.pdf
- Shareholder Performance Incentives: Enough Cheese? Right Cheese?
2009-09-28 - 27 slides - Regulatory Assistance Project -
http://www.EnergyCollection.us/Energy-Regulators/Shareholder-Performance-Incentives.pdf
Cost Recovery:
Performance Incentives:
http://www.google.com/search?q=Shareholder+incentives&rlz=1I7GGLD_en&ie=UTF-8&oe=UTF-8&sourceid=ie7