Energy Conservation and Efficiency
Load Growth Down, Conservation Works — Why Are Utilities
Dismayed?
The good news is, U.S. power demand dropped steeply this year.
The economic downturn and the weather are partly responsible. But
a growing number of businesses and residential customers are clearly
reducing power usage. That means fewer carbon emissions and less
waste. Conservation is working. The bad news? Utilities don't like
it much.
Is it true that investor-owned utilities have a built-in conflict
of interest — the less power they sell, the less money they
make? Is that why they don't get better results from system and
consumer efficiencies? Let's review the facts.
It's true that when California “decoupled” utility profits
from electric power sales, better efficiency resulted. This was
an important first step. Since the 1970’s, California has flattened
per capita electricity use while the rest of America saw per capita
increases.
However, decoupling can hardly take all the credit. Much goes to
improved efficiency standards, legislated and regulated on the federal,
state and local levels. Half or less of the savings in California
have been due to efficiency programs run by utilities, according
to research from the California Energy Commission.
There are several important lessons from the California experience:
1. Even with per capita consumption frozen — a great accomplishment
to be sure — utility sales growth still happens due to economic
growth and population growth.
2. We can’t necessarily trust numbers like “savings have
been three times the investment of public-goods funds” —
especially if utilities self-report the savings. That's why it's
important to set up independent verification systems that
have no connection whatever to the self-interest of the utilities.
Utilities like nothing better than to report savings that aren’t
really there. That way they get the best of all worlds: great PR;
revenues or even profits for efficiency programs, and they still
get to sell more electricity! California has been in the process
of reforming the evaluation/measurement/verification (EMV) for several
years now, even as utilities have strongly resisted letting anyone
but themselves get the funds, administer the programs then self-evaluate
and report on the savings. The findings from independent measurement
have sometimes been rather unfavorable toward the utility programs,
and has significantly deflated the claimed program savings. These
programs do have some benefits, but not nearly as much as many people
think.
3. Decoupling sales from profits is not an “incentive”
to reduce consumption; it is merely the removal of one existing
incentive. There are other motives to increase consumption, and
these have powerful effects. Today, the main profits for utilities
are based upon the value of their assets, such as generators, wires
and customer meters. The infrastructure itself is “rate based”,
with a guaranteed rate of return. The cost of the assets and the
profit is paid back by customers through the electric bill. Thus,
there is still a big motive to build more wires and power plants,
and to be able to justify them to regulators. The demonstrated “need”
to sell more electricity is thus a key to profits, both through
actual increases in sales as well as by gaming the system through
inflated forecasts that allows utilities to build stuff that costs
a lot of money—whether or not it is needed. A world of decreasing
energy sales would undermine the infrastructure-based profit system
that has been the result of the first “decoupling”.
4. The next major “decoupling” reform in California and
other states has been to get utilities to divest their ownership
in power generation. That was a big part of the “deregulation”
of the 1990s, and despite the problems around 2000-2001, the independent
wholesale market has worked just fine. The only big problem is that
the utilities still own about one-third of the generating capacity,
mainly hydro and nuclear. Thus they are not entirely devoid of interest
in power generation, and they have made moves to go back into building,
owning and profiting from more power plants.
5. Regulated utilities, moreover, don’t always sell just electricity.
Many of them also sell natural gas. As efficiency measures and declining
industrial sales limit this market, utility companies are hungry
for growth in the only remaining sectors that can grow. In the immediate
timeframe that would be by increasing natural gas power generation.
One important reform would be to break up this vertically integrated
trust, where utilities own the fuel, the power plants, the wires
and the customers. The third big “decoupling” should be
to separate fuel sales from the utilities, by splitting them up
and forbidding fuel delivery to be by the same entity as the one
selling electricity.
6. Profits are not the only economic drivers for the fiduciary interest
of utility companies. If you carefully scour utility company corporate
reports, you will see in the fine print that stock prices depend
on the existence of growth, not just growth of profits, but also
growth of customer base, growth of equity, and growth of sales.
This pressure remains even if all the other elements discussed above
are “decoupled” from regulatory profits.
Bottom line: The puzzle of getting utility companies to “like”
energy efficiency is somewhat more complex than at first it might
appear. The best solution is to make sure efficiency programs are
performance-based, open to competition, and independently evaluated,
measured and verified. There is no reason that utilities could not
participate and profit in such a program if they wanted to; but
the funds should be awarded by an independent administrator on a
competitive basis.
Updated 10/4/09
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