By - Jim Vess

States begin to allow utilities to included energy efficiency programs in their rate base

Energize Weekly, December 26, 2018

New types of incentives are being added by states to the quiver programs to promote energy efficiency among utilities, according to a survey by the American Council for an Energy Efficiency Economy (ACEEE), a non-profit advocacy group.

The council first surveyed state energy efficiency programs in 2015 and it did so again this year. It found that the 29 states that had incentives in 2015 have, for the most part, the same measures in place today.

There have, however, been some innovations, most notably the adoption of mechanisms that allow utilities to earn a rate of return on energy efficiency expenditures and to amortize energy expenses for cost recovery.

Illinois, Maryland, Utah and New York have all adopted some form of cost recovery, the council said.

“The rational for this type of approach is that it makes energy efficiency investments and the level of focus given to energy efficiency by the utility and its executives, more comparable to traditional rate-of-return treatment for supply side investments,” the council said.

The council cautioned, however, that return-on-equity incentives without performance metrics will just reward spending.

Hawaii is taking decoupling—separating a utility’s revenue from the sale of electricity—a step further by developing performance-based rates that will include of a comprehensive set of criteria, such as reliability and energy efficiency. The rates are slated to go into effect in 2020.

Hawaii already has an incentive program with cash rewards for meeting targets and has been among the top ten states for energy efficiency, the council said.

The challenge in getting utilities to undertake comprehensive energy efficiency programs has been the question of how costs are recovered, the reduced energy sales and profits they could lead to and the lack of earning opportunities for investors compared to other utility investments.

The states have been using performance incentive mechanisms, which the council said are “among most important factors contributing to higher utility energy savings year to year.”

These incentives generally brake down into four groups:

  • Shared net-benefit incentives where utilities earn a percentage of the benefits from their efficiency programs.
  • Multifactor incentives where a utility can earn a reward for meeting a set of energy-savings-based targets
  • Energy-savings-based incentives where utilities earn a reward for meeting a pre-established goal.
  • Rate-of-return savings where utilities can include the spending on energy efficiency program in rates.

The incentives are coupled with an Energy Efficiency Resource Standard (EERS) which sets specific, long-term energy saving targets.

The most prevalent incentive is the net benefit, which is used in 12 states, followed by the multifactor incentive in nine states.

Rhode Island and Massachusetts have become leaders in energy efficiency in part due to their multifactor incentives, the council said. In 2017, energy savings in Rhode Island equaled more that 3 percent of retail sales and in Massachusetts they were 2.57 percent of sales.

Massachusetts created a $100 million, three-year incentive fund and awards are made based on the dollar value of energy savings and the dollar value of net benefits. Rhode Island’s program makes awards on energy savings and demand savings—reducing the demand on the highest peak summer says.

In 2017, New York State updated its ratemaking policies and allowed for a return on equity (ROE) for energy efficiency projects, as long as the utility met energy efficiency targets

“In addition to leveling the field for demand-side investments, the ROE mechanism may smooth the impact of customer bill surcharges… or other cost recovery mechanisms that fund energy efficiency,” the council said.

Maryland utilities must produce an annual 2 percent, incremental energy saving through 2023. To encourage efficiency investments the state has decoupled rates and allowed utilities to rate base and capitalize efficiency projects with a return on that investment based on the average weight cost of capital.

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