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Designing Utility Regulation to Promote Investment in Cost-Effective Energy Efficiency

Designing Utility Regulation to Promote Investment in Cost-Effective Energy Efficiency. Dale S. Bryk Natural Resources Defense Council dbryk@nrdc.org. Pennsylvania PUC Discussion December 7, 2006. Overarching Goals. Safe, reliable, affordable energy service Minimize environmental impacts

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Designing Utility Regulation to Promote Investment in Cost-Effective Energy Efficiency

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  1. Designing Utility Regulation to Promote Investment in Cost-Effective Energy Efficiency Dale S. Bryk Natural Resources Defense Council dbryk@nrdc.org Pennsylvania PUC Discussion December 7, 2006

  2. Overarching Goals • Safe, reliable, affordable energy service • Minimize environmental impacts • Economic efficiency • Customers and utilities invest in all cost-effective energy efficiency

  3. Policy Context • Rate Regulation/ Decoupling • Portfolio Management • Portfolio Standards • System Benefit Charge Programs • Secure minimum amount of energy efficiency • Market Transformation • Codes and Standards • Transmission and Distribution System Planning

  4. Emerging Policy Context • Regional Greenhouse Gas Initiative • CA Emissions Cap on Electricity Sales/ Procurement • New Requirements to Manage Carbon Risk

  5. Traditional Regulation • Rewards sales / encourages consumption • Discourages utility support for efficiency • Recovery of fixed costs uncertain

  6. Decoupling • Severs link between profit and sales • Modest true-ups in both directions vs. rate cap • Assures recovery of fixed costs • Removes incentive to increase sales • Rewards safe, reliable service; public goals • Customizable to reward/ penalize based on performance

  7. Decoupling Objectives • Align consumer and shareholder interests • Promote investment in least cost efficiency • Assure recovery of fixed costs • Reduce gas prices by reducing demand

  8. Energy Efficiency: Benefits & Barriers • Cost-effective efficiency investments • 5:1 cost benefit ratio • likely to reduce load by 1%/ year • Market barriers • Lack of knowledge, access to efficient products • Split incentives • Customers require 40-100% return, < 3 yr payback

  9. Energy Efficiency Potential

  10. Decoupling Objectives • Environmental Benefit • Energy efficiency competes directly with supply • Reduced consumption = reduced environmental impact • Lower gas prices put more competitive pressure on coal • Consumer Benefit • Utilities more likely to help customers reduce demand, lower bills • Reducing demand reduces electric and gas prices for all (ACEEE study) • Utility Benefit • Guaranteed fixed cost recovery • Reduced risks associated with economy, weather, efficiency standards • Better service to customers • Improved Reliability • More efficiency means less strain on system

  11. Alternatives to Decoupling • Increase fixed customer charges • Reduces reward for end-use efficiency • More disruptive to rate structures than modest true-ups that decoupling would require • Lost revenue recovery mechanisms • Asymmetrical; fails to recapture “found” revenues from excess sales • Does not address disincentive to promote efficiency beyond programs (e.g., codes and standards) • Codes and standards; SBC programs • Current regulation discourages utility support • Funding uncertain • Massive subsidies for coal gasification; LNG • Much more expensive than promoting efficiency

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