Sharing the Savings to Promote Energy Efficiency

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Shared-savings incentives offer a new way for regulated utilities to improve earnings by encouraging customer energy efficiency. Benefits of cost-effective energy efficiency measures can be shared explicitly among customers participating in a utility demand-side management (DSM) program, all utility ratepayers, and the utility itself. For participating customers, electricity bills are lowered directly; for ratepayers, the costs of providing electric services are reduced; and for utility shareholders, they are allowed to retain a fraction of the net benefits as additional earnings. In this study, we define the basic elements of shared-savings arrangements for utility demand-side resources. Next, we compare and contrast specific details of the arrangements approved for three different utilities: Pacific Gas and Electric Company (PG&E), San Diego Gas and o Electric Company (SDG&E), and two operating subsidiaries of the New England Electric System (NEES). Our analysis suggests that the percentage share of net benefits on which utilities are allowed to earn is a relatively poor indicator of the incentive mechanism's overall affect on: utility earnings. Earnings opportunities and potential are also significantly influenced by particular incentive features. These include the definition and measurement of load reductions, program costs, and program benefits; program cost recovery and the timing of incentive recovery; performance thresholds; program spending and earnings caps; program eligibility criteria; treatment of lost revenues; and for NEES, a complementary, non-shared-savings incentive. We conclude that the "collaborative" processes used to develop incentives for each utility proved extremely useful in allowing parties to negotiate trade-offs inherent between various program design features. In 1991, the net impact of DSM incentives resulted in PG&E, SDG&E, and NEES earning simple returns of 11%, 60% and 12% respectively, on their 1991 DSM program expenditures. The SDG&E earnings are significantly higher due to a pre-existing, non-shared saving incentive.

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