Energy Utilities Should Be Rewarded for the Right Behavior Rather than the Wrong. We Must Incentivize Saved Energy Services

Pollution is at apocalyptic levels because the financial health of monopolistic power companies improves when they sell more electricity. At least in cases where it is generated from fossil fuels, the outdated electric utility business model rewards practices that spew more CO2 into the atmosphere and thereby increases the industry's contribution to ecological destruction.

So much of the energy from fossil fuels does not even make it to consumers and is simply wasted at various stages of the process such as transmission line losses or 2/3 of the energy from coal burned in power plants being simply lost to waste heat. Yet utilities are not being forced to internalize the environmental costs that such rampant waste poses.

So, we are hit with a 1-2 punch of utilities being rewarded for customers consumption while not being financially penalized for emitting the pollution responsible for climate chaos. We are apparently locked into a system where energy utility profits are tied to their sales.

The rules of an outdated system tilt the playing field against energy conservation practices that decrease energy sales and thereby reduce the amount of greenhouse gas emissions injected into the atmosphere. That is backwards. And this does not have to be the case.

We are still living under the thumb of archaic rules that were developed for the old mid-20th century central station era of energy. The default incentive for the central station era was to get energy utilities to make electricity universally available at a reasonable price. That is something which has long since been achieved. The imperative has been more on conservation since the 1970’s but the rules of the old system have not been overturned with a set of new rules to replace them.

To this day, the financial health of electric utilities declines when energy sales fail to meet the “test year” expectations. If a critical mass of customers were to become drastically more energy efficient in a short amount of time, such as us all switching to LED lights, then what would happen? The utilities will ask regulators to raise the rates we pay for electricity as a way to maintain their revenue and guaranteed profits. This has happened before!

Requiring utilities to submit Integrated Resource Plans is indeed one update from the 1970’s in response to a drive for conservation. It provides a check against utilities gold-plating customers by obligating the utility to prove that certain infrastructure is needed before they can get guaranteed returns on it. We also have something of another counterbalance against obsolete incentives to increase consumption. Regulated power companies now are ordered by state laws to manage energy conservation programs which thereby reduce some of the pollution.

While the flaws of the old system were managed in this way, we need to go deeper to the core issue.  In sum, we can no longer financially reward electric utilities for promoting wasteful consumption and then protect their financial security by providing them with monopoly status.

But here is why stopping short of addressing the root cause does not make for an effective counterbalance. How well would you do things that you really don't want to do but are ordered to do anyway? Would utility company managers be any different?  

The net result is utilities being eager to get greenwashing marketing brownie points for saved energy while simultaneously being hesitant to make it too easy for too many people to save a significant amount of energy (unless required by the state of course). This put utility spokespeople in an awkward, duplicitous position of wanting to publicly celebrate accomplishments with saved energy while being privately reluctant go beyond what it required. It is the reason why investor-owned utilities are not voluntarily offering Inclusive Financing for Energy Efficiency. Because admitting these real motivations to not even consider Inclusive Financing would cause a PR crisis for a utility company with a greenwashed public image, their spokespeople (and enabling front groups) find themselves in a position of goofy defensiveness of having to make up phony reasons to tell the public to explain their reluctance.

If we compensated power suppliers by using financial structures that reward the behaviors that reduce ecological destruction, then the utility decision makers would not have these internal motivations to be hesitant toward making energy efficiency more accessible on a mass scale. If only we could somehow change the underlying power company incentives to reward energy efficiency rather than energy consumption, then power company managers would no longer be left in a position of goofy defensiveness. Saved energy in the built environment is the low hanging fruit for mitigating climate chaos – and should be noncontroversial.

Conservation Improvement programs have resulted in some saved energy, which is necessary, fine and good. But stopping short of getting to the core issue and limiting the scope of reform to incremental measures means that the market penetration of high efficiency end use devices has not accelerated to where it should be. As long as the underlying incentive structure for delivering electric utility services remains locked in place, power company revenues decline when high efficiency washers and dryers for example, get installed. That understandably depresses market penetration of pollution-reducing consumer-saving energy appliances.

Passively waiting around for individual energy consumers to invest in high efficiency and use devices means that market penetration rates for these technologies will not deviate much from historical trends. Consumers also bear the brunt of similarly flawed incentive structures that make it more profitable for apartment owners to put in cheap and inefficient appliances in their units because renters pay the electricity bill.

What would addressing the core issue look like?

It would be reforming electric utility regulation so that power companies sell energy services rather than selling KWH as a commodity. Then the power company would be rewarded for providing these services as efficiently as possible so that the financial health of power companies depends on the efficient use of its product rather than on its own consumption.

If we were to finally adjust to this new electric utility incentive and structure, then power companies would invest directly to purchase high efficiency washers and dryers. They would get a regulated return on their investment. Consumer electric bills would be reduced. There would be more well-paying washer and dryer manufacturing jobs in the overall economy. Most importantly, pollution will get abated. In other words, in addition to all other benefits of correcting this hideous outdated flaw, electric utility managers would gain a valuable tool for managing their electric loads more strategically and cost effectively as they balance supply and demand side requirements.

Another way to properly correct this terrible flaw is inclusive financing for energy efficiency, formally known formally as tariff-based on bill repayment. It is a regulatory reform that would allow customers to pay for energy efficiency improvements using the value of the energy they save. It would make it way easier for far more people to save energy by shaving the up-front cost and minimum credit score barriers. It has been adopted by several smaller municipal and Rural Electric Association jurisdictions around the country but has been struggling to get acceptance in Minnesota for almost a decade. The first step is to establish a pool of capital for energy efficiency improvements through legislation or regulations that is strategically sized to match the needs of the jurisdiction. If the utility is guided by enlightened incentives, then the utility itself could finance the end use efficiency improvements with an appropriate rate of return on the pool of capital it establishes for the purpose of financing the improvements. That would save a bit of overhead from tapping an outside group.

Community Power took the lead with a near decade long effort to make Inclusive Financing an available option in Minnesota. In fact, Community Power had been working with CenterPoint energy to establish an inclusive financing pilot project for Minneapolis natural gas customers. CenterPoint offered to host and manage the capital pool. At first it seemed we were on track to break new ground with a high-profile inclusive financing program. But before we could get it to go CenterPoint pulled a bait-and-switch by not wanting to offer the pilot unless they could turn it into its own perverted profit center, making it far different from the field-tested version of Inclusive Financing. They insisted on unilaterally jacking up the interest rate on the capital pool to a prohibitive level to the point where energy savings would be siphoned off into their coffers rather than allowing the energy savings to become a net financial benefit to the customers. CenterPoint told the MN PUC that it would refuse to offer the program without this minimum rate of return, and the proceeding at the PUC did not turn out so good as a result. This is a key example of how we are essentially climbing a greasy rope if the underlying incentives are not changed. Inclusive financing would improve end-use efficiency if given a chance and would thereby reduce CenterPoint’s earnings.

For more than 30 years we have had knowledge of the escalating climate crisis as well as brilliant analytical tools described above how to resolve the contradictory incentives of the electric utility rate system. Who has the ability to change the rules? Is it someone other than the power company managers and the state regulators who oversee them? How could whoever has the power to correct these design flaws in the system be either so jaded or so out of touch that they have refused to do so and at a huge consequence of driving human civilization toward catastrophe? Somehow, we must organize to be able to quickly correct market and regulatory flaws that reward destructive energy management practices by electric utilities. Otherwise, the ecological foundation will continue to disintegrate at an accelerating pace.


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