Natural gas energy efficiency programs are widespread throughout the country and successfully deliver energy and financial savings to customers. Important to the success of these programs is ensuring that utility incentives are aligned with helping customers reduce their usage – i.e., where utilities are able to recover direct program costs and lost revenues, and earn a profit on energy efficiency services, they are stronger partners with customers in achieving conservation.
Direct Program Cost Recovery
All 35 states with natural gas energy efficiency programs allow direct program costs to be recovered from ratepayers. Direct program costs include utility-subsidized customer equipment replacement and upgrades, subsidies for the weatherization of homes and businesses, loan discounts for financing, and the costs of energy audits, technology demonstrations, and consumer and building operator training.
Lost Revenue Cost Recovery
Energy efficiency leads to reduced customer payments for utility service, even though the regulator-authorized costs of providing utility service do not decrease. This is due to the nature of traditional and widely used rate designs, in which fixed costs are recovered through variable energy charges. This conflict between traditional rate designs and customer energy efficiency is now widely understood and regulatory methods that allow utilities to recover revenues lost when customers reduce energy consumption are becoming routine.
Rate Design (RD)
The most common way to mitigate lost revenues is to use a non-traditional rate design that breaks the link between utility revenue and the energy consumption of its customers. The following utilities use either revenue decoupling or a flat monthly fee rate design to recover revenues lost from energy efficiency.
State Utility Cases Case Number
Margin Tracker (MT)
The second method of mitigating marginal revenue loss caused by decreased customer energy consumption is to use a margin tracker. Margin trackers estimate the level of decreased distribution revenues caused by energy efficiency and recover the loss as a surcharge to rates. There is a great deal of uncertainty in the measurement of consumption reductions specifically caused by energy efficiency, as opposed to the measurement of all energy reductions.
State Utility Cases Case Number
Financial Incentives for Energy Efficiency Programs
An important goal of energy efficiency policy is trying to make energy efficiency a profitable undertaking as opposed to simply a breakeven business initiative. Recent federal legislation urged state commissions to implement policies that provide a timely earnings opportunity for utilities' energy efficiency programs. Three types of natural gas energy efficiency incentives in current use are the shared savings incentive, the performance target incentive, and the rate of return adder.
Shared Savings (SS)
Shared savings incentive programs measure actual ratepayer benefits and allow the company to earn a percentage of the savings received by customers. The annual incentive that the companies earn from their energy efficiency programs is recovered from customers through a surcharge in the following year.
State Utility Cases Case Number
Performance Targets (PT)
Performance target incentives allow the utility to earn a financial reward for meeting certain program goals such as the number of upgraded thermostats installed, the number of homes winterized, and overall customer participation level. The variable reward is calculated according to a formula that considers the overall program budget and whether goals were achieved.
State Utility Cases Case Number
Rate of Return Adder (RRA)
Rate of return adders are premised upon capitalizing and earning a profit on energy efficiency program investments in the same manner as traditional utility capital investments. As the utility spends within an approved energy efficiency plan, the company charges the investment to a regulatory asset. At the time of the next rate case, the regulatory asset and associated carrying costs are placed in the rate base, thereby allowing the utility the opportunity to earn a return on energy efficiency investments.
State Utility Cases Case Number