New 21st Century Business Model Emerging for Utilities

A new business model is quietly emerging that allows utilities to sustainably grow and profit from helping their customers save energy and money.

A paper released today by the American Council for an Energy-Efficient Economy (ACEEE), "The Old Model Isn’t Working: Creating the Energy Utility for the 21st Century," describes the new business model and its potential to lead the nation into an energy paradigm shift.

"At the heart of the issue is the way that utilities currently make money by selling energy and building new power plants and transmission lines, instead of selling an energy service. This means that a utility is discouraged from investing in technologies and programs that reduce customer energy use through improved energy efficiency," says Dan York, ACEEE’s Utility Program Director and lead author of the white paper.

"What we need to do is flip the century-old model on its head and change the financial motivations for utilities from selling energy and building power plants to helping customers use energy more efficiently," says Marty Kushler, ACEEE fellow and paper co-author.

Utilites and regulators are increasingly open to a new model because of pending EPA regulations will require utilities to make significant investments in retrofitting or replacing power plants. These investments could raise electricity rates more than 20% for customers in some markets in the next few years. New power plants are more expensive and there are fewer places to site them where they won’t meet citizen resistance.

Another recent ACEEE white paper shows how investments in energy efficiency can meet energy demand at a fraction of the cost of upgrading old coal plants or building new ones.

To prioritize investments in energy efficiency over new power generation, utility regulators need to adopt a new business model.

The model encourages utilities to save energy through a "three-legged stool" approach where utilities can make a profit from providing customers with cheaper, cleaner energy through improvements in energy efficiency.

The three "legs" of the new utility business model are:

Allowing utilities to earn a return on investments that save energy for customers: Traditionally, regulated utilities make their money by selling more energy and by getting approval for higher rates when they build new power plants. 

The new model turns this on its head, allowing utilities to make money when they invest in energy efficiency instead of new power plants. ACEEE’s report, "Carrots for Utilities: Providing Financial Returns for Utility Investments in Energy Efficiency", provides a review of state experiences with this approach.

Ensuring that energy savings don’t reduce utilities’ authorized revenues: Under the traditional regulatory model, when people buy less energy, utilities make less money. 

The new model ensures that utilities gain when customers save energy. "Decoupling" separates profits from energy sales, adjusting rates as necessary to ensure they collect authorized revenues. As customers improve their energy efficiency, utilities receive bonuses.

One way of addressing these "lost revenues" is through a  mechanism that allows utilities to recover profits that are "lost" due to energy savings programs that reduce sales. "Balancing Interests: A Review of Lost Revenue Adjustment Mechanisms for Utility Energy Efficiency Programs," a new ACEEE report also released today, reviews recent state experiences and discusses the pros and cons of that approach.

Permitting utilities to recover the costs of energy efficiency programs for customers: Cost recovery of legitimate expenses incurred from efficiency measures is essential in order to make investments in energy efficiency a prudent choice for utilities.

In October, ACEEE’s 2011 State Energy Efficiency Scorecard will provide an updated ranking of each state’s progress in implementing the elements of the new utility business model.

"Our research shows that these approaches are working. They motivate utilities to reduce utility bills and save their customers money," says Sara Hayes, lead author of the ACEEE reports on shareholder incentives and lost revenues, and contributor to the forthcoming Scorecard.

Read "The Old Model Isn’t Working: Creating the Energy Utility for the 21st Century" here:

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