How well do these mechanisms work? The American Council for an Energy-Efficient Economy (ACEEE) examined a number of utilities with large-scale energy-efficiency programs serving all types of customers to find out, interviewing utility program managers and executives, and clean-energy advocates and regulators, as well as examining the financial stock performance of these utilities.

Financial disincentives for utility energy-efficiency programs have existed since the 1970s due to utility rate structures and processes. Utilities face such obstacles as the financial losses associated with the costs of customer energy-efficiency programs without cost recovery allowed through utility rates or fees. Reducing energy use reduces utility revenues but does nothing to reduce the short-term fixed costs of providing the service. Further, utility investments in energy-efficiency programs defer or avoid the need for investments in utility assets that provide financial returns allowed by traditional rate regulation.

Regulators, utilities and stakeholders can implement policy solutions to align regulation with energy efficiency to overcome such barriers, according to ACEEE. Regulators are recognizing the need for program cost recovery and approving it through rates and/or fees. Revenue decoupling policies can address throughput incentives. And shareholder incentives for energy-efficiency prorams can provide earnings opportunities for utility investors. Such policies and incentives are not necessarily common, but their use is growing among U.S. utilities. These policies are generally part of a larger set of policies addressing energy efficiency.

Utilities examined by ACEEE are from states with either long, well-established records of supportive energy efficiency or states that have made significant advances over the last several years, including National Grid in Massachusetts, Northeast Utilities in Connecticut, Xcel Energy in Minnesota and Colorado, DTE Energy in Michigan, and Idaho Power Company.

These utilities all share common characteristics that make them successful, including a strong commitment to energy efficiency by both regulators and utilities; regulations addressing the utilities’ financial objectives; collaboration between utilities and stakeholders; and a willingness to experiment and learn from mistakes as well as successes.

Supportive regulatory frameworks are critical to customer energy efficiency programs within the utility business model and should protect utilities from financial harm.  ACEEE found that the utilities it examined have all performed well financially with no evidence to suggest that energy-efficiency programs have had negative effects on shareholder returns. However, it was difficult for ACEEE to detect the financial impact associated with ratemaking adjustments that support energy-efficiency programs since other factors affect corporate performance.

In order for utility customer energy-efficiency programs to work, regulators will have to establish appropriate frameworks that align energy efficiency with the financial goals of utilities while utilities will need to establish new business models based on regulations that remove financial disincentives and provide earning opportunities.