Ratepayer-Funded Efficiency through Regulatory Policy

Regulatory policy can have a significant impact on investment in energy efficiency.  Developing a set of regulatory policies appropriate for each individual state’s context will set a foundation for achieving all cost-effective energy efficiency.  

Photo of an electricity pylon

Key Focus Areas

Electric and natural gas utilities can play a vital role in deploying all of our nation's available cost-effective energy efficiency—but traditional utility regulation can create unintended obstacles for the utilities.

Under the conventional regulatory framework, a utility's financial health can be negatively impacted when it delivers energy efficiency to its customers.  State utility regulators are using a variety of incentives for overcoming these barriers.  SEE Action has identified seven key focus areas to assist state utility regulators:

  • Utility financial incentives. Incentivize utilities to deliver energy efficiency through energy efficiency cost recovery, mitigating or eliminating the throughput incentive, and aligning customer and utility interests.
  • Bill and rate impacts.  Account for the long-term savings as well as short-term costs of efficiency programs, and design programs in ways that mitigate rate increases.
  • Method of energy efficiency program delivery. Understand successful examples of different choices in efficiency program delivery including investor or public owned utilities; independent, non-government statewide organizations (“3rd Parties”); state agencies; and hybrid models.
  • Building Codes and appliance standards. Building energy codes and appliance efficiency standards are likely to capture significant energy efficiency savings over the coming years. This has implications for existing utility energy efficiency program design and utility involvement in codes and standards.
  • Customer service and satisfaction.  Energy efficiency programs contribute significantly toward customer satisfaction, and the desire to improve customer satisfaction can motivate utilities to offer or expand energy efficiency programs.
  • Integrated resource planning (IRP).  An IRP can be a powerful impetus for energy efficiency and other demand management alternatives to new supply, especially where the planning process is mandatory and overseen by a PUC, because the IRP may require utilities to consider demand side resources that benefit ratepayers even if those resources do not benefit utility shareholders.
  • Targets and goals.  A growing number of states are setting mandatory energy-saving targets. Experience to date indicates that most states are on track to meet the targets that have been set, and that establishing such targets is driving significant and cost-effective energy-efficiency savings. However, targets need to be developed with care and many issues considered in setting targets.

Key Initiatives

SEE Action is currently working on several initiatives that will provide state utility regulators and stakeholders the tools and information they need to create utility motivations that will lead to a significant increase in energy efficiency. These include: 

  • Hosting regional Regulatory Policy Exercises - informative, interactive, day-long exercises that enable regulators to explore a variety of energy efficiency policies in a consequence-free environment.  Participants—including utility commissioners, commission staff, and state consumer advocates—experience a variety of utility and consumer perspectives in a mock scenario in which they:
    • Act as regulators and explore a variety of stakeholder perspectives in a mock scenario
    • Hear live "testimony" and discuss policy options with fellow commissioners
    • Select from several regulatory approaches and use a modeling tool to observe, analyze, and discuss the financial impacts on a hypothetical utility
    • Leave with resources—relevant decisions, orders, and additional resources to explore.
  • Promoting best practice utility planning processes that allow demand side resources to compete as a cost-effective alternative to supply side resources, including generation, transmission, and distribution infrastructure investments.
  • Understanding how electric and natural gas utilities can be motivated by the establishment of numeric energy savings targets and goals for energy efficiency program results.
  • Providing regulators with a comprehensive approach to analyze impacts of energy efficiency programs on rates and bills, when concerns about rate impacts pose a barrier to energy efficiency programs either for utilities or regulators
  • Identifying and advancing the understanding of factors that should be considered in evaluating choice of model for administering ratepayer funded energy efficiency programs, given that energy efficiency runs counter to the traditional/core business model for utilities.
  • Highlighting the customer satisfaction benefits of utility sponsored energy efficiency programs, and encouraging policymakers and other stakeholders to recognize and consider these benefits during their review of proposals.

Guidance Documents from the Network

Photo of the Making It Count report.Making it Count: Understanding the Value of Energy Efficiency Financing Programs Funded by Utility Customers

This report lays the groundwork for a dialogue to explore regulatory and policy mechanisms for ensuring that efficiency financing initiatives provide value for society and protection for consumers. Featuring case studies of Connecticut, New York, Massachusetts, California, and Maryland, Making it Count explores emerging questions that jurisdictions will need to answer when considering an increased reliance on financing, including:

  • Can financing be placed in a regulatory context that preserves accountability while providing sufficient flexibility to program administrators and customers?

  • Can the tools that have been used to screen traditional energy efficiency programs for cost-effectiveness and assess potential savings and impacts be adapted in ways that make them work for energy efficiency financing programs?

The California Legislature asked the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA), in consultation with the California Public Utilities Commission, to work with stakeholders to develop criteria for a comparative assessment of energy efficiency financing programs available in California, including PACE and on bill financing. We found Making It Count: Case Studies in Evaluating Energy Efficiency Financing Programs to be directly onpoint to the work CAEATFA's been tasked to complete and very meaningful to the policy issues at hand.

- Deana Carillo, CAEATFA
setting energy savings targets for utilititesSetting Energy Savings Targets for Utilities

Helps policymakers understand how electric and natural gas utilities can achieve greater efficiency by establishing numeric energy savings targets and goals for energy efficiency programs.

using integrated resource planningUsing Integrated Resource Planning to Encourage Investment in Cost-Effective Energy Efficiency

Describes how utility planning processes that allow demand-side resources to compete with supply-side resources can promote cost-effective energy efficiency.

Energy Efficiency Collaboratives

Energy efficiency collaboratives vary greatly and are typically designed for a specific jurisdiction, making them hard to compare side by side. This guide seeks to highlight a few common elements and draw conclusions on the overall effectiveness of specific characteristics of collaboratives. 

aligning utility incentivesAligning Utility Incentives with Investment in Energy Efficiency

Describes the effects of utility spending on efficiency programs, how those effects could constitute barriers to investment in energy efficiency, and how policy mechanisms can reduce these barriers.

analyzing and managing bill impactsAnalyzing and Managing Bill Impacts of Energy Efficiency Programs: Principles and Recommendations

Provides policymakers with principles and recommendations to understand and manage concerns about bill and rate impacts resulting from requiring utilities to provide efficiency programs.

Guide for States: Energy Efficiency as a Least-Cost Strategy to Reduce Greenhouse Gases and Air Pollution, and Meet Energy Needs in the Power Sector

A practical document that presents established policy and program “pathways” to advance demand-side energy efficiency, including:

  • Ratepayer-funded energy efficiency
  • Building energy codes
  • Local government-led efforts, such as building performance policies
  • State-led efforts, such as energy savings performance contracting
  • Commercial and industrial private sector approaches, such as strategic energy management and combined heat and power.

The guide presents case studies of successful regional, state, and local approaches to energy efficiency with sources for more information, resources to understand the range of expected savings from energy efficiency, and common protocols for documenting savings.

State and local air pollution control agencies will find SEE Action's Guide for States: Energy Efficiency as a Least-Cost Strategy to Reduce Greenhouse Gases and Air Pollution, and Meet Energy Needs in the Power Sector to be a very helpful resource. The guide provides a clear and credible overview of how states and localities are putting energy efficiency to work for them, and what they are getting out of their investment. These approaches give air agencies a broader set of tools to meet air quality standards, protect public health, and achieve multipollutant emission reductions at a low cost.

- Bill Becker, National Association of Clean Air Agencies