Do Electric-Resource Portfolio Managers Have an Inherent Conflict-of-Interest with Energy Efficiency?

Devra Bachrach and Sheryl Carter, Natural Resources Defense Council

Keywords

Abstract

Sweeping claims are made about the presence or absence of conflicts-of-interest relative to energy efficiency faced by electric-resource portfolio managers, including investor-owned utilities, publicly-owned utilities, and Community Choice Aggregators. This paper examines the incentives and disincentives faced by these different types of portfolio managers, and finds that there is nothing inherent about the conflict-of-interest faced by portfolio managers. All types of portfolio managers, whether public or private, can face conflicts-of-interest when cost recovery and profits are tied to sales volume, but this problem can be solved and this paper provides the details. This paper also reviews the status of efforts around the country to implement policies that remove any disincentive for investments in cost-effective energy efficiency and distributed resources. While we focus here on providers of electricity service, natural gas providers face the same disincentive, and we briefly discuss progress in this area.

As the procurement options for portfolio managers have increased over the past decade, the incentives they face for procuring one type of resource over another have become more complex. Not only must they choose between supply- and demand-side resources, but between various types of owned and contracted resources as well. In order to create a more level playing field among all competing resources, and to allow the most cost-effective resources to prevail, the portfolio manager needs to have balanced incentives for all these types of resources. This paper looks at how to structure incentives for energy efficiency in the context of an entire portfolio of resources, drawing heavily on California’s recent experience.