Can utilities incorporate energy efficiency into their core business? With performance incentives, they can

(ACEEE blog, 11 Dec 2018) As the utility business model changes, more states are offering utilities incentives to increase energy efficiency by making it as appealing as traditional investments. Our new topic brief, released today, explores performance incentives for utilities in 29 states, focusing on nine innovative states in particular.

New Jersey is one example. In September, the state’s largest utility, Public Service Gas and Electric (PSE&G), proposed a six-year energy efficiency portfolio that would allow them to earn a return on their investment. The utility’s proposed portfolio would increase utility investments in efficiency by 60% in its first year, ramping up to a 700% increase in 2024, compared to 2017 utility investments. It would also more than quadruple the number of programs the utility offers, help New Jersey meet its energy efficiency targets, and save customers an estimated $5.7 billion. The proposal is now being reviewed by the state utility commission.

Even with such clear benefits, however, many utilities would be unable or unwilling to invest as much in energy efficiency. Why? Without proper policies, efficiency reduces electricity sales and profits. To counteract this, New Jersey and 28 other states have performance incentive mechanisms (PIMs) that allow utilities to earn rewards for their investments in energy efficiency when they meet certain performance criteria.

PIMs can be structured in different ways. Some allow utilities to earn a share of the net benefits from efficiency investments and others provide a cash reward for meeting energy savings or other targets (called savings-based and multifactor incentives). Another type of incentive allows utilities to earn a rate of return on their efficiency spending as they would for investments in generation or transmission and distribution infrastructure (and these incentives can also be aligned with performance criteria).

Since our last national review of performance incentives in 2015, we’ve seen a notable upward trend in both multifactor and rate of return incentives. The figure below shows the current landscape of utility energy efficiency PIMs.

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ACEEE blog, 11 Dec 2018: Can utilities incorporate energy efficiency into their core business? With performance incentives, they can