Energy Savings and Utility Profits in Arizona
Posted on February 19, 2010 at 10:09 am
At last week’s session of the Association for Energy Service Professionals’ (AESP) 20th annual national conference, I sat by Paul Bonavia, Chairman and CEO of Tucson Electric Power – who looked somewhat uncomfortable as Ralph Cavanagh spoke to the audience of Arizona’s new energy efficiency goal: a 22% reduction by 2020. So I asked my long-time colleague, who is Energy Director of the Natural Resources Defense Council and a real efficiency policy thought leader, how do policymakers get electric and gas utilities excited about selling less of their product?
Ralph argued the case for decoupling of utility revenues and profits. For 100 years, utilities have earned more by selling more. Decoupling is a new regulatory mechanism that allows utilities to earn the same or higher profits when they succeed in reducing energy sales, plus a profit bonus for exceeding conservation targets. I pointed out that this formula is fine for a year or two, but how does a utility grow? How does Paul Bonavia turn a 22% reduction in kWh sales into a success in 2020 when Wall Street is demanding ever-increasing earnings?
The issue is crucial, because the single biggest benefit of the Smart Grid and smart meters is energy conservation. Conservation, based on the studies, will deliver 10% lower bills and carbon emissions from education, feedback, and behavior – and another 10%, for a total of 20% savings, from smart thermostats and smart appliances over the next decade (providing those markets take off).
Ralph’s answer to my query was that decoupling must be accompanied by a somewhat complex profit adjustment mechanism, so utilities continue to benefit and can grow earnings over the years. While the complexity is a challenge, the good news is that 10 states have solved the problem for electricity and 18 for gas.
I have to admit I wasn’t fully convinced of the solution. But I am convinced that the energy efficiency industry is committed to the hard work needed to come up with a better one. Hard work that I’ll continue to work with Ralph and others on.
Ralph’s target is aggressive but achievable. Action points can be like;
1. Redifining the TOU pricing to encourage for DSM – expected energy consumption reduction/re-arrangement by 5%
2. This above measures will decreates the technical loss expected by 2% (consumption reduction by 0.16% considering 8% Tech loss)
3. Efficiency improvement of the electrical gadgets – expected consumption decreament by 5-10%
4. Proper fuel consumption balancing (Gas – Electricity) – expected improvement 2%
5. Encouraging RES (specially solar/wind) – expected consumption reduction from utility by 5% (This will reduce the sale of utility)
6. Merit order operation for using the cheapest power first (over the expensive generations) – expected reduction of cost of supply. This requires proper planning and aggrement in multi organizational level.
…