Maryland is Energizing America: Electricity Profit Decoupling

Every so often, need to delve into one of those policy arenas which are — on their face — arcane, but critical pieces of moving the nation on the path toward a sustainable and prosperous energy future, on the path to Energize America.  

Just as Renewable Power Standards are critical to helping drive America’s electrical supply away from fossil fuels, so too is Profit Decoupling critical to foster ever more efficient use of that electricity.

Maryland just took a real step forward, instituting profit decoupling, becoming the fourth state (after California, Iowa, and New York) in the Union to have profit decoupling in place.

Cheers to Maryland …

Time to work on the other 47 states … DC … and the territories as well.

What Maryland is doing is, as Joe Romm would put it, smart Californication of energy policies.

Popularized by the Red Hot Chili Peppers, the term “Californication” actually refers to the surge of Californians migrating up the West Coast following the opening of a major highway. In this context, we’re hoping we can Californicate the state’s climate change and energy policies to the rest of the Union.

Since the 1970s, California has kept its per capita energy use at a level rate, using primarily energy efficiency programs. Over time and with minimal spending, the cost of electricity under the programs is 1.4 cents per kilowatt-hour. That’s an outstanding rate compared to traditional or even carbon-free energy sources.

What does that “1.4 cents per kilowatt-hour” refer to?  To
Negawatts, or the saving of energy rather than the creation of new power. There are few (if any) Americans who pay 1.4 cents per kwh. Thus, California has been saving power through investment in better technology, education, and other investments that come in far less expensive than what it costs to create new power.  (For more details, see this CA briefing (PDF) which, by the way, shows the average cost of energy efficiency at 2.95 cents, still less than half any additional power generation options.)

Now, Maryland has decided to adopt the key regulatory approach that enables systematic and long-term investment in that energy effficiency.

According to
The Washington Post (Maryland Adopts Plan for Energy Efficiency) (note a business article rather than Metro or Front Page):

decoupling will not cut electricity demand by itself, but it will mean that utilities can provide incentives for conservation programs — such as rewards for purchases of high-efficiency appliances — without losing revenue.

Thus, the business has an incentive for helping people cut energy use.

But, do consumers win out as well?

Under decoupling plans, if customers cut energy use, the rate for distribution costs is increased in later months so that the utility can cover its fixed costs and maintain its wires, poles, substations and other infrastructure. Consumers would still save money on fuel costs, the largest component of their electric bills.

Note, that the increased distribution costs really means — opportunity for bigger profits.  Hmm, weird that the business writer misses that.

But, what is the consumer’s savings? Help in cutting electrical power use and thus paying less for ‘the’ electricity. Now, the savings are shared as the distribution charge will go up a little.

“We look at it as a significant win for both the customer and the utility,” said Pepco Holdings chief financial officer Joseph M. Rigby. “If we have reduced usage, the utility is not harmed. It provides a great deal of stability to the revenue the utility gets and it also provides a great deal of stability for the customers themselves.”

Again, the utility has a chance to make more money even while helping people save power.  

Delmarva has projected that its customers’ average electricity use will rise 1.2 percent a year through 2010, and Pepco has forecast 0.8 percent annual increases, though rising prices have actually lowered demand slightly over the past two years. But the utilities currently spend virtually nothing to promote energy efficiency. In their proposals to the PSC, they said they would spend a still-modest $7.4 million over the next three years.

What might profit decoupling do? Provide a real incentive for multiplying this energy efficiency investment. Help consumers, at all levels, save power at a lower cost than the value of increased distribution fees. Seek a win-win by splitting the savings. (Note: there is a potential early stage problem: the biggest, easiest payoffs are frequently large users (business, government) and thus the utility has an incentive to focus on the large customer at least early in the process — higher, easier payoff for the same work load.)

The
Energize America plan (link to June 2007, v5, pdf) Act XVIII was the  Demand Side Management Act (“Real Time Energy Pricing”)

Objective

  • To provide incentives for utility companies to reduce energy consumption, and
  • to provide users with timely and actionable information on the cost of their electricity.

Description

Utilities are often in the best position to reduce both aggregate and localized energy consumption for businesses and consumers alike. However, under the current regulatory framework where ‘more income’ is derived mainly from selling ‘more power’, utilities are not financially motivated to implement meaningful demand reduction solutions for their customers. Furthermore, business and residential customers often lack the detailed information and tools necessary to make informed decisions on their energy consumption, especially during times of supply constraints such as a prolonged heat wave in the summer.
The Demand Side Management Act will decouple utility profits from their traditional role of energy generation, transmission and distribution, and will allow utilities and businesses to profit from energy savings that they create for their customers.

Energize America supports Maryland’s action and hopes other states will follow suit.

Northern Virginia is spendthrift when it comes to electricity, with above average growth in electricity use. Projecting these profligate habits into the future provides the basis for a high-power electric transmission line to bring electricity from ‘cheap’ coal to the DC area.  This is a disastrous approach in many ways.  

My January OPED in the Post (No Efficiency In Power Line Debate) included the following line:

Does the utility have any incentive to explore energy efficiency and distributed power generation rather than expanding the distribution system to facilitate greater use of electricity?
Sadly, no. The utility rate structure rewards the utility for selling more kilowatt hours. Under current structuring, massive energy-efficiency projects would be money-losers. There are ways to address this — most notably through profit-decoupling, which provides paths for a utility to make money through “negawatts” just as it might through selling more kilowatts.

Note that many in the electricity industry are big supporters of profit decoupling, such as you will find at the Regulatory Assistance Project.  Or, for example, the Energy Pulse article: Divorcing Electricity Sales from Profits Creates Win-Win for Utilities and Customers. In other words, it is a mainstream — not out-of-this-world — concept to seek to create incentives for the utility to cut energy use/seek efficiencies even more aggressively than creating additional power.

Maybe Richmond will look to Annapolis for a lesson. (*UPDATE* At Raising Kaine (RK), Lowell, similarly argues that it is  Time to “Decouple” Dominion.) If Virginia would become the sixth state to adopt profit de-coupling, perhaps that power line and a lot of coal-fired electricity would become unnecessary.

Hmmm … time to write a letter to Richmond.

Ask yourself:  Are you doing
your part to
ENERGIZE AMERICA?
Are you ready to do your part?

Your voice can … and will make a difference.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s