The Value Case for Energy Efficiency

There is no questioning the notion that customer knowledge of how electricity is priced will lead to improved efficiency and conservation, and ultimately lower electricity bills. The continuing challenge to full customer acceptance of any initiative regarding energy efficiency is two-fold:

• Do the benefits outweigh the costs?
• Will investors support the programs?

The Standard Approach

State regulators continue to struggle with how to best finance the assets that define the utility of the 21^st century. The standard approach of utilities making investments, contingent on regulatory approval, is to pass the costs on to the consumer remains the most viable:

• Certainly the ability of the grid to enable two-way communication between utilities and consumers can reduce peak energy consumption, thereby avoiding the necessity to build out expensive generation infrastructure.
• Operational savings potentially exceed deployment costs, but a compelling argument focuses on the resulting reduction of greenhouse gas emissions and reduced cost of power to consumers over a 15 to 20 year time frame.

The challenge remains an overall supportive yet skeptical view that these new technologies will actually capture the value as advertised. The wild card in the discussion is the expectation that the demand for electricity will steadily increase over the years to come, with higher prices unless:

• Generation capacity is increased, and / or
• Utilities provide customers sufficient motivation and insight to use less energy.

This last point points towards the growing need for two-way communication and demand response, which can lead to improved reliability and real-time pricing.

The Value of Energy Efficiency from 3 Perspectives

Utilities are confronted with a 3-dimensional challenge when they are making plans to  for energy efficiency:

• The advanced consumer needs remains a vital consideration,
• The utility requires a smarter and more responsive grid and supporting T&D infrastructure to meet the regulatory and legislative system performance mandates, and
• Shareholder value must be increased.

The greatest variable to confront in balancing these perspectives is the pace at which consumers will adapt to emerging capabilities and take control of their energy bills. Failure to deal with this variable creates a downward spiral as perceived non-value from the customer equates to regulatory resistance and a potential negative impact on earnings. A number of technical approaches are gaining traction:

• Investments in “smarter” lines allow for redirecting of power flows just prior to congestion,
• Meters are being installed to support the reduction of electricity consumption and facilitate 2-way communication between the utility and customers, and / or
• Devices (e.g. programmable thermostats) are being installed to capture the easier savings related to discretionary use based on preset decisions.

As these approaches are considered by each utility, state regulators are being asked to put the capital investment costs into the rate base; and though appropriate, significant increases in rates during troubled economic times has created an inevitable tension between the consumers and shareholders, with the utility and regulator stuck between. Fortunately, government support, through direct investments, subsidies or cost recovery is not only available, but critical to breaking this potential logjam.

Funding is Only Part of the Challenge

Given that the current partnership” among the traditional stakeholders and government remains intact, it appears that a path exists for a financially viable solution. There is still an issue with respect utility, and ultimately, shareholder profits:

• Energy efficiency will likely lead to selling less electricity, which could in turn decrease profits.
• However, every projection suggests that the demand for power will increase, which based on experience will result in wholesale construction of more power plants.
• By encouraging and enabling consumers to be more energy conservation minded, fewer power plants will need to be built, which will free up capital to address the requirements related to smart grid.

In fact, this reallocation of capital can serve all parties, particularly when trading off between a capital intensive new generation project and reinforcement / modernization of an existing T&D infrastructure. The timing is such that the utilities and regulators need to take full advantage of any government support, thus alleviating the inherent challenge of extended payback periods from all perspectives, and step up its efforts to inform and educate its customers. The benefits are there to be captured, but the key variable will be the smart use of electricity by a society that has not been actively engaged in managing its energy consumption.