Decoupling

Energy efficiency saves money, emits no pollution, and contributes to energy independence. It is a clear boon, yet there are barriers to its implementation.

Traditional utility regulation provides little incentive for utilities to promote energy efficiency because a reduction in sales equals a reduction in utility profits. Decoupling is a way to align a utility’s financial interest with the public interest in efficiency. It separates — or decouples — a utility’s income from the amount of gas or electricity it sells. One way to do this is to establish a “revenue per customer” formula and to periodically revise that based upon actual energy sales.

While decoupling neutralizes the disincentive for utilities to support energy efficiency programs, it doesn’t actually encourage efficiency. Utilities still have more financial incentive to invest in capital assets such as new power plants. For that reason, states that have achieved the greatest efficiency gains have also created performance-based efficiency incentives that allow utilities to earn a positive return on their energy efficiency investments.

One way to do this is with an energy efficiency resource standard, which sets targets for annual efficiency improvements, accompanied by performance-based cash rewards or penalties. This mechanism is often combined with public programs explicitly “hiring” the utility to act as the primary efficiency provider, as Massachusetts, Rhode Island, and Connecticut have done. In those states (unlike Vermont or Maine where there is a statewide efficiency provider), each utility is primarily responsible for delivering efficiency services, like airsealing and weatherizing of most homes, factories and offices in the areas where they provide electricity or natural gas. Under this “utility delivery model,” the utility is paid by a public fund to play that role.

These affirmative incentives are important, but they build upon the foundation laid by decoupling – the crucial first step. That’s why CLF is urging regulators throughout New England to modernize utility rate structures and to implement decoupling. Using energy efficiency to meet more of our power needs – rather than building new power plants — is good for consumers and good for the environment.