Bill Clinton explains utility decoupling

Regulatory reform of utilities could lessen the need for new power plants

Posted by Joseph Romm (Guest Contributor) at 2:05 PM on 04 Oct 2007

Read more about: Bill Clinton | energy | climate | greenhouse-gas emissions

Last week, the Clinton Global Initiative (CGI) announced that eight utilities "are committed to seeking regulatory reforms and approvals to increase their investment in energy efficiency by $500 million annually to about $1.5 billion annually."

The utilities -- Con Edison, Duke Energy, Edison International, Great Plains Energy, Pepco Holdings, PNM Resources, Sierra Pacific Resources, and Xcel Energy -- represent nearly 20 million customers. The extra efficiency effort would "reduce carbon dioxide emissions by about 30 million tons" and "avoid the need for 50 500-megawatt peaking power plants."

What regulatory reform? Our former President offered "to try to explain it to you in my basic English" which I reprint here:

Here's the way you pay your electric bill in America, you go -- the electric company gets permission to charge a certain rate per kilowatt hour, so the more you use, the more you pay, and this is the way it is everywhere. Only California today has the power to disconnect how much you pay from how much you use [actually, a few states do]. The significant thing is you can pay a little more kilowatt hour and pay over time for investments in energy efficiency. They've been working on this for 32 years. As a result in California, our largest state, the per capita energy consumption is only 55 percent of the national average.

Mr. Rogers' idea is to have all the utilities have the option and eventually the responsibility to tell every homeowner and every business owner in the United States that they have a right not just to electricity but to the most energy efficient electricity available, and this is not a user-friendly practice. I think I said something about this yesterday, it's not the easiest thing in the world to go out and figure out how to maximally insulate your home, and what is the most cost effective thing to do.

If the utilities do this, then they can put together a plan, go find all the contractors, get all the materials and if in effect pay for the cost on your home or in your office building as if they were building a mini power plant there. That is instead of financing it like a consumer loan for one year or a car loan for three, it could be financed over a twenty-year period or longer. The consumer then would have to pay a little more per kilowatt hour but never so much that they wouldn't still have lower total utility bills because they'd be using so much less. So suppose they make your home 30 percent more efficient, they charge you 15 percent more per kilowatt hour, so your bill goes down 15 percent and they get the financing they need, collectively it will be much less expensive for them than building a new power plant. They'll be able to finance and we won't be contributing any more to climate change.

This is a simple, brilliant idea, but it has the capacity to fundamentally transform what we have been doing in America ... This has a potential to fundamentally change the nature of this debate in a way that will prove its great economics and possible to effectively reduce greenhouse gas emissions ...

If you want to jump start this process, by the way, and you're an American, remember, I will say again, there are, I think, 11 states, Mr. McClarty would know this better, I think there are 11 states which have decoupled electric charges, I mean natural gas charges from natural gas usage, but only California has done this for electricity. We have to do this everywhere in America, then the utilities can become the drivers of maximum energy efficiency.

If you want to learn more about utility decoupling and related measures, go here.

This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.

For story: Bill Clinton explains utility decoupling
16 Comments | Post a Comment

Voodoo economics

Decoupling probably has more meaning in sex, and I really don't want to be educated about how this process saves energy unless stringent conservation measures are imposed - which I guess means even LESS sex. Oh well, maybe Slick Willy could benefit from some of that religion.

The fact is that no matter what the end user does, that electricity came from some power plant that has a known carbon footprint. If you use 450 kW-hours in a month somebody has had to make that juice and send it to you, not to mention significant transmission costs.

Paying for that example 450 kW-hours is a completely different matter. And may I remind the reader that many Californians were the Number One Sucker when ENRON manipulated that exact same trading market.

Onward through the fog

by Sam Wells at 5:57 PM on 04 Oct 2007

Thoughtless, shallow post ...

This is about as polite a comment as can be given to the comment above.

Profit Decoupling provides a financial incentive for utilities to figure out which is cheaper: add new electrical power production to the grid or support energy efficiency.

The US is, today, so energy inefficient (writ large) that we could cuts 10s of % of electricity use before the new power (of any type) could be competitive.

Sadly, Sam seems more interested in trying to write cute phrases with political attacks than in aiding understanding about a complex issue.

A coupld months ago I wrote "Maryland is Energizing America: Electricity Profit Decoupling" (http://www.dailykos.com/story/2007/7/22/225822/077). This provides a different path toward that win-win discussion that Clinton raises (and, well, I quoted Joe Romm in that discussion).

Blogging regularly at Energy Smart to Energize America .

by A Siegel at 8:59 PM on 04 Oct 2007
[ Parent ]

yeah, well

At least he's honest about it. "Onward through the fog" indeed.

by GreenEngineer at 11:10 PM on 04 Oct 2007

Great idea, but be careful

Decoupling is a lot like cap & trade, in that the headline is great, but the (too often overlooked) details are really important. For example, one could decouple simply by shifting to fixed monthly bills with no kWh measure. Utilties would end up with fixed revenue, but customers would have no incentive to conserve, with catastrophic impacts on overall energy use, equivalent to a college with an all-inclusive meal plan. (I have heard utilities ask for this under the guise of decoupling.)

On the more subtle, but no less important side, decoupling removes a negative incentive from the utility (remember: every time you conserve energy, the utility loses money, and so electric utilities have historically been the single biggest obstacle to greater energy efficiency)... but it doesn't create any positive incentives. They can stop losing money with decoupling, but they can't make money. The more rigorous ideas on decoupling address this by "coupling" decoupling with a performanced based rate where a utility is allowed to earn a little more profit if the overall energy efficiency in it's service territory increases. Frustratingly, such measures are often opposed by consumer advocates who think that letting utilities earn more money would be bad for society, but this is critical for success.

Finally, there is an awkward truth to modern utilities that costs are largely fixed (wires & pipes) while revenues are largely variable ($/Kwh). As a result, small reductions in utility revenue lead to big drops in profits... and small increases in utility revenue cause big increases in profits. You can generally tell where a utility is in their cycle by how often they ask for a rate case. (If they don't ask, it almost certainly means that their revenues have risen since the last case on a constant cost base, and they don't want to revisit those costs in the public eye. If they do ask, the reverse is true.) Utilities know this, but do their best to hide it from their regulators - and as a result, the biggest opposition to decoupling has come from the fastest growing utilities, who essentially see this as a cap on profits. Very broadly speaking, gas utilities like decoupling while electric utilities don't, for precisely this reason (although there are of course exceptions to this generalization, especially amongst integrated gas & electric utilities).

I'm delighted to see Clinton raise this issue - but am dubious about Jim Rogers' motivations given the above. And I'd ask us all to keep these details in mind if it comes up in our jurisdictions. The single best resource on all this stuff BTW is The Regulatory Assistance Project, from whom all the concepts above derive.

by Sean Casten at 5:46 AM on 05 Oct 2007

Interesting!

Leave it to Bill to bring this up, and even explain it in plain language. A way to use the cash diverted from big oil, coal,fuel farming, and nuclear subsidies to get distributed renewable energy generation and storage funded.

Subsidies directly to home and business owners who buy into solar, wind, smart grid storage, and conservation measures like geothermal heat exchange heating and air conditioning.

heating/cooling buildings produces 36% of GHG. Transportation is less at 26%. Decoupling could fund that saving of nearly 36% of GHG. And even help pay for the electricity for plugin cars by installing renewable sources for the replacement for oil fueled transportation.

Sam. Could your favorite chimp even understand the word "decoupling" or pronounce it?

http://amazngdrx.blogharbor.com/blog

by amazingdrx at 7:54 AM on 05 Oct 2007

Capital engineering

Access to low cost capital, like that of utility discounts, is not a renewable energy subsidy. It levels the playing field and could cut the cost of efficiencies and renewables in half without limits, and amazingly without tax revenues. I spend a lot of time and money engineering solar cost reductions. Decoupling (access) does more than I could hope for from engineering.

by sunflower at 8:43 AM on 05 Oct 2007

Oh well

My point was that "decoupling" is a buzzword and abstraction, when the true goal is to conserve power and promote alternatives. It has no basis in engineering and is rather an economic tool. Sure have a great Friday and whoop up and Sammy!

I can take whatever you Californicators throw my way. [Dang, another pun, I've got to stop this.]

Onward through the fog

by Sam Wells at 9:54 AM on 05 Oct 2007

Is it really cause and effect

All this sounds good but how much of California's lower energy use is due to efficiency incentives and how much results from a combination of high energy prices, a very moderate climate and a growth rate that has allowed a higher rate of new construction/rebuilding than the rest of the country? I think it's pretty hard to answer that question but my experience is that people respond faster to direct costs that can be avoided than "incentives".

by KenG at 10:25 AM on 05 Oct 2007

My simple mind

There is something my simple mind cannot quite work out.....how is the utility better off from encouraging energy efficiency. Sure, it saves the cost of building another power plant.....but doesn't a utility make money from building power plants?

So instead of the business-as-usual scenario in which the utility makes more money from the original power plant (higher consumer bills) and also makes money from a 2nd plant (required due to energy demand growth left unchecked), we have the decoupling scenario in which the utility makes less money from the original plant (consumer saves money on bills) and cannot make any money from a 2nd plant, as this is not needed. Wouldn't the utility choose the 1st scenario?

Please someone explain where I am going wrong here. I am not trying to criticise the idea, I genuinely cant work out how it is "win-win". Me stupid.

by spiderdijon at 1:34 PM on 05 Oct 2007

Spider

You're asking exactly the right question - let me try to answer. Under the presented paradigm, you're right. More capex at a constant, commission-set return on equity = more revenue. This revenue number then gets divided by anticipated kWh sales to get a $/kWh rate.

Ergo, utilities are incentivized to build big expensive stuff (or, as the old Fortune magazine article put it, it's the only industry in the world where you can drive up your revenues by redecorating the CEO's office). And since the revenue is recovered by kWh charges, the utility has a very strong incentive to block any actions that lower kWh sales, whether through conservation, on-site generation or (God forbid) competition.

The crux of decoupling - at least as RAP has structured it - is essentially that the $/kWh rates are reset periodically to ensure that total revenues remain constant even as kWh sales vary. This doesn't necessarily give them an incentive for efficiency, but it at least makes them agnostic. (See my earlier note about how one needs also to add a peformance-based rate mechanism to give them an incentive for efficiency in a decoupled world - but note that one could also get this same incentive simply by exposing them to competition. It says something deep about the nature of electricity regulation that it's easier to get decoupling done than it is to let markets work in the electric sector, but that is another issue...)

One final note: It is tempting - but false - to conclude that this implies steady increases in rates as consumers can flock towards efficiency and those who don't are left paying more for their power. The reality is that since our electric demand keeps increasing, this actually has the very real potential to lead to steadily lower rates, at least until efficiency investments succeed enough to offset load growth. But given as that would implicitly mean an inversion in energy consumption growth, that's hardly something to be upset about.

Make sense?

by Sean Casten at 1:51 PM on 05 Oct 2007
[ Parent ]

ah ha!.........but.............

Thanks Sean for taking the time to explain this to a dufus such as myself. I understand now that $/kWh rates are adjusted so that revenues are unaffected by varying kWh sales.

However, it now seems to me that the 2 choices open to the utility are:

Business As Usual option (no conservation) -

Higher kWh sales would mean that the rate is adjusted downwards so that revenue remains constant. A 2nd plant is needed, from which the utility makes a guaranteed return-on-capital.

Conservation option -

Lower kWh sales (due to conservation) mean a higher rate to keep utility revenues constant (though how is this consistent with lower electricity bills for consumers?). So in terms of the 1st power plant, the utility is agnostic.

However, there is a reduced liklihood of needing the 2nd plant, so the utility misses out on the guaranteed return that comes with building this extra plant.So the BAU option is still preferred.

(I know that this is a very simplistic scenario in which I assume 1 plant for conservation and possibly 2 plants otherwise, but as I said before, I have a simple mind :-)

I must still be missing something......but I'll work it out eventually!

by spiderdijon at 2:36 PM on 05 Oct 2007

Uh Oh

Spider I think you just convinced me that something is very strange here ... maybe voodoo economics?

The fact is that somebody has to pay for power, no matter its source.

Funny thing is, California has hardly ANY large electrical generation plants. Yup, they import most of it. Oh well, what do I know ...

Onward through the fog

by Sam Wells at 5:28 PM on 05 Oct 2007

Spider

You're generally right, but that's why the RAP model includes a PBR, such that as the efficiency goes up in your territory, you get to earn a higher rate of return on your existing capital. So yes, you might forgo the new plant, but building the new plant would lower efficiency and drop your overall return on invested capital.

As always, the details are important - this certainly isn't universal to all decoupling models. But it is important to recognize the points you've made to make sure that we don't get all caught up in a nice baby/crummy bathwater situation.

by Sean Casten at 10:04 PM on 05 Oct 2007
[ Parent ]

Once again for the record

In the standard scenario the utility earns a fixed rate for power based upon investments in capital projects (coal plants) and operation costs (labor) plus some profit. If more power generation is needed it just builds another plant and charges new and existing customers for it.

The decoupled scenario allows the utility to perform a trick. In order to serve more customers it can help existing customers use less power, say by installing a geo-exchange HVAC system. The utility helps finance the installation of the power saving improvements. The customer still pays less for power imediately and for the life of the unit.

Install enough of these and the utility can serve 5 customers with the original generation capacity it served say 3 customers with. Its allowed a power rate adjustment so that it gets the profit for it's cost in installing efficiency equipment and an allowance that lets it profit from all 5 "average" customers at the same rate as it had for the earlier 3.

All the customers save money because efficiency measures are cheaper than building new power plants. The planet is better because less carbon emissions are required to serve the larger customer base.

The Sacramento Municipal Utility District, SMUD, takes this to the point of installing solar panels on large, south-facing roofs, and providing discounts to large building owners who reduce their cooling loads. It's cheaper to do this than to build new peaker plants. So solar panels are going up all over Sacramento.

How does this effect the end user? SMUD's rates are significantly lower than PG&E's which has a less aggressive solar and efficiency program.

...And since PG&E's rates are currently about 30-percent higher than SMUD's rates, it's not surprising that residents and businesses alike look across the Sacramento River and ask, "Why can't we have that?"
"People who come to West Sacramento, a lot of them from Sacramento, are getting sticker shock" said Oscar Villegas, a West Sacramento City Council member.
"This really impacts our businesses," Villegas said. He noted that Nugget Markets has stores with identical floor plans in SMUD territory and in PG&E territory. The PG&E store pays $300,000 a year more for electricity. "There are other businesses that might not want to move to West Sacramento" because of the higher energy costs, Villegas added.
from Sacramento News and Review

Just to sweeten the pot SMUD is a government run utility district like a water board. PG&E was the formerly bankrupt private utility that promoted the disastrous deregulation scheme initiated by Enron. SMUD's customer don't pay for investors profits and aren't subject to crazed manipulations by Ken Lay wannabees.

Put the Carbon Back

by Pangolin at 3:07 AM on 06 Oct 2007

Pangolin

That's a great point, although I think it's more about the benefits of non-profit utilities (e.g., munis & coops) than decoupling.

One minor disagreement though: decoupling doesn't necessarily say anything about whether or not the utility invests in efficiency. It would be wonderful if they did, and one could certainly come up with a decoupling model that directed them towards same, but the basic idea is agnostic on who puts the money up so long as the utility stops being hostile to it. This is an important point, because the historic model where all system investments are made by the utility has been blind to all the really good investments that end-users would like to make for themselves.

by Sean Casten at 4:53 AM on 06 Oct 2007
[ Parent ]

Wrong

"...We have to do this everywhere in America, then the utilities can become the drivers of maximum energy efficiency."

Our wonderful former President hasn't mastered this subject yet. Utilities will be the drivers of whatever regulators allow them to drive. The old engineering-based mentality of electric industry execs seems to respond only to enhanced profits, and these execs--including Jim Rogers--seem to think they are entitled to every kwh they could possibly produce, and if they aren't allowed to produce it, then they still should be allowed to collect whatever profit they would have realized if they had generated it. That is wrong thinking, and trusting utilities to deliver conservation and efficiency is like letting the fox guard the chicken coop. A better way is to simply order investor-owned utilities to collect funds for implementing efficiency and conservation programs--then engage a third party to administer the programs. Furthermore, it is very possible that a poorly designed "decoupling" mechanism would indeed financially harm those that have already taken aggressive steps to make their homes and businesses efficient

by azirish at 3:29 PM on 09 Oct 2007

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