Duke Energy and Energy Efficiency: NC Commission’s Decision Could Have Been Better

Lynne Kiesling

On Wednesday the North Carolina Utilities Commission approved one of two new power plants for construction by Duke Energy.

Duke Energy Corp. may build only one 800-megawatt coal-fired generator at its aging facility in western North Carolina, not the two the utility has sought for nearly two years, the state Utilities Commission ruled Wednesday.

The Charlotte-based company said it needed the generators to meet increasing consumer demand.

Environmentalists argued Duke had failed to consider cleaner power-generating options and that the new generators would increase pollution from the Cliffside Steam Station, about 60 miles west of Charlotte.

In addition, commissioners ruled that the single unit could be built only if Duke agrees to retire the four existing units when the new generator comes on line. Duke would also be required to invest 1 percent of its annual retail revenues from electricity sales in energy efficiency programs.

Let’s highlight that last sentence: Duke would also be required to invest 1 percent of its annual retail revenues from electricity sales in energy efficiency programs.

Clearly the Commission is trying to move its regulated firm in the direction of reducing quantity demanded as growth occurs and demand shifts out, instead of building new generation to meet anticipated demand increases. But “requiring investment in energy efficiency programs”? That’s an old-fashioned, retrograde way to think about the utility’s incentives and “demand side management”. Mandating energy efficiency programs is a relic of the century-long history of the top-down control-and-manage mindset in the industry, and it’s sad and disappointing that state commissions continue to rely on the mandatory energy efficiency program as their only means of providing incentives to utilities to sell less power. For one thing, they are not generally particularly effective at producing demand reduction, and one reason why they are not effective is that they don’t create any incentives for the utility to cater to the diverse, heterogeneous ways and times that their customers use power and could change their behavior.

Here’s a more innovative, 21st-century, but still straightforward approach: why not change the utility’s incentive to sell more power? Historical, rate-of-return regulation solidifies the volumetric incentive: to make more profit, the utility must sell more power. As long as that incentive persists, utilities will prefer building new power plants as a core part of their corporate strategy. But the utility business model is a creature of the regulatory incentives facing it. Until commissions change those incentives in a deeper way than just mandating energy efficiency programs, the tension we see in this Duke Energy case will persist.

How can utilities make more profits by selling less power? One way is through dynamic pricing, which enables the utility to offer time-varying rates to its customers and empowers its customers to choose the level of price risk that they are willing to bear, in return for some anticipated amount of savings on their bill if they change their behavior in response to these price signals. And if the utility wants another value proposition to accompany that dynamic pricing and to increase their profit potential from dynamic pricing, they could offer value-added services to accompany the different contracts. These services, such as installing a home gateway that provides the consumer with information about the energy consumption of all of the appliances and systems in the home, could be of immense value to some consumers, and dynamic pricing plus value-added services allows both the consumer and the firm to benefit.

That’s a more forward-looking, more innovative, more insightful approach than the old-style mandatory energy efficiency program. Dynamic pricing harnesses the consumer’s interest in energy efficiency, and through the consumer’s preference, it makes the utility care about energy efficiency in a way that they will never care about a mandatory energy efficiency program. Energy efficiency and dynamic pricing go hand in hand. Until state commissions are willing to incorporate dynamic pricing into their regulatory arsenal, they will fail to achieve as much energy efficiency as they want.

Maybe the North Carolina Commission sees the dynamic pricing approach as risky, or as only feasible in states with retail restructuring. That is incorrect. Take, for example, the residential time-of-use contract at Gulf Power, or the residential real-time pricing contract at Commonwealth Edison. These contracts have been available for years, and they have a proven track record of peak smoothing, customer bill saving, and customer satisfaction. I encourage North Carolina and other state commissions to use the laboratory of the states and consider these examples of active, dynamic ways to achieve energy efficiency through offering choice to consumers.

UPDATE: In an instance of interesting timing, the Electricity Consumers Resource Council has released a white paper on what they perceive as the failure of regulatory “revenue decoupling” rulings. One point of the paper reiterates my point above:

[T]he first and most important step regulators can take to ensure that ratepayers themselves are induced to make energy efficient investments and behavioral changes is to implement retail rates that send the proper price signals to each customer class.

Duke Energy and Energy Efficiency: NC Commission’s Decision Could Have Been Better

Lynne Kiesling

On Wednesday the North Carolina Utilities Commission approved one of two new power plants for construction by Duke Energy.

Duke Energy Corp. may build only one 800-megawatt coal-fired generator at its aging facility in western North Carolina, not the two the utility has sought for nearly two years, the state Utilities Commission ruled Wednesday.

The Charlotte-based company said it needed the generators to meet increasing consumer demand.

Environmentalists argued Duke had failed to consider cleaner power-generating options and that the new generators would increase pollution from the Cliffside Steam Station, about 60 miles west of Charlotte.

In addition, commissioners ruled that the single unit could be built only if Duke agrees to retire the four existing units when the new generator comes on line. Duke would also be required to invest 1 percent of its annual retail revenues from electricity sales in energy efficiency programs.

Let’s highlight that last sentence: Duke would also be required to invest 1 percent of its annual retail revenues from electricity sales in energy efficiency programs.

Clearly the Commission is trying to move its regulated firm in the direction of reducing quantity demanded as growth occurs and demand shifts out, instead of building new generation to meet anticipated demand increases. But “requiring investment in energy efficiency programs”? That’s an old-fashioned, retrograde way to think about the utility’s incentives and “demand side management”. Mandating energy efficiency programs is a relic of the century-long history of the top-down control-and-manage mindset in the industry, and it’s sad and disappointing that state commissions continue to rely on the mandatory energy efficiency program as their only means of providing incentives to utilities to sell less power. For one thing, they are not generally particularly effective at producing demand reduction, and one reason why they are not effective is that they don’t create any incentives for the utility to cater to the diverse, heterogeneous ways and times that their customers use power and could change their behavior.

Here’s a more innovative, 21st-century, but still straightforward approach: why not change the utility’s incentive to sell more power? Historical, rate-of-return regulation solidifies the volumetric incentive: to make more profit, the utility must sell more power. As long as that incentive persists, utilities will prefer building new power plants as a core part of their corporate strategy. But the utility business model is a creature of the regulatory incentives facing it. Until commissions change those incentives in a deeper way than just mandating energy efficiency programs, the tension we see in this Duke Energy case will persist.

How can utilities make more profits by selling less power? One way is through dynamic pricing, which enables the utility to offer time-varying rates to its customers and empowers its customers to choose the level of price risk that they are willing to bear, in return for some anticipated amount of savings on their bill if they change their behavior in response to these price signals. And if the utility wants another value proposition to accompany that dynamic pricing and to increase their profit potential from dynamic pricing, they could offer value-added services to accompany the different contracts. These services, such as installing a home gateway that provides the consumer with information about the energy consumption of all of the appliances and systems in the home, could be of immense value to some consumers, and dynamic pricing plus value-added services allows both the consumer and the firm to benefit.

That’s a more forward-looking, more innovative, more insightful approach than the old-style mandatory energy efficiency program. Dynamic pricing harnesses the consumer’s interest in energy efficiency, and through the consumer’s preference, it makes the utility care about energy efficiency in a way that they will never care about a mandatory energy efficiency program. Energy efficiency and dynamic pricing go hand in hand. Until state commissions are willing to incorporate dynamic pricing into their regulatory arsenal, they will fail to achieve as much energy efficiency as they want.

Maybe the North Carolina Commission sees the dynamic pricing approach as risky, or as only feasible in states with retail restructuring. That is incorrect. Take, for example, the residential time-of-use contract at Gulf Power, or the residential real-time pricing contract at Commonwealth Edison. These contracts have been available for years, and they have a proven track record of peak smoothing, customer bill saving, and customer satisfaction. I encourage North Carolina and other state commissions to use the laboratory of the states and consider these examples of active, dynamic ways to achieve energy efficiency through offering choice to consumers.

UPDATE: In an instance of interesting timing, the Electricity Consumers Resource Council has released a white paper on what they perceive as the failure of regulatory “revenue decoupling” rulings. One point of the paper reiterates my point above:

[T]he first and most important step regulators can take to ensure that ratepayers themselves are induced to make energy efficient investments and behavioral changes is to implement retail rates that send the proper price signals to each customer class.