NYT Story on Energy Efficiency, But Where Are The Prices?

Lynne Kiesling

Earlier this week there was a good story in the New York Times on energy efficiency and increasing industrial and commercial interest in improving their energy efficiency. In talking about getting utilities more interested in inducing their customers to implement more efficient technologies, the article notes that

Opportunities like this abound in the commercial and industrial sectors, requiring no new research or technology. But few places are doing an effective job of finding them, experts say. …

At present, most regulated utilities have their rates set by state officials by calculating how much money they would need for a fair rate of return, and dividing by the amount of electricity sold, to arrive at a price for each kilowatt-hour, or for a kilowatt of load. Spend dollars to make more power, and earn a return on that money; spend dollars to sell less, and watch your income fall. …

In Vermont, a different argument has carried the day. Cutting electric consumption at Green Mountain’s coffee roasting plant and hundreds of other places will eliminate the need to build some additional power plants, string transmission lines and fuel the plants.

The last few megawatts of power, from new generators and lines, is more expensive than the cost from existing plants and lines, so cutting growth in electricity demand also cuts high-cost supplies.

Finally! An energy efficiency story that notes two important things about prices: utilities have no incentive to sell less power given the existing regulatory structure, and dynamic retail pricing that does a better job of reflecting peak-hour generation costs will reduce the strain on the physical infrastructure and reduce the need for additional investment. Yay!


One thought on “NYT Story on Energy Efficiency, But Where Are The Prices?

  1. What the article also misses is that regulatory ratemaking mixes fixed and variable costs in ways which further discourage utility efforts regarding conservation and efficiency. Most jurisdictions allow utilities to recover only 25-30% of their fixed costs in the fixed portion of their rates (monthly service charges); the balance of the fixed costs are recovered in the variable portion of the rates. Therefore, if a utility experiences reduced sales, for whatever reasons, it under-recovers its fixed costs. This is why utilities’ earnings suffer during periods of mild weather or economic slowdowns; and, why utilities “over-earn” their allowable returns during extreme weather, or during periods of very good economic activity and growth.

    Utilities which still own their generation have the extra incentive to fully recover their fixed generation costs as well.

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