Nationwide, there is growing interest in revamping the utility business model. Doing so has never been more crucial, as the utility industry confronts game-changing trends such as distributed generation, flattening electricity demand, and new regulations.
One of the most recent prominent examples in this domain comes from New York, where earlier this year the state’s Public Service Commission issued a proposal to "Reform the Energy Vision." The proposal, also known as “REV,” paints an ambitious vision of a customer-centric energy system that prioritizes objectives like energy efficiency, demand response, and distributed generation.
The developments in the Empire State reflect a broad and accelerating interest in the “Utility 2.0” model, where utilities deliver customer-focused energy solutions that go well beyond the historical norm of selling energy purely as a commodity.
Across the country, states are revamping the utility business model by implementing an assortment of important regulatory and economic approaches (Sources: ACEEE, the Edison Institute, Opower).
Innovation in the utility sector’s regulatory frameworks is already paving the way for utilities to provide these types of solutions to their customers, in a way that delivers value for consumers while also bolstering utilities’ business.
The map above — which synthesizes data from The Edison Institute, ACEEE, and internal Opower research — shows three common approaches that are being used to deliver one key customer-focused energy solution in particular, energy efficiency, which has been an area of substantial utility spending (upwards of $7 billion annually) over the past few years. It also helps visualize trends in the business models being adopted across the country. Given Opower’s commitment to working closely with our utility partners in their unique regulatory environments, trends like this continually help us understand the landscape and models that exist for our partners in their states.
In the past decade, states have adopted a number of mechanisms to align utility business goals with customer-focused energy solutions and especially greater energy efficiency. These mechanisms -- which as shown in the map include decoupling, lost-revenue adjust mechanisms ("LRAMs"), and performance incentives -- address two main hurdles that traditional utilities face in running energy efficiency initiatives: decreased sales and reduced return on investment. And they ensure that a focus on energy efficiency is a viable and in many cases attractive business proposition for utilities.
For example, decoupling and LRAMs are regulatory mechanisms that essentially sever the tie between a utility's energy sales and its final revenues. In other words, if energy efficiency leads to reduced electricity sales, a utility's business won't suffer in the long term because their ultimate revenues are decided by a publicly approved financial rate of return, rather than how many electrons they sell. Both decoupling and LRAMs have been instrumental in increasing efficiency in the US and are found in 33 states, from California to Arkansas to Massachusetts.
Apart from decoupling and LRAMs, performance incentives for efficiency have also proven to be a highly effective tool to drive energy savings. These incentives motivate utilities to exceed their savings targets, in such a way that helping customers save energy is as financially attractive as selling more of it. Incentives like this can be found in 26 states. As seen in the map, for example, Colorado has a performance incentive that returns 1 percent of net energy efficiency savings to the utility for every 5 percent they exceed their savings goals.
Often, the mechanisms described above are combined with Energy Efficiency Resource Standards (EERS), which function as overarching statewide energy savings targets. Together, EERS's have delivered enormous results in helping customers save money on their electric and gas bills, regulators meet their policy outcomes, and utilities invest in efficiency. In fact, on average, states that use these mechanisms spend more than $50 per household on energy efficiency — 8x the efficiency investment in states without them.
As more states and utilities move towards the Utility 2.0 model, there are several lessons to be learned from how the utility business model can thrive, while simultaneously increasing customer engagement and customer satisfaction.