Impact of Large Scale Energy Efficiency Programs On Consumer Tariffs and Utility Finances in India

Large-scale EE programs would modestly increase tariffs but reduce consumers' electricity bills significantly. However, the primary benefit of EE programs is a significant reduction in power shortages, which might make these programs politically acceptable even if tariffs increase. To increase political support, utilities could pursue programs that would result in minimal tariff increases. This can be achieved in four ways: (a) focus only on low-cost programs (such as replacing electric water heaters with gas water heaters); (b) sell power conserved through the EE program to the market at a price higher than the cost of peak power purchase; (c) focus on programs where a partial utility subsidy of incremental capital cost might work and (d) increase the number of participant consumers by offering a basket of EE programs to fit all consumer subcategories and tariff tiers. Large scale EE programs can result in consistently negative cash flows and significantly erode the utility's overall profitability. In case the utility is facing shortages, the cash flow is very sensitive to the marginal tariff of the unmet demand. This will have an important bearing on the choice of EE programs in Indian states where low-paying rural and agricultural consumers form the majority of the unmet demand. These findings clearly call for a flexible, sustainable solution to the cash-flow management issue. One option is to include a mechanism like FAC in the utility incentive mechanism. Another sustainable solution might be to have the net program cost and revenue loss built into utility's revenue requirement and thus into consumer tariffs up front. However, the latter approach requires institutionalization of EE as a resource. The utility incentive mechanisms would be able to address the utility disincentive of forgone long-run return but have a minor impact on consumer benefits. Fundamentally, providing incentives for EE programs to make them comparable to supply-side investments is a way of moving the electricity sector toward a model focused on providing energy services rather than providing electricity.