Sharing the savings to promote energy efficiency

Shared-savings incentives offer a new way for regulated utilities to improve earnings by encouraging customer energy efficiency. Benefits of cost-effective energy efficiency measures can be shared explicitly among customers participating in an utility demand-side management (DSM) program, all utility ratepayers, and the utility itself. For participating customers, electricity bills are lowered directly; for ratepayers, the costs of providing electric services are reduced; and for utility shareholders, they are allowed to retain a fraction of the net benefits as additional earnings. In this study, we define the basic elements of shared-savings arrangements for utility demandside resources. Next, we compare and contrast specific details of the arrangements approved for three different utilities: Pacific Gas and Electric Company (PG&E), San Diego Gas and Electric Company (SDG&E), and two operating subsidiaries of the New England Electric System (NEES). Our analysis suggests that the percentage share of net benefits on which utilities are allowed to earn is a relatively poor indicator of the incentive mechanism`s overall affect on utility earnings. Earnings opportunities and potential are also significantly influenced by particular incentive features. These include the definition and measurement of load reductions, program costs, and program benefits; program cost recovery and the timing of incentive recovery; performance thresholds; program spending and earnings caps; program eligibility criteria; treatment of lost revenues; and for NEES, a complementary, non-shared-savings incentive. We conclude that the ``collaborative`` processes used to develop incentives for each utility proved extremely useful in allowing parties to negotiate trade-offs inherent between various program design features.