Carrots and Sticks: A Comprehensive Business Model for the Successful Achievement of Energy Efficiency Resource Standards

Energy efficiency resource standards (EERS) are a prominent strategy to potentially achieve rapid and aggressive energy savings goals in the U.S. As of December 2010, twenty-six U.S. states had some form of an EERS with savings goals applicable to energy efficiency (EE) programs paid for by utility customers. The European Union has initiated a similar type of savings goal, the Energy End-use Efficiency and Energy Services Directive, where it is being implemented in some countries through direct partnership with regulated electric utilities.U.S. utilities face significant financial disincentives under traditional regulation which affects the interest of shareholders and managers in aggressively pursuing cost-effective energy efficiency. Regulators are considering some combination of mandated goals ("sticks") and alternative utility business model components ("carrots" such as performance incentives) to align the utility's business and financial interests with state and federal energy efficiency public policy goals. European countries that have directed their utilities to administer EE programs have generally relied on non-binding mandates and targets. In the U.S., most state regulators have increasingly viewed "carrots" as a necessary condition for successful achievement of energy efficiency goals and targets.In this paper, we analyze the financial impacts of an EERS on a large electric utility in the State of Arizona using a pro-forma utility financial model, including impacts on utility earnings, customer bills and rates. We demonstrate how a viable business model can be designed to improve the business case while retaining sizable ratepayer benefits. Quantifying these concerns and identifying ways they can be addressed are crucial steps in gaining the support of major stakeholder groups - lessons that can apply to other countries looking to significantly increase savings targets that can be achieved from their own utility-administered EE programs.