Designing Shared-Savings Incentive Programs for Energy Efficiency: Balancing Carrots and Sticks

The focus of this work is on the practical issues that emerge when regulators review utility incentive proposals for energy efficiency programs. We examine one particular type of incentive mechanism-shared savings, in which the net benefits from the energy efficiency investment are shared between ratepayers and utility shareholders. The primary basis for the analysis is the shared-savings mechanisms recently put in place by two California investor-owned utilities, Pacific Gas and Electric (PG&E) and San Diego Gas and Electric (SDG&E). The discussion centers on the regulatory concerns and resolutions that arose in reviewing the shared-savings mechanisms proposed by these two utilities. The problems included establishing the basis for determining net benefits, establishing minimum levels of utility performance, rewarding cost-minimizing and resource-value maximizing behavior, and equitable allocating the risks associated with uncertainty in the performance and value of demand-side programs. We suggest that in some cases practical implementation considerations override the theoretically superior choice when addressing these issues. We also argue that important differences between utility demand-side programs make it unreasonable to apply the same incentive mechanism uniformly to all types of DSM programs.