Local, state and federal policies that jointly promote the generation of electricity from renewable technologies and the pursuit of energy efficiency are expected to help mitigate the detrimental effects of global climate change and foster energy independence. We examine the financial impacts on various stakeholders from alternative compliance strategies with a Combined Efficiency and Renewable Electricity Standard (CERES) using a case study approach for utilities in Kansas. If only supply-side options are considered, our analysis suggests that a Kansas "super-utility" would prefer to build its own renewable energy resources, while ratepayers would favor a procurement strategy that relies on long-term renewable power purchase agreements. Introducing energy efficiency under varying levels as a CERES resource will, under our analysis, reduce ratepayer bills by ~;;$400M to ~;;$1.0B between 2009 and 2028, but commensurately erode shareholder returns by ~;;10 to ~;;100 basis points. If a business model for energy efficiency inclusive of both a lost fixed cost recovery mechanism and a shareholder incentive mechanism is implemented, our results illustrate how shareholder returns can be improved through the pursuit of energy efficiency, by at most ~;;20 basis points if certain conditions apply, while ratepayers continue to save between $10M and ~;;$840M over 20 years.

Achieving significant reductions in retail electric sales is becoming a priority for policymakers in many states and is echoed at the federal level with the introduction of legislation to establish a national energy efficiency resource standard. Yet, as the National Action Plan on Energy Efficiency (NAPEE) pointed out, many utilities continue to shy away from seriously expanding their energy efficiency program offerings because they claim there is insufficient profit motivation, or even a financial disincentive, when compared to supply-side investments. In response to an information request from the Kansas Corporation Commission staff, we conducted a financial analysis to assess the utility business case in Kansas for pursuing more aggressive energy efficiency that complies with recent state legislation. Kansas' utilities are vertically integrated and don't face retail competition. With historically low retail rates and modest experience with energy efficiency, the achievement of rapid and substantial sales reductions from energy efficiency will require a viable utility business model. Using a conglomerate of the three largest utilities in Kansas, we quantitatively illustrate the tradeoff between ratepayer and shareholder interests when a 1percent reduction in incremental sales is achieved through energy efficiency both with and without the impact of future carbon regulation. We then assess if the utility can be compensated in a manner that produces a sufficient business case but leaves an adequate amount of net resource benefits for ratepayers at a cost that is not overly burdensome. Finally, we show how several common shareholder incentive mechanisms would be designed to achieve this balance.

Empirical evidence concerning demand response (DR) resources is needed in order to establish baseline conditions, develop standardized methods to assess DR availability and performance, and to build confidence among policymakers, utilities, system operators, and stakeholders that DR resources do offer a viable, cost-effective alternative to supply-side investments. This paper summarizes the existing contribution of DR resources in U.S. electric power markets. In 2008, customers enrolled in existing wholesale and retail DR programs were capable of providing ~;;38,000 MW of potential peak load reductions in the United States. Participants in organized wholesale market DR programs, though, have historically overestimated their likely performance during declared curtailments events, but appear to be getting better as they and their agents gain experience. In places with less developed organized wholesale market DR programs, utilities are learning how to create more flexible DR resources by adapting legacy load management programs to fit into existing wholesale market constructs. Overall, the development of open and organized wholesale markets coupled with direct policy support by the Federal Energy Regulatory Commission has facilitated new entry by curtailment service providers, which has likely expanded the demand response industry and led to product and service innovation.

Many state regulatory commissions and policymakers want utilities to aggressively pursue energy efficiency as a strategy to mitigate demand and energy growth, diversify the resource mix, and provide an alternative to building new, costly generation. However, as the National Action Plan for Energy Efficiency (NAPEE 2007) points out, many utilities continue to shy away from aggressively expanding their energy efficiency efforts when their shareholder's fundamental financial interests are placed at risk by doing so. Thus, there is increased interest in developing effective ratemaking and policy approaches that address utility disincentives to pursue energy efficiency or lack of incentives for more aggressive energy efficiency efforts. New regulatory initiatives to promote increased utility energy efficiency efforts also affect the interests of consumers. Ratepayers and their advocates are concerned with issues of fairness, impacts on rates, and total consumer costs. From the perspective of energy efficiency advocates, the quid pro quo for utility shareholder incentives is the obligation to acquire all, or nearly all, achievable cost-effective energy efficiency. A key issue for state regulators and policymakers is how to maximize the cost-effective energy efficiency savings attained while achieving an equitable sharing of benefits, costs and risks among the various stakeholders. In this study, we modeled a prototypical vertically-integrated electric investor-owned utility in the southwestern US that is considering implementing several energy efficiency portfolios. We analyze the impact of these energy efficiency portfolios on utility shareholders and ratepayers as well as the incremental effect on each party when lost fixed cost recovery and/or utility shareholder incentive mechanisms are implemented. A primary goal of our quantitative modeling is to provide regulators and policymakers with an analytic framework and tools that assess the financial impacts of alternative incentive approaches on utility shareholders and customers if energy efficiency is implemented under various utility operating, cost, and supply conditions. We used and adapted a spreadsheet-based financial model (the Benefits Calculator) which was developed originally as a tool to support the National Action Plan for Energy Efficiency (NAPEE). The major steps in our analysis are displayed graphically in Figure ES- 1. Two main inputs are required: (1) characterization of the utility which includes its initial financial and physical market position, a forecast of the utility?s future sales, peak demand, and resource strategy to meet projected growth; and (2) characterization of the Demand-Side Resource (DSR) portfolio ? projected electricity and demand savings, costs and economic lifetime of a portfolio of energy efficiency (and/or demand response) programs that the utility is planning or considering implementing during the analysis period. The Benefits Calculator also estimates total resource costs and benefits of the DSR portfolio using a forecast of avoided capacity and energy costs. The Benefits Calculator then uses inputs provided in the Utility Characterization to produce a ?business-as usual? base case as well as alternative scenarios that include energy efficiency resources, including the corresponding utility financial budgets required in each case. If a decoupling and/or a shareholder incentive mechanism are instituted, the Benefits Calculator model readjusts the utility?s revenue requirement and retail rates accordingly. Finally, for each scenario, the Benefits Calculator produces several metrics that provides insights on how energy efficiency resources, decoupling and/or a shareholder incentive mechanism impacts utility shareholders (e.g. overall earnings, return on equity), ratepayers (e.g., average customer bills and rates) and society (e.g. net resource benefits).