Question

Why is it a challenge to utilities to promote energy efficiency? How might decoupling reduce the challenge?

Answer 1

In conventional regulatory rate systems, utility income is proportional to energy and natural gas purchases, while other service prices, irrespective of purchases, are set. As a result, initiatives that increase their consumers' energy usage and thereby decrease revenue may have a detrimental effect on utility income. This "throughput opportunity" poses an significant obstacle to successful energy efficiency measures for utilities. Since energy efficiency is one of the simplest, safest and cleanest ways to address many of our energy challenges, it's important to encourage utilities to invest in efficient energy efficiency initiatives for customers. Decoupling is a method for rate change that addresses the market barrier

Decoupling refers to policies intended to "decouple" utility revenues from overall electric or gas sales such that utilities have little incentive to seek to sell more electricity. Decoupling modifies conventional rate-making methods to periodically change prices to ensure that revenue from utilities is neither greater nor less than what is required to cover expenses and equal returns.

Since utilities operate within their coverage areas as monopolies, the investor-owned utilities do not set their own rates. Public utilities commissions (PUCs) often set rates every couple of years at a point that is appropriate for the utility to recover costs and obtain a fair return on investment. Real utility revenue, however, varies depending on actual energy usage, leading to utilities earning more or less revenue than the PUC said they wanted. Decoupling sets the revenue required to cover defined expenses, then allows prices to adjust with demand in order to meet the target revenue. Decoupling can be introduced by adding a 'true-up' feature, which automatically changes consumption-based levels more frequently. Decoupling may also be carried out using other strategies, such as a balance account, which is used to store surplus revenue or compensate for shortfalls in revenues.