Go Green and Save Money

The concept Mr. Rogers is proposing is not all that novel. I watched a re-run of a story on "Race to Save the Planet" which highlighted the efforts of a mid-western utility to reduce energy demand. This utility (I forget the name) financed energy audits for the community it served. They then helped finance the necessary work to improve the efficiency of the community. After a couple of years, this community used 25% less energy than the U.S. national average. Not a bad start.

NY Times

By Thomas Friedman
August 22, 2007

Have your eyes recently popped out of your head when you opened your electric bill? Do you, like me, live in one of those states where electricity has been deregulated and the state no longer oversees the generation price so your utility rates have skyrocketed since 2002?

If so, you need to listen to a proposal being aired by Jim Rogers, the chairman and chief executive of Duke Energy, and recently filed with the North Carolina Utilities Commission. (Duke Energy is headquartered in Charlotte.) It’s called “save-a-watt,” and it aims to turn the electricity/utility industry upside down by rewarding utilities for the kilowatts they save customers by improving their energy efficiency rather than rewarding them for the kilowatts they sell customers by building more power plants.

Mr. Rogers’s proposal is based on three simple principles. The first is that the cheapest way to generate clean, emissions-free power is by improving energy efficiency. Or, as he puts it, “The most environmentally sound, inexpensive and reliable power plant is the one we don’t have to build because we’ve helped our customers save energy.”

Second, we need to make energy efficiency something that is as “back of mind” as energy usage. If energy efficiency depends on people remembering to do 20 things on a checklist, it’s not going to happen at scale.

Third, the only institutions that have the infrastructure, capital and customer base to empower lots of people to become energy efficient are the utilities, so they are the ones who need to be incentivized to make big investments in efficiency that can be accessed by every customer.

The only problem is that, historically, utilities made their money by making large-scale investments in new power plants, whether coal or gas or nuclear. As long as a utility could prove to its regulators that the demand for that new plant was there, the utility got to pass along the cost, and then some, to its customers. Mr. Rogers’s save-a-watt concept proposes to change all of that.

“The way it would work is that the utility would spend the money and take the risk to make its customers as energy efficient as possible,” he explained. That would include installing devices in your home that would allow the utility to adjust your air-conditioners or refrigerators at peak usage times. It would include plans to incentivize contractors to build more efficient homes with more efficient boilers, heaters, appliances and insulation. It could even include partnering with a factory to buy the most energy-efficient equipment or with a family to winterize their house.
“Energy efficiency is the ‘fifth fuel’ — after coal, gas, renewables and nuclear,” said Mr. Rogers. “Today, it is the lowest-cost alternative and is emissions-free. It should be our first choice in meeting our growing demand for electricity, as well as in solving the climate challenge.”

Because energy efficiency is, in effect, a resource, he added, in order for utilities to use more of it, “efficiency should be treated as a production cost in the regulatory arena.” The utility would earn its money on the basis of the actual watts it saves through efficiency innovations. (California’s “decoupling” systems goes partly in this direction.)

At the end of the year, an independent body would determine how many watts of energy the utility has saved over a predetermined baseline and the utility would then be compensated by its customers accordingly.

“Over time,” said Mr. Rogers, “the price of electricity per unit will go up, because there would be an incremental cost in adding efficiency equipment — although that cost would be less than the incremental cost of adding a new power plant. But your overall bills should go down, because your home will be more efficient and you will use less electricity.”

Once such a system is in place, Mr. Rogers added, “our engineers would wake up every day thinking about how to squeeze more productivity gains out of new technology for energy efficiency — rather than just how to build a bigger transmission or distribution network to meet the growing demands of customers.” (Why don’t we think about incentivizing U.S. automakers the same way — give them tax rebates for save-a-miles?)

That is how you produce a more efficient energy infrastructure at scale. “Universal access to electricity was a 20th century idea — now it has to be universal access to energy efficiency, which could make us the most energy productive country in the world,” he added.

Pulling all this off will be very complicated. But if Mr. Rogers and North Carolina can do it, it would be the mother of all energy paradigm shifts.