As if we economists do not stir up enough trouble by pontificating on national monetary policy, we have now hit the hornet's nest on energy efficiency. Recent economic analysis points to energy-efficiency investments delivering as little as half of their promoted savings. This is more than a little upsetting to an environmental community attempting to protect humanity from global warming. Will we investigate Santa Claus next?
We economists are such troublemakers. We want to research how energy efficiency actually works inside a home with real humans that pay a monopoly a monthly electricity bill. What this type of economic research has found is that energy efficiency is not an obvious money-saver.
Since less than one-tenth of 1 percent of consumers can correctly self-calculate their electricity bills (that arrives a month after they use their air conditioners), they have little economic basis to do anything other than focus on their thermostat and its ability to clearly message a spouse’s desire to be cool.
Here is an example that illustrates how utility rate design can alter the ROI on energy-efficiency or renewable-energy investments. I am analyzing the return on renewable-energy and energy-efficiency investments for a medical office building. The building pays for its electricity through a highly complex utility rate in which half of the monthly bill is determined by something the utility industry calls a “15 minute non-coincident demand charge.” Let me try to explain how this type of price complexity can deter customer investment in energy efficiency and renewable energy.
Electric demand is the rate of electrical use. Non-coincident means a consumer is setting a higher rate of use at a time that does not align with the time period a utility is setting its system peak rate of use. For example, a consumer could set their rate of use at midnight in the winter when the utility sets its rate of use at noon in the summer. This is a big deal in allocating utility costs. Utilities want to charge more to customers who set their rate of use at the same time they set theirs. But a utility wants to charge customers less (or nothing) went they do not contribute to the setting of that utility’s rate of use.
Now let’s assume you invest in energy efficiency or renewable energy. You do so because you will reduce your energy consumption and you think you will reduce your demand. You think you will save money. But for one 15-minute period during a 8,760-hour year, your building could set a higher demand than estimated in calculating the ROI on an energy-efficiency or renewable-energy investment. Even if this demand occurs at a time when the utility’s system demand is not setting its own peak, you will face a year of higher electric bills!
Clear as mud right? Because it is not, this explains why home- and building-owners maybe underinvesting in energy efficiency and renewable energy. Investors are not attracted to investments that have a precept threat to the targeted rate of return. Utility pricing is too often a perceived threat because it combines the principal of “you can’t beat city hall” (in this case a monopoly utility’s complex pricing) and the principal of “fool me once shame on you, but fool me twice ...” Too many customers view utility pricing (and its regulation) as skewed toward the utility, and too many customers have invested in energy efficiency and have not seen the anticipated savings in their electricity bills as utilities raise rates and change rate designs.
How would this work? The current regulatory process fundamentally designs rates to enable utility investments. Prices are designed to ensure that a utility’s investments delivers a target ROI. What if regulation were to focus instead on insuring that customer investment in energy efficiency and renewable energy delivered a target ROI?
Under such a system, the utility becomes a “network” provider. It profits not from its investments but from its role in enabling customers to profit from their own investments in energy efficiency and renewable energy. In effect, the utility becomes the integrator of customer-owned Zero Net Energy buildings that optimize building performance around cost and environmental impacts. The utility profits when the customer profits, and the utility profits when the customer achieves a lower environmental footprint.
An alternative path would be for states to shift the investment opportunity to consumers. The reason for doing so is because the most promising technology innovations in electricity generation and consumption (like the Nest smart thermostat, rooftop solar and LED lighting) are on the customers’ side of the meter. These technologies offer a path to lower consumer electricity bills plus reduced environmental impacts. In comparison, a utility-centric Clean Power Plan would focus on fossil fuel technologies that will not deliver reduced customer bills and will only deliver modest reductions in global warming emissions compared to our most polluting power plants.
Image credit: Flickr/Jan Tik
Bill Roth is a cleantech business pioneer having led teams that developed the first hydrogen fueled Prius and a utility scale, non-thermal solar power plant. Using his CEO and senior officer experiences, Roth has coached hundreds of CEOs and business owners on how to develop and implement projects that win customers and cut costs while reducing environmental impacts. As a professional economist, Roth has written numerous books including his best selling The Secret Green Sauce (available on Amazon) that profiles proven sustainable best practices in pricing, marketing and operations. His most recent book, The Boomer Generation Diet (available on Amazon) profiles his humorous personal story on how he used sustainable best practices to lose 40 pounds and still enjoy Happy Hour!