Energy Efficiency in the Power Distribution Industry

Abstract

In the power industry, it is a well-known fact that, under traditional regulatory schemes, such as rate-of-return regulation, power distribution companies (DISCOs) have disincentives to provide energy efficiency (EE) programs because this rate design ties utilities’ revenue directly to the volume of commodity sales. Consequently, the debate about EE in power distribution has focused on the design of regulatory mechanisms to mitigate disincentives and/or to incentivize DISCOs to implement EE programs. This paper studies the most recent trends in EE policies aimed to mitigate disincentives and/or to incentivize DISCOs to implement EE programs. Basically, we analyze four types of mechanisms to promote energy efficiency of the DISCOs: (i) mechanisms that decouple the income and the sales volume of DISCOs through periodic rate adjustments; (ii) performance-based incentive mechanisms aimed to reach certain goals of EE programs; (iii) tradable certificates (permits) of EE programs; and (iv) legal imposition to reach certain goal levels of EE.
Decoupling mechanism refer to a tariff-tuning mechanism that decouples the DISCOs’ ability to recover their costs (and earn profits) from the realized sales volume, guaranteeing a fixed revenue level to DISCOs during a specific period. Performance-Based Ratemaking (PBR) is a form of utility regulation that strengthens the financial incentives to lower rates, lower costs, or improve non-price performance relative to traditional, rate-of-return regulation. A tradable EE certificate represents a certain amount of energy saving that is to be realized during a pre-specified time span as result of an energy saving investment, which has been typically undertaken in the framework of the EE certificate regulatory system. Under legal imposition mechanisms, a regulatory authority fixes a minimum investment level in EE programs, typically imposing a requirement to DISCOs of spending at least x% of their revenues in EE programs.