Energy Efficiency Performance Incentives

Successfully Aligning Utility and Public Policy Objectives

By Carol WhiteDirector, Program StrategyApril 17, 2013

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Overview

What is a performance incentive mechanism?

History of EE PI mechanisms in MA

Today’s MA EE PI mechanism

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A performance incentive provides a reward for achieving pre-defined desirable outcomes that might not otherwise be a priority.

Definition: Performance Incentive

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Shifting Focus – Increasing Importance of Demand-side Efforts

Integrated Resource Planning/Least Cost Planning methods instituted in late ‘80’s to ensure reliability at the lowest possible cost.

Demand-side efforts that resulted in reduced sales became a prominent component of a utility’s long-term resource plan.

Misalignment between utility management’s focus on creating a return for investors and public policy objectives related to IRP/LCP.

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Finding Solutions – LBR and/or PI

LBR: Utility allowed to recover lost revenue based on energy savings achieved

Performance Incentive: Utility allowed to earn a return on EE investments based on performance

3 components:

1. Efficiency Mechanism (B/C ratio)

2. Maximizing Mechanism (Savings)

3. Other Metrics

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Utility Restructuring and LBR/PI

DPU emphasis on performance incentives in place of LBR recovery (DTE 98-100)

Minimum and maximum performance under the PI defined

Threshold: 75% of goal

Design: 100% of goal

Exemplary: 125% of goal

Incentive rate tied to return on 3-month T-bills – expected return projected to be 4.5 – 5.5% after taxes

Funding for EE limited by statute - $0.0025/kWh

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Modifications to PI Over Time (Pre-Green Communities Act)

T-bill rates bottomed out – returns based on T-bills insufficient to align utility and public policy objectives

Negotiated incentive rate accepted by DPU (5% after tax return at Design Level performance)

Incentive cap lowered to 110% of Design

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Green Communities Act (2008)

Funding for EE no longer limited by SBC - focus on all cost-effective EE

Law included continued support for EE PI

Led to reconsideration of EE guidelines by the DPU

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DPU Response to GCA

Continued recognition of importance of aligning utility and public policy objectives:

Revenue decoupling – elimination of disincentive

and

Performance Incentive – potential reward

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Incentive Mechanism Post GCA

Negotiated PI pool allocated based on contribution to planned statewide efforts

3 components: Savings, Value, Other Metrics

Consistent PI design for all utilities

No penalties – focus on carrots, not sticks

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2013 – 2015 Electric Incentive Mechanism

Line No. Comment

1. Statewide Budget $1,908,409,698Proposed funding for all electric PAs excluding CLC and excluding funding for the PI

2. Statewide PI Pool $80,074,419 Negotiated design level incentive for 2013-2015

3. Implied incentive rate 4.20% Line 2/Line1

4. Savings Mechanism:Reward based on $ value of benefits created by program efforts

5. Statewide Design level Savings Mechanism $44,841,675 56% of Line 2

6. Projected $ benefits (Plan) $7,188,982,219 Projected $ benefits in Plan excluding CLC

7. Payout rate per $ of benefits created $0.0062376 56% of Line 2/$ benefits in statewide Plan

8. Value Mechanism:Reward based on $ value of net benefits created by program efforts.

9. Statewide Design Level Value Mechanism $28,026,047 35% of Line 2

10. Projected net benefits (Plan) $5,280,572,521 Projected net benefits in Plan excluding CLC

11. Payout rate per $ of net benefits created $0.0053074 Line 9/Line 10

12. Performance Metrics: Other areas of focus beyond savings and value

13. Statewide Design Level - Performance Metrics $7,206,698 9% of Line 2

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Minimum Performance Requirements

Minimum performance requirements by PA dependant on proposed goals relative to EEAC recommended goals.

Threshold for PAs at or below EEAC recommended goals increased to 76.72%.

PAs with savings targets above EEAC recommended goals have threshold set as if goals were at and not above recommended level

• Threshold is less than 76.72%.

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Incentive Caps

Maximum earnings defined by component

Earnings capped at 125% of Design Level incentive

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Determining Earnings

Actual savings, value, expenses, and net benefits documented in a DPU filing

Documentation for performance metrics includes support for the PA’s distinct role in achieving results

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Recovering Earned Incentives

Design Level incentive is built into the energy efficiency cost-recovery factors and collected on a current basis

Energy efficiency cost recovery factors are adjusted periodically to take into account actual under or over recoveries, including the PI

Utility is provided with certainty that both costs and the PI will be recovered in a timely way.