Energy Productivity and the “Fifth Fuel”

McKinsey and & Company released a report in May titled Curbing Global Energy Demand Growth: The Energy Productivity Opportunity. The report documented how we could reduce the world wide annual energy demand growth rate between now and 2020 from about 2% to around 1%, simply by improving energy productivity.

Not surprisingly, the report states that the “… most substantial productivity improvement opportunity is in the global residential sector, which is also the world’s largest consumer of energy with 25 percent of global end-use demand. By implementing available technologies such as high-insulation building shells, compact fluorescent lighting, and high efficiency water heating, the sector’s energy demand growth would more than halve, from 2.4% a year to only 1.0% a year.”

The report also states that:

“Consumers lack the information and capital they need to become more energy productive, and tend to make [decisions based on] comfort, safety, and convenience priorities. In addition, a range of policies dampen price signals and reduce incentives for end users to adopt energy productivity improvements.”

The report argues that policy changes will be necessary before consumers will take significant action to improve the energy efficiency of their homes. In other words, nothing will happen without leadership from our policy makers

In an example of enlightened leadership, Duke Energy filed a request (also in May) with the North Carolina Utility Commission proposing regulatory authorization to be rewarded for investments in energy efficiency much like they would for a new coal fired electrical plant. I don’t often use enlightened and Duke Energy in the same sentence, but their Save-a-Watt program represents an exciting new business paradigm and addresses the some of the policy issues outlined in the McKinsey report. This is a promising new development that could help pave the way to a more sustainable future.

The following bullets are a summary of benefits Duke sees is this new business model for consumers, themselves, and by extension other electric utilities

  • Allows for the treatment of energy efficiency as a “Fifth Fuel
  • It would displace a portion of the electricity otherwise needed to meet it customers’ energy requirements with zero air emission conservation, and also reduce the amount of new generation that would otherwise be required
  • It would lower costs for customers, when compared to the costs that result would from the addition of new electrical generation resources.
  • It would offer the potential to substantially lower costs for customers who participate in energy efficiency programs (PV, solar hot water etc.).
  • Would provide customers the opportunity to lower their environmental footprint through direct participation in energy efficiency.
  • The program would provide more choices and options that help customers manage their energy costs in an environment of rising energy prices
  • The program would create new energy efficiency service jobs in order to implement energy efficiency programs.
  • The program would provide the Company with an incentive to make significant, sustainable investments in energy efficiency and rewards the Company for the results produced and the risks taken.

The filing by Duke explains this new “energy efficiency” business model as follows:

“The Save-a-Watt approach will encourage and compensate the ultility for investments in energy efficiency at 90% of the avoided supply-side costs. Under traditional regulation, a utility is allowed to recover the depreciation and operation costs for a new plant and also earn a return on the un-depreciated plant. Under the save-a-watt regulatory approach, the utility would be allowed to recover 90% of the depreciation and operating costs avoided by not building the new plant and also earn a return.”

“The Company assumes some risk in the proposed save-a-watt approach. Revenues collected through the proposed energy efficiency rider are intended to cover program costs and the financial impact of lost sales, but will be based on actual results achieved. Lost sales occur when energy efficiency programs reduce energy consumption, thus reducing the revenues available to cover fixed costs between rate cases (e.g. investments in utility infrastructure).”

In perfect accord with the McKinsey report, Duke goes on to say that:

“…customers are unlikely to sacrifice comfort and convenience to participate in energy efficiency. In addition, the initial capital outlay associated with some programs could be a significant barrier to customer participation.”

In addition to addressing capital outlay hurdle for consumers, some of the elements of proposed Save-a-Watt program include:

  • discounted or free Compact Fluorescent Lamps
  • discounted energy efficient air conditioning and heat pump units
  • remote power management of air conditioning and heat pump units
  • PV and solar hot water systems free to the consumer (pilot program)
  • energy efficiency capital cost financing through Duke (pilot program)
  • monthly billing statements correlated with historical usage and weather data to facilitate ongoing improvement

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2 responses to “Energy Productivity and the “Fifth Fuel”

  1. Duke’s Save-A-Watt proposal should be called Costs-A-Lot. If it is approved, customers will be charged for the energy that they DO NOT use at 90% of the market rate for energy.

    Efficiency requires action, planning, and conserving by consumers. Significant economic savings should be consumers’ reward.

    While improving efficiency to meet future demand is essential, the charge to customers must be fair.

    Fundamentally, entrusting Duke Energy, which is in the business of selling energy, as the energy efficiency custodian does not make sense. What an independent administrator could achieve with a few thousandths of cent per kilowatt surcharge, Duke is asking several cents. Moreover, Duke’s proposal ushers in a host of additional problems:

    1. How will efficiency be measured — how can the non-use of energy be measured? Who will measure it? How can it be verified?

    2. How will Duke be compensated for the efficiency? Will it be tied to how much Duke invests?

    3. How will Duke prove that they caused the efficiency gains? Will Duke customers be forced to pay for the energy they do not use if they independently buy energy efficient appliances?

    If Save-A-Watt is approved, customers may end up paying a lot for nothing, literally.

  2. I followed up with Shana’s comment via email and what follows is a copy of our lively conversation. FYI, Shana is with the North Carolina Public Interest Research Group [www.ncpirg.org] which is a state-wide nonpartisan, nonprofit research and advocacy group dedicated to consumer rights, public health, and good government.

    John: Short of peak load demand reduction, it seems to me that utilities have little financial incentive to invest in conservation measures that essentially reduce their “sales”. How would you propose to reward a utility like Duke for investing in conservation. In other words, how would you change their proposal to make it a win for the utility, the environment, AND equitable for consumers?

    Shana: I appreciate your blog, your e-mail, and pursuit of win-win solutions. You ask good questions.

    Two thoughts in response – first, I completely agree that if utilities are to be the promoters of energy efficiency, then they must be fairly compensated, and customers must be fairly charged. The question becomes, however what is fair? Under Duke’s proposal, customers will keep around 10% of what they should be saving as a result of being more efficient.
    Duke will keep the other 90%. Is this fair. I don’t think so. While Duke’s efforts to promote efficiency may be important, ultimately customers must make changes in their energy use, appliances, and insulation. They should get to keep more than 10% of their savings.

    Putting aside the split pay out on efficiency – 10%-90% – there are serious problems regarding implementation. Two of the biggest ones related to the cost to consumers are the measurement of efficiency and the attribution of causation. Regarding the first, how do you measure the non-use of energy? I am guessing that Duke will propose models that forecast demand, and seek compensation based upon the models. If utilities’ forecasts for demand are used as the measure, however, customers could end up paying a lot of money for measurement errors, not efficiency gains.

    For example, Progress Energy significantly miscalculated demand in the seventies, and based on their calculation, got approval for four nuclear reactors at Shearon Harris. Ultimately, only one was built (at 16 times the cost) and it met NC needs for over twenty years. Imagine if we had a Save-A-Watt proposal in place at that time. Would Progress claim
    credit for reducing demand?

    Assuming we could measure the non-use of energy, Duke is likely to free ride off customers’ efficiency that has nothing to do with Duke’s actions, and get paid for it. There is no opt-out for customers who are already “green” or working on becoming so…

    The second thought is on the underlying prudence of appointing utilities to promote efficiency. Does it make sense for utilities, whose business is to sell energy, to be in the business of efficiency? Other states employ “efficiency utilities” whose sole job is to promote efficiency. They are funded often by a small surcharge (hundredths or thousandths of a cent) on all kilowatts sold. This is cheaper for customers, and can be effective, too.

    John: I totally understand the Fox in Henhouse issue. But LEEDS is essentially 5,000 foxes in the henhouse and they’ve been able to create a new standard for building that actually makes an difference. I see this as a very large group of vested interests in the building industry “seeing” the writing on the wall and saying to themselves that “this is going to happen no matter what we do, so let’s get control of it.” Could Duke’s proposal be utility industry’s first attempt to get in front of the conservation wave? It doesn’t change the issues you’ve raised, but is the best strategy to stop Duke or modify their proposal into something equitable and workable?

    Shana: I appreciate your comparison to LEEDS, though I think there is a distinction that makes a difference. Buildings will never become obsolete. The LEEDS vested interests provide a building service, and their compensation is based upon their product. They are not asking for compensation based upon their not building buildings, or upon their marketing of someone else’s product.

    In contrast, fossil fuel-generated electricity might become obsolete. Duke’s in the business of providing fossil fuel-generated electricity, primarily, and their efficiency plan is not based on a replacement product that they produce. (They do not manufacture CFLs, or energy star appliances, for example). Paying Duke for promoting efficiency is kind of like paying a buggy-whip manufacturer to promote the model T. Why not cut the middleman out of the equation? Why subsidize an unsustainable business plan by offering to pay the company for not doing business, literally?

    Following this metaphor, it makes sense, however, to pay Duke for promoting renewable energy. This is a product they produce (or should), that will supplant their unsustainable product, and that will provide a needed service for customers…

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