As the electricity sector transforms to meet cities’ and states’ increasingly ambitious clean energy goals and carbon reduction targets, energy efficiency (EE) will be a vital component of the formula for success. Meeting these policy goals requires improved coordination and a fresh look at the different business models and incentive mechanisms for entities undertaking EE program administration and delivery.
A new study by Brattle economists concludes that the choice of EE administrator model does not itself determine stronger EE performance. Regardless of the EE administrator model, key factors for success are state-level energy efficiency goals, dedicated EE funding, the availability of full decoupling, and performance incentive mechanisms.
Prepared for Uplight, the Brattle study evaluates the strengths and weaknesses of four different EE administrator models that have emerged across utility jurisdictions: utility administrator models (the most common); state and government administrator models; third-party administrator models; and hybrid models. The study includes a detailed quantitative analysis to assess the effectiveness of these alternative EE administrator models in delivering successful EE outcomes. One of the innovations in the study is that it accounts for the effects of various regulatory incentive mechanisms used to address program cost recovery, lost fixed cost recovery, and program performance.
Brattle’s analysis concludes that none of the EE administrator models has a statistically significant advantage in terms of stronger EE performance, measured by annual EE savings as a percent of the total load served. Instead, stronger EE performance is driven by other variables, such as having a state energy efficiency resource standard (EERS), dedicated funds for EE programs, and regulatory incentive mechanisms such as full decoupling and performance incentive metrics. These drivers collectively highlight the importance of (1) a state’s policy commitment to a long-term EE agenda; and (2) enabling utilities with incentives to be partners in achieving that agenda.
“While EE administrators play an important role in effective program budget setting, management, and, in some cases, the execution of the EE programs, the most critical factors for success are utilities’ and regulators’ full support of these initiatives,” noted Brattle Principal and study co-author Sanem Sergici. “Utility incentives should be aligned with the goals of the EE programs by providing them with certain and timely program cost recovery, eliminating risk of lost revenue, and providing opportunities to improve their earnings based on how well they meet certain targets.”
“There’s been clear momentum for innovation in incentive mechanisms for EE investments, but no one has ever evaluated the results of these programs,” said Tanuj Deora, the vice president of market development and regulatory affairs at Uplight. “As a result of this report, we are excited to have quantifiable evidence that these approaches are impactful––providing a powerful tool for decarbonization.”
The study, Energy Efficiency Administrator Models: Relative Strengths and Impact on Energy Efficiency Program Success, is authored by Brattle Principal Sanem Sergici and Associate Nicole Irwin.