The many factors that affect the success of regulatory mechanisms designed to foster investments in energy efficiency

A utility’s profit-maximizing level of investment in energy efficiency or demand-side management (DSM) programs and mix of programs is affected by natural load growth, the frequency of rate cases, program costs, and the structure of any mechanism designed to either compensate the utility for foregone profits or sever the link between sales and profits. Under a range of reasonable assumptions, decoupling can incent a utility to invest in DSM. However, a utility experiencing high natural load growth and little inflation is likely to resist the imposition of a decoupling mechanism, as it would tend to lower profits. A utility with low growth in per-customer sales will tend to favor decoupling, as it will tend to lead to higher profits than under traditional regulation. The results presented here are quite sensitive to the assumptions made regarding natural load growth, regulatory lag, the frequency of price changes, price elasticity of demand, and other factors. This suggests that there is not a single approach to promoting energy efficiency without penalizing utility profits that will work in all situations for all utilities.