Last year, the trade association for the utility industry, the Edison Electric Institute (EEI), published a whitepaper on the disruptive challenges facing the utility industry. In summary, EEI’s thesis was that the existing utility business model (centralized, fossil-fuel based generation) is under threat from on-site, distributed generation as more customers switch to cleaner, and often cheaper, solar power. The white paper poses an important question: How can utilities acquire the revenue needed to keep the electric grid humming and provide reliable power to all customers if a growing number of people are producing their own electricity?
In business, one of the most difficult problems that companies face is how to adapt a successful business model to technological or social changes that threaten that business model. Wang, Unisys, DEC and Amdahl were all big computer companies in the 1970’s that clung to an obsolete business model in the face of distributed computing. IBM and HP, on the other hand, adapted their business models and generally thrived.
Over the past year, we have seen several utilities tackling this challenge head-on by investing in distributed, renewable energy projects. In September, I wrote about how NextEra and NRG were voluntarily developing solar investments and how Direct Energy and Viridian were investing in solar installations developed by SolarCity. Read More
Environmental Defense Fund and the North Carolina Sustainable Energy Association recently joined the North Carolina Utilities Commission Public Staff and environmental colleagues in reaching an agreement with Duke Energy on its new incentive mechanism for energy efficiency investments.
The NC Utilities Commission is expected to issue a ruling on the agreement by the end of November 2013. If approved, the agreement will motivate Duke to implement energy efficiency measures as broadly and cost-effectively as possible. Duke’s efforts, in turn, can help ensure a robust market for providers of energy efficiency goods and services.
The agreement would replace Duke's avoided cost energy efficiency program, “Save-a-Watt,” with a business model known as “shared savings.” Save-a-Watt, which expires at the end of 2013, was successful in motivating Duke to make investments in energy efficiency. In fact, the company exceeded its energy savings targets, but the program was overly complex for energy regulators and stakeholders.
In contrast, the shared savings approach will split the anticipated dollar savings between Duke and its customers and set a single, flat rate of return. By sharing the savings, the model properly balances the interests of the utility and customers, and it will motivate Duke to make energy efficiency investments that save customers money. The shared savings model is the most commonly used energy efficiency utility incentive mechanism in the United States.