Benefits and Costs of Aggressive Energy Efficiency Programs and the Impacts of Alternative Sources of Funding: Case Study of Massachusetts

Abstract

Increased interest by state (and federal) policymakers and regulatory agencies in pursuing aggressive energy efficiency efforts could deliver significant utility bill savings for customers while having long-term implications for ratepayers (e.g. potential rate impacts). Equity and distributional concerns associated with the authorized recovery of energy efficiency program costs may necessitate the pursuit of alternative program funding approaches. In 2008, Massachusetts passed the Green Communities Act which directed its energy efficiency (EE) program administrators to obtain all cost-effective EE resources. This goal has translated into achieving annual electric energy savings equivalent to a 2.4% reduction in retail sales from energy efficiency programs in 2012. Representatives of electricity consumer groups supported the new portfolio of EE programs (and the projected bill savings) but raised concerns about the potential rate impacts associated with achieving such aggressive EE goals, leading policymakers to seek out alternative funding sources which can potentially mitigate these effects. Utility administrators have also raised concerns about under-recovery of fixed costs when aggressive energy efficiency programs are pursued and have proposed ratemaking policies (e.g. decoupling) and business models that better align the utility's financial interests with the state's energy efficiency public policy goals. Quantifying these concerns and identifying ways they can be addressed are crucial steps in gaining the support of major stakeholder groups - lessons that can apply to other states looking to significantly increase savings targets that can be achieved from their own ratepayer-funded energy efficiency programs. We use a pro-forma utility financial model to quantify the bill and rate impacts on electricity customers when very aggressive annual energy efficiency savings goals ({approx}2.4%) are achieved over the long-term and also assess the impact of different cost recovery approaches that integrate alternative revenue sources. We also analyze alternative lost fixed cost recovery approaches to better understand how to mitigate the erosion of utility shareholder returns in states that have adopted (and achieved) very aggressive savings targets.