Raising the stakes for energy efficiency: A qualitative case study of California's risk/reward incentive mechanism

Abstract

This article examines California's experience implementing the Risk/Reward Incentive Mechanism (RRIM) between 2007 and 2012. RRIM is a system of financial rewards and penalties designed to motivate California's investor-owned utilities to expand their energy efficiency programs and meet ambitious energy-savings targets. The RRIM is credited with achieving a substantial amount of cost-effective energy savings. Nevertheless, a dispute over the savings attained and the subsequent impact on ratepayers led the California Public Utilities Commission (CPUC) to pause halfway through the implementation period and overhaul the incentive system. The following policy recommendations flow from the analysis. First, in terms of incentive design, avoid sharp payment distinctions that do not reflect meaningful differences in program performance and do not expect an incentive to single-handedly shift the balance between investment in new electricity generation and investment in programs to reduce energy consumption. Second, in terms of institutional factors, expect that incentives will put pressure on evaluation processes and engender new disputes, and implement a high-stakes incentive only if institutional arrangements for savings measurement and dispute resolution are in place and accepted by all parties. Third, in terms of implementation, put incentives in place before utility energy efficiency programs are designed and implemented and design incentives to be as predictable and repeatable as possible.