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Utility Dive: Oklahoma's energy efficiency incentives give facilities a business reason to save customers money

Posted by Coley Girouard on Feb 11, 2019

Utility Dive published AEE’s Coley Girouard’s piece spotlighting Oklahoma's efforts in the last decade to implement energy efficiency programs through shared-savings  incentives.This is the third in a six-part series on utility business model reform provided by Rocky Mountain Institute, America's Power Plan and Advanced Energy Economy Institute. See excerpts below and the entire Utility Dive piece here:

Incentives under the traditional cost-of-service utility revenue model are fundamentally misaligned with the implementation of energy efficiency programs. This is because, traditionally, utilities collect revenues based on the amount of energy they sell, whereas energy efficiency programs attempt to reduce energy consumption, thereby reducing utility revenues and profits.

This traditional structure disincentivizes utilities from delivering robust energy efficiency programs, limiting the use of a proven least-cost resource that also reduces peak demand and lowers consumer energy bills. Oklahoma demonstrates two ways to help utilities embrace energy efficiency programs — and ultimately make themselves and their customers better off financially.

Today, each utility under rate regulation in Oklahoma is eligible to recover lost revenue from energy efficiency programs through two vehicles: a Lost Revenue Adjustment Mechanism (LRAM) and a performance incentive based on energy savings shared with customers. These policies have led to significant improvements in annual energy savings and peak demand reduction in Oklahoma over the past decade.

The LRAM is a policy lever that allows the utility to recover revenues that are reduced specifically from energy efficiency programs. In Oklahoma, lost revenues are recovered annually and calculated by energy savings recorded in the utility's annual report multiplied by a cost factor set in its most recent rate case.

The shared savings incentive allows the utility to retain a portion of the net benefits of its energy efficiency program, up to 15%, if the utility meets certain performance metrics. Specifically, the incentive is a function of utility performance in two categories: total net benefits of the program and total energy savings. To be eligible for shared savings, a utility must achieve at least 80% of its energy savings goals and its portfolio of programs must meet certain industry-standard benefit-cost thresholds — Total Resource Cost Test ratio greater than 1 and Utility Cost Test ratio greater than 1.2.

These policies did not materialize from a legislative mandate but instead from a series of collaborative stakeholder meetings following a 2006 rate case proposal from Public Service Co. of Oklahoma (PSO) to build a new coal power plant to meet capacity needs...

As a result, the OCC issued an order in October 2007 requiring OG&E and PSO — Oklahoma's two largest utilities — and subsequently all electric utilities under rate regulation of the OCC, to propose and implement a portfolio of energy efficiency and demand response programs at least once every three years...

That said, Oklahoma's programs have still not fulfilled their full promise. Based on analysis from the Electric Power Research Institute, Oklahoma's utilities are only achieving 20% of their energy efficiency potential. High benefit-cost ratios for most individual programs as well as overall demand-management portfolios suggest that substantial cost-effective energy efficiency is being left on the table...

See the entire Utility Dive piece here.

Topics: Advanced Energy Buyers Group, Industry News, AEE In The News