IOUs Getting Smart About Efficiency

Investor-owned utilities (IOUs) have a sometimes tense relationship with energy efficiency. They earn profits by building more power plants and transmission lines, and by selling more, not less, power. They’ve got to be responsive to their shareholders and maximize profits, and that gives them few reasons to actually promote energy efficiency. In fact, IOUs – which account for about 8% of all utilities, but 75% of revenues, nationwide – have traditionally fought against tougher efficiency standards.

Here’s the catch: conserving energy is actually far less expensive than building new infrastructure.

To untie this inefficiency knot, a handful of Midwestern states are experimenting with a new approach. Policymakers are designing incentives that reward utilities with new revenue for meeting or exceeding efficiency goals.

Take Minnesota, which has recently revamped its incentive structure. Under the new regulations, Xcel Energy receives about 14 percent of the net benefit of energy savings. That got the utility’s management to shift its way of thinking. In 2010, the utility helped its customers conserve about 416 gigawatt hours of electricity — more than any other year in the company's history.

The energy savings totaled approximately $291 million. That amounts to about $40 million in new revenue for the company's shareholders.

Today, Xcel is running its potentially profitable efficiency program more like a business, adding staff and dedicating more resources to its customer energy-efficiency programs.

We like it when lawmakers get creative. And when utilities run with it.

Photo credit: Xcel Energy