Thursday, November 29, 2007

Decoupling to Promote Energy Efficiency.

Global warming and cost-cutting are moving regulatory authorities to give utilities more incentive to promote energy efficiency by "decoupling" utility’s recovery of fixed costs from the volume of amount of electricity sold. The theory behind decoupling is that traditional rate structures discourage utilities from promoting energy efficiency because their profits suffer when customers cut back on electricity consumption. (Aligning utility interest with energy efficiency objectives: A review of recent efforts at decoupling & performance incentives, ACEEE, Oct 06)

Proponents believe that decoupling could result in lower rates by reducing risks for electric companies and by reducing the need for rate cases. Another favorable argument would be that it is inconsistent for policy makers to promote energy conservation and apply rate schemes that can discourage conservation. At the other side, skeptics argue decreases in electricity sales can be the result of factors unrelated to conservation, notably changes in weather and economic conditions, and that decoupling is inconsistent with established rate-making principles. As a result, adjusting electric rates to make up for reduced sales can shift risks from the companies to ratepayers and provide utilities with a windfall.

Regardless the position one supports, several US states have implemented decoupling recently to modify the economic effects of energy efficiency on the utilities. As an example, on July 20, 2007, the Maryland Public Service Commission approved a new rate mechanism for the state's largest utilities that "decouples" rates and thus eliminates a disincentive for the utilities to promote energy efficiency and demand response. The new rate mechanism allows the utilities to increase their rates for power distribution to make up for lost revenues if the demand for electricity drops, thereby decoupling their revenues from electricity sales. See the Maryland PSC press release

The Maryland decoupling plan was developed in the course of two rate cases for Potomac Electric Power Co. (PEPCO) and Delmarva Power & Light Co., both of which aresubsidiaries of Pepco Holdings, Inc. In their filings, each company had proposed a "bill stabilization adjustment" (BSA), which they described as a mechanism that "decouples revenues from abnormal levels in kWh sales and/or changes in the number of customers from adjusted test-year levels." Acording to the new rate scheme, a BSA for retail customers, will increase rates if revenues from distribution deliveries fall below the level approved by the applicable regulatory commission and will decrease rates if revenues from distribution deliveries are above the commission-approved level. The end result will be that the utility will collect its authorized revenues for distribution deliveries. As a consequence, a BSA "decouples" revenue from unit sales consumption and ties the growth in revenues to the growth in the number of customers. Some advantages of the BSA are that it (i) eliminates revenue fluctuations due to weather and changes in customer usage patterns and, therefore, provides for more predictable utility distribution revenues that are better aligned with costs, (ii) provides for more reliable fixed-cost recovery, (iii) tends to stabilize customers' delivery bills, and (iv) removes any disincentives for Pepco to promote energy efficiency programs for its customers, because it breaks the link between overall sales volumes and delivery revenues.

Pepco (Delmarva) is developing an ambitious plan entitled the "Blueprint for the Future" Plan ("Blueprint for the Future"). The cost recovery of this plan is based on BSA. Pepco's vision of the futue involves a substantial investment in new technologies such as advanced meter infrastructure, distribution automation, smart thermostats linked to the AMI system, and an improved communications network.

See as well Blueprint for the Future. Application Plan. February 6,2007.

Pepco Holdings belong to the IBM's Intelligent Utility Network (IUN) Coalition. See in this blog Global Talent to Develop the Smart Grid

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