Energy efficiency is “the first fuel to set priorities about design, deployment, and use of any devices or materials that consume electricity or contribute to its consumption.” (Definition from the Smart Grid Dictionary, 2nd Edition). It is also called “low-hanging fruit” to describe that it is the easiest and cheapest way to avoid the purchase of expensive energy or build out of costly generation, transmission, and distribution equipment and networks to satisfy commercial, industrial, and residential needs for electricity. Programs designed to encourage energy efficiency focus on reducing consumption of electricity by a number of means that range from building envelope improvements to deployment of energy-miser appliances. The end result of these programs is an overall drop in electricity consumption.

What’s wrong with this picture? If you are a utility that gets revenues based on the volume of sales of electricity, then energy efficiency programs that reduce volume translate into reduced revenues. Imagine if a fast food restaurant encouraged you to NOT supersize your meal – although it would be good for American waistlines, it would be bad for the restaurant and its investors.

Utilities that operate in this model face a real dilemma therefore in offering and aggressively promoting effective energy efficiency programs. Here’s where a regulatory concept called “decoupling” helps. It is a ratemaking mechanism that removes the barriers to energy efficiency programs. It eliminates the link between electricity sales and utility profits. The regulatory body guarantees a revenue return through rates that are typically calculated on a per-customer basis, and periodically reviewed to see if the pre-determined revenue requirement is met.

What does decoupling and support of energy efficiency programs mean for utilities and investors? Decoupling provides stability in revenue expectations, reducing risks for investors. According to a recent report released by Ceres, utilities that engage in energy efficiency programs also reduce their risk exposure to fluctuating energy prices.  Utilities that support diversification and distribution of generation assets take risk reduction a step further.  Utilities that engage in energy efficiency and diversification and distribution of generation are more likely to attract low-cost capital, enabling better returns for investors.

What does decoupling and participation in energy efficiency programs mean for consumers?  It means increased and improved opportunities to reduce utility bills.  Depending on the state, the programs can cover replacement of selected appliances with energy-efficient models or rebates on certain building remodeling projects.   Federal tax credits may also come into play and add even more financial benefits for consumers. 

What does decoupling and energy efficiency mean for the environment?  It means reduced carbon emissions reflecting reduced electricity consumption.  And because decoupling also removes a barrier to localized generation – the prosumer model – decoupling facilitates broad integration of renewable energy sources into the grid.

What does this have to do with the Smart Grid?  The Smart Grid is more than an overlay of ground-breaking technologies, it is based on smart policies that provide incentives to consumers and utilities to optimize generation, transmission, distribution, and consumption of electricity.   

For more information, the Regulatory Assistance Project has good presentations that explain decoupling and its benefits to consumers, utilities, and our environment.