The Smart Grid Dictionary defines energy efficiency as technologies, applications, and services that reduce the consumption of energy without impacting operations or behaviors.  It is that lack of change to behaviors or operations that sets energy efficiency (EE) apart from energy conservation.  EE produces negawatts – and treating it as that “penny earned” has been promoting welcome innovations in technologies and policies that financial and environmental benefits for consumers.

First, improved EE in products means lower total costs of ownership or TCOs for residential and business consumers.  The California Energy Commission recently adopted EE standards for battery chargers, which are vampire loads in just about every home and business.  Those chargers are often plugged in and drawing power even when they are not fulfilling their purpose of charging up a smart phone, mini-vac, or powered toothbrush.  In California alone, a cringe-worthy 5.3 gigawatthours of electricity is spent on chargers, mostly in the form of waste heat.  The standards, which take effect between 2013 – 2017, will require that manufacturers produce chargers that stop drawing power once the device battery is topped off.  That will lower consumers’ electricity bills and reduce the need to invest in additional generation capacity to support these vampire loads.  And that in turn helps keep electricity rates from rising.  California EE standards are reckoned to have saved its state residents over $36 billion since 1977.  That’s a lot of pennies earned.

Second, purposefully designing EE into products will reduce the amount of energy expended for any device’s operations – whether they are always tethered to the grid or reliant on battery power.  Researchers at the University of Michigan have a new technology called Energy-Minimizing Idle Listening that has reduced energy use in mobile devices by 44% in proof of concept testing.  By putting mobile devices into a “subconscious mode’, the device’s normal idle listening state consumes less energy, extending battery charges and reducing electricity consumption.   Another interesting technology trend first articulated by Jonathan Koomey of Stanford University and known as Koomey’s Law states that the amount of computing power per joule doubles every 1.6 years.  (A joule is a measure of energy, whereas a watt is a measure of the rate of energy consumption.)  Essentially, a fixed amount of computing power gets twice as energy efficient just under every two years, which has tremendous implications for our proliferation of electricity-guzzling data centers that support our growing use of cloud-based applications and digital storage.  IEEE’s local Silicon Valley Chapter of the Solid State Circuits Society is sponsoring a course about the fundamentals of low-power design, which portends opportunities for designers of computing devices, who have long understood the need to build in as much EE design as possible, to share their expertise with developers of consumer electronics.  These developments will ultimately reduce the costs of operation for many popular devices.

Third, thinking about energy efficiency as a penny earned enables policy-makers to support decoupling for electric utilities.  The Smart Grid Dictionary defines decoupling as a regulatory and market strategy that allows utilities to invest in and profit from efficiency-based capacity by assuring them a return that is equivalent to sales of electricity.  It means that utilities are not penalized for encouraging their customers to use less electricity.  Today, 30 states do not have pending or established decoupling policies in place for electricity and/or gas, and they should.  Consumers would like utilities to help them reduce their energy bills, but without decoupling, why would utilities negatively impact their revenues?  Understanding the full value of decoupling translates into political will to modify utility business models.  Why do regulators and legislators in these 30 states ignore the opportunities to save money for their citizens?     

Whether we’re looking at improving product designs or market mechanisms to encourage energy efficiency as that “penny earned”, the financial and environmental benefits for consumers are compelling.  Ben Franklin would approve.   

Twenty-four states have Energy Efficiency Resource Standards (EERS) that define annual energy efficiency targets sustained over time, not single events like Demand Response programs.  Each EERS mandates that energy consumption be reduced by a certain percentage through energy efficiency programs.  These programs can be aimed at residential, commercial, industrial, and agricultural customers, and incentives are tailored to meet different needs.  But unless the regulatory agencies that govern utilities provide support in the form of revenue recovery for these energy efficiency programs, utilities are naturally reluctant to invest time, money, and resources into reducing their revenues.   One form of support is a policy called decoupling, in which utilities are assured a rate of return that is equivalent to sales of electricity. 

However, given the current economic downturn and a continued trend in improved energy efficiency in home and business appliances and equipment, utilities are facing a stall in consumption that mirrors the classic S-shaped curve of growth, and are at the point where growth slows.  There are no policy mechanisms like decoupling to protect utilities from these economic realities, but there are strategies that utilities can deploy to change their business model from revenue reliance on one service to a diversity of services and new metrics for consumer value. 

Utilities should consider new business models that are enabled by Smart Grid technologies as opportunities to protect and grow revenues even as electricity consumption falls.  Subscription-based services to manage electricity, such as Home Energy Management Systems (HEMS) software and devices are one possibility.  Similar to the business models successfully used by telecom carriers to increase the Average Revenue Per User or ARPU, an array of energy management services could help boost utility revenues.  But while ARPU is a useful metric for classic consumer/service provider relationships, it falls short in valuing some of the most exciting opportunities with the Smart Grid.  If we consider that electricity consumers may become prosumers – both consumers and producers of electricity or services, then we need a metric that reflects services that are sold back to a utility as well as purchased.  That metric is Lifetime Consumer Value (LCV). 

LCV accounts for the consumption and production values of a consumer.  For instance, a recent Texas law requires the state’s grid operator, ERCOT, to devise a market model whereby residential, commercial and industrial consumers can bid conservation (energy savings called negawatts) into the wholesale electricity market.  Sales of energy produced from customer-owned generation sources or energy storage assets may also be factored into LCV calculations.  This is a far different metric than kilowatthours consumed, and it requires significant re-engineering within utilities to create consumer-centric operations that can build lifetime consumer value.  I’ll be discussing how utilities can build consumer value at a webinar on October 10, and you’re invited to attend.

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.