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It's Energy Efficiency, Stupid!

It's no longer breaking news, Deloitte released earlier this week the results of two surveys, one of state public utility regulators and one of residential electricity consumers (both PDF documents). Deloitte's interpretation of the results can be found here.

The results have also been interpreted by two prominent alt energy/environmental blogs: the WSJ's Environmental Capital and Grist. The former argues that policy-makers and 'smart-money' are out of whack with the little guy, because the little guy simply isn't willing to pay for solutions to climate change out of his electricity bill. The latter, looking at the same data, effectively calls the little guy dumb and selfish. It's true: by-and-large, while respondents (consumers and regulators) express concerns over climate change, neither group is willing to see electricity rates go up to deal with the issue. But as I was reading through the survey slides from the standpoint of an alternative energy investor, different things stood out for me.

Firstly, regulators view transmission as the number 1 impediment to renewables growth (followed closely by cost). We at AltEnergyStocks.com have been on the power grid and transmission stories for quite some time (see our Electric Grid section for investment ideas), so this result is not especially surprising. Nevertheless, the fact that the individuals who have perhaps the best visibility on this issue place transmission above costs speaks volume to the scale of the problem. But while this problem is well understood, it's still unclear how it's going to be resolved. We can all agree that more investment in transmission needs to be made, but who is going to make it and under what model? Governments are increasingly apprehensive to going into massive capital spending sprees, and the incentives for the private sector don't seem to be all there. One thing is clear: something will have give sooner rather than later.

However, the main thing that caught my attention in the survey is the degree of support energy efficiency receives from both consumers and regulators. When asked what approach had the best ability to deal with greenhouse gases (slide 8 for the regulator presentation), more regulators picked efficiency as extremely effective and moderately effective than did for renewables. A resounding 70.8% of residential customers would support their utility boosting profitability on the back of efficiency measures (slide 4 for the consumer presentation), and consumers would prefer energy efficiency to clean coal and nuclear (slide 11). Some 66% percent of regulators believed investment in efficiency should receive similar regulatory treatment as investment in new generation (slide 11).

What does this tell us? What we already know: that efficiency is a win-win. Efficiency can help utilities reduce operating expenses as the cost of generating power goes up (mostly because of fuel), not to mention avoid massive capital outlays as the capital costs of building new generation continue to increase. Efficiency also means flat or decreasing power bills as no or little new electricity needs to be produced to meet growing demand (granted, this is not possible where demand is growing too rapidly).

So why haven't policy-makers embraced efficiency and given it the same incentives as renewables? It's not clear, but I would posit that, for one, efficiency does not have a great job creation angle, quite the contrary. It's also not as sexy and tangible as new renewables project. Lastly, there isn't a well organized efficiency lobby, while wind has some very powerful allies.

No matter the reason, this survey reinforces my belief that the case for efficiency is growing, especially if electricity prices continue to trend up in the near-term as predicted by the regulators. Efficiency measures can be deployed relatively rapidly and have an almost immediate impact on power bills. In many cases, the upfront costs continue to discourage adoption, but that is something that could be remedied through simple fiscal incentives until scale pushes prices down. I expect we'll hear a lot more about efficiency in the months to come, and the investment case is, in my opinion, as strong as ever. Want to know how strong? This recent report by the American Council for an Energy-Efficient Economy provides some interesting numbers.



was posted on AltEnergyStocks.com.


       

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Comments

I would suggest that the biggest problem with efficiency is that it's anti-growth. It's like potato chip companies promoting healthy diets. I may not have the foresight here, but what's really in it for energy companies. Sure, they don't have to invest more money in capacity when power use doesn't increase, but they also don't get to grow. It's certainly a win for consumers, and for the environment. But maybe not so much for utilities. And as long as the utilities are the biggest lobby in energy, I don't see efficiency regulation taking hold in Washington.

Hank:

That is an argument that is often put forth.

Profit is made up of revenue (R) minus costs (C). Revenue in turn equals price (P) times quantity (Q).

With efficiency measures, Q sold will remain constant or even decrease, you are right. However, the other components of profit can be impacted favorably.

For instance, where residential rates are capped but wholesale rates are market-based, it might make economic sense for utilities to save a unit of electricity with residential customers to sell it in the wholesale market at a higher price during peak hours. This is an example where P is involved.

Another example could be where efficiency measures allow a producer to shut down some production but keep Q sold constant. In this case, C would almost certainly decrease so profits could be up even if P x Q stays flat.

The problem is that in many jurisdictions, the structure of electricity markets is such that higher profit is difficult to realize without greater production, thus your growth-as-a-break-on-efficiency argument.

This is something regulators and policy-makers will have to look into seriously. But the results of this survey confirm that this topic is indeed on the agenda, so I am confident that it will receive more attention in the years to come, especially if energy markets continue to trend up.

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