Do Utilities Make Less When I Use Less Energy?

March 20, 2014 Written by  Sarah Frye Comments Print
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Clean technology is one of the fastest rising industries today. You may have also heard it in terms of smart grid, but it’s important to note that they are not the same thing. There are a host of innovations and technologies that are emerging that are helping us reduce our energy use.

One of the questions that often gets asked is, why aren’t the utility companies fighting this advancement?  If these technologies help consumers and businesses reduce their power use, wouldn't the utilities industry lose money?

In the same way that the oil industry was initially reluctant to adopt electric cars when they first arrived, it seems like power generation companies should be against clean technology.  However, they are working together.  In markets where utilities are regulated, revenue is managed within a specific threshold. If the utility brings in more revenue beyond the threshold, they have to issue a refund back to the customers.  If they bring in less, the government makes up the difference.  This way, if the government regulates it properly, both clean technology companies and utility companies alike will benefit in terms of how much money they are bringing in each year.

In the conventional utility industry, utility companies make money based on how much energy they sell.  Simple enough, right? Rates are based on an estimation of costs of providing service over a certain period of time, a set profit margin, and fixed costs. The utility companies forecast the amount of energy they will need to provide to come up with the aforementioned rates. Furthermore, any promotion of energy efficiency would clearly go against the utility companies’ best interests and profits.  

Enter “Decoupling.”  Decoupling breaks the link between the utility’s ability to recover its fixed costs, including profit margin, from the actual volume of sales.  What this means is that if a utility company sells less than the forecasted amount of energy it projected, they are not punished, but in fact rewarded by it’s respective state.  When less energy is sold, the state compensates the difference between actual amount sold and forecasted amount to recover fixed costs.  This incentivizes utility companies to promote less energy usage among its customers.  Additionally, encouraging less energy usage prevents the need for utility companies to build new and extremely expensive power plants to meet the demand of the consumers.  On the consumer side of this all, of course using less energy shows savings on our monthly utility bills, but if a utility company needed to build a new power plant we would take a direct hit as the companies try to recoup the cost of building said power plant.

A couple of examples from some places around the country that have really invested in clean technology are Calpine, Destiny USA, and the AC Transit Agency in Oakland, California.

The government, utilities companies, clean technology companies and the public are all working together to save our environment. If we can continue to engage in this way, we can look forward to a more sustainable future.

For more energy saving tips, check out our previous blog post: Green Mortgages: An Energy Efficient Mortgage Guide.