Utility Deregulation: DSM Dawn or Dusk?
Utility Deregulation: DSM Dawn or Dusk?
Increased utility competition and price deregulation are being hailed by some as a new opportunity for demand-side management (DSM) and by others as its demise. However, we have very little real-world experience with this complicated question.
In a fully deregulated market, any electricity consumer (residential, commercial, or industrial) would be able to purchase kilowatt-hours from any supplier, but still through regulated distribution utilities. This situation would usher in an era of fierce price competition. The possible end of utility monopolies poses a considerable creative challenge to those who want to devise new ways of organizing utility conservation programs in a competitive marketplace.
Whereas in the past DSM has often been mandated by utility regulators, in deregulated markets it would be carried out at the discretion of the utilities. Since energy customers can be expected to compare electricity providers primarily on the basis of prices, there would be a clear disincentive to operate DSM programs whose costs must be recovered via rate increases. Deregulation also leads to the dismantling of the financial incentives for DSM that have been increasingly provided to utilities and their shareholders by their regulators. These incentives reduce an important market barrier by allowing utilities to recover the DSM program costs and lost revenues resulting from reduced power sales. This is accomplished by raising the price per kWh. Of course, reduced total demand can still translate into lower total energy expenses for the consumer.
In this new environment, the role of non-utility purveyors of energy-efficiency services would take on new importance. Energy service companies (often called ESCOs) would still be free to enter into contracts directly with energy users.
CUTTING DSM EXPENDITURES
It is too early to say how far deregulation will go and what its impact will be, nor do we know when or at what pace this process will move forward. In the US, simply the discussion of possible deregulation has caused some electric utilities to slash hundreds of millions of dollars from their DSM budgets. Many major programs, including lighting, are being eliminated, and conservation staffs are being reduced dramatically in size. Pacific Gas and Electric, one of the world's pioneers in utility-promoted energy efficiency, reduced its DSM spending by 75% between 1992 and 1993. However, spending at some other utilities held constant or increased.
Reduced program spending is not the only impact of concern. For instance, there is a trend among utilities to treat data on customer energy use patterns and conservation programs as secret or proprietary information, marking a serious departure from the relatively open and sharing atmosphere in recent years. This will make it extremely difficult to conduct independent evaluations of DSM programs and to spread market information on what works best.
Another area that is suffering is utility-sponsored research and development (R&D). US utilities direct many millions of dollars of R&D each year towards efficient end-use technologies. These programs have resulted in new technologies and software not provided by government and private industry R&D.
ENERGY SERVICES IN COMPETITION
Utilities will have to think hard about what kind of services to offer as a means of keeping their customers from switching to new suppliers. Providing energy efficiency to customers is often listed as a way of achieving this goal, but it is certainly not the only way. Companies could offer a wide assortment of enticements as diverse as gardening, snow removal, frequent flyer miles for each kilowatt-hour used, lottery tickets, or free Christmas lights. Some such inducements may even translate into increased energy use.
It may prove difficult for a utility to identify DSM strategies that would be viable in such a new marketplace. However, for a utility that fears losing a customer to a competitor who offers cheaper electricity, it may be possible to successfully market energy efficiency as a "value-added" service. Indeed, there is good reason to believe that some consumers would rather pay a little more for the electricity from a utility offering such a service as opposed to getting cheaper electricity from a competitor that does not offer any energy efficiency support.
In this new market environment, the amount a utility or customer will be willing to spend to achieve energy savings will be determined by the price that a competing supplier can offer to the consumer (rather than at the marginal production cost). Utilities with low production costs may find it worthwhile to implement energy efficiency locally so that they can sell the freed-up power in other utility service territories (at a higher profit margin). DSM may also become a popular way of gaining an increased market share against competitor fuels.
Examples of new utility demand-side services could include financial strategies that provide much higher leverage than ordinary rebates, as well as various forms of technical assistance:
Financial Services
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Provision of financing for efficient technologies
- Leasing of efficient equipment
- Efficiency-focused technology procurement
- Direct sales of energy services (e.g. illumination, comfort)
Technical Services
- Energy audits
- Operation, maintenance, and commissioning
- Design and project management
- Training of facility operators
- Emphasis on non-energy benefits
While these "new" strategies may sound appealing, the hard fact is that many such programs and marketing strategies already exist and are being eliminated-to achieve lower energy prices-in anticipation of utility deregulation. My own institution switched to a cheaper electricity provider, even though it had to give back large rebates received from its former utility. Deregulation or reregulation?
In a competitive market, the prospects for DSM are dim. An interesting proposal is to establish some form of universal "efficiency fee" to be paid by all consumers. Such fees would be assembled in a fund and allocated to DSM programs. One approach is to level a fee on each unit of energy sold, as has been implemented in the Netherlands and Norway. Another approach is to collect an equal fee from each consumer, as has been established in the UK, where £1 is collected from each of the 45 million residential and small commercial consumers each year to fund the Energy Saving Trust.
Of course these strategies are inherently regulatory, suggesting that a competitive market that optimizes energy efficiency still requires a properly focused political and regulatory vision. A critical area yet to be addressed is how governments will fulfill committments to achieve reductions of greenhouse-gas emissions in the utility sector.
Governments will always have a role in ensuring competition, protecting the rights of consumers, looking after environmental quality, and the like. And certain segments of the market (e.g. low-voltage power distribution) will still behave as monopolies and require regulatory involvement. Thus, "Reregulation" may be a more accurate term to describe the situation than "Deregulation".
Evan Mills
See also "Britain, Barriers and Opportunities" (IAEEL 1/93)
"DSM and energy efficiency in deregulated electricity markets" was the title of a workshop organized in June by IAEEL and the UK Energy Saving Trust with support from the European Union's Thermie program and the local business community in Newcastle and Sunderland, UK. A small report summing up the workshop is under production.