PERFORMANCE METRICS FOR MARKET TRANSFORMATION PROGRAMS: INCENTIVIZING PROGRESS WITHOUT STRANGLING CREATIVITY

Steven Nadel, ACEEE
Dave Hewitt, Northeast Energy Efficiency Partnerships
Noah Horowitz, Natural Resources Defense Council
Lauren Casentini, Pacific Gas & Electric Company
Ben Bronfman, Northwest Energy Efficiency Alliance

August 2000

Abstract

For the past decade, many state utility commissions have provided financial incentives to utilities for the successful implementation of demand-side management (DSM) programs. With the growing emphasis on the market transformation approach to DSM, regulatory incentive structures also need to evolve. This report discusses strategies for developing and configuring these incentives, drawing on experiences in three regions - New England (particularly Massachusetts), California, and the Pacific Northwest. As a result of this review, we reach the following tentative conclusions:

1. incentives are useful in states where utilities are the prime administrators of market transformation programs;
   
   
2. incentives are complex and must be developed with care;
   
   
3. increased emphasis should be placed on market effect metrics;
   
   
4. good data and market/evaluation research are an important foundation for incentives;
   
   
5. incentive metrics are often best set through negotiation, but parties need to have adequate time and flexibility;
   
   
6. a modest level of incentives appears to be acceptable to a wide range of parties in the regulatory process; and
   
   
7. current incentive approaches have difficulty addressing the dynamic nature of the markets they are trying to change, and as a result, there is a need to experiment with modifications to current incentive mechanisms.