Beyond Carrots for Utilities: A National Review of Performance Incentives for Energy Efficiency

This report is one in a three-part ACEEE series on utility business models for energy efficiency. The two others examine state experience with lost revenue adjustment mechanisms and present an overall analysis of the utility business model framework. Utility incentive policies are ripe for examination as the regulation of the natural gas and electric utility industry undergoes major shifts and as more states adopt efficiency performance incentives. This study finds that states are increasingly adopting mechanisms to incentivize the cost-effective achievement of energy savings targets and encourage more comprehensive, longer-term performance criteria beyond saving energy. Twenty-five states have energy efficiency performance incentives for utilities or statewide program implementers, and two more states have the policy framework but have not yet implemented incentives. We group incentive policies into four types and measure the ratio of actual incentive payments to utilities relative to their total budgets or spending on energy efficiency. We also provide twelve case studies. Overall, we find that performance incentives are working well to elevate utilities' interest in investing in energy efficiency and to encourage them to meet or exceed their energy savings targets.