Topic Area: Encouraging Conservation
Geographic Area: Sacramento, California, USA
Focal Question: How can policy encourage utilities to help customers conserve energy?
(1) Flavin, Christopher and Nicholas Lenssen, June 1994. "Powering the Future: Blueprint for a Sustainable Electricity Industry." Worldwatch Paper, no. 119: 33
(2) Lerner, Steve, 1998. Eco-Pioneers. Cambridge, MA: The MIT Press.
Reviewer: Tielman T. Van Vleck, Colby '99
S. David Freeman is a self-described "utility repair man" (Lerner, p. 91). He has helped many utilities, including the Tennessee Valley Authority to make a transition toward renewable energy generation (Lerner, p. 91). Some of Freeman's most ingenious work was done while running the Sacramento Municipal Utility District (SMUD). When he began, SMUD was a standard electric utility depending heavily on fossil fuels and nuclear energy for generating electricity. Since that time, Freeman has taken advantage of new technologies allowing him to generate power from renewable sources and to help consumers to use less energy.
One of the most effective methods for reducing the use of unsustainable energy sources is by encouraging consumers to use power more wisely. Freeman believes SMUD can reduce demand for power by 20 to 25 percent through increased efficiency (Lerner, p. 97). SMUD uses solar energy, wind power, and hydro power as methods of sustainable generation, though Freeman still finds that creating renewable energy sources is more expensive than encouraging conservation of power (Lerner, p. 97). Though it makes sense that saving energy should cost less than finding more efficient energy sources, it can at first seem counter-intuitive for utilities to encourage this behavior.
The concept of a utility investing money in order to reduce demand for their product can be troubling. Conservation may be economical for two reasons. One reason for investing in energy saving measures is that major fluctuations in demand are very costly to utilities. There is no good way to store energy. It is therefore difficult for utilities to generate excess electricity during times of low demand and then use it during peak hours. Few people heat their homes with electricity, so demand is fairly low during the winter. Air conditioners, however, run almost invariably on electricity. Therefore, on a hot summer day demand far exceeds the normal rate. In order to meet the peak summer demand, the utility must invest in additional generating capacity, which goes unused for the majority of the year. This results in tremendous overcapitalization and a waste of resources for the utility. The backup generation generally takes the form of inefficient coal-burning generators. It could be more cost-effective for the firm to invest in helping consumers to find alternative methods to cool their homes in order to level out demand than to invest in an additional power plant. For example, over the past eight years SMUD has given away 200,000 trees to shade houses in order to reduce air-conditioning costs. This argument may work for a small percentage of conservation investments but it is only a seasonal reduction. This clearly does not provide the level of investment desired by environmentalists and policy makers.
A more compelling reason for utilities to invest in decreasing demand is that electricity markets are generally regulated by the state, which can create strong financial incentives to make environmentally sound decisions. The state sees a value in making utilities invest in energy saving measures to help the environment and improve the quality of life in the state. The act of encouraging utilities to reduce demand is called demand-side-management (DSM) (Lerner, p. 33). In order to offset the lost revenue from decreased demand, thirty states have developed a system known as integrated resource planning (IRP). Under IRP, states must calculate the costs, benefits and also risks, associated with all practical generation and energy-saving techniques available. In the majority of states this cost benefit analysis must include environmental costs (Flavin, p. 34). As a result of this policy, investments toward reducing consumption increased three fold within four years&emdash;from under $900 million in 1989 to approximately $2.8 billion in 1993 (Flavin, p. 35). Under regulated markets, buying back energy through conservation can be significantly cheaper than generating it.
SMUD has engaged in two programs of this type recently, the first being a refrigerator trade-in program to encourage the use of more efficient refrigerators where customers were offered between $100 and $175 to trade up to a new, efficient model. In this program, over thirty-seven thousand old refrigerators were exchanged and rebates issued for the purchase of forty-seven new refrigerators. The second program offers homeowners a $850 rebate and 8.5% financing if they chose to replace an electric water heater with a solar water heater. Twenty-nine thousand SMUD customers chose to have the solar water heater installed (Lerner, p. 98). In 1995, it was estimated that SMUD would spend 7.2 percent of revenues on energy efficiency programs and loan $45 million to customers for energy saving improvements (Lerner, p. 97).
For SMUD, the cost of the refrigerator trade-in program including state incentives resulted in an average cost of four cents per kilowatt-hour saved while the cost to buy this energy from other sources would have been five to eight cents (Lerner, p. 98). Studies of other utilities have found the cost of saving energy is generally even less than four cents per kilowatt-hour. In a survey of most DSM programs in the United States, it was found that the average cost of saving one kilowatt-hour was 2.1 cents (Flavin, p. 35). When saving electricity can be so much cheaper than producing it, it is clear why utilities now spend money to reduce demand. Incentives to electric utilities have become large enough recently that over $2 billion are invested annually toward demand reductions.
David Freeman calculates that over the next twenty years, SMUD will be saving 800 MW of power with what he refers to as their "conservation power plant". This is enough power for 640,000 customers (Lerner, 97). Freeman has turned SMUD into a model for utilities across the country. While in 1991 only 19.0% of this country's energy came from renewable sources (Flavin, p. 14), 54% of SMUD's power now comes from renewable sources (Lerner, p. 97). Today, Freeman has changed jobs and he is currently cleaning up the practices of the New York State Power Authority.