Electric Utility Decoupling in North Carolina: Removing Disincentives for Energy Efficiency

Abstract

North Carolina’s demand for electricity will grow at approximately 1.1% annually through 2035. That could mean an additional yearly demand of 39 million megawatt hours (MWh) by 2035, enough to power 2.9 million North Carolina households. If residents paid the current rate for that additional electricity, it would increase yearly electric utility bills by $3.9 billion. This cost will almost certainly increase due to the need to build new generation plants in order to meet increased demand. However, North Carolina has the potential to meet or exceed its future increase in demand through energy efficiency. Moreover, energy efficiency is less expensive per kilowatt-hour (kWh) than any other form of new generation. However, current regulation of electric utilities in the state makes it unlikely that any utility would choose to implement energy efficiency over increased generation. Under traditional regulation, electric utilities earn revenue based on the amount of electricity they sell, in kWh. Increased sales lead to more profits and decreased sales lead to reduced profits and more risk for the utility. Since energy efficiency would decrease the amount of electricity sold, compared to projections, it financially penalizes the utility by damaging its core business- selling electricity. Traditional regulation creates a link between sales volume and revenue, which creates the throughput incentive. The throughput incentive has two parts: 1) an incentive for the utility to increase sales and, 2) a disincentive for the utility to decrease sales (or implement energy efficiency which would decrease sales). Full decoupling breaks the link between sales volume and revenue and completely removes the throughput incentive. This Master’s Project examines the current regulation of electric utilities in North Carolina and the implications of that regulation for energy efficiency. It then examines current knowledge of full decoupling and details options for implementation. Next, it examines the positions of some North Carolina stakeholders around full decoupling. Finally, the report offers suggestions for further study that should be done in the state before full decoupling is put into practice.