Energy Efficiency Performance Incentives Successfully Aligning Utility and

Energy Efficiency Performance Incentives Successfully Aligning Utility and Public Policy Objectives By Carol White Director, Program Strategy April 17, 2013

Overview ¾ What is a performance incentive mechanism? ¾ History of EE PI mechanisms in MA ¾ Today’s MA EE PI mechanism 2

Definition: Performance Incentive A performance incentive provides a reward for achieving pre-defined desirable outcomes that might not otherwise be a priority. 3

Shifting Focus – Increasing Importance of Demand-side Efforts ¾ Integrated Resource Planning/Least Cost Planning methods instituted in late ‘ 80’s to ensure reliability at the lowest possible cost. Ø Demand-side efforts that resulted in reduced sales became a prominent component of a utility’s long-term resource plan. Ø Misalignment between utility management’s focus on creating a return for investors and public policy objectives related to IRP/LCP. 4

Finding Solutions – LBR and/or PI ¾ LBR: Utility allowed to recover lost revenue based on energy savings achieved ¾ Performance Incentive: Utility allowed to earn a return on EE investments based on performance Ø 3 components: 1. Efficiency Mechanism (B/C ratio) 2. Maximizing Mechanism (Savings) 3. Other Metrics 5

Utility Restructuring and LBR/PI ¾ DPU emphasis on performance incentives in place of LBR recovery (DTE 98 -100) ¾ Minimum and maximum performance under the PI defined Ø Threshold: 75% of goal Ø Design: 100% of goal Ø Exemplary: 125% of goal ¾ Incentive rate tied to return on 3 -month T-bills – expected return projected to be 4. 5 – 5. 5% after taxes ¾ Funding for EE limited by statute - $0. 0025/k. Wh 6

Modifications to PI Over Time (Pre -Green Communities Act) ¾ T-bill rates bottomed out – returns based on T-bills insufficient to align utility and public policy objectives ¾Negotiated incentive rate accepted by DPU (5% after tax return at Design Level performance) ¾Incentive cap lowered to 110% of Design 7

Green Communities Act (2008) ¾ Funding for EE no longer limited by SBC - focus on all cost-effective EE ¾ Law included continued support for EE PI ¾ Led to reconsideration of EE guidelines by the DPU 8

DPU Response to GCA ¾ Continued recognition of importance of aligning utility and public policy objectives: ¾ Revenue decoupling – elimination of disincentive and ¾ Performance Incentive – potential reward 9

Incentive Mechanism Post GCA ¾ Negotiated PI pool allocated based on contribution to planned statewide efforts ¾ 3 components: Savings, Value, Other Metrics ¾ Consistent PI design for all utilities ¾ No penalties – focus on carrots, not sticks 10

2013 – 2015 Electric Incentive Mechanism 11

Minimum Performance Requirements ¾ Minimum performance requirements by PA dependant on proposed goals relative to EEAC recommended goals. Ø Threshold for PAs at or below EEAC recommended goals increased to 76. 72%. Ø PAs with savings targets above EEAC recommended goals have threshold set as if goals were at and not above recommended level • Threshold is less than 76. 72%. 12

Incentive Caps ¾ Maximum earnings defined by component ¾ Earnings capped at 125% of Design Level incentive 13

Determining Earnings ¾ Actual savings, value, expenses, and net benefits documented in a DPU filing ¾ Documentation for performance metrics includes support for the PA’s distinct role in achieving results 14

Recovering Earned Incentives ¾ Design Level incentive is built into the energy efficiency costrecovery factors and collected on a current basis ¾ Energy efficiency cost recovery factors are adjusted periodically to take into account actual under or over recoveries, including the PI Ø Utility is provided with certainty that both costs and the PI will be recovered in a timely way. 15