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February 27, 2006

The Odd Decouple

This is good news: according to NW Current, more and more utilities are becoming interested in "decoupling" -- which could be the single most cost-effective step I've heard of for encouraging conservation.

Here's how decoupling works.  Utility rates are pretty tightly regulated:  rate structures are dictated by utility commissions and the like.  Traditionally, rate structures link a utility's profits to its sales:  the more a utility sells, the greater its profits.  But that creates a huge disincentive for conservation: if utilities get people to cut their consumption, they cut into their own earnings.  In fact, a private utility that tries to get its customers to use gas more efficiently could actually run the risk of a shareholder lawsuit.

Under decoupling, though, utility rates are structured so that a utility's profit margins can rise when consumption falls.  (In other words, a utility's earnings are "decoupled" from its gross sales.)  This simple change can make it profitable for utilities to promote conservation.  And as a result, decoupling aligns the utility's incentives with the incentives of its customers:  everyone has an incentive to use energy more efficiently.  Northwest Natural, an Oregon gas company, has been operating under a decoupled rate structure since 2002.  One result -- it's shifted staff from marketing (trying to get people to buy more gas) to customer service.  Whee!

Decoupling is one of those nifty little ideas with a huge potential payoff for a seemingly insignificant change.  It doesn't take much to make decoupling a reality -- it relies on a simple alteration to the rules, rather than regulatory strictures or costly upgrades to technology.  So it's nice to see it catching on. 

Posted by ClarkWD | Permalink


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In the end, it is the customer who decides to conserve or consume more. This proposal creates a disincentive for the customer by allowing rates to rise when consumption decreases.

Posted by: sf | Feb 28, 2006 9:46:55 AM

Hm. It may reduce the incentive -- that is, if I, as a consumer, save 10 units of energy, I only reduce costs by ~9 units or so; the extra bit goes as profit to the utility. I'm not sure if this counts as a disincentive, but I suppose it does reduce the consumer's incentive for conserving.

But consumers, apparently, aren't particularly rational when it comes to saving energy. We require a short payback -- maybe 18 months to 3 years -- in order to invest in energy-saving home improvments. That's an incredibly short payback -- most businesses would leap at opportunities with a 10 year payback, but households leave them on the table. And most households don't seek even out opportunities to save energy; experience has shown that they have to be marketed pretty aggressively, and homeowners may need technical help and assistance.

The way the Northwest Natural decoupling program was set up, everybody's incentives are at least pointing in the same direction, and there's someone out there marketing & providing technical assistance for saving energy. In practice, it seems to work out much better than a system in which there's no commercial entity that can turn a profit from home energy efficiency.

Posted by: Clark Williams-Derry | Feb 28, 2006 10:17:55 AM