The financial effects of energy efficiency on utilities: a closer look at decoupling

Wednesday, October 28, 2009 · availble on-demand

1 hr 24 min

Many energy efficiency advocates believe that revenue decoupling consistently removes the disincentive for utilities to promote energy efficiency. Finance principles suggest a more nuanced conclusion.

In this webinar, Steve Kihm explains that utility managers ultimately care about stock prices, of which rate of return is only one component. Energy efficiency affects all three key drivers of a utility's stock price: rate of return, cost of capital and investment scale. Decoupling, however, addresses only the rate of return driver. When Steve applies the more comprehensive financial framework, he shows that decoupling is a tactical tool that can be applied effectively to some utilities rather than a strategic approach that will work for all utilities.

Also see Steve's article When revenue decoupling will work...and when it won't published in the October 2009 issue of The Electricity Journal (pdf).

What other experts are saying:

"Revenue decoupling, while useful in some situations, is not a panacea in removing the financial disincentive for utilities to promote energy efficiency. Steve Kihm's analysis demonstrates that it is not only rate of return, but also investment scale, that drives utility stock prices. When the scale factor is controlling, energy efficiency advocates must look to mechanisms other than decoupling to accomplish their objectives." – George Edgar, former Director of Policy, Wisconsin Energy Conservation Corporation (WECC)

"Decoupling as a policy instrument merits careful scrutiny in terms of implications for the traditional regulatory compact. Without rigorous financial and policy analysis, we run the risk of oversimplification and misplaced attention with regard to incentives, risks and strategies. Steve Kihm's work is an important contribution, revealing that decoupling's short-term focus on sales, cash flows and profits might detract from what may be the more relevant and intractable incentive issue for utilities with respect to efficiency: the potential opportunity costs associated with foregone investment scale over the long term." – Janice A. Beecher, Ph.D., Director, Institute of Public Utilities, Michigan State University

Who should attend?

This webinar is designed for utility executives, regulators, legislators, stock analysts, utility investors and professionals in the energy field who want a technical, financial perspective on the impacts of energy efficiency and decoupling on utilities.