Financial incentives for DSM [demand-side management]: Theory and practice

Recent efforts to provide incentives for electric utilities in the USA to undertake demand-side management (DSM) programs are reviewed. The major need for incentives is seen as the overcoming of disincentives inherent in traditional regulation that affect utilities' interest in, and motivation for, DSM programs. These disincentives include the failure to recover all program costs, loss of revenues, and loss of financial opportunity. In addition, utilities seldom perceive DSM as a low-risk proposition; principal areas of concern include regulatory risk, competitive risk, and balance sheet risk. In view of these disincentives and risks, any DSM program therefore should provide for full and timely recovery of all program costs; adjust for DSM-induced revenue losses; and counterbalance risk and loss of financial opportunity by providing a bonus above cost. Three utility-specific incentive proposals are presented for the case of utilities in New York, Massachusetts, and Pennsylvania. Each of these programs meets the goal of overcoming the disincentives that surround utility DSM programs. The most significant differences across the mechanisms are found in the bonus component. Mechanisms that reduce the utility's uncertainty about the receipt of a bonus by providing it in a lump sum will likely prove more powerful motivators than those that spread the bonus out over a period of years. Use of preapproved per-unit or per-customer impact measurements reduces uncertainty and thus increases the apparent value of the bonus. Annual review of program plans and assumed impacts, supported by continuing evaluation activities, minimizes the risk that the utilities will gamble with the system or receive excessive awards. 6 refs