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Sunday, June 08, 2008

McCain Energy Policy Watch Day 410: Revenue Decoupling

See also:
McCain Energy Policy Watch Introduction
McCain Energy Policy Watch Day 385: Cap and Trade

410 days ago John McCain officially launched his candidacy for President of the United States, and he has yet to announce or endorse an energy policy. Today I'm going to briefly explain a policy referred to as "revenue decoupling," a simple and ingenious method to encourage more renewable microgeneration and consumption, that Senator Obama supports and Senator McCain has no position on.

In order to understand profit decoupling you must first briefly understand how electric utilities operate. First, utilities are regulated by the government, and the rates that they charge for power are set by the government as follows. The costs to produce power (including a profit for the unility companies) are estimated for a period of time, and the expected sales units (power) are also forecasted. The total costs divided by the units sold determines the rate per kilowatt-hour. If the utility sells more power, it earns extra profits, and if it sells less than forcasted, it earns less money. In this manner, utility company profits are very sensitive to sales. A drop in sales has a magnified impact on profits.

The dynamics of this relationship are as follows. Customers have an incentive to conserve, as they are charged according to how much they use. Utility companies, however, have a strong disincentive to promote conservation or reduced consumption. This relationship disincentivises utility companies to promote smart metering, microgeneration, or conservation initiatives.

That's where revenue decoupling comes in. Revenue decoupling breaks the link between the consumption of power and the profit to utility companies, therefore positioning them with economic incentives to allocate resources and energy in more efficient manners. Instead of fixing prices to adjust revenues, revenues are fixed by adjusting prices. As Bill Clinton himself explained the advantages of revenue decoupling;
"If the utilities do this, then they can put together a plan, go find all the contractors, get all the materials and if in effect pay for the cost on your home or in your office building as if they were building a mini power plant there. That is instead of financing it like a consumer loan for one year or a car loan for three, it could be financed over a twenty-year period or longer. The consumer then would have to pay a little more per kilowatt hour but never so much that they wouldn't still have lower total utility bills because they'd be using so much less. So suppose they make your home 30 percent more efficient, they charge you 15 percent more per kilowatt hour, so your bill goes down 15 percent and they get the financing they need, collectively it will be much less expensive for them than building a new power plant. They'll be able to finance and we won't be contributing any more to climate change."
The technical possibilites of distributed microgeneration are very promising. Microgeneration of wind and solar power can go a long way towards supplying the energy needs of developed societies, and reduce the loads on our antiquated electrical grid. Smart implementation requires effective and intelligent political and regulatory leadership, and Obama has shown that he takes the issue seriously.

Now, these are state issues, but as with nearly all such "state" issues, leadership from the federal government can promote or inhibit the actions of the states. From Obama's energy plan:
Flip Incentives to Energy Utilities: Obama will work to “flip” incentives to state and local utilities by ensuring companies get increased profits for improving energy efficiency, rather than higher energy consumption. Currently, utilities make profits when consumers purchase more energy, and when consumers purchase energy at peak times when energy prices are higher because of greater demands on the system. This decoupling of profits from increased energy usage will incentivize utilities to partner with consumers and the federal government to reduce monthly energy bills for families and businesses. Obama will provide early adopter grants and other financial assistance from the federal government to states that implement this energy efficient policy.
Emphasis added.

McCain, on the other hand, has no stated position at all on revenue decoupling. McCain apparently places our energy needs somewhere below pandering on guns and McCain branded golf gear.

Right now a nearly a dozen states have decoupled their electrical utilites. The results are encouraging. California, which a number of years ago experimented disasterously with deregulation of the electric industry, but now has a decoupled scheme. The per capita energy consumption is now 55% of the national average, due in part to revenue decoupling.

Don't let anyone call Obama an empty suit without pointing out that McCain is running for president while oil costs $138 per barrel, and he can't be bothered to formulate an energy policy.

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