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Energy Conservation and Energy Prepayment

We have issued the seventh “Series of Regulatory Choices” white paper at no charge to the public. Michael Ozog, a respected economist, sets forth a methodology to measure the impact of energy prepayment (prepaid electricity) on energy consumption. (Download the paper.)  The simple truth is that when you pay in advance, you give more attention to how you spend your money! Prepayment removes the utility or competitive energy supplier from the role of money lender. It places the consumer into the role of energy manager which is compatible with the role each of us plays as home budget manager for everything we buy.

How much does this matter? Previous studies show about 10% savings simply because consumers pay more attention to how they are using the electricity. I expect this to grow over time as consumers seek new channels of information, new technologies and new services to reduce energy use through increased investments in efficiency. A portion of the energy savings will go to consumers who make these choices. And a portion of the savings will go to the businesses that come up with products and services that allow the consumer to be more efficient.

Prepaid Energy: Choice, Technology, and Consumer Protections

DEFG’s research regarding the potential for prepaid energy service has revealed some differences among stakeholders. These differences parallel the approaches people take with regard to utility service. Is it a monopoly with costs and services shared equitably? Or is it a service provided in the market place with consumers exercising choice.

Some stakeholders consider prepaid energy service a positive innovation for consumers — a 21st century payment channel that uses the investments in advanced meters and leverages the capabilities of the smart grid. Others view prepaid energy as potentially predatory and discriminatory toward low-income consumers. A new DEFG white paper (in the “Series of Regulatory Choices”) discusses the low-income issues.


There appears to be a common desire to see low-income consumers pay fair rates for electric service. There is also a universal desire to protect consumers during dangerous weather periods (moratoria on disconnections). Despite these common concerns, the biggest barrier to prepaid energy service seems to be that industry stakeholders do not see eye-to-eye. There are significant differences in how they frame the issues, and this make it hard to resolve policy differences.

Can DEFG identify a basis for trust to address the challenges, concerns and opportunities presented by prepaid service? DEFG has four screens that create an analytical framework to examine existing regulations. Let’s see whether a fundamental principle involved, such as “everyone must be served equally”? A rule formulated decades ago may be based on a practice that could not anticipate 21st century technologies. New technological capabilities may allow a change in the rules without giving up our basic principles. To what degree will consumers be permitted to make choices and express their preferences? How will be balance equity and efficiency?

In some cases, a rule or practice may be rooted in an ideological difference, such as supporting or opposing the role of competition in energy markets. A more rigorous analytical framework may allow us to identify an underlying motivation, and thus advance the discussion and possibly narrow differences.

Resource Adequacy and Resource Attributes: Is the Jar Half Full or Half Empty?

When one approaches a task, however simple, the brain assembles a series of small steps that, taken together, represent a plan of action. You carry out the plan based on the picture in your brain. A disagreement can arise with someone else when there is a failure to clearly communicate the different meanings of the words used to describe the tasks or execute the plan.

There is a common parable about a jar of rocks. Imagine a jar. The task is to fill it. You have large pebbles, and you begin to drop them into the jar until it is full. A friend comes along and you show her your accomplishment. She observes that the jar is not full, and she collects small pebbles and sand. She adds them to your jar. The large pebbles serve one purpose, and the smaller ones serve another. The two of you agree the jar is now quite full. You share your story with a third friend, who finds some water. He adds the water until it reaches the rim of the jar. Liquid has brought a new attribute to the simple task of “filling a jar.” Indeed the mass in the jar is greater now than it was a moment ago. Sand filled spaces among the large pebbles, and water filled spaces among the grains of sand. The three of you have finally accomplished the task. But wait! Along comes a fourth friend with a bag of salt, and you find that salt brings additional attributes to task of “filling a jar.” Salt is added to the apparently full jar, and the mass of the jar plus its contents increases again as more salt is dissolved in the water. Will this ever end? Along comes a fifth friend with a heat source, and the jar becomes “fuller” still as thermal energy is added …

Download a white paper: Resource Adequacy and the Cost of Reliability

Electric systems seemed complete or “full” decades ago when utilities built power plants, transmission lines, distribution lines and the associated facilities to control voltage and frequency. Every day, it seems, a new device or service comes along to disrupt the tranquility of the electric system which was already “full.” New resources bring new attributes to a complex system. We disaggregate products and services to accommodate the new resources that have one valuable attribute but lack another. Wind power provides clean energy but cannot be counted on in the same way as a natural gas generator because wind has a lower availability. Electric batteries provide fast acting ancillary services–short duration and extremely fast responsiveness–but cannot economically provide many hours or days of electricity. Some technologies are displaced, but others are complemented by new technologies.

If we talk through the needs for the electric industry and how to assemble resources that will complement one another, we may settle on a good mix of resources to provide basic service at a low or reasonable cost. Let’s keep the jar in mind, and talk through what it means to “fill the jar.” Let’s keep in mind that a variety of resource alternatives can provide lower-cost products and services and improve on the simple “large-pebble” solution.

More information:

Regulatory Challenges Presented by Smart Grid-Enabled Prepay Offerings

The development of customer-facing applications of smart grid invites the question: How do existing regulatory constructs comport with technological innovation? At first glance, prepaying for energy may appear to be just another payment channel for consumers, where energy is purchased now for consumption later. When supported by smart technologies, prepay may be linked with a two-way communication channel between the supplier and consumer. Energy consumption data is made available to suppliers in regular intervals (fifteen-minute, hourly, daily, etc.), which allows for different types of pricing structures. Consumers may also opt to receive communications regarding payment and account updates, price signals (potentially using dynamic pricing), and energy management options. Prepay enabled by smart grid is thus a billing option with a consistent feedback loop delivered via SMS, email, web-based portal, in-home display, or perhaps a combination of these options. The information flow allows consumers to monitor their usage, creating opportunities to reduce energy consumption and costs. With prepay, moreover, the usage data is tied to the payment transaction in real time, so consumers can directly relate energy consumption with dollars.

Thus begins the newest paper in DEFG’s Series of Regulatory Choices titled, “Regulatory Challenges Presented by Smart Grid-Enabled Prepay Offerings.”  The paper sets forth many issues that regulators must address as they consider the balance between new customer service choices and customer protection.

DEFG believes that all regulatory agencies make a “series of choices” as they go about the business of administering the laws that govern the behavior of players in network industries. DEFG’s Series of Regulatory Choices explores the federal, state and local regulatory decisions that expand the choices available to energy consumers as they construct and inhabit buildings, purchase and maintain energy-consuming devices, purchase energy, or manage their consumption of energy. Greater choice increases efficiency.

It has been stated that prepay electric service is a “killer app” for smart grid — the first customer-facing application of smart grid that will have far-reaching consequences. Read more about our work on prepay or contact us to participate in our prepay working group in 2011.

Who’s in Charge? Property Assessed Clean Energy (PACE) Programs

There is a lot in the news about so-called “big government.”  But we govern ourselves at many different levels, and each level should have clear authority to act in certain ways, and the discipline to restrain itself in other ways.

Have you heard about the conflict between certain local governments — which have authority from their states to use “land-secured financing” — and a federal agency which is fighting them using its oversight of mortgage lenders?

Local governments are using a relatively new financing mechanism to encourage their residents and businesses to invest in energy efficiency and renewable resources. Using “Property Assessed Clean Energy” (PACE) programs, private investors apply “land-secured financing” to residential and commercial building improvements. Monies lent to property owners are secured by liens on the property. Lenders like this security which is paid back through an assessment levied against the property. The assessment, using taxing authority, is transfered to the new property owners if the property is sold. Twenty two states have passed PACE legislation, and several local entities have applied this approach since 2008. These states and local governments have the backing of the White House and USDOE.

Certain federal authorities are not sure this is a good idea. On July 6, 2010, the Federal Housing Finance Agency issued a statement detailing objections to PACE programs. It directed mortgage giants Fannie Mae and Freddie Mac to take precautions. The chief concern is that if a property owner defaults on a mortgage and the property has a PACE lien, repayment of the PACE loan would take priority over the mortgage because property taxes are typically paid first from the proceeds of the sale of a foreclosed home. Consequently, PACE programs across the country have been suspended.

Writing in the third of DEFG’s “Series of Regulatory Choices,” Cynthia Boland, Esq., states:

Though PACE has the potential to both strengthen the retail renewable energy and energy efficiency marketplace and produce critical energy, environment and economic benefits, there is intense debate over whether a municipal government-sponsored lending scheme which poses potential risks to mortgage lenders is a prudent policy and thus best suited to achieve these goals.

Local Governments and Federal Agency Clash Over Property Assessed Clean Energy Programs” presents the status of PACE programs, analyzes the risks, benefits and trade-offs associated with PACE, discusses reactions to the FHFA July Statement, and discusses potential alternative policies.

No one ever said that government was simple, or that execution of any new “rules of the marketplace” would be easy to understand. I would be interested in your reactions to this report and PACE programs.

  • What authority is appropriate at each level of government? When are discipline and restraint called for?  Who needs to be more restrained?
  • If you prefer that “government just leave the marketplace alone,” please comment on the uncertainty of “no rules” — Is that preferable to rules that give certainty to businesses?
  • Finally, what is wrong with local officials using land-secured financing to shape the community’s building efficiency consistent with the values of that community? Would you prefer that they mandate efficiency through building standards, or offer voluntary investment incentives through land-secured financing, or take another approach?

Here is one place to follow PACE financing events as they unfold.

Feed-In Tariff and Regulatory Choice

DEFG’s senior associate, Cynthia Boland, esq., has written an excellent summary of the laws and policy options surrounding the use of “feed-in tariffs” (Fit) to promote renewable energy development in the United States. “Feed‐In Tariffs and Renewable Resource Policy Tradeoffs,” is the second in the “Series of Regulatory Choices” published by DEFG to promote thinking and discussion surrounding issues relating to the smart grid, alternative energy development, and the expansion of customer choices in energy services. Interested persons may download a copy of the report here. This second report describes the key provisions of feed-in tariff policy, the German experience, U.S. renewable resource policy and the issues presented by a FiT policy.

UPDATE 6/15/2010: The National Association of Regulatory Utility Commissioners (NARUC) has published a short guide on this topic. “Feed-in Tariffs (FIT): Frequently Asked Questions for State Utility Commissions,” is available as a PDF download here.

DEFG’s “Series of Regulatory Choices” explores the federal, state and local regulatory decisions that expand the choices available to energy consumers as they construct and inhabit buildings, purchase and maintain energy‐consuming devices, purchase energy, or manage their consumption of energy. I believe that greater choice increases economic efficiency — that is, makes us better off.  The “tagline” of the series is “All agencies make a series of choices,” because each government agency makes decisions about whose rights matter, and good public policy requires a balancing of competing choices. DEFG’s regulatory practice remains focused on energy consumers and customer-facing issues in the selection of alternative resources and energy efficiency services. Comment below on those regulatory issues – federal, state and local – that you are grappling with in this period of market transformation.

The FiT report complements DEFG-EcoAlign’s “Project Energy Code” paper on Germany. “Why Germany? Why Solar?” discussed Germany’s experience with solar energy, and included a political-economic analysis of Germany’s industrial and energy policy. It considered: Why have Germans supported government intervention in the energy industry and why are they willing to pay more for renewable energy? Why does solar energy make sense if Germany is not particularly sunny? Why is the German experience worthy of study? Download the paper here.  The “Project Energy Code” facilitates a discussion among energy professionals and social scientists about the “green gap” between consumers’ stated intentions and purchasing behavior. The reports address social, psychological, emotional and instinctual “codes of behavior” that affect human energy consumption.

DEFG-EcoAlign has third series of papers. The popular “EcoPinion” presents the results of statistically valid consumer surveys. EcoPinion is a macro-level assessment of consumer values, drivers and behavior around energy and environment. The periodic surveys target 1,000 people matching the U.S. population by age, gender, region and ethnicity. The surveys indicates various examples of the gap that providers have to fill through marketing. Learn more.