Historically, utilities were compensated based on the number of kilowatt-hours they were able to sell to customers. If they could sell above the projected kWh sales used to create tariffs, they could make excess returns. However, if they sold fewer kWh than expected, they earned returns below the allowed return that the utility regulator permitted. These basic rules made it very difficult for utilities to offer efficiency programs, since those would limit their ability to sell more kWhs and earn higher returns. Recognizing the disincentive for offering efficiency to customers, many regulators have changed how utilities get paid for saving energy. More than half of the United States have some type of cost recovery in place. Perhaps the most effective mechanism has been decoupling, which breaks the link between earnings and total energy sold. The most effective programs also let utilities keep a small part of the savings they achieve for customers, so the parties’ incentives are fully aligned.
Natural Resources Defense Council. 2011. "U.S. Decoupling Maps." Natural Resources Defense Council.