Steve Fischmann
Adding new electric generating capacity is expensive. Data from New Mexico’s largest electric utility, PNM, shows that it costs $150 per megawatt hour to add new natural gas power generating capacity, $140 to add coal power, $130 for nuclear, and $85 for wind. New generation is so costly that whenever new capacity is added electric rates go up.
By contrast, installation of energy efficiency measures costs about $20 per megawatt- hour saved, according to PNM. In other words, electric consumers save somewhere between 75 percent and 87 percent when we invest in efficiency rather than building new electric plants. Efficiency also largely eliminates the pollution, health, noise and landscape impacts that come with new power generation.
Energy efficiency should be an equal partner with renewable development in our policies, but currently gets short shrift. New Mexico Law requires that 20 percent of our year 2020 power generation from investor owned utilities come from renewable technologies, but asks for only a 10 percent improvement in energy efficiency during the same time period.
It’s easy to see how this came to pass. The cost of wasting energy seems inconsequential for years until consumers are hit with the cost of a $500 million generating facility to meet growing demand. We are lulled into complacency.
In contrast, the cost of implementing efficiency measures hits immediately. Locked in a cycle of false economy, we balk at making the $2 efficiency investment today and instead are forced into a $10 generation investment tomorrow.
Changing the way we charge for power
We can dramatically improve adoption of energy efficiency without expensive government programs or raising overall utility rates. All it takes are revenue-neutral changes in the way we charge for power. Water utilities in El Paso, Santa Fe, and to a lesser degree Las Cruces have all experienced success using this strategy to reduce water usage.
It is time we applied the same common sense to our gas and electric utilities.
Power companies have historically charged lower rates to high usage customers. The theory was that it is less expensive per kilowatt-hour (kWh) to service big consumers. If you look a few years out that theory falls apart.
That profligate neighbor down the street who runs the air conditioner with the windows open, and never turns off the lights or the TV, is the same guy who makes it necessary to add expensive new electric generation. In return for his low bills, that guy costs everyone else a bundle.
To add insult to injury, the low cost of wasting electricity has given home builders and appliance makers little incentive to design efficient products. That has further inflated our energy bills.
Three strategies
Three pricing strategies for residential customers have the power to drive market-based energy efficiency that will result in lower future utility bills.
- Inclining block rates: An example of this billing model would be charging residences 10 cents per kWh for the first 400 KWH of monthly power usage, 20 cents for the next 400 kWh, and 30 cents per KWH for any additional usage. While total billings would be no higher than charging a flat 20 cent rate, the savings for eliminating high cost usage above 800 kWh makes adopting efficiency measures very attractive. Installing sun shades, CFL lighting, and efficient appliances suddenly becomes a fast payback. And that guy down the street? Odds are he will stop running his air conditioner with the windows open.
- Decoupling: This strategy has been implemented successfully in 12 states. Utilities currently earn more money the more power they sell. This has encouraged marketing practices that entice consumers to use more electricity. Decoupling allows regulators to tie utility revenues to the number of residential customers served – rather than kWh delivered – through a monthly billing adjustment. This gives utilities the opportunity to earn just as much money by selling fewer kWh, insulates consumers from big swings in energy costs during unusually hot or cold years, and maintains a stable bottom line that allows utilities to continue reliable service.
- Eliminating fixed monthly charges: If my monthly electrical bill is $80, but $20 comes via a fixed monthly charge, my efficiency efforts can only affect the remaining $60 on my bill. The fixed charge penalizes consumers who conserve electricity by effectively charging them more per KWH consumed. It also puts a bigger burden on low-income consumers. Since the data tells us energy efficiency is the surest route to minimizing monthly utility bills and long term prices, regulators should require utilities to minimize fixed monthly charges and tie all charges to energy use instead. Better yet, eliminate fixed monthly charges altogether.
The PRC can help
The good news is that utilities such as PNM and El Paso Electric are more amenable to implementing inclining rates and decoupling than they have been in the past. The bad news is that they threaten to undo the benefits of these strategies by pushing for higher fixed monthly charges.
The Public Regulation Commission can help contain utility price increases, improve our environment, and put money in your pocket by requiring implementation of all three pricing strategies. Adopting phased in implementation of these strategies in annual increments would give utilities and consumers time to adapt while giving regulators an opportunity to adjust to any implementation surprises. It is the best favor the commission can do for New Mexicans and our economy.
Fischmann is state senator for District 37 and chair of the interim Science and Technology Committee.