1. Energy Efficiency Performance Incentives Successfully Aligning Utility and Public Policy Objectives By Carol White Director, Program Strategy April 17, 2013

2. 2 Overview  What is a performance incentive mechanism?  History of EE PI mechanisms in MA  Today’s MA EE PI mechanism

3. 3 A performance incentive provides a reward for achieving pre-defined desirable outcomes that might not otherwise be a priority. Definition: Performance Incentive

4. Shifting Focus – Increasing Importance of Demand-side Efforts  Integrated Resource Planning/Least Cost Planning methods instituted in late ‘80’s to ensure reliability at the lowest possible cost.  Demand-side efforts that resulted in reduced sales became a prominent component of a utility’s long-term resource plan.  Misalignment between utility management’s focus on creating a return for investors and public policy objectives related to IRP/LCP. 4

5. Finding Solutions – LBR and/or PI  LBR: Utility allowed to recover lost revenue based on energy savings achieved  Performance Incentive: Utility allowed to earn a return on EE investments based on performance  3 components: 1.Efficiency Mechanism (B/C ratio) 2.Maximizing Mechanism (Savings) 3.Other Metrics 5

6. Utility Restructuring and LBR/PI  DPU emphasis on performance incentives in place of LBR recovery (DTE 98-100)  Minimum and maximum performance under the PI defined  Threshold: 75% of goal  Design: 100% of goal  Exemplary: 125% of goal  Incentive rate tied to return on 3-month T-bills – expected return projected to be 4.5 – 5.5% after taxes  Funding for EE limited by statute - $0.0025/kWh 6

7. Modifications to PI Over Time (Pre-Green Communities Act)  T-bill rates bottomed out – returns based on T-bills insufficient to align utility and public policy objectives  Negotiated incentive rate accepted by DPU (5% after tax return at Design Level performance)  Incentive cap lowered to 110% of Design 7

8. Green Communities Act (2008)  Funding for EE no longer limited by SBC - focus on all cost-effective EE  Law included continued support for EE PI  Led to reconsideration of EE guidelines by the DPU 8

9. DPU Response to GCA  Continued recognition of importance of aligning utility and public policy objectives:  Revenue decoupling – elimination of disincentive and  Performance Incentive – potential reward 9

10. Incentive Mechanism Post GCA  Negotiated PI pool allocated based on contribution to planned statewide efforts  3 components: Savings, Value, Other Metrics  Consistent PI design for all utilities  No penalties – focus on carrots, not sticks 10

11. 2013 – 2015 Electric Incentive Mechanism 11

12. Minimum Performance Requirements  Minimum performance requirements by PA dependant on proposed goals relative to EEAC recommended goals.  Threshold for PAs at or below EEAC recommended goals increased to 76.72%.  PAs with savings targets above EEAC recommended goals have threshold set as if goals were at and not above recommended level Threshold is less than 76.72%. 12

13. Incentive Caps  Maximum earnings defined by component  Earnings capped at 125% of Design Level incentive 13

14. Determining Earnings  Actual savings, value, expenses, and net benefits documented in a DPU filing  Documentation for performance metrics includes support for the PA’s distinct role in achieving results 14

15. Recovering Earned Incentives  Design Level incentive is built into the energy efficiency cost- recovery factors and collected on a current basis  Energy efficiency cost recovery factors are adjusted periodically to take into account actual under or over recoveries, including the PI  Utility is provided with certainty that both costs and the PI will be recovered in a timely way. 15