Raising the Stakes for Energy Efficiency

The report evaluates California's Risk/Reward Incentive Mechanism (RRIM), a shared-savings incentive designed to motivate investor-owned utilities to meet energy efficiency targets. While it increased senior management's attention to energy efficiency and drove significant savings in cost-effective areas like lighting, it struggled with implementation delays and a controversial 'true-up' process. The mechanism's high sensitivity to small measurement changes and the resulting conflict between utilities and the CPUC led to the abandonment of retroactive adjustments for the 2006-08 period. The report concludes that incentives should be implemented before program design, avoid sharp earnings cutoffs, and be designed for predictability to be truly valued by shareholders.

• The RRIM was implemented retroactively, which limited its potential impact on energy savings because utilities could only make marginal changes to programs that were already more than halfway through their three-year cycles.
• The RRIM's design encouraged utilities to prioritize the most cost-effective programs, specifically lighting, over more comprehensive, long-term measures like whole-home retrofits, which often fared poorly on cost-effectiveness tests.
• The RRIM succeeded in increasing the visibility of energy efficiency among utility senior management, who tracked progress toward earnings goals more closely when efficiency was viewed as a potential source of profit.
• The RRIM failed to protect ratepayers effectively because the CPUC abandoned the 'true-up' process for the 2006-08 period, which was the primary mechanism for adjusting utility earnings based on retrospective evaluations.
• The RRIM's tiered reward and penalty structure was too sensitive to small fluctuations in energy savings estimates, meaning that large differences in payouts did not always reflect meaningful differences in actual performance.
• The 'true-up' process created significant conflict and mistrust between utilities and the CPUC, as utilities had a financial stake in contesting the measurement and evaluation process after programs were completed.
• The RRIM's penalty provision was not enforced in practice, and utility staff reported that the threat of penalties focused management on avoiding loss rather than maximizing ambitious energy savings goals.
• The CPUC replaced the RRIM with a new incentive mechanism in 2013 (the Efficiency Savings and Performance Incentive) that rewards utilities based on the amount of energy saved rather than net economic benefits, and eliminates sharp earnings cutoffs.

APA

Chandrashekeran, S., Zuckerman, J., & Deason, J. (2014). Raising the Stakes for Energy Efficiency. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2014/01/Raising-the-Stakes-for-Energy-Efficiency-Californias-Risk-Reward-Incentive-Mechanism.pdf

Chicago

Chandrashekeran, Sangeetha, Julia Zuckerman, and Jeff Deason. Raising the Stakes for Energy Efficiency. Climate Policy Initiative, 2014. https://www.climatepolicyinitiative.org/wp-content/uploads/2014/01/Raising-the-Stakes-for-Energy-Efficiency-Californias-Risk-Reward-Incentive-Mechanism.pdf.

Wikipedia

{{cite report |last1=Chandrashekeran |first1=Sangeetha |last2=Zuckerman |first2=Julia |last3=Deason |first3=Jeff |title=Raising the Stakes for Energy Efficiency |publisher=Climate Policy Initiative |date=January 2014 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2014/01/Raising-the-Stakes-for-Energy-Efficiency-Californias-Risk-Reward-Incentive-Mechanism.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{chandrashekeran2014raising, author = {Chandrashekeran, Sangeetha and Zuckerman, Julia and Deason, Jeff}, title = {{Raising the Stakes for Energy Efficiency}}, institution = {Climate Policy Initiative}, year = {2014}, month = jan, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2014/01/Raising-the-Stakes-for-Energy-Efficiency-Californias-Risk-Reward-Incentive-Mechanism.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }