Raising the Stakes for Energy Efficiency: California’s Risk/Reward Incentive Mechanism

The report assesses the Risk/Reward Incentive Mechanism (RRIM) implemented by the California Public Utilities Commission (CPUC) in 2007. While the RRIM increased senior management's attention toward energy efficiency and drove the expansion of cost-effective programs like lighting, it struggled to protect ratepayers due to the abandonment of the 'true-up' process. The mechanism's design—characterized by sharp earnings 'cliffs' and retroactive implementation—led to significant regulatory conflict and unpredictable earnings, which limited its value to shareholders. The report concludes that while the RRIM was a valuable experiment, future incentives should be implemented before program design, avoid sharp payment distinctions, and be designed for predictability and repeatability.

• The RRIM's retroactive implementation limited its impact because utilities could only make marginal changes to programs that were already more than halfway through their three-year cycle.
• The mechanism successfully elevated the profile of energy efficiency among utility senior management, who began tracking progress toward earnings goals and requesting frequent updates from staff.
• The RRIM's design encouraged utilities to prioritize the most cost-effective measures, specifically leading to a substantial expansion of compact fluorescent light (CFL) programs.
• The RRIM failed to align with California's 2008 Long Term Energy Efficiency Strategic Plan, as it penalized utilities for pursuing comprehensive, long-term savings (like whole-home retrofits) that performed poorly on cost-effectiveness tests.
• The 'true-up' process, intended to protect ratepayers by adjusting earnings based on ex post evaluations, was abandoned for the 2006-08 period due to intense conflict over measurement methods.
• The RRIM's tiered earnings structure was too sensitive to small fluctuations in energy savings estimates, meaning that large differences in payouts did not always reflect meaningful differences in performance.
• The unpredictability of the RRIM earnings, highlighted by the potential for rewards to flip into penalties during the true-up, reduced the mechanism's value to utility shareholders and investors.
• The penalty provision of the RRIM was largely ineffective in practice, as utilities were highly averse to them and the CPUC eventually negotiated a resolution that reduced the likelihood of penalties.

APA

Chandrashekeran, S., Zuckerman, J., & Deason, J. (2014). Raising the Stakes for Energy Efficiency: California’s Risk/Reward Incentive Mechanism. 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: California’s Risk/Reward Incentive Mechanism. 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: California’s Risk/Reward Incentive Mechanism |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: California’s Risk/Reward Incentive Mechanism}}, 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} }