DESIGNING A PERFORMANCE INCENTIVE MECHANISM FOR PEAK LOAD REDUCTION: A STRAW PROPOSAL

The paper argues that traditional cost-of-service regulation incentivizes utilities to invest in capital expenditures to meet peak demand. To counter this, it proposes a PIM based on an outcome-oriented metric—specifically the percentage reduction in peak load—rather than a measure-by-measure counterfactual approach, which it claims failed in California's Risk Reward Incentive Mechanism (RRIM). The author recommends setting long-term targets (five to eight years) with annual interim goals and utilizing a sloped, symmetrical incentive structure with upper and lower caps. To manage risk, the proposal suggests a gradual implementation starting with small revenue amounts, eventually scaling the PIM based on independent studies of the net societal benefits of peak reduction.

• The author recommends using a percentage reduction in peak load as the primary metric for PIMs because it is easier to track across multiple utilities than megawatt reduction targets and avoids the controversies associated with counterfactual assessments.
• A measure-by-measure counterfactual accounting approach is discouraged based on the failure of California's Risk Reward Incentive Mechanism (RRIM), which led to protracted disputes, high administrative costs (7.6% of portfolio spending compared to a 3% U.S. average), and arbitrary penalties.
• To provide a consistent signal for investment and market transformation, peak reduction targets should be established five to eight years in advance, supported by annual interim targets.
• The proposed compensation structure is a sloped symmetrical incentive bounded by upper and lower caps, which simulates competitive pressure by penalizing shareholders for failure to create customer value while limiting excessive rewards.
• The PIM should be implemented gradually, starting with small revenue amounts to reduce the risk of overcompensation or gameable metrics before scaling up based on observed behavioral responses.
• The financial scale of the PIM should be informed by independent studies of net benefits; for example, peak demand reductions in Massachusetts showed a benefit-cost ratio of 3.2-4.1, and 2.6-2.8 in Illinois.

APA

O’BOYLE, M. (2016). DESIGNING A PERFORMANCE INCENTIVE MECHANISM FOR PEAK LOAD REDUCTION: A STRAW PROPOSAL. Energy Innovation. https://energyinnovation.org/wp-content/uploads/peak_reduction_pim_whitepaper.pdf

Chicago

O’BOYLE, MICHAEL. DESIGNING A PERFORMANCE INCENTIVE MECHANISM FOR PEAK LOAD REDUCTION: A STRAW PROPOSAL. Energy Innovation, 2016. https://energyinnovation.org/wp-content/uploads/peak_reduction_pim_whitepaper.pdf.

Wikipedia

{{cite report |last1=O’BOYLE |first1=MICHAEL |title=DESIGNING A PERFORMANCE INCENTIVE MECHANISM FOR PEAK LOAD REDUCTION: A STRAW PROPOSAL |publisher=Energy Innovation |date=April 2016 |url=https://energyinnovation.org/wp-content/uploads/peak_reduction_pim_whitepaper.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{oboyle2016designing, author = {O’BOYLE, MICHAEL}, title = {{DESIGNING A PERFORMANCE INCENTIVE MECHANISM FOR PEAK LOAD REDUCTION: A STRAW PROPOSAL}}, institution = {Energy Innovation}, year = {2016}, month = apr, url = {https://energyinnovation.org/wp-content/uploads/peak_reduction_pim_whitepaper.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }