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

This white paper proposes a Performance Incentive Mechanism (PIM) to encourage utilities to prioritize peak load reduction over capital-intensive infrastructure expansion. The author recommends using an outcome-oriented metric—specifically percentage reduction in peak load—and a sloped, symmetrical compensation structure with upper and lower caps to align utility incentives with system efficiency and customer value.

• The author recommends using a percentage reduction in peak load as the primary metric for a PIM because it is easier to track across multiple utilities than megawatt reduction targets. This outcome-oriented approach is preferred over measure-by-measure counterfactual accounting, which the author argues is prone to controversy and high administrative costs.
• To provide utilities with a consistent signal for investment and market transformation, PIM targets should be established for a long-term horizon of five to eight years, supported by annual interim targets.
• The proposed compensation structure is a sloped symmetrical incentive bounded by upper and lower caps. A symmetrical approach, which includes both rewards and penalties, is recommended to simulate competitive pressure and motivate utilities more effectively than reward-only structures.
• Regulators should adopt a gradual approach to PIM implementation, starting with small revenue amounts to mitigate the risk of overcompensation or unforeseen financial shocks to utilities and ratepayers.
• The financial scale of the PIM should be based on an independent study of the net benefits of peak reduction. This total societal value should serve as the theoretical maximum for the PIM to ensure that benefits are shared between the utility and customers.
• The document cites California's Risk Reward Incentive Mechanism (RRIM) as a failed example of measure-by-measure counterfactual accounting, noting that it led to protracted disputes and administrative costs two to three times higher than the U.S. average for energy efficiency programs.

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} }