Performance Incentive Mechanisms for Strategic Demand Reduction

The report examines performance incentive mechanisms (PIMs) designed to motivate US utilities to implement strategic demand reduction (SDR)—a combination of energy efficiency and demand response that optimizes the electricity system. Analyzing seven state case studies, the authors find that while PIMs are effective, the potential for cost-effective load flexibility remains largely untapped. Most current PIMs focus on 'shape' (long-term demand adaptation) and 'shed' (peak demand reduction) services, with limited focus on 'shift' (moving demand between times of day) or 'shimmy' (real-time grid balancing). The report argues that durable, long-term incentives with periodic updates, supported by complementary policies like decoupling and time-varying rates, are most effective at aligning utility business models with public interest and decarbonization goals.

• Performance incentive mechanisms (PIMs) are an effective tool for incentivizing strategic demand reduction (SDR), though the overall potential for cost-effective load flexibility in the US remains largely untapped.
• In a study of seven existing SDR PIMs, four administrators in Massachusetts, New York, Texas, and Vermont met or exceeded their targets. These administrators earned incentives between 2% and 25% of their program spending and achieved peak demand savings ranging from 0.69% to 6.5% of total peak demand, with benefit-cost ratios of 2 or higher.
• Current SDR PIMs primarily focus on 'shape' services (long-term demand adaptation via efficiency and price signals) and 'shed' services (traditional demand response for peak reduction), while 'shift' (moving demand between times of day) and 'shimmy' (real-time grid balancing) services are underutilized.
• The most successful SDR outcomes are associated with durable, long-term incentives (often spanning a decade) that feature regular performance cycle updates every one to three years, as seen in Texas, Vermont, and Massachusetts.
• SDR PIMs are most effective when paired with complementary state and regional policies, including energy efficiency and clean energy targets, business model reforms like decoupling, independent evaluation, measurement, and verification (EM&V), and time-varying rates (TVR).
• Traditional utility business models create significant barriers to SDR because utilities typically rely on increasing capital investment and volumetric sales to drive shareholder returns, whereas SDR can reduce the need for such infrastructure and sales.
• Outcome-based PIMs, such as those in Rhode Island and New York, allow for a technology-neutral approach, enabling the use of diverse resources including distributed solar PV, battery storage, thermal storage, and fuel switching to meet demand reduction goals.

APA

Gold, R., Myers, A., O’Boyle, M., & Relf, G. (2020). Performance Incentive Mechanisms for Strategic Demand Reduction. Energy Innovation. https://energyinnovation.org/wp-content/uploads/Performance-Incentive-Mechanisms-for-Strategic-Demand-Reduction.pdf

Chicago

Gold, Rachel, Amanda Myers, Michael O’Boyle, and Grace Relf. Performance Incentive Mechanisms for Strategic Demand Reduction. Energy Innovation, 2020. https://energyinnovation.org/wp-content/uploads/Performance-Incentive-Mechanisms-for-Strategic-Demand-Reduction.pdf.

Wikipedia

{{cite report |last1=Gold |first1=Rachel |last2=Myers |first2=Amanda |last3=O’Boyle |first3=Michael |last4=Relf |first4=Grace |title=Performance Incentive Mechanisms for Strategic Demand Reduction |publisher=Energy Innovation |date=February 2020 |url=https://energyinnovation.org/wp-content/uploads/Performance-Incentive-Mechanisms-for-Strategic-Demand-Reduction.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{gold2020performance, author = {Gold, Rachel and Myers, Amanda and O’Boyle, Michael and Relf, Grace}, title = {{Performance Incentive Mechanisms for Strategic Demand Reduction}}, institution = {Energy Innovation}, year = {2020}, month = feb, url = {https://energyinnovation.org/wp-content/uploads/Performance-Incentive-Mechanisms-for-Strategic-Demand-Reduction.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }