As with any investment decision, you must do your homework before entering into energy efficiency names. Make sure the stock offers an acceptable return on the investment and check out how the utility charges for energy.
However, the most important consideration is to understand how the utility structures its charges. In all likelihood, you will conclude that investing in energy efficiency is a bad bet.
The structuring of a utility's charges is a very simple thing to overlook. A building owner wants to save money by reducing the use of energy. They understand that they can reduce consumption by significant amounts if they invest in various projects, such as geothermal heat pumps, solar panels, wind generators and more insulation and better windows.
The argument seems simple. Invest in energy efficiency technologies and calculate the payback. If the payback is acceptable, go forward with the investment. So, if the investment results in a 25% reduction in electricity consumption, most would expect to see a 25% reduction in their electric bill. But, this is a wrong assumption.
Some utilities' progressive rate structures can be a big trap. These structures are designed to discourage consumers who use small amounts of energy and reward those customers who use a lot of energy. Typically, utilities' rate structure (tariff) prices the first several kilowatt-hours at one price and subsequent kilowatt-hours at lower prices. So, when energy-efficiency customers invest in projects to reduce consumption by 25%, the cost savings may be substantially less than 25% .
However, it gets more complicated. Tariffs are also structured around broad consumption categories. A typical utility may have 20 separate schedules to address 20 separate customer categories. If a customer decides to invest in energy efficiency, he or she may find that the utility company has changed their profile and they could be reassigned to a completely different schedule.
Many utilities make it difficult for consumers to find and understand their rate structures. is a good example. For example, for its North Carolina service area, Duke Energy's (DUK) customers have to search through many website pages before they find something called "Residential -- North Carolina Electric Rates." On that page is a long list of schedules, including commercial and industrial schedules.
Merely finding the schedule is not enough. The schedules are incomplete and refer to a list of other schedules, called "leafs" or "sheets." Schedule "ES" offers a tiered rate with a higher rate for the first 350-kilowatt hours and a list of eight, separate leafs, with additional buried costs. Apparently, the utility and the utility commission do not want their customers and constituents to understand how monthly bills are calculated. They carefully disperse critical information to unconnected sheets that, in turn, refer to yet other leafs. In addition, they overuse a lot of utility and regulatory jargon to assure their customers are completely confused.
Progress Energy (PGN) and NextEra Energy (NEE) use similar approaches. They bury their rate structures and use similar techniques to disperse critical information.
Dominion Resources (D) is different. Dominion attempts to educate their consumers, and the company has website pages that explain how rates are determined. But, Dominion also uses progressive rates; it seems to be a pattern in the regulated states.
In deregulated states, most utilities do not own power-generating assets and they buy their power from third parties or allow their customers to buy their power from third parties. Companies, such as Pepco Holdings (POM) and Consolidated Edison (ED) tier their rates differently. Their distribution charges change seasonally, and they charge more to deliver third-party energy in the summer than the winter.
To confuse matters even more, utility rate schedules constantly change. Some change monthly; others change less frequently. For most utility consumers, no price certainty exists.
Without certainty, an investment decision is not possible and returns on energy efficiency projects cannot be calculated. Unless another party, such as the state or federal government, helps to pay, investing in energy efficiency projects requires a leap of faith and a lot of hope that any money invested would ultimately be returned.