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

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Published: January, 2014

In 2007, the California Public Utilities Commission (CPUC) implemented the Risk/Reward Incentive Mechanism (RRIM) — a system of financial rewards and penalties designed to motivate California’s investor-owned utilities to expand their energy efficiency programs and meet ambitious energy savings targets.

During the time the RRIM was in place, utility-run energy efficiency programs achieved a large volume of cost-ef- fective energy savings. Still, the policy has been con- troversial. Utilities, regulators, and other stakeholders disagree about the quantity of energy savings attained and what role the RRIM played in achieving them. The resulting conflict not only consumed resources but also led CPUC to pause halfway through implementation and overhaul the incentive.

California has long been a leader in energy efficiency policy among U.S. states, and the RRIM represents a large-scale policy experiment that holds lessons for other jurisdictions dealing with energy efficiency policy design, especially those considering shareholder incentives. Our evaluation of the RRIM contributes to the debate on the effectiveness of shareholder incentives, providing insights on how program design choices and institutional dynamics contribute to policy outcomes.