The essence of getting the most bang for your buck is to put fewer dollars into areas where benefits at the margin are lower and more dollars into areas that are just the opposite. That does not mean that you put more dollars into areas where total returns are highest because total and margin are different concepts. That basic idea is important when considering how Florida is doing with its energy efficiency programs.
The 2012 Florida legislature directed the Florida Public Service Commission (FPSC) to work with the Florida Department of Agriculture and Consumer Services to sponsor a study on whether Florida’s energy efficiency laws (known as FEECA) remain in the public interest. The FPSC, following its established procurement practices, chose a research team consisting of the Public Utility Research Center and the Program for Research Efficient Communities of the University of Florida, and the National Regulatory Research Institute.
The study team concluded that Florida’s laws and policies appear to serve the state’s citizens and energy customers well, although some data limitations kept the team from doing as thorough an investigation as it would have liked. The team found that the cost effectiveness of FEECA programs compare well with the cost effectiveness of comparable programs in other states. Favorable benefit-cost ratios indicate that Floridians are getting a good return on their energy efficiency dollars.
But it is easy to misinterpret the beneficial ratios and conclude that Florida should be spending more. By way of analogy, think about someone who has adopted a healthy diet, eating nutritious foods in just the right amounts. This person’s benefit-per-calorie ratio for eating would be quite high. Should this person consume even more calories? Absolutely not! Each additional calorie consumed would make the person worse off and decrease the benefit-per-calorie ratio. The additional calories would actually make the person less healthy!
Similarly, a favorable benefit-cost ratio for FEECA programs that compares well with other states suggests that Floridians are getting good returns on their investments in energy efficiency. We don’t know if improvements could be made at the margin without additional studies.
To illustrate, if a utility is now spending $10 million on energy efficiency (recovered in bills), with customers obtaining $15 million in benefits, customers are receiving a net benefit of $5 million. If the utility spent and recovered $11 million instead, and total benefits increased to $15.5, the additional $1million outlay would have additional benefits that were half the additional costs. That is not a bargain for customers, even if the benefit cost “ratio” is still greater than one!
How much should Florida spend on energy efficiency? Even though that cannot be known without sophisticated studies, it is important to keep in mind that the goal is the highest benefit cost ratio we can obtain, given customers’ opportunity costs. A high ratio is not a signal to do more. A more appropriate interpretation is that we may be close to spending the right amount.