While utilities are eager to clean up the power sector, they're realizing that will be a difficult task for renewables alone to accomplish. Consider that, because power and energy aren't the same thing, it takes 2 gigawatts (GW) of solar or 1.4 GW of wind to replace the electricity generated from every 1 GW of retired coal-fired capacity. That gap will close as technology improves, but time is of the essence to meet carbon emission reductions outlined in the Paris Agreement.
That helps to explain why many utilities are turning to one of the most important, lowest-cost, and most often overlooked clean energy technologies available: energy efficiency. Long-term investors should pay close attention, as the compounding synergies realized from pairing renewables with energy efficiency could differentiate the best utilities stocks to own from the rest of the pack.
According to the most recent annual report from the Consortium for Energy Efficiency, American electric utilities spent nearly $7 billion on energy efficiency programs for customers in 2016 and saved an estimated 25,788 gigawatt-hours (GWh) of electricity. That's up markedly from just $1.6 billion spent in 2006 and was roughly equivalent to annual retail electricity consumption for the entire state of Connecticut.
So why would electric utilities, in the business of selling electricity, invest in reducing their market opportunity?
While it may seem counterintuitive, energy efficiency investments are actually largely driven by economics. That's because when energy saved is considered an "energy source," it's by far the cheapest form of electricity, with levelized costs as low as $0.028 per kilowatt-hour (kWh). By comparison, the average American household pays $0.102 per kWh of electricity.
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