Shaping utility efficiency programs with multi-factor performance incentive mechanisms
When it comes to energy efficiency in Minnesota, we want our utilities to be overachievers. One way to encourage utilities to go above and beyond minimum requirements is through performance incentive mechanisms (PIMs), regulatory tools that financially reward or penalize utilities based on their ability to achieve specific targets.
Under the Energy Conservation and Optimization (ECO) Act, electric and gas utilities in Minnesota can earn a financial incentive for meeting and surpassing minimum energy savings requirements. However, the current ECO PIM structure relies on a single metric, the net benefits of a utility’s efficiency programming, to gauge performance and calculate the size of the earned incentive. Minnesota’s focus on net benefits prioritizes the simplest to achieve and most cost-effective investments while overlooking other considerations like equity and more challenging but essential investments with longer payback periods.
To avoid over-incentivizing a single metric, states like Michigan, Massachusetts, and Colorado have adopted multi-factor PIMs, which take multiple metrics into account when defining a successful and incentive-worthy efficiency plan. When designed well, multi-factor PIMs allow states to better align their utility incentives with multiple policy priorities. Looking ahead to Minnesota’s next ECO triennial plan cycle (2027–2029), it is worth exploring how other states use multi-factor PIMs to align energy efficiency programming with additional goals beyond just cost-effectiveness.
Exploring multi-factor PIMs in other states
From Michigan to Massachusetts to Colorado, multi-factor PIM frameworks have emerged to reward utilities for additional achievements through their efficiency programs. Their mechanisms demonstrate the range of metrics and incentive structures that can make up a multi-factor PIM, as summarized in the following table.
Michigan's Energy Waste Reduction Act (EWR)
Utilities regulated by the Michigan Public Service Commission can earn financial incentives of up to 25% of their Energy Waste Reduction program spending if they exceed their annual energy savings targets. To qualify for the incentive, utilities must also meet additional utility-specific program metrics. Consumers Energy, one of Michigan’s largest electric and gas utilities, adopted a multi-factor PIM that demonstrates how utility-specific approaches can drive meaningful progress toward exceeding energy efficiency targets.
Consumers Energy’s multi-factor PIM includes the following metrics: lifetime energy savings, low-income investment, targeted low-income measures, and, specifically for gas utilities, the percentage of spending to reduce heating load. While the lifetime energy savings metric captures the overarching, long-term benefits of Consumers’ efficiency efforts, the metrics for low-income investment and measures signal that low-income communities should be prioritized, especially for high-impact measures like heat pump installations and insulation.
The gas-specific heating load metric also rewards Consumers for directing at least 67 percent of its gas efficiency spending toward heating load reduction measures like insulation and air sealing, further incentivizing high-impact yet costly measures. The multi-factor PIM aligns efficiency incentives with the challenging yet essential measures that Consumers must implement to achieve Michigan’s environmental and equity goals.
Massachusetts' Mass Save incentive framework
In Massachusetts, utilities and efficiency providers file triennial plans together under the Mass Save program and follow a shared incentive structure to earn from a statewide incentive pool. The current PIM in place from 2025 to 2027 is multi-factor and largely contingent on whether a utility or program provider can meet its equity goals.
Mass Save’s multi-factor PIM measures and rewards utilities for the net benefits their efficiency programs generate but categorizes these benefits into an equity and non-equity standard component, with a pre-determined percentage of the statewide incentive pool set aside for each. The equity component measures benefits delivered to underserved communities, including low- and moderate-income customers, renters, and small businesses participating in a turnkey retrofit initiative, while the standard component captures the remaining non-equity benefits. Since the mechanism allocates a higher percentage of the statewide incentive pool for the equity component, utilities and program providers are encouraged to pursue programming for this segment of the population more aggressively.
To ensure that the efficiency programs are still cost-effective, the Mass Save PIM has a third value metric that measures total portfolio benefits minus total program costs. However, the value component is weighted less than the equity and standard components to avoid dissuading utilities and program providers from carrying out costly yet impactful measures such as air sealing and insulation.
The Mass Save framework exemplifies how performance-based mechanisms can simultaneously promote equity, efficiency, and cost-effectiveness, serving as a model for other states aiming to achieve similar goals through their efficiency programming.
Xcel Energy's beneficial electrification and efficiency PIM in Colorado
The Colorado Public Utilities Commission recently decided on a multi-factor PIM structure to incentivize Xcel Energy’s efforts in energy efficiency, beneficial electrification, and demand management. In Colorado, Xcel Energy earns a percentage of the net benefits achieved through its electric and gas efficiency programming, which is similar to the mechanism in place in Minnesota. However, since the Colorado Commission approved the new PIM structure, Xcel can now also earn incentives for beneficial electrification and demand management measures. The beneficial electrification incentive rewards Xcel Energy with a pre-determined dollar amount per dekatherm of gas saved, while the demand management incentive rewards a percentage of net benefits based on the actual load produced by utility measures.
Colorado stands out from Michigan and Massachusetts in that Colorado allows Xcel Energy to earn beneficial electrification and demand management incentives separately from their standard efficiency incentive.
Key takeaways from multi-factor PIMs in other states
Learning from the examples of Michigan, Massachusetts, and Colorado, the following principles and ideas can guide the creation of effective multi-factor PIMs
- Metrics can incentivize programming for typically underserved groups as well as high-impact and challenging measures that offer sustained benefits in energy savings.
- Metrics must be transparent, quantifiable, and verifiable to build accountability and trust among stakeholders and program implementers.
- Metrics should be weighted to reflect the desired outcomes for programming and balanced with other considerations such as encouraging a high level of cost-effectiveness.
As states like Minnesota refine their utility incentive structures, collaboration among utilities, policymakers, and stakeholders will be crucial. Well-designed multi-factor PIMs allow for a comprehensive evaluation of utility performance across goals, such as energy savings, equity, long-term sustainability, and environmental impact. Around the country, multi-factor PIMs are already being implemented and tested as tools to pave the way to a cleaner and more equitable future.
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*Elizabeth Batsaikhan was a policy intern at CEE, winter 2024–2025.