PSNC Energy and Piedmont Natural Gas, which together have more than 1 million customers in the state, both fear that they will lose customers to Progress Energy and Duke Energy if the electric utilities start offering cash incentives to customers who buy energy-efficient appliances.

The natural gas companies have asked the N.C. Utilities Commission to review any financial incentives as an unfair competitive advantage for Progress and Duke; the matter has been set for a public hearing in June. Progress and Duke are expected to propose the first customer incentive programs this year and add more incentives over time.

Efficiency advocates are also alarmed about the hidden environmental consequences of promoting conservation through financial incentives. In a state where more than half the electricity comes from coal-burning power plants, advocates want to shift as much energy use toward more benign fuels. Natural gas is not only considered a clean-burning fossil fuel, but it's also more efficient than electricity when used for household heating.

"We don't want to provide some sort of perverse incentive for fuel switching when electricity may be the least efficient option," said Stephen Smith, executive director of the Southern Alliance for Clean Energy, an Asheville group. "The bias should be toward maximum efficiency and minimum environmental impact. From a pure physics point of view, there's a real advantage to natural gas for hot water and direct cooking."

Conservation goals

That energy paradox demonstrates the law of unintended consequences when shaping energy policy. Progress and Duke are introducing efficiency programs under a new state law that requires the two utilities to tap renewables, such as solar or wind or biomass, as well as conservation, to meet 12.5 percent of electricity sales by 2021. The incentives will be necessary to boost customer participation to meet the conservation goals.

The electric companies are likely to introduce a wide range of financial incentives -- to encourage customers to invest in compact fluorescent bulbs, home energy audits, duct sealing, remote-controlled thermostats as well as energy-efficient appliances. The cost of a utility's incentives will be paid by all customers served by that utility through a surcharge on bills.

Incentives are designed to be generous enough to influence consumer behavior. In Florida, where Progress Energy has a robust efficiency program, the utility offers customers up to $350 to put in an efficient electric heat pump and up to $450 to put in a solar water heater that's backed up by electricity on cloudy days and at night.

When an aging appliance is on the fritz, incentives could entice a natural gas customer to replace an old gas furnace with a new electric heat pump, especially since financial incentives are not available in North Carolina to buy natural gas appliances. Switching from gas to electricity would run counter to the state's energy efficiency goals because using electricity for heating is about 2 1/2 times less energy efficient than using natural gas, according to Neal Elliott, associate research director at the American Council for an Energy Efficient Economy, a Washington nonprofit that promotes efficiency.

Natural gas officials are scrambling to undo the potential damage. The state's renewables and efficiency law covers electric utilities because they operate major power plants and generate greenhouse gases. Natural gas companies, which mostly pipe gas to households to burn pilot lights or bake roasts, were overlooked in the state's energy overhaul.

Dual incentives

In some other states, the gas versus electric quandary has been resolved by requiring that incentives be offered for gas and electric appliances. In Oregon, for example, customers are offered $35 to use energy efficient water heaters, whether gas or electric. Customers can receive up to $400 for an efficient heat pump and up to $700 for an efficient gas furnace with duct sealing.

Piedmont Natural Gas, which has customers in Clayton and Smithfield, also has raised the fairness issues in South Carolina. Duke Energy agreed not to propose any financial incentives for appliances that can also run on natural gas until June 1. Instead, Duke and Piedmont are trying to reach an accommodation.

One possible outcome could be that Progress and Duke would offer customer incentives that reward upgrades of electric appliances but don't pay customers to switch from gas to electric.

"The bottom line for us is fuel switching," said Angela Townsend, spokeswoman for PSNC. "If the ultimate goal is to truly promote energy efficiency, an incentive program wouldn't allow customers to switch over to electricity."