Energy Efficiency Resource Standard

A performance-based standard for electric and natural gas utility energy-efficiency programs reduces energy costs, improves reliability, and cuts pollution

Why Should Utilities Promote Energy Efficiency?

As California found out in 2001, a slight excess of demand for electricity over available supply can cause blackouts, massive price spikes, and economic turmoil. Small increases in demand have doubled retail natural gas prices nationwide over the last few years, resulting in plant shutdowns and home foreclosures. Energy-efficiency programs are the cheapest, quickest, and cleanest way to respond to these challenges. Efficiency investments can save consumers money, increase consumer comfort, reduce air pollution and global warming, enhance economic competitiveness, and promote energy security. In California an aggressive campaign reduced peak electricity demand by 10% in less than one year, and thus helped drop electricity prices and end the blackouts.

These demand-side management (DSM) programs use measures such as rebates for efficient appliances, commercial lighting retrofits, and energy audits to help their customers use less energy. The cost to the utility for the energy savings is often around 2-4 cents per kilowatt-hour (kWh), much less than the cost of generating and delivering electricity. Over the last two decades, states have worked with regulated utilities to avoid the need for about one hundred 300-Megawatt (MW) power plants. However, utility spending on energy-efficiency programs nationwide was cut almost in half as the electricity industry was partially deregulated in the late 1990’s. In recent years there has been a resurgence of interest in electricity and natural gas energy-efficiency programs, with about half the states committing significant resources to these efforts.

What Is an Energy Efficiency Resource Standard (EERS)?

An energy efficiency resource standard (EERS, also referred to as an energy efficiency performance standard) is a flexible market-based approach to deploy energy efficiency as an energy resource, to help meet customer needs through energy-efficiency programs rather than by constructing new supply facilities. An EERS requires utilities to achieve electricity or natural gas savings equal to a set percentage of their baseline sales or load through energy-efficiency programs, in the same way that a renewable electricity standard (RES) requires utilities to meet a set percentage of their load from renewable resources. The two policies may be—and sometimes are—used in combination.

Since an EERS applies to efficiency programs, not sales, it does not limit utility sales or revenues. The energy savings can be independently verified. Some EERS policies permit trading of efficiency credits, which allow the savings to be achieved at the lowest cost, but may give credit for more existing programs.

Savings from a national EERS The savings from a national EERS could be very large. The American Council for an Energy-Efficient Economy estimates a national EERS would by 2020: Save 300 billion kWh of electricity each year, Reduce new electric capacity by over 50,000 MW (about 170 power plants), and Prevent over 200 million metric tons of carbon dioxide greenhouse gas emissions each year. It also would save consumers over $500 billion (net after investments) through 2030.

How Would an EERS Work?

While there are many ways to structure an EERS; a leading proposal would work as follows:

• The EERS applies to utilities that distribute either electricity or natural gas. Distribution utilities are regulated even in restructured markets. A size cutoff excludes very small utilities.
• Savings targets ramp up to require new electricity and natural gas savings each year equivalent to 1% of electricity sales and 0.5% of natural gas sales. The most aggressive state programs currently meet or exceed this level of savings.
• Utilities can achieve the savings through a combination of customer energy-efficiency programs, customer combined heat and power, and reducing energy losses in the distribution system. New savings under existing state programs would count.
• Utilities can also buy credits from other utilities, other companies with similar energy-efficiency programs, or the government (with such payments reserved for state energy-efficiency programs).
• The Department of Energy (DOE) issues regulations on eligible measures and on how to count the savings. States can choose to verify and enforce compliance or have DOE do so.
• Funding for the required programs is included in utility bills, under state regulation.

State Energy Efficiency Resource Standards

Several states have set performance standards for their utility energy-efficiency programs:

• Texas requires utilities to avoid a percentage of the forecast increase in electric demand through efficiency programs, rising to 20% starting in 2009. Illinois requires electricity savings rising to 2% of sales in 2015, and Minnesota requires 1.5% annual savings starting in 2010.
• Pennsylvania, Nevada, Hawaii, and North Carolina include energy efficiency along with renewable energy as options in broader resource portfolio standards.
• Connecticut revised its RES to require utilities to save 4% of electricity use by 2010 through residential and commercial programs and combined heat and power.
• The California Public Utilities Commission sets multi-year targets for electric and natural gas utilities based on a study of how much cost-effective savings the programs can achieve.
• Colorado’s largest utility, Xcel, has agreed to achieve a set level of savings, and Vermont has performance requirements in its contract with an independent efficiency provider.

Current Federal Legislation

Energy efficiency can be used to meet up to 27 percent of the RES that was in the House energy bill (H.R. 3221), which works out to four percent of total electricity demand in 2020. It also is an eligible resource in the broader portfolio standard in S. 1602 by Sen. Hagel (R-NE). A federal EERS is proposed in H.R. 2529 by Rep. Markey (D-MA), S. Amdt. 1656 by Sen. Schumer (D-NY), H.R. 1945 by Rep. Shays (R-CT), and three climate bills: H.R. 1590 by Rep. Waxman (D-CA), S. 485 by Sen. Kerry (D-MA) and Sen. Snowe (R-ME), and S. 309 by Sen. Sanders (I-VT).

For more information please contact Alliance policy staff at (202)857-0666 or policyinfo@ase.org.

The Alliance to Save Energy is a coalition of prominent business, government, environmental and consumer leaders who promote the efficient use of energy worldwide to benefit consumers, the environment, the economy, and national security.

Updated April 2008