Energy Efficiency in the American Power Act

May 20, 2010 - After months of speculation, Senators John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) released their energy and climate bill, the American Power Act, on May 12, 2010. The bill would establish a greenhouse gas pollution reduction program and encourage development of nuclear power, offshore oil and gas drilling, cleaner coal, clean transportation, and, to a lesser extent, energy efficiency and renewable energy. Senator Lindsay Graham (R-S.C.) helped write the bill and has said positive things about it, but was not part of the release.

What's in it for efficiency?

Energy and climate bills, like the House-passed American Clean Energy and Security Act (ACES) and the American Power Act (APA), can drive energy efficiency through both separate energy provisions and the cap-and-trade mechanism itself. Here's how the American Power Act stacks up:

(Click here for a detailed summary of the bill)

Provisions and Programs

The bill is light on energy efficiency provisions but expresses an intent by Congress, in Section 1601, to adopt additional clean energy mandates, innovative financing and funding, transmission improvements, building codes, and appliance standards. The language appears to nod to ACELA, the energy-only bill passed by the Senate Energy and Natural Resources Committee last year.

Allocations and Funding

The American Power Act devotes emission revenues to energy efficiency through consumer protection measures and specified energy efficiency provisions. Both pools of funding are significantly smaller in APA as compared to ACES.

Consumer Protection

The bill directs emissions revenues to utility ratepayers to ease increased energy bills. Like ACES, utility allocations are to be used "solely for the benefit of retail ratepayers" with some requirements for energy efficiency:

• Natural Gas receives the same annual allocation as ACES, with a smaller set-aside for energy efficiency - one-fifth of revenues down from one-third.
• Electricity receives a greater allocation than ACES in the early years. Efficiency receives some ambiguous treatment in the electricity section: while the section title is called "Investing in Low-carbon Electricity and Energy Efficiency for Consumer Protection," there are no requirements to use the allowances for efficiency while there is language that would make distributing efficiency equitably among ratepayer classes difficult.
• Heating Oil and Propane receives a slightly greater allocation in the early years than ACES, with the same requirement for energy efficiency - one half of revenues.

Energy Efficiency Provisions

The bill directs allowance revenues to other energy efficiency programs, for states, industry, and research and development:

• The Rural Energy Savings Program (Section 1602) gives allowance revenues to rural electric coops to make loans to their customers for energy efficiency improvements. The program would be administered by the Department of Agriculture’s Rural Utilities Service and receive 0.5 percent of allowance revenues ($300-$500 million) each year from 2013 to 2015.
• State Renewable Energy and Energy Efficiency Programs (Section 1603) receive 2 percent of allowance revenues for a number of clean energy programs: building energy codes, efficient manufactured homes, building energy performance labels, low income community energy efficiency, building efficiency retrofits, local efficiency programs, smart grid, renewable energy deployment and surface transportation projects. The program mirrors the SEED program of ACES, though funded at less than one-quarter the ACES amount and with a shorter duration of the funding (through 2021). The American Power Act also does not set aside any funding for specific purposes, such as building codes or retrofits, as ACES does.
• Industrial energy efficiency receives 0.5 percent of emissions allocations only in 2013 through 2015 for grants for manufacturing plant energy efficiency retrofits and modernization (Section 781(b)(2)).
• Research and development receives more funding than under ACES (2.0 percent in the early years), for the ARPA-E program within the Department of Energy (Section 781(c)(4)).

The bill would also advance clean transportation by developing a pilot program for electric vehicle infrastructure, mandating and funding national and regional transportation emissions reduction goals, and directing allowances to the Highway Trust Fund to "promote the safety, effectiveness and efficiency of transportation in the United States." These programs will receive a significant portion of emission allowances, starting at 12 percent in 2013 and phasing down to 7 percent by 2033 (Section 781(f)).

Price Signal

To drive end-use energy efficiency, a climate bill must be designed so that energy users see the price of the emissions they cause, and thus have an incentive to save money by saving energy. This price signal is strong in certain cases in the American Power Act, and weaker in others:

The American Power Act issues some consumer dividends separate from energy bills, strengthening the price signal for energy efficiency:

• The Energy Refund Program gives emission allowances to low income families through direct deposit (roughly 12 percent of emission allowances for all years after 2013).
• The Universal trust fund returns allowances to all people of the United States, beginning with 8.1 percent of allowances in 2026 and rising to 77.8 percent each year after 2034.

In contrast, several provisions in the bill tie consumer dividends to utility bills, energy use, and carbon emissions, weakening the price signal for energy efficiency:

• Utility Bills: Allocations to electric and natural gas utilities will likely be returned to consumers in large part through decreased utility bills. This framework will prevent consumers from seeing the cost of carbon emissions or the cost savings from energy improvements.
• Energy Use: The American Power Act does attempt to separate the size of the dividends from the amount of energy consumed. This would mean a net gain for the low-consuming households and an incentive for all household to invest in energy efficiency. Like ACES, however, the language is mixed, requiring utilities to return consumer dividends “equitably among ratepayers” and not solely based on energy use, unless this structure would result in increased residential or industrial electricity costs. This exception could effectively negate the requirement for a fixed rate.
• Carbon Emissions: Finally, the American Power Act changed the distribution formula of allowances among electric utilities, more heavily weighing historic emissions over the amount of electricity delivered. The change – 75 percent based on emissions, as compared to 50 percent in ACES - means that those utilities emitting the most carbon also get the greatest benefit for their consumers, reducing their price signal to use less energy.

One Small Step for the Senate

The American Power Act contains a real carbon cap, some attention to showing the price signal to consumers to reduce their energy use, and modest funding for energy efficiency. With the inclusion of the Senate Energy bill, ACELA, the American Power Act would also drive efficiency through important programs and standards, albeit with little funding for those programs. The American Power Act is a step in the right direction for energy efficiency in the United States, but needs improvement to more fully harness the power of energy efficiency to save money while meeting our climate and energy goals.

Questions? Contact Carol Guest, cguest@ase.org