Report: 10 Strategies Deliver State Efficiency Gains, Good Jobs

Americans are feeling the effects of the economic downturn. While consumers tighten their belts and businesses take strong measures to reduce costs, state governments are implementing innovative solutions. From New England to the West Coast, many states are meeting economic challenges through energy efficiency, a new report says.

In Efficiency Works: Creating Good Jobs and New Markets Through Energy Efficiency, the Center for American Progress (CAP) joined Energy Resource Management (EnergyRM) to explore each state’s energy efficiency policy. Overall, the study found that various state-level energy efficiency policies have driven private investment into energy efficiency projects, including retrofits. Such projects have created new jobs, particularly in the floundering construction industry, and have cut energy costs for homes and businesses.

Building a Stronger Economy

Efficiency Works builds on a 2009 study, in which CAP explored the great economic potential of efficiency projects: Retrofitting 40 percent of the nation’s residential and commercial buildings would save $64 billion in energy bills annually; create 625,000 full-time jobs for a decade; and generate $500 billion in new investments.

This year’s report finds that while a national retrofit policy — including programs such as Home Star, a House-passed bill that would invest billions into making homes more energy efficient — may be a long way off, state programs already have pushed investment in this direction.

Key Policy Initiatives

Efficiency Works identifies 10 policy categories that can deliver big efficiency gains. States have used various combinations of these categories in their efficiency policy packages. The report also ranks the top 22 “leading energy efficiency states” based on their policy implementation and regional market dynamics. The top three energy efficiency states are Connecticut, California and Maryland.

National legislators and states can learn from the top-ranked states’ tried-and-true methods:

1. Energy efficiency in renewable portfolio standards. Many states have passed renewable energy portfolio standards, which require utilities to meet a percentage of their electric demand through renewable energy.  Some states count energy efficiency gains toward the renewable portfolio standard, further advancing the cost-benefit advantage of efficiency.
2. Energy efficiency in renewable energy credits. Similar to No. 1, some renewable energy credit trading programs allow participants to receive credit for energy efficiency gains.
3. Energy efficiency  specific standards. These policies require that utilities meet a percentage of future demand growth through efficiency. This includes Energy Efficiency Resource Standards (EERS) and Energy Efficiency Portfolio Standards (EEPS).
4. Unbundled utility structures. Power utilities are traditionally paid by the amount of energy they deliver, and thus have no incentive to reduce consumer demand. By separating the power generators and the distributers into different entities, generators are encouraged to meet energy demands through cost-saving efficiency options rather than expensive increases to generation capacity.
5. Decoupled utility rate structures. Decoupling works similar to unbundling (see No. 4). These policies disassociate utility revenues from the amount of energy sold, thus encouraging utility-financed efficiency and conservation programs to help utilities meet demand.
6. Aligning efficiency with utility companies’ shareholder benefits. Policies such as bonus rates of return and reimbursement programs can make it profitable for utilities to seek energy savings.
7. Penalties for noncompliance with energy efficiency standards. To ensure compliance, utilities that do not adhere to policies such as renewable portfolio and energy efficiency resource standards face strong market penalties.
8. Regulatory cost-benefit tests that focus on utilities’ real costs. There are many ways to assess the cost effectiveness of an energy efficiency program. Measurement and verification methods that isolate the energy costs and savings of efficiency installations best support energy efficiency programs.
9. Property assessed financing structures.  Because investment payback times for a building may outlast its tenant, front-end costs often serve as a market barrier to major projects. Financing structures such as in Property Assessed Clean Energy (PACE)  that are affixed to a property — rather than a tenant — can overcome this initial barrier to investment.
10. Service assessment delivery structures. Similar to No. 9, special assessments address the market barriers of long-term paybacks, paying off efficiency projects and loans as part of utility bills or property taxes. Although special assessments are most commonly seen as part of PACE financing, various states are using the structure by itself for other projects.

Negawatts: The Value of Future Energy Savings

One of the primary barriers to efficiency investment is that neither consumers nor economic frameworks treat saved energy the same as gained energy. To overcome this mental barrier, the report suggests embracing the concept of “negawatts,” conceptualized by physicist Amory Lovins. Simply put, a negawatt is the energy gained through efficiency. By understanding negawatts as an economic entity, the authors explain, energy markets benefit as investors put money down on efficiency projects whose value rests in savings down the road.

The policies explored by CAP and EnergyRM create innovative financing structures and overcome market barriers to leverage negawatt investment. In fact, policies that realize the value of saving energy are the key to unleashing efficiency’s full market power, the report says.

Eyes on the States

Although there is room to grow at the state level — no state uses all 10 of the featured policy categories — states with such energy efficiency policies have created jobs, boosted their economy and saved energy.

Federal legislators could pursue similar policies with comparable outcomes on the national level. While stakeholders wait for federal action, one thing is clear: If you’re looking for the next great efficiency policy, keep an eye on the states.