Energy Efficiency Policies for the Utility Sector

Federal and state initiatives to reduce electricity and natural gas demand can improve reliability, lower costs, and cut pollution

As California found out in 2001, a slight excess of demand for electricity over available supply can cause blackouts and massive price spikes, and cause havoc throughout the economy. A small excess of demand has doubled retail natural gas prices nationwide over the last few years, causing plant shutdowns and home foreclosures. Energy-efficiency investments are the cheapest, fastest, and cleanest way to respond to these challenges. Efficiency investments save consumers money, increase consumer comfort, reduce air pollution and greenhouse gas emissions, enhance economic competitiveness, and promote energy reliability and security. In California an aggressive campaign reduced peak electricity demand by 10% in less than one year, and thus helped avoid further shortages.

Over the last two decades, states worked with regulated utilities using demand-side management (DSM) programs to avoid the need for about one hundred 300-Megawatt (MW) power plants. However, utility spending on DSM programs nationwide was cut almost in half as the electricity industry was partially deregulated in the late 1990’s. More recently, interest in similar natural gas programs has grown along with natural gas prices. Today, new policies are being implemented to:

• Set energy savings performance requirements or targets
• Provide stable funding and appropriate incentives to utilities for efficiency programs, and
• Choose energy efficiency as a priority energy resource.

Energy Efficiency Performance Standards (EEPS)

An energy efficiency performance standard (EEPS) is a flexible performance-based and market-based regulatory mechanism to promote use of cost-effective energy efficiency as a resource. An EEPS requires utilities to meet customer needs in part through energy efficiency and load reduction programs rather than by constructing new supply facilities. For example, Texas requires utilities to avoid 10% of the expected increase in electric peak demand through efficiency programs. Other states, such as Pennsylvania and Nevada, are including energy efficiency along with renewable energy as options in broader resource portfolio standards.

Utilities can meet an EEPS through the kinds of effective demand reduction programs that have been conducted in many states for years, such as appliance rebate programs, energy audits, and consumer education campaigns. The program savings are independently verified, and “efficiency credits” trading can allow the savings to be achieved at the least cost.

A uniform national EEPS could require utilities to take action to reduce total electricity and natural gas use by their customers by 0.75% each year (compared to a no-action baseline). According to the American Council for an Energy-Efficient Economy (ACEEE), a 0.75% federal EEPS would by 2020:

• Save 386 billion kilowatt hours of electricity and 3600 billion cubic feet of natural gas each year
• Reduce peak electricity demand by 124,000 MW (avoiding about 400 power plants)
• Save consumers $170 billion (net after investments)
• Prevent 320 million metric tons of carbon dioxide greenhouse gas emissions each year

Public Benefits Funds (PBF)

Twenty-four states and the District of Columbia have created a guaranteed stream of funds, usually through a small surcharge on electricity bills (“wires charge”), for energy efficiency and other energy-related services traditionally provided by regulated electric utilities. Public benefit funds (PBFs), aka system benefits charges (SBCs), support projects to increase energy efficiency, renewable energy, low-income energy assistance, and energy research and development. State PBFs spend almost $1 billion each year just on energy-efficiency projects.

A federal public benefits fund could match these state funds through a national wires charge. A federal PBF would double resources available to the states for energy efficiency and other public benefits, and would encourage more states to create public benefits programs. Each tenth of a cent per kilowatt hour (mill/kWh) charge would provide $3.7 billion a year, and would add less than one dollar to the average residential monthly electric bill.

Energy, consumer, and environmental savings from a federal PBF could be similar to those from an EEPS described above.

Rate Decoupling and Incentives

Under traditional regulatory rate structures, utility revenues are proportional to sales of electricity and natural gas, even though many utility costs are fixed. Thus utility profits may be hurt by energy efficiency programs even if the utility is paid for the program costs. This “throughput incentive” is a significant barrier to effective utility energy-efficiency programs. The National Association of Regulatory Utility Commissioners (NARUC) and others have supported new rate structures under which profits are “decoupled” from sales by fixing utility revenues rather than by fixing customer rates, thus aligning utility interests with the public interest in energy efficiency. Performance incentives for successful utility energy-efficiency programs also reward utilities for efficiency measures that save their customers money.

Facilities Planning

Several approaches can be used by states in electric facilities planning to choose between energy efficiency and supply-side options in meeting energy needs:

• States and regulated utilities use Integrated Resource Planning to choose investments in generation, transmission, and distribution facilities and in energy-efficiency programs to meet customer needs with the least cost and environmental impact.
• Default service providers, which serve most customers in restructured markets, can use Portfolio Management to meet customer needs using a balanced portfolio of supply and demand resources.
• California has adopted a Loading Order directing its utilities to use cost-effective efficiency measures, and then renewable resources, before adding traditional fossil fuel plants.
• Some regional transmission organizations (RTOs) are trying to design market rules that allow demand-side solutions to compete in wholesale electricity and ancillary services markets.

Current Federal Legislation

The Energy Policy Act of 2005 did not include either an EEPS or a PBF. It did include provisions advocated by the Alliance for a DOE study and authorization of state pilot projects to stimulate utility and state electricity and natural gas efficiency programs. Two climate bills, the Safe Climate Act (H.R. 5642) by Rep. Henry Waxman (D-CA) and the Global Warming Pollution Reduction Act (S. 3698) by Sen. James Jeffords (I-VT), include a federal EEPS, and another Jeffords bill (S. 426) also includes a PBF.