Utility Energy Efficiency Programs
ELCON members are strong supporters of energy efficiency and are world-class practitioners of innovative technologies that reduce their energy use and costs. They need no reminder that using all resources more efficiently—labor, materials, capital and energy—is necessary to survive in competitive global markets.
The growing popular support for initiatives to address climate change and the general resistance to the siting of new generation and transmission facilities have renewed interest in expanding utility energy efficiency (EE) programs. Some states are proposing to significantly increase ratepayer dollars committed to EE programs by making “cost-effective” energy efficiency the “highest priority procurement resource” or the “first fuel.” These actions are based on the assumption that energy efficiency can be implemented at very low or negative cost and avoid the need for investments in new generation or transmission facilities and achieve significant net reductions in greenhouse gases (GHG) emissions. Such claims are reminiscent of the boast decades ago that nuclear power would be “too cheap to meter.”
ELCON believes that consumer behavior, energy markets and macroeconomic forces are too complex and uncertain to warrant the leap of faith that promoting energy efficiency will result in net reductions in electricity consumption (kW and kWh) unless extra care and resources are committed to determining net energy and capacity savings. There are other concerns regarding cost allocation and recovery in rates, and compensation to utility shareholders. The likely outcome of imprudent EE program design, impact evaluation based exclusively on engineering models and cost recovery (including utility incentives) is that ratepayers will pay twice or more for the same resource capability or GHG reductions, and the long-term objectives of policies designed to promote energy efficiency will be undermined and discredited.
ELCON Position & Recommendations
Energy Efficiency Gap & EE Program Targets
- Utility EE programs are only one part of national (and international) policies to promote energy efficiency. If one overarching objective of EE programs is to reduce carbon-intensive energy consumption, then EE programs must be designed to be cost effective in the context of the broader economy.
- The trend in some states to mandate EE programs as the “first fuel” creates the false impression that there is no need to build new supply-side generation. That is wrong. As long as electric utilities project positive growth in electric sales and number of customers there will be a need to add incremental supply-side resources regardless of the level of EE programs.
Standard Protocols Accredited in an ANSI-Approved Process Should Guide Impact Evaluation of EE Programs
- National standards and business practices should be developed for the impact evaluation and reporting of the net energy and capacity savings of utility EE programs directed at mass-market customers. Such standards and business practices (“protocols”), including common definitions, compliance measures and training requirements, should be vetted on an on-going basis by organizations such as the North American Energy Standards Board (NAESB) using procedures that have been accredited by the American National Standards Institute (ANSI).
- Standard protocols should be developed based on randomized controlled trials to accurately identify and quantify the net GHG emission reductions associated with avoided fuel combustion resulting from utility EE programs.
- The use of so-called “deemed savings” should be discouraged unless standard protocols are developed for impact evaluation. This effort should include criteria for calibrating deemed savings values to actually measured values, guidelines for updating savings values and determining region or climate zone specific deemed savings values. The use of dated average values is not sufficient for maintaining grid reliability unless the values are deeply discounted.
- The protocols should specify the minimum allowable methods and rigor used to measure, verify and report EE program impacts. The protocols should also require that all significant behavioral responses to EE programs (such as the rebound effect, free ridership, moral hazard and spillover effects) be accounted for, measured and verified.
- As long as a utility experiences positive increases in load and customer growth, ratepayers are exposed to the real risk that they will pay twice for incremental resources unless impact evaluation (including application of deemed savings) achieves the comparable degree of reliability as a metered, dispatchable resource.
EE Program Administration & Impact Evaluation
- There is no evidence that utility administration of EE programs is better or worse than third-party administration. Regulators’ decisions to pick the appropriate administrator should be based on minimizing the total costs recovered from ratepayers for the programs.
- To ensure unbiased application of standard protocols, the responsibility for impact evaluation should be separated from the entity performing the program design and administration functions.
NERC Metrics for Quantifying Influence of Demand-Side Resources on the Reliability of the Bulk Electric System
- The North American Electric Reliability Corporation (NERC) should continue its efforts to develop and refine metrics for energy efficiency and demand response, and to require the reporting of such data to support NERC’s long-term reliability assessments and standards.
Cost-Effectiveness of EE Program Impacts
- Cost-effectiveness determination requires accurate estimates of avoided costs. Unless proven otherwise, EE programs will at best only defer the need from some form of supply side resource.
- Avoided costs should not be based on deferring another resource (e.g., nuclear) that has no practical feasibility of being sited and built during the planning horizon used to estimate such costs. In the short term, the next or marginal unit is often another EE program, demand response or a supply-side option fueled with natural gas or wind. It may also be removing an old generator from mothballed status.
- The best way to determine avoided costs is with the bid prices for incremental energy and capacity in the wholesale markets.
- The lowest costs must translate into the lowest possible rates and charges to customers. The lowest cost should not mean the lowest cost to the utility. Utility planning should be conducted to produce the lowest net present value revenue requirement (i.e., levelized cost) per unit of energy supplied over the long-term planning horizon and given due consideration to risk.
Allocation & Recovery of EE Program Costs
- The measured and verified resource value of EE programs (in terms of actual fuel or capacity reduced) should be compensated and its costs allocated and recovered from ratepayers on the same basis as generation resources. Thus if generators sell capacity and energy under long-term contracts or purchased-power agreements at market-based rates, the resource value of EE programs should be eligible for the same form of compensation.
- If a utility rate-bases incremental supply-side resources and receives a return of and on the capital, EE program costs should be afforded the same treatment if the utility seeks a profit on EE program investments.
- No compensation from ratepayer rates should be provided for the resource value of energy efficiency improvements resulting from state or federal mandates (e.g., new appliance efficiency standards or building codes).
- Ratepayers who make energy efficiency investments at their own expense should be eligible to opt-out from participation in utility programs.
- If higher costs can be avoided with EE programs (or with the decision to procure any other type of resource), the utility should not be allowed to recover any portion of those costs as a “profit” or “incentive” for administering EE. A fundamental feature of the utility business model must be the obligation to plan a least-cost resource mix regardless of the type of resource used. Every dollar given to a utility as an “incentive” for ordinary business behavior is a dollar that could have been spent on more energy efficiency.
Meredith Fowlie, Michael Greenstone and Catherine Wolfram, Do Energy Efficiency Investments Deliver? Evidence from the Weatherization Assistance Program, E2e Working Paper 020, June 2015
Hunt Allcott and Judd B. Kessler, The Welfare Effects of Nudges: A Case Study of Energy Use Social Comparisons, E2e Working Paper 022, November 2015
Electricity Consumers Resource Council, Utility Energy Efficiency Programs: Too Cheap to Meter? A Policy Brief of the Electricity Consumers Resource Council, Washington DC