TODAY’S STUDY: THE VALUE OF EFFICIENCY

Efficiency Works; Creating Good Jobs and New Markets Through Energy Efficiency
Bracken Hendricks, Bill Campbell and Pen Goodale, September 2010 (Center for American Progress and Energy Resource Management)

New Energy needs Energy Efficiency and Energy Efficiency will make New Energy possible. Each dollar invested in Energy Efficiency returns an estimated three dollars in energy cost savings, just the money New Energy needs to buiild the infrastructure it requires to compete against the established Old Energies. Energy Efficiency and New Energy are like the characters from Greek mythology who were separated at the time of the Beginning. They will search for one another through all time and and, when reunited, they will complete creation.

Introduction and Summary

The United States is mired in an urgent jobs crisis. Despite some early signs of a sustained economic recovery, in many parts of the country the debilitating fallout from the Great Recession on employment remains a painful fact of daily life. Few industries have felt the economic downturn harder than the construction industry, which suffered the most from the consequences of a decade of gross mismanagement of our nation’s mortgage markets and financial services industries.

The unemployment rate in the construction industry hovers at Depression-era levels, remaining near 25 percent for three straight months by March of this year.

Between 2006 and early 2010, total payroll employment in construction fell by 2.1 million jobs, with residential construction declining by 38 percent, meaning that more than one in three construction workers lost their job as a result of this recession. And this collapse in construction cascades across other industries as well. Construction-related retail jobs fell by 14 percent, and manufacturing jobs in wood products by 30 percent over the same period.

Collapsing demand for labor in construction industries is devastating to American families and communities nationwide. To confront this crisis, the U.S. jobs market needs sustained new demand for the skills of construction workers that is grounded in providing real value to the economy through enhanced productivity, greater efficiency, and improved asset value for real estate. For that to happen, we need a sound strategy for investment in our nation’s stock of residential and commercial buildings—a strategy that will get banks lending again, put construction crews back on the job, and improve the long-term economic value of buildings for homeowners, businesses, and investors alike.

Such a solution is readily available. Our country needs a national program to retrofit America’s homes, offices, and factories for energy efficiency—a program that can provide an important answer to the jobs crisis facing our country (see box on page 2). But it will take public policy leadership to mobilize the private sector investment that is needed to grow this emerging market. Fortunately, many states around the country are already demonstrating that with public sector leadership it is possible to jumpstart market demand for energy efficiency retrofits of our homes and businesses.

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In this paper, the Center for American Progress and Energy Resource Management look at state regulations and incentives for energy efficiency that are working today in leading states to accelerate demand for energy efficiency services, businesses, and ultimately jobs. As this market rapidly grows in coming years, states that have put in place strong policies for energy efficiency will be best positioned to capture these new employment opportunities for construction workers in clean energy. Despite the growing state leadership documented here, however, more must be done to capture the full potential of energy efficiency to serve as a national engine of reinvestment and job creation.

Choices in policy can have a tremendous impact on setting the market conditions that entice private sector investment and put skilled construction workers back on the job. This paper identifies 10 policies that are effectively used in states and can have an especially large impact in shaping the market for energy efficiency. Using a state-by-state analysis of existing policies (including both regulations and investment incentives), as well as market conditions (including energy prices and building stock), the Center for American Progress and Energy Resource Management identified the leading states where smart policies are poised to set the stage for clean energy jobs and the homegrown businesses that will serve this new demand.

These leading states can be found in every region of the country, in states with high and low-cost sources of energy, and in both heating and cooling intensive climates.

The key driver of these markets for efficiency is the presence of policies and market prices that allow businesses to profitably recover the cost of their investments in productive, innovative, and cost-effective energy efficiency measures.

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None of these states has put in place the entire suite of policies, and each is only now beginning to develop the potential of energy efficiency to create a robust market for clean energy jobs. But these states have developed important pieces of the puzzle. In the pages that follow we will detail how we chose the “Top 10 Energy Efficiency States” and identified an additional “Top 10 High Market Potential States” that also could be poised to assume leadership in building energy efficiency as a new industry and source of increased economic competitiveness.

For other states that do not appear on this list, policy innovations could rapidly create the structures for energy efficiency as a growth business sector. Our rankings looked specifically at the potential market for energy efficiency, especially for the underserved commercial building market segment. A significant factor in determining the market potential for energy efficiency is energy prices, and it is important to realize that some of the most successful market structure innovations undertaken have been in states that rank relatively far down on our list, or even out of the top 10, because their retail energy prices are below the norm, slowing the recovery of investments in energy-saving measures. For other states that do not appear on this list, following this path of policy innovation could rapidly create the structures for energy efficiency as a growth business sector.

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We based our analysis on what we consider the 10 key energy efficiency policies that states are adopting or experimenting with to varying degrees. These policies are:

• Energy efficiency measures in Renewable Portfolio Standards—policies that not only require utility companies to meet a set portion of demand from renewable energy but also include energy efficiency as a qualifying form of clean energy.

• Energy efficiency measures in Renewable Energy Credits—policies that establish markets for tradable clean energy credits and include energy efficiency as a qualifying clean energy resource.

• Energy efficiency specific standards that require utilities to plan for meeting a percentage of future growth in demand through energy efficiency instead of increasing supply. These policy tools include Energy Efficiency Resource Standards and Energy Efficiency Portfolio Standards.

• Unbundled utility structures in which energy transmission and distribution utilities are separate from power generation companies that own power plants, encouraging least costs strategies for meeting energy demand through conservation.

• Decoupled utility rate structures, where utilities’ rates are adjusted to compensate for changes in the volume of energy sold, removing the structural disincentive to conserve energy.

• Aligning efficiency with utility companies’ shareholder benefits, such as bonus rates of return, reimbursing program costs, or other incentives that help transform efficiency from a special program into a core business practice.

• Penalties for noncompliance with energy efficiency standards, to ensure that well-intentioned programs are effectively implemented, monitored, and improved upon over time. Effective policies must have real consequences.

• Regulatory cost-benefit tests that focus on utilities’ real costs, in order to isolate the specific value offered by energy efficiency investments.

• Property-assessed financing structures that link the benefits of installed efficiency to a building, rather than the owner of the building, allowing repayment of financed investments to transfer automatically to new owners.

• Service assessment delivery structures, which allow government jurisdictions to directly facilitate financing of upfront capital costs, assuring repayment through municipal or other service assessment mechanisms.

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As we will demonstrate in this paper, these policies enacted at the state level (in different mixes in different states) are already providing numerous real-world examples of how policy-driven energy efficiency markets can create a new industry to power job creation in the construction sector profitably and sustainably.

These same policies help to combat global warming and lower our nation’s reliance on foreign fossil fuels—both important national goals. But make no mistake: No state has fully developed the potential of their energy efficiency market to create clean energy jobs, let alone the federal government.

As a country, the United States substantially lags behind our closest economic competitors in the energy efficiency of our economy. We believe the examples presented in this paper can set the stage for a powerful new national energy efficiency strategy, which fixes market barriers to unleash entrepreneurs, investment, and innovation. This is must reading for anyone interested in broad-based job creation and economic prosperity, enhanced national energy security, and a clean, sustainable environment powered by new ideas, new private capital and fresh policy prescriptions for the 21st century.

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Fast Facts

A national program to retrofit America’s homes, offices, and factories for energy efficiency can provide an important answer to the jobs crisis facing our country. The Center for American Progress estimates that retrofitting just 40 percent of the residential and commercial building stock in the United States would:

• Create 625,000 sustained full-time jobs over a decade

• Spark $500 billion in new investments to upgrade 50 million homes and office buildings

• Generate as much as $64 billion a year in cost savings for U.S. ratepayers, freeing consumers to spend their money in more productive ways

Whether we are motivated by economic, national security, or environmental concerns, a national commitment to energy efficiency will create substantial new demand for labor across the economy, and especially in construction and construction-related manufacturing jobs.

Investing in energy efficiency provides economic benefits in other ways as well. Increasingly efficiency means state-of-the-art buildings, enhanced comfort, better health, and improved economic value.

Highly efficient “green” buildings use less energy, attract higher rents, spend less time vacant, and command higher prices at the time of sale. Energy cost savings and well-designed financing structures also reduce net building operating costs permanently.

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Energy efficiency is driving innovation in business models as well.

As entrepreneurs generate value and profit by mining current inefficiency and waste for new economic opportunities, they improve the competitiveness of the broader economy. And increased efficiency makes both homeowners and the economy as a whole less vulnerable to fluctuations in energy prices, while advanced building materials and cutting-edge information technology for better building management represent fast-growing markets for American manufactured products.

Smart policies for energy efficiency can be not only an engine of economic recovery but a catalyst for innovation as well.

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Conclusion

Taking state lessons nationwide to transform America’s energy efficiency capabilities. Today, civic leaders and forward-thinking businesses are rallying around the task of rebuilding America for greater energy efficiency and as an engine for jobs, innovation, and sustained economic growth. We are in a unique historical moment that presents a valuable opportunity to stand up a new and vibrant industry to meet the growing demand for energy efficiency services in the residential, commercial, institutional, and industrial sectors of our economy.

We can only expect the demand for energy efficiency to grow in coming years with growing global energy challenges. As the United States seeks to rejoin the community of nations in responding to global warming, energy efficiency must top the list of climate solutions. Our nation’s cheapest, cleanest, most abundant source of energy is the coal, gas, and oil we never have to mine, transport, or burn because of efficiency gains. Improving energy efficiency is the lowest-cost way to cut our carbon emissions, and it is available in every state in the union. Through efficiency, we can provide consumer protection, even as we enter an uncertain energy future.

Energy efficiency also has important national security dimensions in a world with increasing competition for scarce fossil fuel resources. By reducing demand, we reduce the vulnerability of individual consumers and of the nation as a whole to sudden price spikes or to despotic leaders who would interrupt supplies of the vital energy resources that are the foundation of our economic security.

Reducing our dependence on wasted energy will not come on its own, however.

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The federal government must lead with pragmatic policies that help create new markets to reflect the real underlying economic benefits of energy efficiency.

Tremendous amounts of private capital investment are waiting in the wings for a strong public signal that the United States is committed to investing immediately in state-of-the-art sustainable buildings and power sector infrastructure. When that happens, the foundation of landmark state policies outlined here, enhanced through new tools for finance, procurement, and information sharing, will support this transition to a more efficient, cleaner, and more productive economy, with profound results.

This paper focused on how state regulatory efforts can lead to a more energy efficient economy, but these policies are only some of the necessary changes. Federal lawmakers and regulators also need to act. Because of our federal system, some solutions will be better implemented by states, while others rely on national leadership.

The federal government’s economic strength and scale uniquely positions it to lead in financing the transition toward efficiency, and reducing risk for private investors.

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One key measure of federal leadership will be for Congress to pass a comprehensive energy bill, not only to place a cap on carbon emissions but also to advance a deeper investment agenda for clean energy. Investment-led policies will notably include a Green Bank to finance innovative energy efficiency projects, sustained streams of new capital investment for both commercial and residential retrofits such as the Retrofit for Energy and Environmental Performance program as well as Renewable Energy Standards, both of which recognize energy efficiency investments, and a dedicated Energy Efficiency Resource Standard. Federal leadership is also important in areas such as research and development for new technology, modernizing building codes for energy, and advancing a national program of smart grid infrastructure construction that allows efficiency to be treated as a source of energy along with new generation.

Together, a comprehensive investment-led strategy to promote the efficient use of clean energy can fix the market failures that disadvantage energy efficiency today, hurt consumers, and weaken the U.S. economy’s competitiveness. The 10 policies outlined in this paper provide the basis for a roadmap that can guide the important policy work of the federal government, as well as states and localities alike.

These measures are already guiding the investment decisions of the private sector in states around the country, but to meet the scale of new investment that a clean energy transition requires, more must be done.

The states showcased here represent important proof that even with an uncertain energy future and volatile prices, consumers can be protected through lower bills and business investment can thrive. These are important lessons for the U.S. economy if we are going to compete and win in the global race for clean energy, and if we hope to ensure that American workers remain world leaders at the cutting edge of technological change and innovation.

As we look to the future, one thing is clear. For creating good jobs and new business opportunities, protecting consumers’ pocketbooks, and strengthening regional electricity markets, energy efficiency works. It’s time to get down to the business of rebuilding America.