TODAY’S STUDY: The Many Ways To Get More Energy Efficiency

State Policies to Expand Market Certainty for Energy Efficiency without an Energy Efficiency Resource Standard Lyng, Cook, et. al., August 15, 2016 (Center for a New Energy Economy)

Introduction

Energy efficiency, broadly defined, means using less energy to provide the same service. Energy efficiency is the least cost resource available to both consumers and utilities to meet the energy needs of today and in the future. Energy efficiency is not only cost-effective, it also provides gridwide benefits such as improved resiliency and reliability, and lower system operating costs – all at relatively low risk. Moreover, there is reason to believe that ongoing technological innovation will further drive down the cost of energy efficiency improvements and offer even greater savings and improved grid performance. Considering these myriad benefits, it is not surprising that energy efficiency is already being deployed, at some level, by every state in the country.

Nevertheless, energy efficiency deployment lags behind what is economically achievable due to a wide range of barriers. These are primarily policy barriers which vary from state to state. For example, in some states, there is a disincentive for electric power utilities to invest in energy efficiency because, as ratepayers consume less electricity, utilities lose revenue from sales to those customers. In other states, consumers may lack the knowledge or resources to invest in energy efficiency measures, despite it being in their best interest. In order to overcome these barriers, states must implement policies supporting energy efficiency, thereby creating market certainty for services and products that reduce energy consumption.

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Historically, the most common way to advance energy efficiency has been via a legislative or regulatory mandate – known as an energy efficiency resource standard (EERS) – which require utilities to save a certain amount of energy per year. EERS policies have been successful in driving efficiency deployment, but, they are beginning to hit their target dates at the same time that energy efficiency markets are maturing. Consequently, many states are looking for ways to increase the market certainty for energy efficiency in a way that would complement an EERS but do not necessarily require one to be in place. This paper focuses on that suite of policy options.

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The Benefits of Energy Efficiency

Energy efficiency is widely recognized as a least cost resource. It is also increasingly viewed as a low risk resource. We explain these two concepts in this section. Figure 1 (below) compares generation resources in terms of a single numerical measure of their respective costs. This measure, the levelized cost of energy (LCOE), represents the cost per megawatt hour (MWh) of energy over the life of a plant and encompasses all expected costs during that lifetime including capital costs, fuel costs, as well as operations and maintenance costs. 2 Among every other common generation resource, energy efficiency is virtually always the least cost.

There are many different types of risks associated with investment in electricity generation assets. Figure 2 (below) outlines two major types of risk: cost-related risk and time-related risk. Cost-related risk reflects the risk that investments will cost more than originally expected, or that cost recovery for those investments will be different from original expectations. Examples of cost-related risks include higher than expected construction costs, or fuel price fluctuations. Timerelated risks reflect the possibility that circumstances will change over time and will do so in a manner that affects the cost-benefit calculation for the investment.3 Examples of time-related risks include new environmental regulations or longer than expected construction times.

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Energy efficiency also carries the least amount of financial risk compared to other investments in electricity generation. A recent analysis, Practicing Risk Aware Regulation, explores the inherent risk of utility and regulator asset decisions. Figure 2 depicts utility generation options plotted in relation to their LCOE and relative risk. Energy efficiency has both the lowest LCOE and lowest risk. This is especially true compared to investment in conventional generation assets which may experience fuel price fluctuations or long, complex construction timelines that cause unexpected increases in cost.

While there is a strong argument for energy efficiency as a least cost and least risk resource, policy barriers exist in every state. Furthering a public policy objective of using electricity more efficiently requires deliberate policy and, often, ongoing policy maintenance. In the sections that follow, CNEE and AEE explore a wide range of policy options that promote market certainty for this least cost, least risk resource.

Policy Approaches…A. Regulatory Mechanisms…B. Financing Programs…C. Technology-specific Energy Efficiency…D. Improving Administration of Existing Programs…E. Investment in Low-Income Communities…U.S. EPA’s Clean Energy Incentive Program…

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Conclusion

States have a variety of policy options available to them for the support and growth of energy efficiency markets that complement or can operate separately from traditional EERS programs. This paper outlines this suite of programmatic, regulatory, and legislative actions; points to states that have implemented them well; and suggests opportunities for future work.

It is important to remember that states are diverse entities. Not all of the policies listed in this paper will be impactful in every state. CNEE recommends that states evaluate and implement policies that fit their state’s public policy objectives. With so many policies available to encourage more energy efficiency deployment, states can think broadly about their options.

To find more information on these policies and others, visit the SPOT for Clean Energy, a State Policy Opportunity Tracker developed by the Center for the New Energy Economy (CNEE) in partnership with The Nature Conservancy (TNC). The State Policy Opportunity Tracker (SPOT) for Clean Energy is a hub of information on both existing state clean energy policies and, uniquely, future policy opportunities.

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SPOT synthesizes existing information related to 38 clean energy policies at the state level and documents whether a given state policy exists and where it stands related to 3 – 6 policy components.

This resource is not a state scorecard. It is a planning tool for states as they develop their clean energy policy roadmaps. The overall value of this hub is to inform decision-making processes by providing policymakers, regulators, and interested stakeholders a clear snapshot of existing state policies as well as opportunities for future policy adoption.

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