TODAY’S STUDY: ENORMOUS EFFICIENCY OPPORTUNITIES IN ARKANSAS

Circular...On this, the one-year anniversary of the West Virginia coal mine cave-in that killed 29 and has been shown to likely be the result of (apparently criminal) negligence on the part the mine’s owners as they feverishly tried to keep coal economically competitive, there is something circular in the air.

Circular is the shape of U.S. energy policy, revolving as it does around the rising and falling price of oil.

Circular also describes the shape of the U.S. energy discussion, revolving as it does around whatever current headline grabs the fatuous attention of the nation’s shortsighted political leaders and its fickle, energy-illiterate public.

And circular is the shape of the logic Old Energy’s power brokers use to show that efforts at building New Energy and Energy Efficiency in the U.S. are largely fruitless. They point at rising greenhouse gas emissions (GhGs), failing to note the absence of long term policy goals and supports which virtually guarantees the work to build a New Energy economy will have a limited.

In fact, Western Europe’s GhGs are falling as a result of smart, long term policies that include (1) a market-based emissions-cutting system making it profitable for companies to reduce their spew and (2) strong mandates to achieve high levels of New Energy and Energy Efficiency by specified dates.

More impressively, China – the country characterized by conservatives as the arch villan of emissions – has dramatically reduced its per-capita emissions through a highly sophisticated Energy Efficiency program developed in collaboration with the U.S. Department of Energy’s Lawrence Berkeley National Laboratory.

As the report highlighted below demonstrates, a smart, long term Energy Efficiency program can dramatically reduce the consumption of energy. This would have two beneficent circular effects.

First, it would free money to build New Energy infrastructure, creating further emissions reductions and spiraling toward freedom from reliance on foreign oil supplies, a stronger domestic economy, a more secure energy supply, and cleaner air.

Second, it would end reliance on polluting, toxic and dangerous Old Energy sources that kill coal miners, oil drillers and plant workers, spiraling toward reliance on sun, wind, deep heat and flowing waters and a return to something more right for this good earth and a more humanistic – Ready? Here it comes. The violins are rising. Now the brass – cirrrrclllle, the circle of liiiife…

Rest in peace, ghosts of Upper Big Branch.

Advancing Energy Efficiency in Arkansas: Opportunities for a Clean Energy Economy
Max Neubauer, Steven Nadel, et. al., March 2011 (American Council for an Energy Efficient Economy)

Executive Summary

Recent policy developments have reinforced Arkansas’ growth as a regional leader in energy efficiency. Under a directive from the Arkansas Public Service Commission (PSC) in 2007, Arkansas’ electric and gas utilities began in 2008 to offer and promote their initial efficiency programs, known as “Quick Start” programs, for all sectors of the state economy. The Quick Start programs were approved by the PSC through December 31, 2009 with continuations and some enhancements approved for 2010. These will be followed by a more aggressive, “comprehensive” phase for which the details have recently been finalized at the PSC. On December 10, 2010, the PSC issued 10 Orders designed to expand the energy efficiency efforts of Arkansas utilities into the comprehensive phase, which included the adoption of an energy efficiency resource standard (EERS), making Arkansas only the second state in the Southeast region to do so. The PSC also issued a number of complementary orders that will bolster the efficacy of the EERS, such as the introduction of performance incentives; a lost revenue adjustment mechanism; and evaluation, verification, and measurement requirements. The PSC’s leadership, in conjunction with greater activity within the Arkansas Energy Office (AEO) and complemented by unprecedented financial support from the American Recovery and Reinvestment Act, has signaled the state’s commitment to transition from business-as-usual to a more robust, clean energy economy that will stimulate economic development and job growth while lowering energy bills and ensuring a rich quality of life for all Arkansans.

To build upon this commitment, this report presents a suite of energy efficiency policies and programs that have the potential to generate savings that by 2025 would satisfy virtually all of the projected growth in electricity consumption and reduce natural gas consumption by 8% below 2009 levels. And by making these investments in energy efficiency technologies and practices, Arkansas can add over 10,000 net jobs in 2025 and a net $3.1 billion in cumulative savings by 2025 through lower energy bills.

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Despite these recent policy developments, there is still much work to be done to ensure that Arkansas benefits from the seeds it has sown. Increased investment in energy efficiency, supplemented by federal funding, has significantly expanded the role of the AEO. As part of the Arkansas Economic Development Commission, the AEO is tasked with helping to shape energy policy in the state through the funding and administration of state energy efficiency and renewable energy programs, a task made considerably more difficult with an annual budget ten times greater than it has been historically and limited staff to manage those funds. Meanwhile, the PSC has truly begun to exercise its authority, requiring annual savings targets for utilities while also adopting policies to ensure that utility investment in energy efficiency offers returns on par with capacity investments in order to remove the “throughput” incentive. Stringent reporting requirements will go a long way towards keeping utilities on target as well. However, this “comprehensive” phase is in its nascent stage and must be carefully cultivated and administered to maximize consumer benefits.

At stake is the sustained growth of an economy that ranks among the most energy-intensive nationwide: Arkansas’ energy consumption per dollar of gross state product was the 11th highest in the country in 2007 (EIA 2010c). Arkansas also ranked 41st in ACEEE’s 2009 State Energy Efficiency Scorecard (Eldridge et al. 2009), which measures the efforts of states to embrace energy efficiency based on a broad range of policies. And while Arkansas is a predominantly rural state with relatively limited resources, aggressive energy efficiency investments could yield tremendous benefits. For example, Arkansas is a state that is heavily industrialized and home to several of the world’s largest industrial manufacturers and commercial retailers. These companies not only offer local employment opportunities, but they are also major producers (and consumers) of energy-efficient products. Investments in energy efficiency not only represent a business opportunity in a burgeoning sector, but they also represent a way to help Arkansas consumers save on their energy bills—savings that can then be spent to further stimulate the Arkansas economy.

With these important issues is mind, this report presents the suite of policies and programs as well as a discussion of pertinent issues intended to guide policymakers and advocates as the state develops its comprehensive energy efficiency programs and further defines the roles that the AEO, PSC, and utilities will play in the future. We present the results to help educate policymakers and the general public about the importance of efficiency, as well as to inform policy development in Arkansas over the next several years by identifying policy and technical opportunities for achieving major efficiency benefits.

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Energy Policy Recommendations

This analysis attempts to both capture existing energy efficiency efforts and model a suite of new or expanded policies based on successful models implemented in other states as well as in-depth consultation with stakeholders in Arkansas. We recommend eleven specific energy-saving policies, and six enabling policies that provide a solid foundation for the former, as well as nine transportation policies (see Table ES-1). The Energy Efficiency Resource Standard represents the core of these policies, providing a foundation upon which other policies may be built to achieve the greatest savings. An EERS is a set of energy-saving targets that utilities are required to meet, initially starting at modest levels but steadily increasing over time. Of the eleven policies we are recommending, there are six that we suggest be eligible to contribute towards the EERS. But it is important to note that the EERS is simply an amalgamation of the savings generated by the individual policies and utility programs, so its absence does not preclude the efficacy of the policy and program recommendations included in this report.

Electricity and Natural Gas

Our analysis includes a medium case and a high case scenario, both of which quantify the potential costs and benefits of the policies listed above, but differ in penetration rates of programs and levels of customer incentives. Table ES-2 shows the contribution of the individual policies and programs we recommend in the medium case in addition to the contribution from Arkansas’ electric cooperatives given a requirement for them to meet savings similar to those required of investor-owned utilities under an energy efficiency resource standard. We estimate that these policies have the potential to meet 15% of projected electricity consumption and almost 14% of projected natural gas consumption by 2025 in the medium case scenario while reducing peak demand by 20% over the same period. These electric savings equate to almost all the projected consumption growth in electricity consumption through 2025 and can actually reduce natural gas consumption by 8% below 2009 sales levels. Additional savings from Arkansas’ cooperative could drive electricity consumption 4% below 2009 sales levels.

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Transportation

Arkansas’ gasoline and diesel fuel consumption has grown quickly in recent decades. In 2008, Arkansas’ transportation sector consumed 292 trillion Btus of energy, 26% of total energy use in the state and about 1% of total transportation energy consumption in the United States.

Arkansas’ ability to slow such unsustainable fuel use lies in addressing not only vehicle fuel efficiency but also the overall efficiency of the state’s transportation system. The nine transportation efficiency policies outlined in this report take advantage of the savings potential for both diesel and gasoline fuels (see Table ES-3). However, the disparate demographic make-up of Arkansas necessitates tailored transportation policy packages based on population and accessibility factors. Policies applicable to metropolitan areas may not be suitable for the parts of the state made up of rural communities. As a result, a number of our policies are focused on the two primary metropolitan regions in the state.

We estimate the total combined (diesel and gasoline) fuel savings to be approximately 10% by 2025 under the medium case scenario (see Figure ES-3). In the high case, transportation efficiency policies and programs have the potential to reduce fuel consumption by 12% by 2025.

Impacts on Employment and the Economy from Energy Efficiency

The energy savings from these efficiency policies and programs can cut the net annual energy bills for customers by $1.9 million in 2025. While these savings will require some public and customer investment, by 2025 net cumulative savings on energy bills will reach $3.2 billion. These savings are the result of two effects. First, participants in energy efficiency programs will install efficiency measures, such as more efficient appliances or heating equipment, therefore lowering their electricity and natural gas consumption and electric and natural gas bills. In addition, because of the current volatility in energy prices, efficiency strategies have the added benefit of improving the balance of demand and supply in energy markets, thereby stabilizing regional electricity prices for the future.

Investments in efficiency policies and programs can also help create new, high-quality "green-collar" jobs in Arkansas while increasing both wages and gross state product (GSP). Our analysis shows that energy efficiency investments can create over 11,000 new, local jobs in Arkansas in 2025 (see Table ES-4), including well-paying trade and professional jobs needed to design, install, and operate energy efficiency measures. These new jobs, including both direct and indirect employment effects, would be equivalent to 90 typical new manufacturing facilities locating to the state.

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Conclusions

Arkansas has signaled its intent to move forward with more aggressive energy efficiency and the PSC has acted accordingly, issuing the 10 Orders along with its Sustainable Energy Resources Action Guide. But Arkansas’ future success will be dependent upon the collective will of its political leadership, businesses, and citizens to move forward. Arkansas is at a turning point where the state and its policymakers can choose either to continue to depend upon conventional, aging energy resource generation, or choose to slow—or even to reduce—future demand for electricity and natural gas by investing in energy efficiency. As this assessment demonstrates, there are plenty of cost-effective energy efficiency opportunities in the state. However, these opportunities will not be realized without careful consideration of how best to position Arkansas’ government agencies, regulators, businesses, and citizens as the state continues to pursue energy efficiency.

Arkansas cannot afford to ignore the potential economic benefits energy efficiency can create for its homes, businesses, and industries. While all of the options for the state’s energy future bear costs, this analysis suggests that making greater and sustained investments in cost-effective energy efficiency as a demand-side resource will create positive returns for citizens and businesses in the state. Furthermore, such efficiency savings reduce the need for expensive, new power plants, helping to constrain rate increases. Efficiency is a win-win strategy to meet the state’s growing energy needs while creating a net benefit to the economy in lower energy bills and net job creation.

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Discussion and Recommendations

The primary goals of this study were twofold: (1) to characterize the overall cost-effective energy efficiency resource potential in Arkansas; and (2) to develop a suite of possible energy efficiency and demand response policies for the state and assess their energy and economic impacts. The results of the suggested policy suite are intended to assist state policy leaders, legislators, and regulators to develop high-level policies and regulations, while the results of the cost-effective resource assessment are intended to provide policymakers a degree of confidence in the reasonableness of the suggested policy suite and its impacts. Readers should note that the resource assessment is not intended to provide detailed energy efficiency program plans that will be needed to capture the savings we have identified in this study. Further analysis will be required in the near future to help design and augment new and existing programs.

In its Rules for Conservation and Energy Efficiency Programs, the PSC has already codified the requisites for energy efficiency program development, complemented by the PSC’s Rules and Regulations Governing Promotional Practices of Electric and Gas Public Utilities. The PSC’s omnibus order, released February 3, 2010, listed eleven issues that will be resolved in future dockets in order to maximize the potential benefits of implementing energy efficiency programs and policies across all sectors of Arkansas’ economy. ACEEE’s list of policy recommendations should be used as a resource to help shape programs as the state and its utilities continue to invest in energy efficiency programs in the future, as guided by the PSC.

In the section below we offer insight on several issues not covered in the discussion of our policy recommendations, but that will have to be addressed as the state progresses down its path towards a clean energy future.

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Fuel Switching

In Arkansas, there is presently a PSC decision that utilities are not permitted to encourage customers to switch from one fuel to another (see PSC Rules and Regulations Governing Promotional Practices of Electric and Gas Public Utilities). Several gas utilities have proposed that this decision be changed and that they be allowed to promote natural gas use where it is in customers’ economic interest to do so. There are some opportunities to save money and to save energy on a primary basis (meaning considering the fuel burned at the power plant) by switching from electricity to natural gas and visa versa. For example, natural gas space and water heating is generally more efficient than electric resistance systems, although the savings are reduced and sometimes eliminated relative to heat pumps. Conversely, highly focused electric heating technologies, such as industrial use of microwaves and induction heating, can be more efficient than natural gas systems.

In some states, fuel-switching is a permissible use of energy efficiency funds, provided the new system saves energy, reduces emissions, and saves consumers money, and ACEEE supports this approach. On the other hand, discussions on fuel switching are generally very contentious and tend to generate more heat than illumination. There are generally more productive and cost-effective energy efficiency investments than fuel switching. Even so, given the relative efficiency of heating with natural gas versus electricity, especially in residential applications, there are clear long-term benefits that could be realized through fuel-switching. Nonetheless, because Arkansas still has much to gain from the augmentation of its Quick Start programs, we recommend that discussions on fuel switching in Arkansas be deferred for a year or so that available time and resources can first be focused on the topic of expanding cost-effective core energy efficiency programs.

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Independent Administration

In Arkansas, energy efficiency programs are mostly run by electric and gas utilities, although some programs are run by the State Energy Office (e.g., Industry Clearinghouse and Building Training Centers of Excellence) and by other state and local agencies (e.g., the Weatherization Assistance Program).

Some parties before the PSC have suggested that Arkansas move to a third-party program administrator and the PSC has agreed to consider this issue as part of Docket # 10-010-U.

In most of the U.S., efficiency programs are primarily implemented by utilities, but there are some notable exceptions. In Vermont, programs are administered by Efficiency Vermont, a statewide program implementer chosen by the Vermont Public Service Board through a competitive solicitation. In Oregon, most programs are run by the Energy Trust of Oregon, a statewide nonprofit organization. In Maine, the programs have been run by the PSC, but are now transitioning towards a third-party administrator, Efficiency Maine Trust. Wisconsin has moved from utility administration to a hybrid in which most programs are administered by third-party contractors, with the Wisconsin Public Service Commission responsible for general oversight, evaluation, and contracting with the third-party administrators. Similarly, the Indiana Utility Regulatory Commission has recently issued a ruling to move the substantial majority of programs in Indiana to third-party administrators chosen collectively by the state’s utilities. New Jersey is another state with periodic changes, with programs originally administered by utilities, now administered by the Board of Public Utilities, but with a pending proposal for administration to revert back to the utilities, since state administration has proved cumbersome in practice. Similarly, in New York, programs were originally administered by utilities, reverted to a statewide “Authority” (the New York State Energy Research and Development Authority, NYSERDA), and now is a hybrid with some utility and some NYSERDA programs. Hybrids are also in place in Maryland and Illinois where most programs are administered by utilities and some administered by state agencies. Delaware also appears to be moving to a hybrid

Where there is non-utility administration, it is sometimes in states where utilities at the time preferred not to administer programs (e.g., Wisconsin, New York, and Vermont). Also, several of these states had existing in-state organizations and/or resources, to make independent administration quickly feasible (e.g., New York with NYSERDA, Vermont with the Vermont Energy Investment Corporation, and Oregon with a local core of experienced staff who quickly built up the Energy Trust of Oregon). Where there wasn’t such an organization or core, developing a non-utility administrator has generally been a slow and difficult process, with major reassessments and changes along the journey (e.g., Wisconsin, Maine, New Jersey, and Delaware). On the other hand, for utility administration to work, the utilities have to really want the programs to work and achieve substantial savings. Several states have moved to non-utility administration because utility interest and support was lackluster (e.g., Vermont, New York, Maine, and Wisconsin).

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In Arkansas, moving to non-utility administration would be challenging, since there is not an obvious in-state organization that could run the programs. Non-utility administration would most likely involve hiring out-of-state contractors, to be overseen by some agency or Board. Such a process would be time-consuming and difficult to set up. On the other hand, it is unclear whether Arkansas utilities truly want substantial energy efficiency programs to succeed in Arkansas. The Arkansas utilities are supporting efficiency programs, but so far only modest efforts. However, uncertainty created by the lack of utility incentives and lost revenue recovery is likely a contributing factor to the level of energy efficiency being pursued by Arkansas’ utilities. Uncertainty about the entity responsible for the future administration of the programs may play a role as well. We urge the Commission to follow our recommendations regarding financial incentives for utilities in order to remove what we think is the primary uncertainty hindering the expansion of utility programs. In addition, utilities would like a final decision concerning the use of an independent administrator as well, arguing that this would provide them with the confidence that the Commission is committed to utility-administered programs. If the utilities were to truly embrace much more substantial efforts, we think they could do a reasonable job running them. But if they either oppose substantial programs, or such support is half-hearted, then non-utility administration should be seriously considered.

Separate from the question of who administers the programs is whether each utility should do its own program or whether the utilities should work together on statewide programs, at least for the major programs that serve many customers. Arkansas has a patchwork of utility service territories, with many regions served by more than one investor-owned utility and many coops interspersed. If each utility runs its own program, then it would be more difficult for customers, retailers and contractors to know who is eligible for which program, creating confusion and likely hampering participation rates. To address this, quite a few states have encouraged or required utilities to work together to develop common eligibility levels, incentives, and other program features (e.g., California, Connecticut, Massachusetts, and New York). And as noted above, a couple of states (Wisconsin and Indiana) have gone a further step and required utilities to hire common contractors to run programs statewide.

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Conclusions

Recent action by the PSC has shown that Arkansas expects energy efficiency to play a major role in Arkansas energy policy for years to come. Arkansas has chosen to continue to fund and augment its current energy efficiency programs and policies, which will help to create new, local jobs for Arkansans; lower consumer energy bills; and stimulate economic development and demand for energy efficiency products produced by Arkansas manufacturers. Although investments in additional capacity will still be necessary in the future, that need will be considerably reduced. No longer will Arkansas limit itself to a path where load growth is met by costly investment in new generation resources, costs which are ultimately passed on to consumers in the form of higher rates with little done to train and prepare Arkansans to participate in and contribute to a 21st century, clean energy economy.

At the behest of the PSC, Arkansas utilities made modest investments in efficiency programs in the roughly two-and-a-half year Quick Start phase, which ended December 31, 2009. With guidance from the PSC on the direction of the comprehensive phase issued in 10 Orders on December 10, 2010, utilities are shifting gears to get their programs ready, with program and budget proposals due by April 1, 2011 for the 2011 program year. Meanwhile, the Arkansas Energy Office is occupied with the task of distributing millions of dollars in stimulus funding towards over a dozen energy programs aimed at stimulating economic development and creating jobs by way of expanding the market for energy efficiency goods and services, as well as developing programs to help train those individuals who will be responsible for delivering the services on the ground. The PSC and the AEO are both in a position to significantly influence the focus of Arkansas energy policy over the next several decades, so it is vital that both entities strongly consider their options and make prudent investments to ensure that Arkansas is able to continue to compete in the national economy.

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Arkansas’ Future with Energy Efficiency

In this study we have recommended and discussed a number of policies that could be implemented to help generate considerable energy savings across all sectors of Arkansas’ economy, as well as a number of enabling policies that would help facilitate the development of these policies and programs. Many of the topics covered in the 10 Orders were based off the work conducted in this study by ACEEE. To review, there are a number of priorities that, if prudently addressed, will increase the potential for these programs to succeed.

A critical issue moving forward is the establishment of energy-saving targets for utilities in the form of an energy efficiency resource standard. The PSC has adopted an EERS as part of the 10 Orders issued in December, although the savings targets are modest and are only required for the next three years (Order No. 17, Docket # 08-144-U). The targets were set for an initial period of three years in order to determine if, during this period, “the comprehensive EE effort is capturing the greatest amount of cost-effective potential that can be effectively delivered.” If it is determined by the PSC that the targets are being met cost-effectively, ACEEE strongly recommends that the PSC continue to require annual savings targets for their utilities and that these targets continue to ramp up over time.

However, since utilities are private businesses and are therefore required to earn a return for their shareholders, it is equally critical that increased investment in utility-funded efficiency programs is remunerated through the offering of mechanisms addressing lost-revenues and also the offering of shareholder incentives, where utilities are rewarded financially for meeting and exceeding the annual targets set by an EERS. The PSC is cognizant of this issue and as a result approved “each component of the ‘three legged milk stool’ that utilities have argued is necessary to remove all utility disincentives to energy efficiency program implementation. These components include recovery of direct program costs, approval of a lost-contribution-to-fixed-costs mechanism, and performance incentives (Order No. 15, Docket # 08-137-U).

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To support these programs, a primary concern moving forward is that the comprehensive phase of Arkansas’ energy efficiency programs is aggressive and adequately funded and staffed. From public outreach to training auditors, evaluators, and operators, the state and its utilities will need to ensure that the market for energy efficiency is robust so as to maximize participation and that there is enough qualified personnel to meet the demand created by investments in these programs. This means ensuring that the PSC and the AEO are also adequately funded and staffed so they are able to satisfy their obligations, such as overseeing measurement and verification of utility programs (PSC) and continuing to offer and administer state and nationally-funded energy programs that will help shape the market and future energy policy in Arkansas (AEO).

Finally, a key component to ensuring the efficacy of energy efficiency policies and programs is the implementation of a proper evaluation, measurement, and verification mechanism (EM&V). Actively pursuing energy efficiency requires that programs are being rigorously monitored and evaluated. Without detailed reporting from utilities on the successes (or failures) of their efficiency programs, improving the programs over time will be difficult. Transparency of the investments and savings realized by these programs will make it easier to determine how the programs can be modified or augmented in order to generate greater cost-effective savings in the future. Included in the 10 Orders issued by the PSC was an Order to direct the convening of a collaborative through which an EM&V protocol will be developed. The EM&V protocol will be used to determine the amount of incentives awarded to utilities (Order No. 15, Docket # 08-137-U) as well as an alternative method of calculating utilities’ lost contribution to fixed costs in the absence of approved deemed savings (Order No. 14, Docket # 08-137-U).

Arkansas has already shown it is poised to embrace a clean energy future and recent policy developments have reinforced its position. But meeting this goal will require a concerted effort from all parties: the PSC, the AEO, the State Legislature, Arkansas utilities, businesses, and the general public. If all parties are willing to compromise to find a path forward that is mutually beneficial, the state, its businesses, and its consumers will reap the benefits for years to come.