by Eric Gimon, Robbie Orvis, Sonia Aggarwal, and the experts of America’s Power Plan
Let’s talk energy efficiency, particularly state energy efficiency programs. It’s big business;
$6.3 billion was budgeted for ratepayer-funded, utility-delivered state-efficiency programs in 2013, alongside
$5 billion in private sector investment.
The $6.3 billion in utility spending amounts to a doubling over the
past five years. But some are beginning to question whether this money
could be spent more wisely to achieve greater levels of efficiency.
Stories of state programs being mired in detail and bureaucracy, high
costs of savings, and problems with cost-effectiveness tests have
precipitated conversations about new approaches to ratepayer-funded
utility-run energy efficiency programs. As stories like these continue
to emerge, now is a reasonable time for policymakers to take a hard look
at how to scale-up energy efficiency cost-effectively.
To
understand all these developments, let us start at the beginning: why
should policymakers create targets for energy efficiency? After all, if
it makes financial sense for people to pursue energy efficiency in their
homes or businesses, why should an additional incentive be necessary?
Unfortunately, consumers tend to systematically underinvest in
efficiency for a variety of
well-documented reasons,
and in many states the utility has a disincentive to invest in
efficiency; under the oldest and simplest regulatory schemes, lost sales
from efficiency tend to reduce earnings for the utility.
But
policymakers should pay attention to this market failure because good
energy efficiency investments don’t only benefit their owners – they
lower economic and environmental costs for everybody. In cases where
electricity needs are increasing (whether to accommodate population
growth, larger housing stock, or retiring power plants), incenting
end-users to decrease their energy demand can often meet the need at a
fraction of the cost of new generation and the associated equipment to
deliver it. So, when customers invest in energy efficiency, system-wide
investment requirements drop and everyone saves money. Avoided
generation also means less pollution, less impact on the landscape,
avoided transmission congestion, and related expenditures. Collectively,
these benefits provide a solid rationale for policymakers to pursue
energy efficiency.
Today’s Efficiency Programs
As a first
step, regulators can undertake structural reforms like decoupling
revenues from the volume of electricity sold (as have half of all
states), but they will usually need to go further by setting targets for
energy efficiency and offering utilities rewards for meeting or
surpassing them. Many states have taken this tack, but it may not be
sufficient to stop there.
Once a ratepayer-funded energy
efficiency program is established, it is important to pay attention to
constraints that may limit the programs’ ability to achieve deep savings
cost-effectively. The devil is in the details. California’s program,
for example, has had a heavy focus on evaluation, measurement, and
verification (EM&V), which has eaten up a
substantial fraction of program funding,
significantly lowering the amount of money that can be spent on
efficiency measures themselves. Aside from overspending on EM&V,
other challenges may arise. For example, traditional cost-effectiveness
tests are incapable of capturing the full benefits of energy efficiency.
A
majority of states use a Total Resource Cost (TRC) test to determine the cost-effectiveness of utility efficiency measures. However,
most states omit non-energy
benefits from the TRC, which substantially limits the types of
efficiency measures that utilities can pursue. In Massachusetts, narrow
restrictions on utility efficiency programs have
led to the highest cost per kWh saved of
any program in the country, though at the same time Massachusetts has
achieved the highest level of savings. These overhead-cost challenges
have inspired some to propose a new regime for energy efficiency.
Options for Efficiency Reform
Most
utility-run programs depend on detailed measure-by-measure estimates,
which leads to higher than necessary administrative costs. Future
programs may consider rewarding utilities for “negawatts” (energy
savings as a direct result of energy conservation or efficiency), without any preference for which particular measure caused them.
This is a major departure from line-by-line accounting for individual
energy efficiency investments. In this new regime, utilities and
contractors would instead be paid based on improvements in long-term
performance at the meter.
Of course, this transaction would still
be based on estimated energy savings, but the idea is to keep things as
simple as possible. Some proposals, like Nate Adams’
“One Knob” idea,
put the onus on contractors to estimate savings with a requirement to
publish all estimates and actual performance, looking at before and
after electricity use at the meter. The thinking is that contractors
probably best understand how their upgrades will perform, while
reputational risk and potential penalties will keep them honest. Other
mechanisms for ensuring delivery, like insurance or posting bonds, might
be applied here.
A second option under discussion is to compute “negawatts” not at the customer meter but at the utility level, or at some large
intermediate level like ConEd’s Brooklyn and Queens territory.
Energy savings and utility revenue recovery would be measured by
comparing total load to a predetermined baseline. This approach requires
regulators and stakeholders to develop and agree upon an acceptable
baseline ahead of time, which is not necessarily the most
straightforward proposition. The baseline has to be long-term enough to
give utilities planning certainty, but adjusted at least every three to
five years to take into account new trends and more accurate
information, including weather, the economy, and population growth, to
name a few. Despite the extra effort involved in developing good
baselines, though, there are several advantages to this approach.
A
baseline approach would allow utilities more freedom to choose
activities based on their own evaluation of how likely the effort is to
deliver real results, and would cut down on measure-by-measure
administrative costs. This opens the door for utilities to be more
efficient and flexible in pursuing energy savings opportunities. Of
course, ensuring that utility efficiency portfolios on the whole (rather
than measure-by-measure) remain cost-effective would be an important
component of any program like this. This approach also creates a utility
performance metric more directly relevant to planning and in line with
public policy goals; society typically doesn’t care which measures
accomplish savings goals, it is most important to enjoy the benefits of
the aggregate savings.
A third option is somewhat in-between these
two approaches and would use building energy management systems, smart
meters and other data to estimate savings in real time for a particular
customer. This could be achieved at scale using calibrated algorithms,
where actual building operating parameters are used to estimate savings.
Johnson Controls has developed this approach for a few large projects,
and it could potentially be expanded to other customers who have energy
management systems and smart meters. Such systems could even be used for
pay-for-performance programs where incentives are per kWh saved
regardless of which widgets may have been installed.
What’s clear
is that these options for new efficiency programs could potentially
reduce the burden on both commissions and utilities by revisiting the
way in which efficiency is unlocked. As states and regulators continue
looking at ways to modify the existing framework for energy efficiency
and pursue deeper savings, they may ask themselves: is it worthwhile to
let go of some of the detailed oversight of individual, measure-based
efficiency targets and instead focus on overall savings in return for
the potential to achieve deeper and more innovative energy efficiency
upgrades and lower total costs for customers?
http://theenergycollective.com/americaspowerplan/2196686/efficiency-can-we-accept-less-stringent-oversight-if-it-means-better-outco
