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Testimony of Lowell Ungar, Senior Policy Analyst House Small Business Committee, Subcommittee on Tax, Finance, and Exports Natural Gas Price Impacts and Energy Efficiency Opportunities for Small Businesses Introduction The Alliance to Save Energy is a bipartisan, nonprofit coalition of more than 100 business, government, environmental and consumer leaders. The Alliance’s mission is to promote energy efficiency worldwide to achieve a healthier economy, a cleaner environment, and greater energy security. The Alliance, founded in 1977 by Senators Charles Percy and Hubert Humphrey, currently enjoys the leadership of Senator Mark Pryor as Chairman; Washington Gas Chairman and CEO James DeGraffenreidt, Jr. as Co-Chairman; and Representatives Ralph Hall, Zach Wamp and Ed Markey, along with Senators Jeff Bingaman, Byron Dorgan, Susan Collins, and Jim Jeffords, as its Vice-Chairs. Attached to this testimony are lists of the Alliance’s Board of Directors and its Associate members. The Alliance is pleased to testify today on what can be done about the impact of natural gas prices on small business. We believe that energy efficiency is the quickest, cheapest, and cleanest way both to help small businesses manage natural gas prices and to help bring those prices under control. Energy Efficiency Is Key to Addressing Natural Gas Issues Last year wholesale natural gas prices reached more than five times typical prices in the 1990s, and retail gas prices for businesses remain almost double their levels in 2002. All told, recent energy price increases, including natural gas, cost American families and businesses over $300 billion last year. These high prices have caused plant closings and loss of manufacturing jobs, and have made many low-income homeowners unable to pay their heating bills. The problems are not likely to go away. The Energy Information Administration last year revised its long-term projections of natural gas prices upward, and now predicts they will stay near recent levels for the next 25 years. The high prices are in large part because demand has outstripped limited production. U.S. production of natural gas is lower now than in the early 1970s and—despite the sky-high prices—lower than in the early part of this decade. Meanwhile use of natural gas to generate electric power has shot up, as most new electric plants run on natural gas. The gap between lower production and rising demand has been filled in two ways. Natural gas imports are rising, in many cases from the same unstable regions of the world from which we import oil. Thus, while doing little about the security implications of our growing dependence on foreign oil, we are adding a similar dependence on foreign natural gas. More importantly, energy efficiency has helped keep direct natural gas use by homes and businesses relatively flat for the past three decades. Even though our economy is two and a half times as large as in 1973, the use of natural gas for residential and commercial buildings has barely risen, and industrial gas use has declined.
And tremendous, cost-effective, potential energy savings remain. A 2000 study by several of the national labs found that overall the United States could save 19 percent of anticipated energy use by 2020, essentially halting growth in consumption. This includes 12 percent savings for natural gas as well as 21 percent savings for petroleum, and 24 percent savings for electricity. The National Petroleum Council concluded in 2003 that supply from traditional North American production will not be able to meet projected natural gas demand, and that “greater energy efficiency and conservation are vital near-term and long-term mechanisms for moderating price levels and reducing volatility.” And a recent analysis by the American Council for an Energy-Efficient Economy found that just a small reduction in natural gas use over the next few years could reduce wholesale natural gas prices by as much as one quarter—because natural gas supplies are so tight, the potential impact of energy efficiency is magnified. Policies to Save Natural Gas and Help Small Businesses The Alliance would like to highlight four energy-efficiency measures that can reduce natural gas use and help small businesses: tax incentives, funding for federal programs, support for utility energy-efficiency programs, and energy standards for appliances and buildings. Many of the proposals reduce electricity use in addition to direct natural gas use; since most of the increased electricity generation is from natural gas, and most of the increased gas demand is for electricity, often the best way to save natural gas is to save electricity. Energy-Efficiency Tax Incentives The Energy Policy Act of 2005 included an important set of tax incentives for highly efficient commercial buildings, new homes, home improvements, heating and cooling equipment, and appliances. These incentives have great potential to transform markets for energy-efficient technologies and thus save natural gas. The American Council for an Energy-Efficient Economy estimates that over the 2006-2020 period, these tax incentives can reduce U.S. natural gas use by 1.6 trillion cubic feet, reduce peak electric demand by more than 6,000 MW (equivalent to 20 power plants of 300 MW each), reduce consumer energy bills by $20 billion, and prevent more than 40 million metric tons of carbon emissions. These incentives may be especially important for small businesses, including home builders who can receive credit for building new homes, contractors and retailers who can leverage the customer tax incentives for home improvements into increased business, and businesses who can receive credit for making their own commercial buildings more efficient. However, these incentives are in effect for too short a time, ending in 2007. This period may be too short to cause lasting change in some markets. The public education, ramp-up in production, development of distribution channels, and other changes needed to increase availability and lower prices of efficient products so they can achieve widespread use may take more than two years. For new buildings the time constraints are even worse. A large commercial building initiated when the bill was signed last August will not be finished before the commercial buildings deduction expires in December, 2007. New homes builders face similar difficulties in learning new technologies and techniques, changing their designs, getting permits, and building and selling homes in new developments in two years. The effective period also is being shortened by the failure of the Treasury Department to issue needed rules quickly. The first partial guidance on the commercial buildings incentive was only issued this month. The Alliance strongly supports extending the incentives as soon as possible with some modifications that have been worked out with other stakeholders—notably a performance-based incentive for whole-home energy-efficiency retrofits that picks up where the current home improvements credit leaves off. We also recommend an additional tax credit to help home energy raters and analysts develop their small businesses to become energy-efficiency resources for homeowners and businesses, including those seeking the tax incentives. A tax credit for efficient combined heat and power systems that was left out of the final energy bill also would help owners of commercial buildings and industrial plants save more energy. Funding for Federal Programs Several effective federal programs help mitigate high energy prices and help small businesses cope with those prices by helping small businesses be more energy-efficient. More funding for these programs would be one of the quickest and most effective ways of addressing the natural gas situation, but most of them have faced budget cuts. Just two of them are described here. Energy Star is a successful voluntary deployment program at the Environmental Protection Agency and the Department of Energy (DOE) that has made it easy for businesses and consumers to find and buy many energy-efficient products. Energy Star works with thousands of small businesses across the country to encourage sales of energy-efficient products, and helps many more businesses reduce their own energy use. In 2004 alone, Energy Star helped Americans save enough energy to power 25 million homes and avoid greenhouse gas emissions equivalent to those from 20 million cars – all while saving $10 billion on their utility bills. Every federal dollar spent on the Energy Star program results in an average savings of more than $75 in consumer energy bills and the reduction of about 3.7 tons of carbon dioxide emissions. With additional funding, the Energy Star program could update its criteria, label additional products, and provide Americans with more information on how to save energy. The House restored FY 2007 funding for the program just to last year’s level. Industrial Assessment Centers (IACs)are one of the most effective DOE industrial programs. University-based IACs train university students to conduct plant-wide energy assessments, and use the students to help small and medium-sized businesses save money by reducing their energy use. They thus develop a workforce of skilled energy managers, have an immediate impact on energy use, and help small businesses cut energy costs. Nonetheless, the administration has proposed to cut IAC by 30 percent (even while it touts its similar work with the largest industrial plants). Other federal programs help small businesses develop innovative energy-efficient technologies, bring those technologies to market, incorporate those technologies in buildings, and educate their customers—including other businesses—about energy-saving opportunities. Yet the administration has proposed to cut energy-efficiency programs at DOE’s Energy Efficiency and Renewable Energy Office by almost one-fifth. The programs would be cut by a third after inflation since 2002, even as energy prices have soared. We need to do better. Energy Efficiency Resource Standard Over the last two decades, states worked with regulated utilities using demand-side management (DSM) programs to avoid the need for about one hundred 300-Megawatt (MW) power plants. Many utilities have found that helping their customers to save a kilowatt-hour of electricity or a therm of natural gas is cheaper than producing and delivering that energy. While estimates vary widely, utility end-use energy-efficiency programs often cost around 3-4 cents per kilowatt-hour. Small businesses benefit from the energy expertise of utilities through these programs. However, utility spending on DSM programs nationwide was cut almost in half as the electricity industry was partially deregulated in the late 1990’s. More recently, interest in similar natural gas programs has grown along with natural gas prices.
Like a renewable portfolio standard, an energy efficiency resource standard is a performance-based approach that gives utilities broad flexibility about how and where to achieve the energy savings. Utilities are required to implement energy-efficiency programs sufficient to save a specified amount of energy, such as one percent of the previous year's sales. They can implement their own programs, hire energy service companies or other contractors, or sometimes pay other utilities to achieve the savings by buying credits. Usually, the costs of the energy-efficiency programs must be recovered from energy customers through utility rates, but the savings from avoided energy supply are greater than the efficiency cost. Note that an energy efficiency resource standard is not a requirement that the utility's sales decrease in absolute terms or a limit on their sales at all; it is a requirement that utilities implement programs that are estimated to save a specified amount of energy.
Appliance and Building Standards Perhaps the only other federal policy to achieve that level of natural gas and electricity savings is appliance standards. While EPAct 2005 included a set of important new standards, additional action by Congress is needed. First, the greatest potential natural gas savings are from a standard requiring efficient residential furnaces in the Northern states, but these furnaces may not be cost-effective in all of the warmer states. Legislation would be useful to clarify that the Department of Energy, if warranted, could set separate levels for heating and cooling equipment in two climate regions. Second, the Alliance is working with manufacturers and other stakeholders to reach agreement on proposed federal standards for additional categories of equipment, and hopes these standards will be legislated as agreement is reached. Finally, the Department of Energy remains years behind in issuing important and legally required energy standards. The Alliance urges Congress to maintain vigilant oversight as DOE attempts to meet the requirements for new rulemakings in EPAct 2005 while issuing the long-delayed standards required in earlier bills. Building energy codes also are very important for saving natural gas. Building codes are usually set at a state or even local level. However the federal government has two important roles. The states, and organizations that set national model codes, rely on the federal government for technical and financial assistance in order to update the codes and encourage compliance. Yet the administration has proposed to zero out the Building Codes Training and Assistance program at DOE that provides the necessary assistance to states. Second, the federal government sets standards for certain buildings that are not amenable to state regulation or that receive federal funding. Yet the federal standards are very out-of-date. The Alliance supports updates to federal standards for manufactured housing and homes with federally subsidized mortgages, as well as housing constructed or reconstructed with disaster relief and privatized military housing. Conclusion Consumers and businesses in this country have been hit by the worst energy price shocks in many years for natural gas, as well as gasoline, and (in some areas) electricity. These price increases hit the rest of the economy, as chemical plants move overseas and, according to polls, about half of American households cut back on other household spending. Improved energy efficiency is the best near-term strategy to begin balancing demand and supply and bring energy prices down, and is a key component of a long-term energy strategy. If Congress does not act, the price volatility and supply shortages will continue to plague us. The Alliance urges you to seize the opportunity now, due to the high prices, to enact significant energy-efficiency measures that will benefit small businesses, the rest of the economy, the environment, and energy security for years to come. |
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Whether for natural gas, oil, or electricity, energy efficiency can slow or reverse the growth in energy demand, and thus moderate the associated price volatility, energy security concerns, and environmental impacts. Energy efficiency is the nation’s greatest energy resource—we now save more energy each year from energy efficiency than we get from any single energy source, including oil, natural gas, coal, and nuclear power. The Alliance to Save Energy estimates that if we tried to run today’s economy without the energy-efficiency improvements that have taken place since 1973, we would need 43 percent more energy supplies than we use now. Much of these savings result from federal energy policies and programs like appliance and motor vehicle standards, research and development, and the Energy Star program. Had we not achieved these energy savings, our natural gas supply shortage and the energy challenge facing small businesses would be much worse.