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As California found out in 2001, a slight excess of demand for electricity over available supply can cause blackouts and massive price spikes, and cause havoc throughout the economy. Increased demand has quadrupled wholesale natural gas prices nationwide in just a few years, causing home foreclosures and plant shutdowns. Rising consumption of electricity and natural gas is straining generation and transmission capacity and natural gas supplies in many regions of the country. Energy-efficiency investments are the cheapest, fastest, and cleanest way to respond to these challenges. Efficiency investments save consumers money, increase consumer comfort, reduce air pollution and greenhouse gas emissions, and enhance economic competitiveness, as well as promoting energy reliability and security. In California an aggressive campaign reduced electricity use by 10% in just one year, and thus helped avoid further shortages.
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. While utility spending on DSM programs nationwide was cut almost in half as the electricity industry was partially deregulated in the late 1990’s, in the last few years spending has rebounded, with $3.7 billion in energy efficiency programs last year. Interest in similar natural gas programs has grown along with natural gas prices. Today, new policies are being implemented that effectively use the benefits of efficiency in the changing electric and natural gas systems.
Public Benefits Funds (PBF)
Twenty-four states and the District of Columbia have created a guaranteed stream of funds, usually through a small surcharge on electricity bills ('wires charge'), for energy efficiency and other energy-related services traditionally provided by regulated electric utilities. Public benefit funds (PBFs), aka system benefits charges (SBCs), support projects to increase energy efficiency, renewable energy, low-income energy assistance, and energy research and development. State PBFs spend almost $1 billion each year just on energy-efficiency projects.
A federal public benefits fund could match these state funds through a national wires charge. A federal PBF would double resources available to the states for energy efficiency and other public benefits, and would encourage more states to create public benefits programs. Each tenth of a cent per kilowatt hour (mill/kWh) charge would provide $3.7 billion a year, and would add less than one dollar to the average residential monthly electric bill. According to the American Council for an Energy-Efficient Economy (ACEEE), a federal electricity PBF would by 2020:
- Save 440 billion kWh a year,
- Reduce peak electricity demand by 160,000 MW (equivalent to about 500 power plants),
- Save consumers $68 billion (net after investments), and
- Prevent greenhouse gas emissions equivalent to 96 million metric tons of carbon each year.
Energy Efficiency Resource Standards (EERS)
An energy efficiency resource standard (EERS) is a flexible mechanism that requires utilities to meet customer needs in part through energy efficiency and load reduction programs rather than by constructing new supply facilities. Utilities can meet an EERS through the kinds of effective demand reduction programs that have been conducted in many states for years, such as appliance rebate programs, energy audits, and consumer education campaigns.
An EERS is a performance and market-based mechanism to promote cost-effective energy-efficiency improvements. For example, Texas requires utilities to meet 20% of the expected increase in peak electric demand through efficiency programs. Ohio has adopted more aggressive savings targets rising to 2% reduction in total electricity use each year. Other states, such as Pennsylvania and Nevada, are including energy efficiency along with renewable energy as options in broader resource standards.
The program savings can be independently verified, and 'efficiency credits' trading may allow the savings to be achieved at the least cost.
Facilities Planning
Several approaches can be used by states to choose between energy efficiency and supply-side options in meeting future energy needs:
- States and regulated utilities use Integrated Resource Planning to choose investments in generation, transmission, and distribution facilities, and in energy-efficiency programs to meet customer needs with the least cost and environmental impact.
- A newer concept, Portfolio Management, was designed to achieve a balanced portfolio of ways to meet customer needs—including efficiency—within a structure of wholesale and sometimes retail competition.
- California has adopted a Loading Order directing its utilities to use all cost-effective efficiency measures, and then renewable resources, before adding traditional fossil fuel plants.
- Some regional transmission organizations (RTOs) have designed market rules that allow demand-side solutions to compete in wholesale electricity and ancillary services markets.
Smart Grid
Modernization of the electrical grid opens up several avenues for greater efficiency - both in the transmission system itself and for consumers as they interface with the grid. Smart grid technology would incorporate greater communications and adaptability into the electrical grid - from power generation to consumer meters and appliances - thereby allowing greater awareness of the grid and of consumer energy use. automation would allow for greater demand response and peak load management. This has the potential to enable reduced electrical grid line losses and greater consumer demand response through automation, information, and time-varying pricing.
But such results are not guaranteed. Not an end in itself for efficiency, smart grid could give consumers and utilities greater access to information on and control over their energy use, and allow them to quickly and clearly see the effect of conservation and investments in energy efficiency and act on that information. The extent to which this occurs depends on the smart grid’s design, particularly on the consumer end, and the Alliance seeks to be involved in the process so as to ensure the greatest potential for energy efficiency.
Rate Reform and Decoupling
Traditional regulatory rate structures that do not value or 'monetize' efficiency represent a significant barrier to effective utility energy-efficiency programs. Under such schemes, utility profits are linked to sales of electricity and natural gas, creating a disincentive to investments in energy efficiency. The National Association of Regulatory Utility Commissioners (NARUC) and others have supported new rate structures under which profits are 'decoupled' from sales, and utilities are rewarded for efficiency measures that save their customers money.
Such rate structures include:
- Recovery of the cost of implementing energy efficiency programs from customers through expensing (direct repayment of costs), a surcharge as described above, or rate-basing (return on investment),
- Performance incentives for successful implementation of programs,
- "Decoupling" of profits from sales, by adjusting recovery of fixed costs to take account of reduced (or increased) sales, and
- Shared savings in which the utility receives a percentage of the savings achieved by use of energy efficiency instead of more expensive production.
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