430R06900
ational Action Plan
or Energy Efficiency
A PLAN DEVELOPED BY MORE THAN 50 LEADING
ORGANIZATIONS IN PURSUIT OF ENERGY SAVINGS
AND ENVIRONMENTAL BENEFITS THROUGH
ELECTRIC AND NATURAL GAS ENERGY EFFICIENCY
JULY 2006
------- OCR error (D:\Scanspot\_Pending\Color\0000003K\tiff\600006ES.tif): Unspecified error
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Acknowledgements
The National Action Plan for Energy Efficiency Report discusses policy, planning, and program issues based on a formal
work plan developed during the December 2005 and March 2006 Leadership Group meetings. The Leadership Group is
led by co-chairs Diane Munns (Member of the Iowa Utilities Board and President of the National Association of Regulatory
Utility Commissioners) and Jim Rogers (President and Chief Executive Officer of Duke Energy). A full list of Leadership
Group members is provided in both the Executive Summary (Table ES-1) and Chapter 1 (Table 1-2) of this report. Rich
Scheer of Energetics Inc. facilitated the Leadership Group discussions during both Leadership Group meetings.
Expert consultants, funded by the U.S. Department of Energy (DOE) and the U.S. Environmental Protection Agency
(EPA), drafted many chapters of the Action Plan Report. These consultants included:
Regulatory Assistance Project: Chapter 2 and Appendix A
Energy and Environmental Economics, Inc.: Chapters 3 through 5, Energy Efficiency Benefits Calculator,
and Appendix B
KEMA: Chapters
In addition, Rich Sedano of the Regulatory Assistance Project and Alison Silverstein of Alison Silverstein Consulting
provided their expertise during review and editing of the overall report.
DOE and EPA facilitated the work of the Leadership Group and this report, including Larry Mansueti with DOE's Office
of Electricity Delivery and Energy Reliability, Mark Ginsberg with DOE's Office of Energy Efficiency and Renewable
Energy, and Kathleen Hogan, Stacy Angel, Maureen McNamara, Katrina Pielli, and Tom Kerr with EPA's Climate
Protection Partnership Division.
Eastern Research Group, Inc. provided technical review, copyediting, graphics, and production services.
To create a sustainable, aggressive national commitment to energy efficiency
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List of Figures
Figure ES-1. National Action Plan for Energy Efficiency Recommendations ES-2
Figure ES-2. National Action Plan for Energy Efficiency Recommendations & Ootions ES-8
Figure 1-1. Energy Efficiency Spending Has Declined 1-5
Figure 1-2. Energy Efficiency Has Been a Resource in the Pacific Northwest for the Past Two Decades.... 1-7
Figure 1-3. National Action Plan for Energy Efficiency Report Addresses Actions to Encourage
Greater Energy Efficiency 1-11
Figure 3-1. Energy-Efficiency Supply Curve - Potential in 2011 3-2
Figure 3-2. California Efficiency Structure Overview 3-10
Figure 3-3. California Investor-Owned Utility Process 3-11
Figure 3-4. BPA Transmission Planning Process 3-12
Figure 3-5. New York Efficiency Structure Overview 3-13
Figure 4-1. Comparison of Deferral Length with Low- and High-Growth 4-10
Figure 6-1. Impacts of the Northeast Lighting and Appliance Initiative 6-33
Figure 7-1. National Action Plan for Energy Efficiency Recommendations 7-1
Figure 7-2. National Action Plan for Energy Efficiency Report Addresses Actions to Encourage
Greater Energy Efficiency 7-2
ii National Action Plan for Energy Efficiency
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List of Tables
Table ES-1. Members of the National Action Plan for Energy Efficiency ES-10
Table 1-1. Summary of Benefits for National Energy Efficiency Efforts 1-8
Table 1-2. Members of the National Action Plan for Energy Efficiency 1-16
Table 2-1. Options to Mitigate the Throughput Incentive: Pros and Cons 2-6
Table 2-2. Examples of Decoupling 2-12
Table 2-3. Examples of Incentives for Energy Efficiency Investments 2-15
Table 3-1. Levelized Costs and Benefits From Four Regions 3-9
Table 3-2. Incorporation of Energy Efficiency in California's Investor-Owned Utilities'
Planning Processes 3-11
Table 3-3. Incorporation of Energy Efficiency in BPA's Planning Processes 3-13
Table 3-4. Incorporation of Energy Efficiency in NYSERDA's Planning Processes 3-14
Table 3-5. Incorporation of Energy Efficiency in Minnesota's Planning Processes 3-15
Table 3-6. Incorporation of Energy Efficiency in Texas' Planning Processes 3-16
Table 3-7. Incorporation of Energy Efficiency in PacifiCorp's Planning Processes 3-17
Table 4-1. Summary of Main Assumptions and Results for Each Business Case Analyzed 4-3
Table 4-2. High- and Low-Growth Results: Electric Utility 4-6
Table 4-3. High- and Low-Growth Results: Natural Gas Utility 4-8
Table 4-4. Power Plant Deferral Results 4-11
Table 4-5. Vertically Integrated and Delivery Company Results 4-13
Table 4-6. Publicly- and Cooperatively-Owned Utility Results 4-15
Table 5-1. Partial List of Utilities With Inclining Tier Residential Rates 5-6
Table 5-2. Pros and Cons of Rate Design Forms 5-9
Table 5-3. Conditions That Assist Success 5-11
Table 6-1. Overview of Energy Efficiency Programs 6-4
Table 6-2. Efficiency Measures of Natural Gas Savings Programs 6-6
Table 6-3. Efficiency Measures of Electric and Combination Programs 6-8
Table 6-4. Achievable Energy Efficiency Potential From Recent Studies 6-16
Table 6-5. NYSERDA 2004 Portfolio 6-20
To create a sustainable, aggressive national commitment to energy efficiency iii
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List Of Tables (continued)
Table 6-6. Nevada Resource Planning Programs 6-21
Table 6-7. Overview of Cost-Effectiveness Tests 6-23
Table 6-8. Research & Development (R&D) Activities of Select Organizations 6-25
Table 6-9. Emerging Technologies for Programs 6-27
Table 6-10. Key Stakeholders, Barriers, and Program Strategies by Customer Segment 6-31
Table 6-11. Types of Financial Incentives 6-40
Table 6-12. Sample Progression of Program Designs 6-42
Table 6-13. Program Examples for Key Customer Segments 6-44
Table 6-14. Evaluation Approaches 6-46
Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter 7-3
iv National Action Plan for Energy Efficiency
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List of Acronyms
aMW
B
Bcf
BOMA
BPA
C/l
CEC
C02
CPP
CPUC
D
DEER
DOE
DSM
EE
EEPS
EERS
EPA
EPRI
ESCO
ETO
average megawatts
billion cubic feet
Building Owners & Managers
Association
Bonneville Power Administration
commercial and industrial
California Energy Commission
carbon dioxide
critical peak pricing
California Public Utility Commission
Database for Energy Efficiency
Resources
U.S. Department of Energy
demand-side management
energy efficiency
energy efficiency portfolio standard
energy efficiency resource standard
U.S. Environmental Protection Agency
Electric Power Research Institute
energy services company
Energy Trust of Oregon
F
FERC
GWh
H
HERS
HVAC
IOU
IPMVP
IRP
ISO
ISO-NE
K
kWh
L
LIHEAP
LI PA
Federal Energy Regulatory Commission
gigawatt-hour (1,000,000 kWh)
Home Energy Rating System
heating, ventilation, and air
conditioning
investor-owned utility
International Performance
Measurement and Verification
Protocol
integrated resource plan
independent system operator
ISO New England
kilowatt-hour (3,412 British thermal units)
Low-Income Home Energy Assistance
Program
Long Island Power Authority
To create a sustainable, aggressive national commitment to energy efficiency
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List Of Acronyms (continued)
M
M&V
Mcf
MMBtu
MW
MWh
N
NEEP
NERC
NOX
NPV
NSPC
NWPCC
NYSERDA
measurement and verification
one thousand cubic feet
million British thermal units
megawatt (1,000,000 watts)
megawatt-hour (1,000 kWh)
Northeast Energy Efficiency Partnerships
North American Electric Reliability
Council
nitrogen oxides
net present value
Non-Residential Standard
Performance Contract
Northwest Power and Conservation
Council
New York State Energy Research and
Development Authority
R
R&D
RARP
REAP
RFP
RGGI
RIM
ROE
RPC
RTO
RTP
SBC
SCE
SMUD
S02
research and development
Residential Appliance Recycling
Program
Residential Energy Affcrdability
Partnership Program
request for proposals
Regional Greenhouse Gas Initiative
rate impact measure
return on equity
revenue per customer
regional transmission organization
real-time pricing
system benefits charge
Southern California Edison
Sacramento Municipal Utility District
sulfur dioxide
PBL Power Business Line
PG&E Pacific Gas & Electric
PIER Public Interest Energy Research
PSE Puget Sound Energy
PUCT Public Utility Commission of Texas
PURPA Public Utility Regulatory Policies Act
TOU
TRC
V
VOLL
VOS
time of use
total resource cost
value of lost load
value of service
w
WAP
Weatherization Assistance Program
vi National Action Plan for Energy Efficiency
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Table of Contents
Acknowledgements i
List of Figures ii
List of Tables iii
List of Acronyms v
Executive Summary ES-1
Chapter 1: Introduction and Background 1-1
Chapter 2: Utility Ratemakmg & Revenue Requirements 2-1
Chapter 3: Energy Resource Planning Processes 3-1
Chapter 4: Business Case for Energy Efficiency 4-1
Chapter 5: Rate Design 5-1
Chapter 6: Energy Efficiency Program Best Practices 6-1
Chapter 7: Report Summary 7-1
Appendix A: Additional Guidance on Removing the Throughput Incentive A-1
Appendix B: Business Case Details B-1
To create a sustainable, aggressive national commitment to energy efficiency vii
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Executive Summary
This National Action Plan for Energy Efficiency (Action Plan) presen ; policy recc rm
a sustainable, aggressive national commitment to energy efficie cy through jas
utility regulators, and partner organizations. Such a commitment ould save A.i-ierl
dollars on energy bills over the next 10 to 15 years, contribute to energy secun ,
environment. The Action Plan was developed by more than 50 leading organizati; v
stakeholder perspectives. These organizations pledge to take specific actions to make tht
represent -ny Key
tum Pkm < reality.
A National Action Plan
for Energy Efficiency
We currently face a set of serious challenges with regard
to the U.S. energy system. Energy demand continues to
grow despite historically high energy prices and mount-
ing concerns over energy security and independence as
well as air pollution and global climate change. The deci-
sions we make now regarding our energy supply and
demand can either help us deal with these challenges
more effectively or complicate our ability to secure a
more stable, economical energy future.
Improving the energy efficiency1 of our homes, business-
es, schools, governments, and industrieswhich
consume more than 70 percent of the natural gas and
electricity used in the countryis one of the most
constructive, cost-effective ways to address these chal-
lenges.2 Increased investment in energy efficiency in our
homes, buildings, and industries can lower energy bills,
reduce demand for fossil fuels, help stabilize energy
prices, enhance electric and natural gas system reliabili-
ty, and help reduce air pollutants and greenhouse gases.
Despite these benefits and the success of energy effi-
ciency programs in some regions of the country, energy
efficiency remains critically underutilized in the nation's
energy portfolio.3 Now we simultaneously face the chal-
lenges of high prices, the need for large investments in
new energy infrastructure, environmental concerns, and
security issues. It is time to i/-,\e a int.-:' <>:: > "!' *'-: t^an
two decades of experience with ..^.cev/u! energy e'fi
ciency programs, broaden and expand these efforts, ana
capture the savings that energy efficiency offers Much
more can be achieved in concert with ongoing efforts to
advance building codes and appliance standards, provide
tax incentives for efficient products and buildings, and
promote savings opportunities through programs such
as ENERGY STARฎ. Efficiency of new buildings and those
already in place are both important. Many homeowners,
businesses, and others in buildings and facilities already
standing todaywhich will represent the vast majority
of the nation's buildings and facilities for years to
comecan realize significant savings from proven energy
efficiency programs.
Bringing more energy efficiency into the nation's energy
mix to slow demand growth in a wise, cost-effective
mannerone that balances energy efficiency with new
generation and supply optionswill take concerted
efforts by all energy market participants: customers, util-
ities, regulators, states, consumer advocates, energy
service companies (ESCOs), and others. It will reguire
education on the opportunities, review of existing poli-
cies, identification of barriers and their solutions, assess-
ment of new technologies, and modification and adop-
tion of policies, as appropriate. Utilities,4 regulators, and
partner organizations need to improve customer access
to energy efficiency programs to help them control their
own energy costs, provide the funding necessary to
To create a sustainable, aggressive national commitment to energy efficiency
ES-1
-------
deliver these programs, and examine policies governing
energy companies to ensure that these policies facili-
tatenot impedecost-effective programs for energy
efficiency. Historically, the regulatory structure has
rewarded utilities for building infrastructure (e.g., power
plants, transmission lines, pipelines) and selling energy,
while discouraging energy efficiency, even when the
energy-saving measures cost less than constructing new
infrastructure.5 And, it has been difficult to establish the
funding necessary to capture the potential benefits that
cost-effective energy efficiency offers.
This National Action Plan for Energy Efficiency is a call to
action to bring diverse stakeholders together at the
national, regional, state, or utility level, as appropriate,
and foster the discussions, decision-making, and commit-
ments necessary to take investment in energy efficiency to
a new level. The overall goal is to create a sustainable,
aggressive national commitment to energy efficiency
through gas and electric utilities, utility regulators, and
partner organizations.
The Action Plan was developed by a Leadership Group
composed of more than 50 leading organizations repre-
senting diverse stakeholder perspectives. Based upon the
policies, practices, and efforts of many organizations
across the country, the Leadership Group offers five
recommendations as ways to overcome many of ~he
barriers that have limited greater investment in programs
to deliver energy efficiency to customers of electric and
gas utilities (Figure ES-1). These recommendations may
be pursued through a number of different options,
depending upon state and utility circumstances.
As part of the Action Plan, leading organizations are com-
mitting to aggressively pursue energy efficiency opportu-
nities in their organizations and assist others who want to
increase the use of energy efficiency in their regions.
Because greater investment in energy efficiency cannot
happen based on the work of one individual or organiza-
tion alone, the Action Plan is a commitment to bring the
appropriate stakeholders togetherincluding utilities,
state policy-makers, consumers, consumer advocates,
businesses, ESCOs, and othersto be part of a collabora-
tive effort to take energy efficiency to a new level. As
energy experts, utilities may be in a unique position to play
a leading role.
The reasons behind the National Action Plan for Energy
Efficiency, the process for developing the Action Plan,
and the final recommendations are summarized in
greater detail as follows.
Figure ES-1. National Action Plan for Energy Efficiency Recommendations
Recognize energy efficiency as a high-priority energy resource.
Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource
1 Broadly communicate the benefits of and opportunities 1
1 Promote sufficient, timely, and stable program funding t> deliver energy efficiency where cost-effective
Modify policies to align utility incentives with the delive
modify ratemaking practices to promote energy efficien
or energy efficiency.
y of cost-effective energy efficiency and
y investments.
ES-2
National Action Plan for Energy Efficiency
-------
The United States Faces Large and
Complex Energy Challenges
Our expanding economy, growing population, and rising
standard of living all depend on energy services. Current
projections anticipate U.S. energy demands to increase
by more than one-third by 2030, with electricity demand
alone rising by more than 40 percent (EIA, 2006). At
work and at home, we continue to rely on more and
more energy-consuming devices. At the same time, the
country has entered a period of higher energy costs and
limited supplies of natural gas, heating oil, and other
fuels. These issues present many challenges:
Growing energy demand stresses current systems,
drives up energy costs, and requires new investments.
Events such as the Northeast electricity blackout of
August 2003 and Hurricanes Katrina and Rita in 2005
increased focus on energy reliability and its economic
and human impacts. Transmission and pipeline systems
are becoming overburdened in places. Overburdened
systems limit the availability of low-cost electricity and
fossil fuels, raise energy prices in or near congested
areas, and potentially compromise energy system relia-
bility. High fuel prices also contribute to higher electrici-
ty prices. In addition, our demand for natural gas to heat
our homes, for industrial and business use, and for
power generation is straining the available gas supply in
North America and putting upward pressure on natural
gas prices. Addressing these issues will require billions of
dollars in investments in energy efficiency, new power
plants, gas rigs, transmission lines, pipelines, and other
infrastructure, notwithstanding the difficulty of building
new energy infrastructure in dense urban and suburban
areas. In the absence of investments in new or expand-
ed capacity, existing facilities are being stretched to the
point where system reliability is steadily eroding, and the
ability to import lower cost energy into high-growth load
areas is inhibited, potentially limiting economic expansion.
High fuel prices increase financial burdens on house-
holds and businesses and slow our economy. Many
household budgets are being strained by higher energy
costs, leaving less money available for other household
purchases and needs. This burden is particularly harmful
for low-income households. Higher energy bills for
industry can reduce the nation's economic competitive-
ness and place U.S. jobs at risk.
Growing energy demand challenges attainment of
clean air and other public health and environmental
goals. Energy demand continues to grow at the same
time that national and state regulations are being imple-
mented to limit the emission of air pollutants, such as sul-
fur dioxide (S02), nitrogen oxides (NOX), and mercury, to
protect public health and the environment. In addition,
emissions of greenhouse gases continue to increase.
Uncertainties in future prices and regulations raise
questions about new investments. New infrastructure
is being planned in the face of uncertainties about future
energy prices. For example, high natural gas prices and
uncertainty about greenhouse gas and other environ-
mental regulations, impede investment decisions on new
energy supply options.
Our energy system is vulnerable to disruptions in
energy supply and delivery. Natural disasters such as
the hurricanes of 2005 exposed the vulnerability of the
U.S. energy system to major disruptions, which have sig-
nificant impacts on energy prices and service reliability. In
response, national security concerns suggest that we
should use fossil fuel energy more efficiently, increase
supply diversity, and decrease the vulnerability of domes-
tic infrastructure to natural disasters.
Energy Efficiency Can Be a Beneficial
Resource in Our Energy Systems
Greater investment in energy efficiency can help us tack-
le these challenges. Energy efficiency is already a key
component in the nation's energy resource mix in many
parts of the country. Utilities, states, and others across
the United States have decades of experience in deliver-
ing energy efficiency to their customers. These programs
can provide valuable models, upon which more states,
To create a sustainable, aggressive national commitment to energy efficiency
ES-3
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Benefits of Energy Efficiency
Lower energy bills, greater customer control, and
greater customer satisfaction. Well-designed energy
efficiency programs can provide opportunities for cus-
tomers of all types to adopt energy savings measures
that can improve their comfort and level of service,
while reducing their energy bills.6 These programs can
help customers make sound energy use decisions,
increase control over their energy bills, and empower
them to manage their energy usage. Customers are
experiencing savings of 5, 10, 20, or 30 percent,
depending upon the customer, program, and average
bill. Offering these programs can also lead to greater
customer satisfaction with the service provider.
Lower cost than supplying new generation only
from new power plants. In some states, well-
designed energy efficiency programs are saving ener-
gy at an average cost of about one-half of the typical
cost of new power sources and about one-third of the
cost of natural gas supply (EIA, 2006).7 When inte-
grated into a long-term energy resource plan, energy
efficiency programs could help defer investments
in new plants and lower the total cost of delivering
electricity.
Modular and quick to deploy. Energy efficiency pro-
grams can be ramped up over a period of one to three
years to deliver sizable savings. These programs can
also be targeted to congested areas with high prices
to bring relief where it might be difficult to deliver
new supply in the near term.
Significant energy savings. Well-designed energy
efficiency programs are delivering annual energy sav-
ings on the order of 1 percent of electricity and natu-
ral gas sales.8 These programs are helping to offset 20
to 50 percent of expected growth in energy demand
in some areas without compromising the end users'
activities and economic well-being (Nadel et al., 2004;
EIA, 2006).
Environmental benefits. While reducing customers
energy bills, cost-effective energy efficiency offers
environmental benefits related to reduced demanc
such as lower air pollution, reduced greenhouse gas
emissions, lower water use, and less environments
damage from fossil fuel extraction. Energy efficiency
can be an attractive option for utilities in advance of
requirements to reduce greenhouse gas emissions.
Economic development. Greater investment in ener-
gy efficiency helps build jobs and improve state
economies. Energy efficiency users often redirect their
bill savings toward other activities that increase local
and national employment, with a higher employment
impact than if the money had been spent to purchase
energy (Kushler et al., 2005; NYSERDA, 2004). Many
energy efficiency programs create construction and
installation jobs, with multiplier impacts on employ-
ment and local economies. Local investments in ener-
gy efficiency can offset imports from out-of-state,
improving the state balance of trade. Lastly, energy
efficiency investments usually create long-lasting
infrastructure changes to building, equipment and
appliance stocks, creating long-term property
improvements that deliver long-term economic value
(Innovest, 2002).
Energy security. Energy efficiency reduces the level of
U.S. per capita energy consumption, thus decreasing
the vulnerability of the economy and individual con-
sumers to energy price disruptions from natural disas-
ters and attacks on domestic and international energy
supplies and infrastructure. In addition, energy effi-
ciency can be used to reduce the overall system peak
demand or the peak demand in targeted load areas
with limited generating or transport capability.
Reducing peak demand improves system reliability
and reduces the potential for unplanned brown-
outs or black-outs, which can have large adverse
economic consequences.
ES-4
National Action Plan for Enemy Efficiency
-------
:;ntiex ana vther uruanvMaon-, ;(.i' i<;iid. Expeneni.e
VIGW-. li'iat eneray efU eiicy ptoqidi-ib c.an io\vei
Customer energy bills, cost less than, ,ind help deter,
new energy infrastructure, provide energy savings to
consumers; improve the environment, and spur local
economic development (see box on Benefits of
Energy Efficiency). Significant opportunities for energy
efficiency are likely to continue to be available at low
costs in the future. State and regional studies have found
that adoption of economically attractive, but as yet
untapped, energy efficiency could yield more than 20
percent savings in total electricity demand nationwide by
2025. Depending on the underlying load growth, these
savings could help cut load growth by half or more com-
pared to current forecasts (Nadel et al., 2004; SWEEP,
2002; NEEP, 2005; NWPCC, 2005; WGA, 2006).
Similarly, savings from direct use of natural gas could
provide a 50 percent or greater reduction in natural gas
demand growth (Nadel et al., 2004).
Capturing this energy efficiency resource would offer
substantial economic and environmental benefits across
the country. Widespread application of energy efficiency
programs that already exist in some regions could deliv-
er a large part of these potential savings.9 Extrapolating
the results from existing programs to the entire country
would yield annual energy bill savings of nearly $20 bil-
lion, with net societal benefits of more than $250 billion
over the next 10 to 15 years. This scenario could defer
the need for 20,000 megawatts (MW), or 40 new 500-
MW power plants, as well as reduce U.S. emissions from
energy production and use by more than 200 million
tons of carbon dioxide (CO.), 50,000 tons of SO,, and
40,000 tons of NO, annually.10 These significant eco-
nomic and environmental benefits can be achieved rela-
tively guickly because energy efficiency programs can be
developed and implemented within several years.
Additional policies and programs are reguired to help
capture these potential benefits and address our sub-
stantial underinvestment in energy efficiency as a nation.
An important indicator of this underinvestment is that
the level of funding across the country for organized effi-
iency piograms is uii'enrv !<-'>s 'aan $/' bii ion per yeai
while it would require about A time1-, tocay's funding lev-
els to achieve the economic ana environment benefits
presented above.' ' ''
The current underinvestment >n energy efficiency is due
to a number of well-recognized barriers, including some
of the regulatory policies that govern electric and natu-
ral gas utilities. These barriers include:
Market barriers, such as the well-known "split-
incentive" barrier, which limits home builders' and
commercial developers' motivation to invest in energy
efficiency for new buildings because they do not
pay the energy bill; and the transaction cost barrier,
which chronically affects individual consumer and
small business decision-making.
Customer barriers, such as lack of information on
energy saving opportunities, lack of awareness of
how energy efficiency programs make investments
easier, and lack of funding to invest in energy
efficiency.
Public policy barriers, which can present prohibitive
disincentives for utility support and investment in
energy efficiency in many cases.
Utility, state, and regional planning barriers, which
do not allow energy efficiency to compete with
supply-side resources in energy planning.
Energy efficiency program barriers, which limit
investment due to lack of knowledge about the
most effective and cost-effective energy efficiency
program portfolios, programs for overcoming
common marketplace barriers to energy efficiency,
or available technologies.
While a number of energy efficiency policies and programs
contribute to addressing these barriers, such as building
codes, appliance standards, and state government lead-
ership programs, organized energy efficiency programs
To create a sustainable, aggressive national commitment to energy efficiency
ES-5
-------
provide an important opportunity to deliver greater
energy efficiency in the homes, buildings, and facilities
that already exist today and that will consume the major-
ity of the energy used in these sectors for years to come.
The Leadership Group and National
Action Plan for Energy Efficiency
Recognizing that energy efficiency remains a critically
underutilized resource in the nation's energy portfolio,
more than 50 leading electric and gas utilities, state util-
ity commissioners, state air and energy agencies, energy
service providers, energy consumers, and energy effi-
ciency and consumer advocates have formed a
Leadership Group, together with the U.S. Department of
Energy (DOE) and the U.S. Environmental Protection
Agency (EPA), to address the issue. The goal of this
group is to create a sustainable, aggressive national com-
mitment to energy efficiency through gas and electric
utilities, utility regulators, and partner organizations. The
Leadership Group recognizes that utilities and regulators
play critical roles in bringing energy efficiency programs
to their communities and that success requires the joint
efforts of customers, utilities, regulators, states, and
other partner organizations.
Under co-chairs Diane Munns (Member of the Iowa
Utilities Board and President of the National Association
of Regulatory Utility Commissioners) and Jim Rogers
(President and Chief Executive Officer of Duke Energy),
the Leadership Group members (see Table ES-1) have
developed the National Action Plan for Energy Efficiency
Report, which:
Identifies key barriers limiting greater investment in
energy efficiency.
Reviews sound business practices for removing these
barriers and improving the acceptance and use of
energy efficiency relative to energy supply options.
Outlines recommendations and options for
overcoming these barriers.
The members of the Leadership Group have agreed to
pursue these recommendations and consider these
options through their own actions, where appropriate,
and to support energy efficiency initiatives by other
industry members and stakeholders.
Recommendations
The National Action Plan for Energy Efficiency is a call to
action to utilities, state utility regulators, consumer advo-
cates, consumers, businesses, other state officials, and
other stakeholders to create an aggressive, sustainable
national commitment to energy efficiency.1 The Action
Plan offers the following recommendations as ways to
overcome barriers that have limited greater investment
in energy efficiency for customers of electric and gas util-
ities in many parts of the country. The following recom-
mendations are based on the policies, practices, and
efforts of leading organizations across the country. For
each recommendation, a number of options are avail-
able to be pursued based on regional, state, and utility
circumstances (see also Figure ES-2).
Recognize energy efficiency as a high-priority energy
resource. Energy efficiency has not been consistently
viewed as a meaningful or dependable resource corn-
pared to new supply options, regardless of its demon-
strated contributions to meeting load growth.13
Recognizing energy efficiency as a high-priority energy
resource is an important step in efforts to capture the
benefits it offers and lower the overall cost of energy
services to customers. Based on jurisdictional objectives,
energy efficiency can be incorporated into resource plans
to account for the long-term benefits from energy sav-
ings, capacity savings, potential reductions of air pollu-
tants and greenhouse gases, as well as other benefits.
The explicit integration of energy efficiency resources
into the formalized resource planning processes that
exist at regional, state, and utility levels can help estab-
lish the rationale for energy efficiency funding levels and
for properly valuing and balancing the benefits. In some
jurisdictions, these existing planning processes might
need to be adapted or even created to meaningfully
ES-6
National Action Plan for Energy Efficiency
-------
incorporate energy efficiency resources into resource
planning. Some states have recognized energy efficiency
as the resource of first priority due to its broad benefits.
Make a strong, long-term commitment to implement
cost-effective energy efficiency as a resource. Energy
efficiency programs are most successful and provide the
greatest benefits to stakeholders when appropriate poli-
cies are established and maintained over the long-term.
Confidence in long-term stability of the program will
help maintain energy efficiency as a dependable
resource compared to supply-side resources, deferring or
even avoiding the need for other infrastructure invest-
ments, and maintain customer awareness and support.
Some steps might include assessing the long-term
potential for cost-effective energy efficiency within a
region (i.e., the energy efficiency that can be delivered
cost-effectively through proven programs for each cus-
tomer class within a planning horizon); examining the
role for cutting-edge initiatives and technologies; estab-
lishing the cost of supply-side options versus energy effi-
ciency; establishing robust measurement and verification
(M&V) procedures; and providing for routine updates to
information on energy efficiency potential and key costs.
Broadly communicate the benefits of and opportuni-
ties for energy efficiency. Experience shows that ener-
gy efficiency programs help customers save money and
contribute to lower cost energy systems. But these ben-
efits are not fully documented nor recognized by cus-
tomers, utilities, regulators, or policy-makers. More
effort is needed to establish the business case for ener-
gy efficiency for all decision-makers and to show how a
well-designed approach to energy efficiency can benefit
customers, utilities, and society by (1) reducing cus-
tomers' bills over time, (2) fostering financially healthy
utilities (e.g., return on equity, earnings per share, and
debt coverage ratios unaffected), and (3) contributing to
positive societal net benefits overall. Effort is also neces-
sary to educate key stakeholders that although energy
efficiency can be an important low-cost resource to inte-
grate into the energy mix, it does require funding just as
a new power plant requires funding. Further, education
is necessary on the impact that energy efficiency pro-
grams can have in concert with other energy efficiency
policies such as building codes, appliance standards, and
tax incentives.
Promote sufficient, timely, and stable program fund-
ing to deliver energy efficiency where cost-effective.
Energy efficiency programs require consistent and long-
term funding to effectively compete with energy supply
options. Efforts are necessary to establish this consistent
long-term funding. A variety of mechanisms have been,
and can be, used based on state, utility, and other stake-
holder interests. It is important to ensure that the effi-
ciency programs' providers have sufficient long-term
funding to recover program costs and implement the
energy efficiency measures that have been demonstrat-
ed to be available and cost effective. A number of states
are now linking program funding to the achievement of
energy savings.
Modify policies to align utility incentives with the
delivery of cost-effective energy efficiency and modify
ratemaking practices to promote energy efficiency
investments. Successful energy efficiency programs
would be promoted by aligning utility incentives in a
manner that encourages the delivery of energy efficien-
cy as part of a balanced portfolio of supply, demand, and
transmission investments. Historically, regulatory policies
governing utilities have more commonly compensated
utilities for building infrastructure (e.g., power plants,
transmission lines, pipelines) and selling energy, while
discouraging energy efficiency, even when the energy-
saving measures might cost less. Within the existing reg-
ulatory processes, utilities, regulators, and stakeholders
have a number of opportunities to create the incentives
for energy efficiency investments by utilities and cus-
tomers. A variety of mechanisms have already been
used. For example, parties can decide to provide incen-
tives for energy efficiency similar to utility incentives for
new infrastructure investments, provide rewards for pru-
dent management of energy efficiency programs, and
incorporate energy efficiency as an important area of
consideration within rate design. Rate design offers
To create a sustainable, aggressive national commitment to energy efficiency
ES-7
-------
Figure ES-2. National Action Plan for Energy Efficiency Recomiinendations & Options
Recognize energy efficiency as a high priority
energy resource.
Options to consider:
Establishing policies to establish energy efficiency as
a priority resource.
Integrating energy efficiency into utility, state, and
regional resource planning activities.
Quantifying and establishing the value of energy
efficiency, considering energy savings, capacity sav-
ings, and environmental benefits, as appropriate.
Make a strong, long-term commitment to implement
cost-effective energy efficiency as a resource.
Options to consider:
Establishing appropriate cost-effectiveness tests for
a portfolio of programs to reflect the long-term
benefits of energy efficiency.
Establishing the potential for long-term, cost-
effective energy efficiency savings by customer class
through proven programs, innovative initiatives,
and cutting-edge technologies.
Establishing funding requirements for delivering
long-term, cost-effective energy efficiency.
Developing long-term energy saving goals as part
of energy planning processes.
Developing robust measurement and verification
(M&V) procedures.
Designating which organization(s) is responsible
for administering the energy efficiency programs.
Providing for frequent updates to energy
resource plans to accommodate new information
and technology.
Broadly communicate the benefits of and
opportunities for energy efficiency.
Options to consider:
Establishing and educating stakeholders on the
business case for energy efficiency at the state, util-
ity, and other appropriate level addressing relevant
customer, utility, and societal perspectives.
Communicating the role of energy efficiency in
lowering customer energy bills and system costs
and risks over time.
Communicating the role of building codes, appli-
ance standards, and tax and other incentives.
Provide sufficient, timely, and stable program funding
to deliver energy efficiency where cost-effective.
Options to consider:
Deciding on and committing to a consistent
way for program administrators to recover energy
efficiency costs in a timely manner.
Establishing funding mechanisms for energy
efficiency from among the available options such
as revenue requirement or resource procurement
funding, system benefits charges, rate-basing,
shared-savings, incentive mechanisms, etc.
Establishing funding for multi-year periods.
Modify policies to align utility incentives with the
delivery of cost-effective energy efficiency and
modify ratemaking practices to promote energy
efficiency investments.
Options to consider:
Addressing the typical utility throughput incentive
and removing other regulatory and management
disincentives to energy efficiency.
Providing utility incentives for the successful
management of energy efficiency programs.
Including the impact on adoption of energy
efficiency as one of the goals of retail rate design,
recognizing that it must be balanced with other
objectives.
Eliminating rate designs that discourage energy
efficiency by not increasing costs as customers
consume more electricity or natural gas.
Adopting rate designs that encourage energy
efficiency by considering the unique characteristics
of each customer class and including partnering
tariffs with other mechanisms that encourage
energy efficiency, such as benefit sharing programs
and on-bill financing.
IES-8
National Action Plan for Energy Efficiency
-------
opportunities to encourage customers to invest in
efficiency where they find it to be cost effective and
participate in new programs that provide innovative
technologies (e.g., smart meters) to help customers
control their energy costs
National Action Plan for Energy
Efficiency: Next Steps
In summer 2006, members of the Leadership Group of
the National Action Plan on Energy Efficiency are
announcing a number of specific activities and initiatives
to formalize and reinforce their commitments to energy
efficiency as a resource. To assist the Leadership Group
and others in making and fulfilling their commitments, a
number of tools and resources have been developed:
National Action Plan for Energy Efficiency Report.
This report details the key barriers to energy efficiency in
resource planning, utility incentive mechanisms, rate
design, and the design and implementation of energy
efficiency programs. It also reviews and presents a vari-
ety of policy and program solutions that have been used
to overcome these barriers as well as the pros and cons
for many of these approaches.
Energy Efficiency Benefits Calculator. This calculator
can be used to help educate stakeholders on the broad
benefits of energy efficiency. It provides a simplified
framework to demonstrate the business case for energy
efficiency from the perspective of the consumer, the util-
ity, and society. It has been used to explore the benefits
of energy efficiency program investments under a range
of utility structures, policy mechanisms, and energy
growth scenarios. The calculator can be adapted and
applied to other scenarios.
Experts and Resource Materials on Energy Efficiency.
A number of educational presentations on the potential
for energy efficiency and various policies available for
pursuing the recommendations of the Action Plan will be
developed. In addition, lists of policy and program
experts in energy efficiency and the various policies avail-
able for pursuing the recommendations of the Action
Plan will be developed. These lists will be drawn from
utilities, state utility regulators, state energy offices,
third-party energy efficiency program administrators,
consumer advocacy organizations, ESCOs, and others.
These resources will be available in fall 2006.
DOE and EPA are continuing to facilitate the work of the
Leadership Group and the National Action Plan
for Energy Efficiency. During winter 2006-2007, the
Leadership Group plans to report on its progress and
identify next steps for the Action Plan.
To create a sustainable, aggressive national commitment to energy efficiency
ES-9
-------
Table ES-1. Members of the National Action Plan for Energy efficiency
Co-Chairs
Diane Munns Member
President
Jim Rogers President and Chief Executive Officer
Iowa Utilities Board
National Association of Regulatory Utility Commissioners
Duke Energy
Leadership Group
Barry Abramson Senior Vice President
Angela S. Beehler Director of Energy Regulation
Bruce Braine Vice President, Strategic Policy Analysis
Jeff Burks Director of Environmental Sustainability
Kateri Callahan President
Glenn Cannon General Manager
Jorge Carrasco Superintendent
Lonnie Carter President and Chief Executive Officer
Mark Case Vice President for Business Performance
Gary Connett Manager of Resource Planning and
Member Services
Larry Downes Chairman and Chief Executive Officer
Roger Duncan Deputy General Manager, Distributed Energy Services
Angelo Esposito Senior Vice President, Energy Services and Technology
William Flynn Chairman
Jeanne Fox President
Anne George Commissioner
Dian Grueneich Commissioner
Blair Hamilton Policy Director
Leonard Haynes Executive Vice President, Supply Technologies,
Renewables, and Demand Side Planning
Mary Healey Consumer Counsel for the State of Connecticut
Helen Howes Vice President, Environment, Health and Safety
Chris James Air Director
Ruth Kinzey Director of Corporate Communications
Peter Lendrum Vice President, Sales and Marketing
Rick Leuthauser Manager of Energy Efficiency
Mark McGahey Manager
Janine Migden- Consumers' Counsel
Ostrander
Richard Morgan Commissioner
Brock Nicholson Deputy Director, Division of Air Quality
Pat Oshie Commissioner
Douglas Petitt Vice President, Government Affairs
Servidyne Systems, LLC
Wal-Mart Stores, Inc.
American Electric Power
PNM Resources
Alliance to Save Energy
Waverly Light and Power
Seattle City Light
Santee Cooper
Baltimore Gas and Electric
Great River Energy
New Jersey Natural Gas
(New Jersey Resources Corporation)
Austin Energy
New York Power Authority
New York State Public Service Commission
New Jersey Board of Public Utilities
Connecticut Department of Public Utility Control
California Public Utilities Commission
Vermont Energy Investment Corporation
Southern Company
Connecticut Consumer Counsel
Exelon
Connecticut Department of Environmental Protection
Food Lion
Entergy Corporation
MidAmerican Energy Company
Tristate Generation and Transmission Association, Inc.
Office of the Ohio Consumers' Counsel
District of Columbia Public Service Commission
North Carolina Air Office
Washington Utilities and Transportation Commission
Vectren Corporation
ES-10
-------
Bill Prindle
Phyllis Reha
Roland Risser
Gene Rodrigues
Art Rosenfeld
Jan Schorl
Larry Shirley
Michael Shore
Gordon Slack
Deb Sundin
Dub Taylor
Paul von
Paumgartten
Brenna Walraven
Devra Wang
Steve Ward
Mike Weedall
Tom Welch
Jim West
Henry Yoshimura
Deputy Director
Commissioner
Director, Customer Energy Efficiency
Director, Energy Efficiency
Commissioner
General Manager
Division Director
Senior Air Policy Analyst
Energy Business Director
Director, Business Product Marketing
Director
Director, Energy and Environmental Affairs
Executive Director, National Property Management
Director, California Energy Program
Public Advocate
Vice President, Energy Efficiency
Vice President, External Affairs
Manager of energy right & Green Power Switch
Manager, Demand Response
American Council for an Energy-Efficient Economy
Minnesota Public Utilities Commission
Pacific Gas and Electric
Southern California Edison
California Energy Commission
Sacramento Municipal Utility District
North Carolina Energy Office
Environmental Defense
The Dow Chemical Company
Xcel Energy
Texas State Energy Conservation Office
Johnson Controls
USAA Realty Company
Natural Resources Defense Council
State of Maine
Bonneville Power Administration
PJM Interconnection
Tennessee Valley Authority
ISO New England Inc.
Observers
James W. (Jay)
Brew
Roger Cooper
Dan Delurey
Roger Fragua
Jeff Genzer
Donald Gilligan
Chuck Gray
John Holt
Joseph Mattingly
Kenneth Mentzer
Christina Mudd
Ellen Petrill
Alan Richardson
Steve Rosenstock
Diane Shea
Rick Tempchin
Mark Wolfe
Counsel
Executive Vice President, Policy and Planning
Executive Director
Deputy Director
General Counsel
President
Executive Director
Senior Manager of Generation and Fuel
Vice President, Secretary and General Counsel
President and Chief Executive Officer
Executive Director
Director, Public/Private Partnerships
President and Chief Executive Officer
Manager, Energy Solutions
Executive Director
Director, Retail Distribution Policy
Executive Director
Steel Manufacturers Association
American Gas Association
Demand Response Coordinating Committee
Council of Energy Resource Tribes
National Association of State Energy Officials
National Association of Energy Service Companies
National Association of Regulatory Utility
Commissioners
National Rural Electric Cooperative Association
Gas Appliance Manufacturers Association
North American Insulation Manufacturers Association
National Council on Electricity Policy
Electric Power Research Institute
American Public Power Association
Edison Electric Institute
National Association of State Energy Officials
Edison Electric Institute
Energy Programs Consortium
ES-11
-------
Notes
Energy efficiency refers to using less energy to pro-
vide the same or improved level of service to the
energy consumer in an economically efficient way.
The term energy efficiency as used here includes
using less energy at any time, including at times of
peak demand through demand response and peak
shaving efforts.
Addressing transportation-related energy use is also
an important challenge as energy demand in this
sector continues to increase and oil prices hit histor-
ical highs. However, transportation issues are out-
side the scope of this effort, which is focused only
on electricity and natural gas systems.
This effort is focused on energy efficiency for regu-
lated energy forms. Energy efficiency for unregulat-
ed energy forms, such as fuel oil for example, is
closely related in terms of actions in buildings, but is
quite different in terms of how policy can promote
investments.
A utility is broadly defined as an organization that
delivers electric and gas utility services to end users,
including, but not limited to, investor-owned, pub-
licly-owned, cooperatively-owned, and third-party
energy efficiency utilities.
Many energy efficiency programs have an average
life cycle cost of $0.03/kilowatt-hour (kWh) saved,
which is 50 to 75 percent of the typical cost of new
power sources (ACEEE, 2004; EIA, 2006). The cost
of energy efficiency programs varies by program and
can include higher cost programs and options with
lower costs to a uti ity such as modifying rate designs.
See Chapter 6: Energy Efficiency Program Best
Practices for more information on leading programs.
Data refer to EIA 2006 new power costs and gas
prices in 2015 compared to electric and gas pro-
gram costs based on leading energy efficiency pro-
grams, many of which are discussed in Chapter 6:
Energy Efficiency Program Best Practices.
Based on leading energy efficiency programs, many
of which are discussed in Chapter 6: Energy
Efficiency Program Best Practices.
These estimates are based on assumptions of aver-
age program spending levels by utilities or other
program administrators, with conservatively high
numbers for the cost of energy efficiency programs.
See highlights of some of these programs in Chapter
6: Energy Efficiency Program Best Practices, Tables
6-1 and 6-2.
10 These economic anc environmental savings esti-
mates are extrapolations of the results from region-
al program to a national scope. Actual savings at the
regional level vary based on a number of factors. For
these estimates, avoided capacity value is based on
peak load reductions de-rated for reductions that do
not result in savings of capital investments.
Emissions savings are based on a marginal on-peak
generation fuel of natural gas and marginal off-
peak fuel of coal; with the on-peak period capacity
requirement double that of the annual average.
These assumptions vary by region based upon situa-
tion-specific variables. Reductions in capped emis-
sions might reduce the cost of comoliance.
11 This estimate of the funding required assumes 2
percent of revenues across electric utilities and 0.5
percent across gas utilities. The estimate aiso
assumes that energy efficiency is de ivered at a total
cost (utility and partic pant) of $0.04 per kWh and
$3 per million British thermal units (MMBtu), which
are higher than the costs of many of today's programs.
12 This estimate is provided as an indicator of under.n-
vestment and is not intended to establish a national
funding target. Appropriate funding levels for pro-
grams should be established at the regional, stare,
or utility level. In addition, energy efficiency invest-
ments by customers, businesses, .ndustry, and gov-
ernment also contribute to the larger economic and
environment benefits of energy efficiency.
13 One example of energy efficiency's ability to meet
load growth is the Northwest Power Planning
Council's Fifth Power Plan which uses energy con-
servation and efficiency to meet a targeted 700 MW
of forecasted capacity between 2005 and 2009
(NWPCC, 2005).
ES-12
National Action Plan for Energy Efficiency
-------
References
For More Information
i <:PI;.,-IM COSMO! tor an L nergy-Etfit le "i! tf.onomy
i,-V~rF.E] '2004). A Fedora' System Benefits Fund'
Ar?':i',tiny States to ฃs7
Southwest Energy Efficiency Project [SWEEP] (2002,
November). The New Mother Lode: The Potential
for More Efficient Electricity Use in the Southwest.
Report for the Hewlett Foundation Energy Series.
U.S. Energy Information Administration [EIA] (2006).
Annual Energy Outlook 2006. Washington, DC.
Western Governors' Association [WGA] (2006, June).
Clean Energy, a Strong Economy and a Healthy
Environment. A Report of the Clean and Diversified
Energy Advisory Committee.
Stacy Angel
U.S. Environmental Protection Agency
Office of Air and Radiation
Climate Protection Partnerships Division
Tel: (202) 343-9606
E-mail: angel.stacy@epa.gov
Larry Mansueti
U.S. Department of Energy
Office of Electricity Delivery and Energy Reliability
Tel: (202) 586-2588
E-mail: lawrence.mansueti@hq.doe.gov
Or visit www.epa.gov/cleanenergy/eeactionplan
To create a sustainable, aggressive national commitment to energy efficiency
ES-13
-------
-------
1
Introduction
I and Background
Overview
We currently face a number of challenges in securing
affordable, reliable, secure, and clean energy to meet
our nation's growing energy demand. Demand is out-
pacing supply, costs are rising, and concerns for the envi-
ronment are growing.
Improving the energy efficiency1 of our homes, business-
es, schools, governments, and industries - which con-
sume more than 70 percent of the energy used in the
countryis one of the most constructive, cost-effective
ways to address these challenges. Greater investment in
energy efficiency programs across the country could help
meet our growing electricity and natural gas demand,
save customers billions of dollars on their energy bills,
reduce emissions of air pollutants and greenhouse gases,
and contribute to a more secure, reliable, and low-cost
energy system. Despite this opportunity, energy efficien-
cy remains an under-utilized resource in the nation's
energy portfolio.
There are many ways to increase investment in cost-
effective energy efficiency including developing building
codes and appliance standards, implementing govern-
ment leadership efforts, and educating the public
through programs such as ENERGY STARฎ.2 Another
important area is greater investment in organized ener-
gy efficiency programs that are managed by electric and
natural gas providers, states, or third-party administra-
tors. Energy efficiency programs already contribute to
the energy mix in many parts of the country and have
delivered significant savings and other benefits. Despite
the benefits, these programs face hurdles in many areas
of the country. Identifying and removing these barriers is
a focus of this effort.
October 2005
Excerpt from Letter FrDm Co-C-iairs ?.o rhซ
National Action Plan for Energy Efficiency
Leadership Group
Energy efficiency is a critically under-utilized resource in
the nation's energy portfolio. Those states and utilities
that have made significant investments in energy effi-
ciency have lowered the growth for energy demand and
moderated their energy costs. However, many hurdles
remain that block broader investments in cost-effective
energy efficiency.
That is why we have agreed to chair the Energy Efficiency
Action Plan. It is our hope that with the help of leading
organizations like yours, we will identify and overcome
these hurdles.
Through this Action Plan, we intend to identify the major
barriers currently limiting greater investment by utilities in
energy efficiency. We will develop a series of business
cases that will demonstrate the value and contributions
of energy efficiency and explain how to remove these
barriers (including regulatory and market challenges).
These business cases, along with descriptions of leading
energy efficiency programs, will build upon practices
already in place across the country.
Diane Munns
President, NARUC
Member, Iowa Utilities Board
Jim Rogers
President and CEO
Duke Energy
To drive a sustainable, aggressive national commitment
to energy efficiency through gas and electric utilities,
utility regulators, and partner organizations, more than
50 leading organizations joined together to develop this
National Action Plan for Energy Efficiency. The Action
Plan is co-chaired by Diane Munns, Member of the Iowa
1 Energy efficiency refers to using less energy to provide the same or improved level of service to the energy consumer in an economically efficient way.
The term energy efficiency as used here includes using less energy at any time, including at times of peak demand through demand response and peak
shaving efforts.
2 See EPA 2006 for a description of a broad set of policies being used at the state level to advance energy efficiency.
To create a sustainable, aggressive national commitment to energy efficiency
1-1
-------
Utilities Board and President of the National Association
of Regulatory Utility Commissioners, and Jim Rogers,
President and Chief Executive Officer of Duke Energy.
The Leadership Group includes representatives from a
broad set of stakeholders, including electric and gas
utilities, state utility commissioners, state air and energy
agencies, energy service providers, energy consumers,
and energy efficiency and consumer advocates. This
effort is facilitated by the U.S. Department of Energy
(DOE) and the U.S. Environmental Protection Agency
(EPA). The National Action Plan for Energy Efficiency:
Identifies key barriers limiting greater investment in
energy efficiency,
Reviews sound business practices for removing these
barriers and improving the acceptance and use of ener-
gy efficiency relative to energy supply options, and
Outlines recommendations and options for overcoming
these barriers.
In addition, members of the Leadership Group are com-
mitting to act within their own organizations and
spheres of influence to increase attention and invest-
ment in energy efficiency. Greater investment in energy
efficiency cannot happen based on the work of one indi-
vidual or organization alone. The Leadership Group
recognizes that the joint efforts of the customer, utility,
regulator, and partner organizations are needed to rein-
vigorate and increase the use of energy efficiency in
America. As energy experts, utilities may be in a unigue
position to play a leadership role.
The rest of this introduction chapter establishes why
now is the time to increase our investment in energy effi-
ciency, outlines the approach taken in the National
Action Plan for Energy Efficiency, and explains the struc-
ture of this report.
Why Focus on Energy Efficiency?
Energy Challenges
We currently face multiple challenges in providing
affordable, clean, and reliable energy in today's complex
energy markets:
Electricity demand continues to rise. Given current
energy consumption and demographic trends, DOE
projects that U.S. energy consumption will increase by
more than one-third by the year 2025. Electric power-
consumption is expected to increase by almost 40
percent, and total fossil fuel use is projected to
increase similarly (EIA, 2005). At work and at home,
we continue to rely on more energy-consum ng
devices. This growth in demand stresses current
systems and requires substantial new investments in
system expansions.
High energy prices. Our demand "or natural gas to
heat our homes, for industrial and business uses, and
for power plants is straining the available gas supply in
North America and putting upward pressure on natu-
ral gas prices. Many household budgets are being
strained by higher energy costs, leaving less money
available for other household purchases and needs;
this situation is particularly harmful for low-income
households. Consumers are looking for ways to man-
age their energy bills. Higher energy bills for industry
are reducing the nation's economic competitiveness
and placing U.S. jobs at risk. Higher energy prices also
raise the financial risk associated with the develop-
ment of new natural gas-fired power plants, which
had been expected to make up more than 60 percent
of capacity additions over the next 20 years (EIA,
2005). Coal prices are also increasing and contributing
to higher electricity costs.
Energy system reliability. Events such as the Northeast
electricity blackout of August 2003 and Hurricanes
Katrina and Rita in 2005 highlighted the vulnerability
of our energy system to disruptions. This led to an
1 -2 National Action Plan for Energy Efficiency
-------
increased focus on energy reliability and its economic
and human impacts, as well as national security con-
cerns using fossil fuel more efficiently and increasing
energy supply diversity.
' :;>".(<-''/'<: are overburdened in some places,
limiting the flow of economical generation and, in
some cases, shrinking reserve margins of the electricity
grid to inappropriately small levels. This situation can
cause reliability problems and high electricity prices in
or near congested areas.
i .'.v./'o/i/nen?.)/ co/KiVb Energy demand continues to
grow as national and state regulations are being imple-
mented to significantly limit the emissions of air pollu-
tants, such as sulfur dioxide (S02), nitrogen oxides (NOX),
and mercury, to protect public health and the environ-
ment. Many existing base load generation plants are
aging and significant retrofits are needed to ensure old
generating units meet these emissions regulations.
In addition, emissions of greenhouse gases continue
to increase.
Addressing these issues will require billions of dollars in
investments in new power plants, gas rigs, transmission
lines, pipelines, and other infrastructure, notwithstand-
ing the difficulty of building new energy infrastructure in
dense urban and suburban locations even with current
energy efficiency investment. The decisions we make
now regarding our energy supply and demand can either
help us deal with these challenges more effectively or
complicate our ability to secure a more stable, economi-
cal energy future.
Benefits of Energy Efficiency
Greater investment in energy efficiency can help us tackle
these challenges. Energy efficiency is already a key compo-
nent in the nation's energy resource mix in many parts of
the country, and experience shows that energy efficiency
programs can lower customer energy bills; cost less than,
and help defer, new energy production; provide environ-
mental benefits, and spur local economic development.
Some of the major benefits of energy efficiency include:
*<:')nv; fv/ev'Qj- ,'
-------
demand in some areas without compromising the end
users' activities and economic well-being (Nadel, et al.,
2004; EIA, 2006).
Environmental benefits. Cost-effective energy efficien-
cy offers environmental benefits related to reduced
demand, such as reduced air pollution and greenhouse
gas emissions, lower water use, and less environmental
damage from fossil fuel extraction. Energy efficiency is
an attractive option for generation owners in advance
of requirements to reduce greenhouse gas emissions.
Economic development. Greater investment in energy
efficiency helps build jobs and improve state economies.
Energy efficiency users often redirect their bill savings
toward other activities that increase local and national
employment, with a higher employment impact than if
the money had been spent to purchase energy (York
and Kushler, 2005; NYSERDA, 2004). Many energy effi-
ciency programs create construction and installation
jobs, with multiplier impacts on other employment and
local economies (Sedano et al., 2005). Local invest-
ments in energy efficiency can offset energy imports
from out-of-state, improving the state balance of trade.
Lastly, energy efficiency investments usually create long-
lasting infrastructure changes to building, equipment
and appliance stocks, creating long-term property
improvements that deliver long-term economic value
(Innovest, 2002).
Energy security. Energy efficiency reduces the level of
U.S. per capita energy consumption, thus decreasing
the vulnerability of the economy and individual con-
sumers to energy price disruptions from natural disasters
and attacks upon domestic and international energy
supplies and infrastructure.
Decades of Experience With Energy
Efficiency
Utilities and their regulators began recognizing the
potential benefits of improving efficiency and reducing
demand in the 1970s and 1980s. These "demand-side
Long Island Power Authority's (LIRA)
Clean Energy Program Drives Economic
Development, Customer Savings, and
Environmental Quality Enhancements
LIRA started its Clean Energy Initiative in 1999 and
has invested $229 million over the past 6 years
LIPA's portfolio of energy efficiency programs from
1999 to 2005 produced significant energy savings,
emissions reductions and stimulated economic:
growth on Long Island:
296 megawatts (MW) peak demand savings
1,348 gigawatt-hours (GWh) cumulative savings
Emissions reductions of:
Greater than 937,402 tons of
carbon dioxide (C02)
Greater than 1,334 tons of NOX
Greater than 4,298 tons of S02
$275 million in customer bill savings and rebates
$234 million increase in net economic output on
Long Island
4,500 secondary jobs created
Source: LIRA, 2006
management" (DSM) approaches meet increased
demands for electricity or natural gas by managing the
demand on the customer's side of the meter rather than
increasing or acquiring more supplies. Planning processes,
such as "least-cost planning" or "integrated resource
planning," have been used to evaluate DSM programs
on par with supply options and allow investment in
DSM programs when they cost less than new supply
options.
DSM program spending exceeded $2 billion a year Jin
2005 dollars) in 1993 and 1994 (York and Kushler,
2005). In the late 1990s, funding for utility-sponsored
energy efficiency was reduced in about half of the states
due to changed regulatory structures and increased
political and regulatory pressures to hold down electrici-
ty prices. This funding has partially recovered with new
1-4 National Action Plan for Energy Efficiency
-------
policies and funding mechanisms (see Figure 1-1) imple-
mented to ensure that some level of cost-effective
energy efficiency was pursued.
Notwithstanding the policy and regulatory changes that
have affected energy efficiency program funding, wide
scale, organized energy efficiency programs have now
been operating for decades in certain parts of the coun-
try. These efforts have demonstrated the following:
Energy efficiency programs deliver significant savings.
In the mid-1990s, based on the high program funding
levels of the early 1990s, electric utilities estimated pro-
gram savings of 30 gigawatts (the output of about 100
medium-sized power plants) and more than 60 million
megawatt-hours (MWh).
Energy efficiency programs can be used to meet a sig-
nificant portion of expected load growth. For example:
The Pacific Northwest region has met 40 percent
of its growth over the past two decades through
energy efficiency programs (see Figure 1-2).
Connecticut's Energy Efficiency Programs
Generate Savings of $550 Million in 2005
In 2005, the Connecticut Energy Efficiency
Fund, managed by the Energy Conservation
Management Board, invested $80 million in ener-
gy efficiency. This investment is expected to pro-
duce $550 million of bill savings to Connecticut
electricity consumers. In addition, the 2005 pro-
grams, administered by Northeast Utilities and
United Illuminating, resulted in:
126 MW peak demand reduction
4,398 GWh lifetime savings
Emissions reductions of:
Greater than 2.7 million tons of C02
Greater than 1,702 tons of NOX
Greater than 4,616 tons of S02
1,000 non-utility jobs in the energy efficiency
industry
Source: CECMB, 2006
California's energy efficiency goals, adopted in
2004 by the Public Utilities Commission, are to
Figure 1-1: Energy Efficiency Spending Has Declined
Puget Sound Energy's (PSE) Resource
Plan Includes Accelerated Conservation
to Minimize Risks and Costs
PSE's 2002 and 2005 Integrated Resource Plans
(IRPs) found that the accelerated development of
energy efficiency minimizes both costs and risks.
As a result, PSE significantly expanded its energy
efficiency efforts. PSE is now on track to save 279
average MW (aMW) between 2006 and 2015,
more than the company had saved between 1980
and 2004. The 279 aMW of energy efficiency rep-
resents nearly 10 percent of its forecasted 2015
sales.
Source: Puget Sound Energy, 2005
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15
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$2.5-r
$2.0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Source: Data derived from ACEEE 2005 Scorecard (York and Kushler,
2005) adjusted for inflation using U.S. Department of Labor Bureau of
Labor Statistics Inflation Calculator
To create a sustainable, aggressive national commitment to energy efficiency
1-5
-------
use energy efficiency to displace more than half of
future electricity load growth and avoid the need
to build three large (500 MW) power plants.
1 Encigy efficiency >5 neing delivered ros7-co/noe//?/i(-/V'
with new supply. Programs across the country are
demonstrating that energy efficiency can be delivered
at a cost of 2 to 4 cents per kilowatt-hour (kWh) and a
cost of $1.30 to $2.00 per lifetime million British ther-
mal units (MMBtu) saved.
Energy efficiency can be targeted to reduce peak
demand. A variety of programs address the peak
demand of different customer classes, lowering the
strain on existing supply assets (e.g., pipeline capacity,
transmission and distribution capacity, and power plant
capability), allowing energy delivery companies to bet-
ter utilize existing assets and deferring new capital
investments.
Proven, cost-effective program models are available to
build upon. These program models are available for
almost every customer class, both gas and electric.
Southern California Edison's (SCE)
Energy Efficiency Investments Provide
Economic and Environmental Savings
SCE's comprehensive portfolio of energy efficiency
programs for 2006 through 2008 will produce:
3 percent average bill reduction by 2010
3.5 billion kWh of energy savings
888 MW of demand savings
20.5 million tons of C02 emission reductions
5.5 million tons of NOX emission reductions
Energy saved at a cost of less than 4.1 cents/kWh
Source: Southern California Edison, 2006
New York State's Aggressive
Energy Efficiency Programs Help
Power the Economy As Well As Reduce
Energy Costs
New York State Energy Research and Development
Authority's (NYSERDA's) portfolio of energy efficiency
programs for the period from 1999 to 2005 pro-
duced significant energy savings, as well as stimu-
lated economic growth and jobs, and reduced energy
prices in the state:
19 billion kWh/year of energy savings
4,166 added jobs/year (created/retained) from
1999 to 2017
$244 million/year in added total economic growth
from 1999 to 2017
*$94.5 million in energy price savings over three
years
Source: NYSERDA, 2006
National Case for Energy Efficiency
Improving the energy efficiency of homes, businesses,
schools, governments, and industrieswhich consume
more than 70 percent of the energy used in the country
is one of the most constructive, cost-effective ways to
address the nation's energy challenges. Many of these
buildings and facilities are decades old and will consume the
majority of the energy to be used in these sectors for years
to come. State and regional studies have found that adop-
tion of economically attractive, but as yet untapped, energy
efficiency could yield more than 20 percent savings in total
electricity demand nationwide by 2025. Depending on the
underlying load growth, these savings could help cut load
growth by half or more compared to current forecasts
(Nadel et al., 2004; SWEER 2002; NEEP, 2005; NWPCC,
2005; WGA, 2006). Similarly, energy efficiency targeted at
direct natural gas use could lower natural gas demand
growth by 50 percent (Nadel et al., 2004). Furthermore,
studies also show that significant reductions in energy
consumption can be achieved quickly (Callahan, 2006) and
at low costs for many years to come.
1-6
National Action Plan for Energy Efficiency
-------
-tqure 1 /: Energy Efficiency H.v-> Keen ;< Resource ;?* the- Pacifr: iMos tliwf>t for the ^a< ' >vw
Pacific Northwest Energy Efficiency
Achievements 1978 2004
en
01
0>
Ol
ro
1,500-
0
Since 1978, Bonneville Power
Administration (BPA) & Utility
Programs, Energy Codes & Federal
Efficiency Standards Have Produced
Nearly 3000 aMW of Savings.
j
.....
Illlll
1978 1982 1986 1990 1994 1998 2002
BPA and Utility Programs
Alliance Programs
State Codes
Federal Standards
Enerqy Efficiency Met Nearly 40 Pen.ent of Pacifa
Northwest Regional Firm Sales Growth Between 198C
to 2003
Generation
Conservation
Source: Eckman, 2005
Capturing this energy efficiency resource would offer
substantial economic and environmental benefits across
the country. Widespread application of energy efficiency
programs that already exist in some regions6 could deliv-
er a large part of these potential savings. Extrapolating
the results from existing programs to the entire country
would yield over the next 10 to 15 years7:
Energy bill savings of nearly $20 billion annually.
Net societal benefits of more than $250 billion.8
Avoided need for 20,000 MW (40 new 500 MW-
power plants).
Avoided annual air emissions of more than 200 million
tons of C02, 50,000 tons of S02, and 40,000 tons of NOX.
These benefits illustrate the magnitude of the benefits
cost-effective energy efficiency offers. They are estimated
based on (1) assumptions of average program spending
levels by utilities or other program administrators that
currently sponsor energy efficiency programs and
(2) conservatively high estimates for the cost of the energy
efficiency programs themselves (see Table 1 -1 ).9 They are
not meant as a prescription; there are differences in
opportunities and costs for energy efficiency that need
to be addressed at the regional, state, and utility level to
design and operate effective programs.
b See highlights of some of these programs in Chapter 6: Energy Efficiency Program Best Practices, Tables 6-1 and 6-2.
7 These economic and environmental savings estimates extrapolate the results from regional programs to a national scope. Actual savings at the region-
al level vary based on a number of factors. For these estimates, avoided capacity value is based on peak load reductions de-rated for reductions that
do not result in savings of capital investments. Emission savings are based on a marginal on-peak generation fuel of natural gas and marginal off-peak
fuel of coal; with the on-peak period capacity reguirement double that of the annual average These assumptions vary by region based upon situation-
specific variables. Reductions in capped emissions might reduce the cost of compliance.
8 Net present value (NPV) assuming 5 percent discount rate.
9 This estimate of the funding reguired assumes 2 percent of revenues across electric utilities and 0.5 percent across gas utilities. The estimate also
assumes that energy efficiency is delivered at a total cost (utility and participant) of $0.04 per kWh and $3 per MMBtu, which are higher than the costs
of many of today's programs.
1-7
-------
Table 1 -1 . Summary of Benefits for National Energy Efficiency Efforts
Program Cost Electric Natural Gas
Utility Program Spending (% of utility revenue) 2.0% j 0.5%
Total Cost of Efficiency (customer & utility) $35/MWh $3/MMBti
Cost of Efficiency (customer) ; $1 5/MWh
i
Average Annual Cost of Efficiency ($MM) i $6,800
Total
$2/MMBtij
"suoo'T
Total Cost of Efficiency (NPV, $MM) | $140,OOoT $25,000 $165,000
Efficiency Spending - Customer (NPV, $MM) $60,000 $13,000 $73,000
Efficiency Program Spending - Utility (NPV, $MM) $80,000
Resulting Savings Electric
Net Customer Savings (NPV, $MM) $277,000
Annual Customer Savings $MM $18, 000
Net Societal Savings (NPV, $MM) j $270,000
Annual Net Societal Savings ($MM) $17,500
Decrease in Revenue Requirement (NPV, $MM) ! $336,000
Annual Decrease in Revenue Requirement ($MM) $22,000
Energy Savings Electric
Percent of Growth Saved, Year 15 61%
Percent of Consumption Saved, Year 15 12%
Peak Load Reduction, Year 1 5 (De-rated)' 34,000 MW
Energy Saved, Year 1 5 588,000 GWh
Energy Saved (cumulative) 9,400,000 GWh
Emission Reductions Electric
C02 Emission Reduction (1 ,000 Tons), Year 1 5 338,000
$13,000
Natural Gas
$76,500
$5,000
$93,000
Total
$353,500
$23,000
$74,000 $344,000
55,000
$89,000
56,000
Natural Gas
52%
$22,500
$425,000
525,000
Total
5%
UOOBcF
19,000 BcF .
Natural Gas
72,000
NOx Emission Reduction (Tons), Year 1 5 I 67,000 61,000
!
Other Assumptions Electric
Natural Gas
Load Growth (%) ! 2% ' 1%
Total
410,000
128,000
Utility NPV Discount Rate 5% 5%
Customer NPV Discount Rate 5%
EE Project Life Term (years) 1 5
5%
15
Source: Energy Efficiency Benefits Calculator developed for the National Action Plan for Energy Efficiency, 2006.
NPV = net present value; $MM = million dollars
' De-rated peak load reduction based on the coincident peak load reduced multiplied by the percent of growth-related capital expenditures that are saved.
Peak load reductions in unconstrained areas are not counted.
1-8 National Action Plan for Energy Efficiency
-------
As a nation we are passing up these savings by sub-
stantially underinvestmg in energy efficiency. One indi-
cator of this underinvestment is the level of energy
efficiency program funding across the country. Based
on the effectiveness of current energy efficiency pro-
grams operated in certain parts of the country, the
funding necessary to yield the economic and environ-
mental benefits presented above is approximately four
times the funding levels for organized efficiency pro-
grams today (less than $2 billion per year). Again, this
is one indicator of underinvestment and not meant to
be a national funding target. Appropriate funding levels
need to be established at the regional, state, or utility
level based on the cost-effective potential for energy
efficiency as well as other factors.
The current underinvestment in energy efficiency is due
to a number of well-recognized barriers. Some key bar-
riers arise from choices concerning regulation of electric
and natural gas utilities. These barriers include:
Market barriers, such as the well-known "split-incen-
tive" barrier, which limits home builders' and commer-
cial developers' motivation to invest in new building
energy efficiency because they do not pay the energy
bill, and the transaction cost barrier, which chronically
affects individual consumer and small business
decision-making.
Customer barriers, such as lack of information on ener-
gy saving opportunities, lack of awareness of how
energy efficiency programs make investments easier
through low-interest loans, rebates, etc., lack of time
and attention to implementing efficiency measures,
and lack of availability of necessary funding to invest in
energy efficiency.
i
-------
The National Action Plan for Energy
Efficiency
To drive a sustainable, aggressive national commitment
to energy efficiency through gas and electric utilities,
utility regulators, and partner organizations, more than
50 leading organizations joined together to develop this
National Action Plan for Energy Efficiency. The Leadership
Group members (Table 1-2) have developed this National
Action Plan for Energy Efficiency Report, which:
Reviews the barriers limiting greater investment in
energy efficiency by gas and electric utilities and part-
ner organizations.
Presents sound business strategies that are available to
overcome these barriers.
Documents a set of business cases showing the
impacts on key stakeholders as utilities under different
circumstances increase energy efficiency programs.
Presents best practices for energy efficiency program
design and operation.
Presents policy recommendations and options for
spurring greater investment in energy efficiency by util-
ities and energy consumers.
The report chapters address four main policy and pro-
gram areas (see Figure 1-3):
Utility Ratemaking and Revenue Requirement. Lost
sales from the expanded use of energy efficiency have
a negative effect on the financial performance of elec-
tric and natural gas utilities, particularly those that are
investor-owned under conventional regulation. Cost-
recovery strategies have been designed and imple-
mented to successfully "decouple" utility financial
health from electricity sales volumes to remove finan-
cial disincentives to energy efficiency, and incentives
have been developed and implemented to make ener-
gy efficiency investments as financially rewarding as
capital investments.
The goal of the National Action Plan for
Energy Efficiency is to create a sustain-
able, aggressive national commitment
to energy efficiency through gas and
electric utilities, utility regulators, and
partner organizations.
The Leadership Group:
Recognizes that utilities and regulators have criti-
cal roles in creating and delivering energy efficien-
cy programs to their communities.
ซ Recognizes that success requires the joint efforts
of the customer, utility, regulator, and partner
organizations.
"Will work across their spheres of influence to
remove barriers to energy efficiency.
Commits to take action within their own organi-
zation to increase attention and investment in
energy efficiency.
Leadership Group Recommendations:
Recognize energy efficiency as a high-priority
energy resource.
ป Make a strong, long-term commitment to imple-
ment cost-effective energy efficiency as a resource.
Broadly communicate the benefits of and oppor-
tunities for energy efficiency.
Promote sufficient, timely, and stable program
funding to deliver energy efficiency where cost-
effective.
Modify policies to align utility incentives with the
delivery of cost-effective energy efficiency and
modify ratemaking practices to promote energy
efficiency investments.
1-10 National Action Plan for Energy Efficiency
-------
Energy efficiency, along with other
customer-side resources, are not fully integrated into
state and utility planning processes that identify the
need to acquire new electricity and natural gas
resources.
1 ;-',,v ,'j -,/y;; Some regions are successfully using rate
designs such as time-of-use (TOU) or seasonal rates to
more accurately reflect the cost of providing electricity
and to encourage customers to consume less energy.
is a lack of knowledge about the most effective and
cost-effective energy efficiency program options.
However, many states and electricity and gas providers
are successfully operating energy efficiency programs
across end-use sectors and customer classes, including
residential, commercial, industrial, low-income, and
small business. These programs employ a variety of
approaches, including providing public information
and training, offering financing and financial incen-
tives, allowing energy savings bidding, and offering
performance contracting.
One reason given for slow adoption of energy efficiency
Figure 1-3: National Action Plan for Energy Efficiency Report Addresses Actions to Encourage Greater Energy Efficiency
Policy Structure
Develop Utility Incentives
for Energy Efficiency
Develop Rate Designs to
Encourage Energy Efficiency
Utility Resource
Planning
Include Energy Efficiency
in Utility Resource Mix
Develop Effective Energy
Efficiency Programs
Program
Implementation
Program Roll-opt
Measurement & Evaluation
Revise Plans and Policies Based on Results
Action Plan Report Chapter Areas and Key Barriers
Utility Ratemaking planning Moctel
& Revenue Processes Rate Design Program
Requirements Documentation
Energy efficiency reduces
utility earnings
Planning does not
incorporate demand-
side resources
Rates do not
encourage energy
efficiency investments
Limited information on
existing best practices
1-11
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Business Cases for Energy Efficiency
A key element of the National Action Plan for Energy
Efficiency is exploring the benefits of energy efficiency
and the mechanisms and policies that might need to be
modified so that each of the key stakeholders can bene-
fit from energy efficiency investments. A key issue is that
adoption of energy efficiency saves resources and utility
costs, but also reduces utility sales. Therefore, the effect
on utility financial health must be carefully evaluated. To
that end, the Leadership Group offers an Energy
Efficiency Benefits Calculator (Calculator) that evaluates
the financial impact of energy efficiency on its major
stakeholdersutilities, customers, and society. The
Calculator allows stakeholders to examine different effi-
ciency and utility cases with transparent input assump-
tions.
The business cases presented in Chapter 4 of this report
show the impact of energy efficiency investments upon
sample utility's financial health and earnings, upon cus-
tomer energy bills, and upon social resources such as
net efficiency costs and pollutant emissions. In general,
the impacts of offering energy efficiency programs ver-
sus not offering efficiency follow the trends and find-
ings illustrated below from the customer, utility and
society perspectives.
Utility Perspective. Energy efficiency affects utility revenues, <
investments. The utility can be financially neutral to investm
greater investment through the implementation of a varietly
These policies can ensure that shareholder returns and earni igs
in infrastructure and contractual obligations for energy
balance sheet impact.
hareholder earnings, and costs associated with capital
?nts in energy efficiency, at a minimum, or encourage
of decoupling, ratemaking, and incentives policies.
could be the same or increased. Utility investment
procurement could be reduced, providing a favorable
Utility Returns - No Change or Increase
Utility earnings remain stable or increase if decoupling or the use of shareholder incen-
tives accompanies an energy efficiency program. Without incentives, earnings might be
lower because effective energy efficiency will reduce the utility's sales volume and
reduce the utility's rate base, and thus the scope of its earnings.
Change in Utility Earnings - Results Vary
Depending on the inclusion of decoupling and/or shareholder incentives, utility earn-
ings vary. Utility earnings increase if decoupling or shareholder incentives are included.
If no incentives, earnings might be lower due to reduced utility investment.
Peak Load Growth and Associated Capital Investment - Decreases
Capital investments in new resources and energy delivery infrastructure are reduced
because peak capacity savings are captured due to energy efficiency measures.
Customer Perspective. Customers' overall bills will decrease
offsets potential rate increases to cover the cost of offering t
with energy efficiency because lower energy usage
le efficiency program.
Customer Bills - Decrease
Total customer bills decline over time as a result of investment in cost-effective energy
efficiency programs as customers save due to lower energy consumption. This decline
follows an initial rise in customer bills reflecting the cost of energy efficiency programs,
which will then reduce costs over many years.
1-12 National Action Plan for Energy Efficiency
-------
Customer Perspective (continued)
Customer Rates - Mild Increase12
Rates might increase slightly to cover the cost of the energy efficiency program.
Community or Society Perspective. From a broad community/society perspective, energy efficiency produces real sav-
ings over time. While initially, energy efficiency can raise energy costs slightly to finance the new energy efficiency
investment, the reduced bills (as well as price moderation effects) provide a rapid payback on these investments,
especially compared to the ongoing costs to cover the investments in new energy production and delivery infrastruc-
ture costs. Moreover, the environmental benefits of energy efficiency continue to grow. The Calculator evaluates the
net societal savings, utility savings, emissions reductions, and the avoided growth in energy demand associated with
energy efficiency.
Net Resources Savings - Increases
Over time, as energy efficiency programs ramp up, cumulative energy efficiency sav-
ings lead to cost savings that exceed the energy efficiency program cost.
Total Resource Cost (TRC) per Unit - Declines
Total cost of providing each unit of energy (MWh, MMBtu gas) declines over time
because of the impacts of energy savings, decreased peak load requirements, and
decreased costs during peak periods. Well-designed energy efficiency programs can
deliver energy at an average cost less than that of new power sources.
Emissions and Cost Savings - Increases
Efficiency prevents or avoids producing many annual tons of emissions and emission
control costs.
Growth Offset by EE - Increases
As energy efficiency programs ramp up, the percent of growth that is offset by energy
efficiency climbs and then levels as cumulative savings as a percent of demand growth
stabilizes.
12 The changes shown in the business cases indicate a change from what would have otherwise occurred. This change does not include a one-time infra-
structure investment in the assumptions, but it does include smooth capital expenditures. Energy efficiency will moderate prices of fossil fuels. The fuel
price reductions from an aggressive energy efficiency program upon fuel prices have not been included and could result in an overall rate reduction.
To create a sustainable, aggressive national commitment to energy efficiency
1-13
-------
About This Report
Chapter 4:
The National Action Plan for Energy Efficiency is struc-
tured as follows:
Chapter 2: Utility Ratemakinq & Revenue Reqmienien!-,
Reviews mechanisms for removing disincentives for
utilities to consider energy efficiency.
Reviews the pros and cons for different strategies to
reward utility energy efficiency performance, including
the use of energy efficiency targets, shared savings
approaches, and shareholder/company performance
incentives.
Reviews various funding options for energy efficiency
programs.
Presents recommendations and options for modifying
policies to align utility incentives with the delivery of
cost-effective energy efficiency and providing for suffi-
cient and stable program funding to deliver energy effi-
ciency where cost effective.
Chapter 3: Energy Resource Planning Processes
Reviews state and regional planning approaches,
including Portfolio Management and Integrated
Resource Planning, which are being used to evaluate a
broad array of supply and demand options on a level
playing field in terms of their ability to meet projected
energy demand.
Reviews methods to quantify and simplify the value
streams that arise from energy efficiency investments
including reliability enhancement/congestion relief, peak
demand reductions, and greenhouse gas emissions
reductionsfor direct comparison to supply-side options.
Presents recommendations and options for making a
strong, long-term commitment to cost-effective energy
efficiency as a resource.
ป Outlines the business case approach used to examine
the financial implications of enhanced energy efficien-
cy investment on utilities, consumers, and society.
ปPresents case studies for eight different electric and
natural gas utility situations, including different owner-
ship structures, gas and electric utilities, and different
demand growth rates.
Chapter 5: Rate Design
Reviews a variety of rate design structures and their
effect in promoting greater investment in energy effi-
ciency by the end-user.
Presents recommended strategies that encourage
greater use of energy efficiency through rate design.
Chapter 6: Energy Efficiency Program Best Practices
Reviews and presents best practices for operating suc-
cessful energy efficiency programs at a portfolio level,
addressing issues such as assessing energy efficiency
potential, screening energy efficiency programs for
cost-effectiveness, and developing a portfolio of
approaches.
Provides best practices for successful energy efficiency
programs across end-use sectors, customer classes, and
a broad set of approaches.
Documents the political and administrative factors that
lead to program success.
Chapter 7: Report Summary
Summarizes the policy and program recommendations
and options.
1-14 National Action Plan for Energy Efficiency
-------
f-or More Information
Visit the National Action Plan for Energy Efficiency
Web site: www.epa.gov/deanenergy/eeactionplan.htm
or contact:
Stacy Angel
U.S. Environmental Protection Agency
Office of Air and Radiation
Climate Protection Partnerships Division
Angel.Stacy@epa.gov
Larry Mansueti
U.S. Department of Energy
Office of Electricity Delivery and Energy Reliability
Lawrence.Mansueti@hq.doe.gov
/r> create ,1 sustainable, aggressive national commitment to energy efficiency 1-15
-------
Table 1 -2. Members of the National Action Plan for Energy Efficiency
Co-Chairs
Diane Munns Member
President
Jim Rogers President and Chief Executive Officer
Leadership Group
Iowa Utilities Board
National Association of Regulatory Utility Commissioners
Duke Energy
Barry Abramson
Angela S. Beehler
Bruce Braine
Jeff Burks
Kateri Callahan
Glenn Cannon
Jorge Carrasco
Lonnie Carter
Mark Case
Gary Connett
Larry Downes
Roger Duncan
Angelo Esposito
William Flynn
Jeanne Fox
Anne George
Dian Grueneich
Blair Hamilton
Leonard Haynes
Mary Healey
Helen Howes
Chris James
Ruth Kinzey
Peter Lendrum
Rick Leuthauser
Mark McGahey
Janine Migden-
Ostrander
Richard Morgan
Brock Nicholson
Pat Oshie
Douglas Petitt
Senior Vice President
Director of Energy Regulation
Vice President, Strategic Policy Analysis
Director of Environmental Sustainability
President
General Manager
Superintendent
President and Chief Executive Officer
Vice President for Business Performance
Manager of Resource Planning and
Member Services
Chairman and Chief Executive Officer
Deputy General Manager, Distributed Energy Services
Senior Vice President, Energy Services and Technology
Chairman
President
Commissioner
Commissioner
Policy Director
Executive Vice President, Supply Technologies,
Renewables, and Demand Side Planning
Consumer Counsel for the State of Connecticut
Vice President, Environment, Health and Safety
Air Director
Director of Corporate Communications
Vice President, Sales and Marketing
Manager of Energy Efficiency
Manager
Consumers' Counsel
Commissioner
Deputy Director, Division of Air Quality
Commissioner
Vice President, Government Affairs
Servidyne Systems, LLC
Wal-Mart Stores, Inc.
American Electric Power
PNM Resources
Alliance to Save Energy
Waverly Light and Power
Seattle City Light
Santee Cooper
Baltimore Gas and Electric
Great River Energy
New Jersey Natural Gas
(New Jersey Resources Corporation)
Austin Energy
New York Power Authority
New York State Public Service Commission
New Jersey Board of Public Utilities
Connecticut Department of Public Utility Control
California Public Utilities Commission
Vermont Energy Investment Corporation
Southern Company
Connecticut Consumer Counsel
Exelon
Connecticut Department of Environmental Protection
Food Lion
Entergy Corporation
MidAmerican Energy Company
Tristate Generation and Transmission Association, Inc.
Office of the Ohio Consumers' Counsel
District of Columbia Public Service Commission
North Carolina Air Office
Washington Utilities and Transportation Commission
Vectren Corporation
1 -16 National Action Plan for Energy Efficiency
-------
Bill Prindle
Phyllis Reha
Roland Risser
Gene Rodrigues
Art Rosenfeld
Jan Schori
Larry Shirley
Michael Shore
Gordon Slack
Deb Sundin
Dub Taylor
Paul von
Paumgartten
Brenna Walraven
Devra Wang
Steve Ward
Mike Weedall
Tom Welch
Jim West
Henry Yoshimura
Deputy Director
Commissioner
Director, Customer Energy Efficiency
Director, Energy Efficiency
Commissioner
General Manager
Division Director
Senior Air Policy Analyst
Energy Business Director
Director, Business Product Marketing
Director
Director, Energy and Environmental Affairs
Executive Director, National Property Management
Director, California Energy Program
Public Advocate
Vice President, Energy Efficiency
Vice President, External Affairs
Manager of energy right & Green Power Switch
Manager, Demand Response
American Council for an Energy-Efficient Economy
Minnesota Public Utilities Commission
Pacific Gas and Electric
Southern California Edison
California Energy Commission
Sacramento Municipal Utility District
North Carolina Energy Office
Environmental Defense
The Dow Chemical Company
Xcel Energy
Texas State Energy Conservation Office
Johnson Controls
USAA Realty Company
Natural Resources Defense Council
State of Maine
Bonneville Power Administration
PJM Interconnection
Tennessee Valley Authority
ISO New England Inc.
Observers
James W. (Jay)
Brew
Roger Cooper
Dan Delurey
Roger Fragua
Jeff Genzer
Donald Gilligan
Chuck Gray
John Holt
Joseph Mattingly
Kenneth Mentzer
Christina Mudd
Ellen Petrill
Alan Richardson
Steve Rosenstock
Diane Shea
Rick Tempchin
Mark Wolfe
Counsel
Executive Vice President, Policy and Planning
Executive Director
Deputy Director
General Counsel
President
Executive Director
Senior Manager of Generation and Fuel
Vice President, Secretary and General Counsel
President and Chief Executive Officer
Executive Director
Director, Public/Private Partnerships
President and Chief Executive Officer
Manager, Energy Solutions
Executive Director
Director, Retail Distribution Policy
Executive Director
Steel Manufacturers Association
American Gas Association
Demand Response Coordinating Committee
Council of Energy Resource Tribes
National Association of State Energy Officials
National Association of Energy Service Companies
National Association of Regulatory Utility
Commissioners
National Rural Electric Cooperative Association
Gas Appliance Manufacturers Association
North American Insulation Manufacturers Association
National Council on Electricity Policy
Electric Power Research Institute
American Public Power Association
Edison Electric Institute
National Association of State Energy Officials
Edison Electric Institute
Energy Programs Consortium
1-17
-------
References
American Council for an Energy-Efficient Economy
[ACEEE] (2004). A Federal System Benefits Fund:
Assisting States to Establish Energy Efficiency and
Other System Benefit Programs. Washington, DC.
Callahan, K. Alliance to Save Energy (2006, January
17). Energy Efficiency As a Cornerstone of National
Energy Policy. Presented to United States Energy
Association, Washington, DC.
Connecticut Energy Conservation Management Board
[CECMB] (2006, March) Energy Efficiency: Investing
in Connecticut's Future: Report of The Energy
Conservation Management Board Year 2005
Programs and Operations.
Eckman, T. (2005, September 26). The Northwest
Forecast: Energy Efficiency Dominates Resource
Development. Paper presented at the ACEEE
Energy Efficiency As a Resource Conference.
Innovest Strategic Value Advisors [Innovest] (2002,
October). Energy Management & Investor Returns:
The Real Estate Sector.
Long Island Power Authority [LIRA] (2006). Clean
Energy Initiative Annual Report 2005.
Nadel, S., Shipley, A., and Elliott, R.N. (2004). The
Technical, Economic and Achievable Potential for
Energy Efficiency in the U.S.A Meta-Analysis of
Recent Studies. Washington, DC: American Council
for an Energy-Efficient Economy [ACEEE].
New York State Energy Research and Development
Authority [NYSERDA] (2006, May) New York Energy
$martSM Program Evaluation and Status Report.
Report to the System Benefits Charge Advisory
Group, Draft Report.
New York State Energy Research and Development
Authority [NYSERDA] (2004, May). New York
Energy $martSM Program Evaluation and Status
Report, Report to the System Benefits Charge
Advisory Group, Final Report. Albany.
Northeast Energy Efficiency Partnerships [NEEP] (2005,
May). Economically Achievable Energy Efficiency
Potential in New England. Optimal Energy.
Northwest Power and Conservation Council [NWPCC]
(2005, May). The 5th Northwest Electric Power and
Conservation Plan,
Puget Sound Energy (2005, April). Least Cost Plan.
Sedano R., Murray, C., and Steinhurst, W. R. (2005,
May). Electric Energy Efficiency and Renewable
Energy in New England: An Assessment of Existing
Policies and Prospects for the Future. Montpelier,
VT: The Regulatory Assistance Project.
Southern California Edison (2006, January 6) Advice
Letter (1955-e) to the California Energy
Commission.
Southwest Energy Efficiency Project [SWEEP] (2002,
November). The New Mother Lode: The Potential
for More Efficient Electricity Use in the Southwest.
Report for the Hewlett Foundation Energy Series.
U.S. Energy Information Administration [EIA] (2006).
Annual Energy Outlook 2006. Washington, DC).
U.S. Energy Information Administration [EIA] (2005,
January). Annual Energy Outlook 2005.
Washington, DC),
U.S. Environmental Protection Agency [EPA] (2006).
Clean Energy-Environment Guide to Action:
Policies, Best Practices, and Action Steps for States.
Washington, DC.
Western Governors' Association [WGA] (2006, June).
Clean Energy, a Strong Economy and a Healthy
Environment. A Report of the Clean and Diversified
Energy Advisory Committee.
York, D. and Kushler, M. (2005, October). ACEEE's 3^
National Scorecard on Utility and Public Benefits
Energy Efficiency Programs: A National Review and
Update of State Level Activity.
http://www.aceee.org/pubs/u054.pdf
1-18 National Action Plan for Energy Efficiency
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2
Utility Ratemaking
& Revenue Requirements
While some utilities manage aggressive energy efficiency programs as a strategy to diversify their portfolio,
lower costs, and meet customer demand, many still face important financial disincentive: to implementing
such programs. Regulators working with utilities and other stakeholders, as well as boards working with
publicly owned utilities, can establish or reinforce several policies to help address these disincentives, includ-
ing overcoming the throughput incentive, ensuring program cost recovery, and defining shareholder
performance incentives.
Overview
The practice of utility regulation is, in part, a choice
about how utilities make money and manage risk. These
regulatory choices can guide utilities toward or away
from investing in energy efficiency, demand response,
and distributed generation (DG). Traditional ratemaking
approaches have strongly linked a utility's financial
health to the volume of electricity or gas sold via the
ratemaking structure, creating a disincentive to invest-
ment in cost-effective demand-side resources that
reduce sales. The ratemaking structure and process
establishes the rates that generate the revenues that gas
and electric utilities, both public and private, can recov-
er based on the just and reasonable costs they incur to
operate the system and to procure and deliver energy
resources to serve their customers.
Alternate financial incentive structures can be designed
to encourage utilities to actively promote implementa-
tion of energy efficiency when it is cost effective to do
so. Aligning utility and public interest aims by discon-
necting profits and fixed cost recovery from sales vol-
umes, ensuring program cost recovery, and rewarding
shareholders can "level the playing field" to allow for a
fair, economically based comparison between supply-
and demand-side resource alternatives and can yield a
lower cost, cleaner, and reliable energy system.
This chapter explores the utility regulatory approaches
that limit greater deployment of energy efficiency as a
resource in U.S. electricity and natural gas systems.
Generally, it is within the power of utility commissions
and utilities to remove these barriers.1 Eliminating the
throughput incentive is one way to remove a disincentive
to invest in efficiency. Offering shareholder incentives
will further encourage utility investment. Other disincen-
Leadership Group Recommendations
Applicable to Utility Ratemaking and
Revenue Requirements
Modify policies to align utility incentives with the deliv-
ery of cost-effective energy efficiency and modify
ratemaking practices to promote energy efficiency
investments.
Make a strong, long-term commitment to implement
cost-effective energy efficiency as a resource.
Broadly communicate the benefits of and opportunities
for energy efficiency.
Provide sufficient, timely, and stable program funding
to deliver energy efficiency where cost-effective.
A more detailed list of options specific to the objective of
promoting energy efficiency in ratemaking and revenue
requirements is provided at the end of this chapter.
In some cases, state law limits the latitude of a commission to grant ratemaking or earnings flexibility. Removing barriers to energy efficiency in these
states faces the added challenge of amending statutes.
To create a sustainable, aggressive national commitment to energy efficiency
2-1
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tives for energy efficiency include a short-term resource
acquisition horizon and wholesale market rules that do
not capture the system value of energy efficiency. After
an introduction to these barriers and solutions, this
chapter will report on successful efforts in states to
implement these solutions. The chapter closes with a set
of recommendations for pursuing the removal of these
barriers.
This chapter refers to utilities as integrated energy com-
panies selling electricity as well as delivering it. Many of
these concepts, however, also apply to states that
removed retail electricity sales responsibilities from utili-
tiesturning the utility into an electric transmission and
distribution company without a retail sales function.
Barriers and Solutions to Effective
Energy Efficiency Deployment
Common disincentives for utilities to invest more in cost-
effective energy efficiency programs include the
"throughput incentive," the lack of a mechanism for
utilities to recover the costs of and provide funding for
energy efficiency programs, and a lack of shareholder
and other performance incentives to compete with those
for investments in new generation.
Traditional Regulation Motivates Utilities to
Sell More: The Throughput Incentive
Rates change with each major "rate case," the tradition-
al and dominant form of state-level utility ratemaking.2
Between rate cases, utilities have a financial incentive to
increase retail sales of electricity (relative to forecast or
historic levels, which set "base" rates) and to maximize
the "throughput" of electricity across their wires. This
incentive exists because there is often a significant incre-
mental profit margin on incremental sales. When rates
are reset, the throughput incentive resumes with the
new base. In jurisdictions where prices are capped for an
extended time, the utility might be particularly anxious
to grow sales to add revenue to cover cost increases that
might occur during the freeze.
With traditional ratemaking, there are few mechanisms
to prevent "over-recovery" of costs, which occurs if sales
are higher than projected, and no way to prevent
"under-recovery," which can happen if forecast sales are
too optimistic (such as when weather or regional eco-
nomic conditions deviate from forecasted or "normal"
conditions).3
This dynamic creates an automatic disincentive for utili-
ties to promote energy efficiency, because those actions
will reduce the utility's net incomeeven if energy effi-
ciency is clearly established and agreed-upon as a less
expensive means to meet customer needs as a least-cost
resource and is valuable to the utility for risk manage-
ment, congestion reduction, and other reasons (EPA,
2006). The effect of this disincentive is exacerbated in
the case of distribution-only utilities, because the rev-
enue impact of electricity sales reduction is dispropor-
tionately larger for utilities without generation resources.
While some states have ordered util ties to implement
energy efficiency, others have questioned the practica ity
of asking a utility to implement cost-effective energy
efficiency when their financial self-interest is to have
greater sales.
Several options exist to help remove this financial barrier
to greater investment in energy efficiency:
Decouple Sales from Profits and Fixed Cost Recovery
Utilities can be regulated or managed in a manner that
allows them to receive their revenue requirement with less
linkage to sales volume. The point is to regulate utilities such
that reductions in sales from consumer-funded energy
2 Public power utilities and cooperative utilities have their own processes to adjust rates that do not require state involvement.
3 Over-recovery means that more money is collected from consumers in rates than is needed to pay for allowed costs, including return on investment. This
happens because average rates tend to collect more for sales in excess of projected demand than the marginal cost to produce and deliver the electric-
ity for those increased sales. Likewise, under-recovery happens if sales are less than the amount used to set rates (Moskovitz, 2000).
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National Action Plan for Energy Efficiency
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Utility and Industry Structure and Energy Efficiency
Publicly and Cooperatively Owned Utilities
Compared With Investor-Owned Utilities
The throughput incentive affects municipal and coop-
erative utilities in a distinctive way. Public power and
co-ops and their lenders are concerned with ensuring
that income covers debt costs, while they are not con-
cerned about "profits." Available low-cost financing
for co-ops sometimes comes with restrictions that
limit its use to power lines and generation, further
diminishing interest in energy efficiency investments.
Natural Gas vs. Electric Utilities
Natural gas and electric utilities both experience the
throughput incentive under traditional ratemaking.
Natural gas utilities operate in a more competitive
environment than do electric utilities because of the
non-regulated alternative fuels, but this situation can
cut either way for energy efficiency. For some gas util-
ities, energy efficiency is an important customer serv-
ice tool, while in other cases, it is just seen as an
imposed cost that competitors do not have. Natural
gas companies in the United States also generally see
a decline in sales due to state-of-the-art efficiencies in
gas end uses, a phenomenon not seen by electric
companies. Yet cost-effective efficiency opportunities
for local gas distribution companies remain available.
Restructured vs. Traditional Markets
The transition to retail electric competition threw open
for reconsideration all assumptions about utility struc-
ture. The effects on energy efficiency have been
strongly positive and negative. The throughput incen-
tive is stronger for distribution-only companies with
no generation and transmission rate base. Price caps,
which typically are imposed in a transition to retail
competition, diminish utility incentive to reduce sales
because added revenue helps cope with new costs.
Price caps also discourage utilities from adding near-
term costs that can produce a long-term benefit, such
as energy efficiency. As a result, energy efficiency is
often disconnected from utility planning. On the other
hand, several states have provided stable funding for
energy efficiency as part of the restructuring process.
High-Cost vs. Low-Cost States
Energy efficiency has been more popular in high-cost
states. Low-cost states tend to see energy efficiency as
more expensive than their supplies from hydroelectric
and coal sources, though there are exceptions where
efficiency is seen as a low-cost incremental resource
and a way to meet environmental goals. Looking for-
ward, all states face similar, higher cost options for
new generation, suggesting that the current resource
mix will be less important than future resource options
in considering the value of new energy efficiency
investments.
efficiency, building codes, appliance standards, and distrib-
uted generation are welcomed, and not discouraged.
For example, if utility revenues were connected to the
number of customers, instead of sales, the utility would
experience different incentives and might behave guite dif-
ferently. Under this approach, at the conclusion of a con-
ventional revenue requirement proceeding, a utility's rev-
enues per customer could be fixed. An automatic adjust-
ment to the revenue reguirement would occur to account
for new or departing customers (a more reliable driver of
costs than sales). An alternative to the revenue per cus-
tomer approach is to use a simple escalation formula to
forecast the fixed cost revenue requirement over time.
Under this type of rate structure, a utility that is more effi-
cient and reduces its costs over time through energy effi-
ciency will be able to increase profits. Furthermore, if sales
are reduced by any means (e.g., efficiency, weather, or eco-
nomic swings) revenues and profits will not be affected.
To create a sustainable, aggressive national commitment to energy efficiency
2-3
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This approach eliminates the throughput disincentive and
does not require a commission resolution of the amount
of lost revenues associated with energy efficiency (see
Table 2-1). A critical element of revenue decoupling is a
true-up of actual results to forecasted results. Rates
would vary up or down reflecting a balancing account for
total authorized revenue requirements and actual rev-
enues from electricity or gas consumed by customers.
The true-up is fundamental to accomplish decoupling
profits and fixed cost revenues from sales volumes.
Annual adjustments have been typical and can be mod-
eled in the Energy Efficiency Benefits Calculator (see
Chapter 4: Business Case for Energy Efficiency), but a
quarterly or monthly adjustment might be preferred. The
plan may also include a deadband, meaning that modest
deviations from the forecast would produce no change in
rates, while larger deviations will result in a rate change.
The plan might also share some of the deviations
between customers and the utility. The magnitude of rate
changes at any one time can be capped if the utility and
regulators agree to defer the balance of exceptional
changes to be resolved later. Prudence reviews should be
unaffected by a decoupling plan. A decoupling plan
would typically last a few years and could be changed to
reflect new circumstances and lessons learned.
Decoupling has the potential to lower the risk of the util-
ity, and this feature should lead to consumer benefits
through an overall lower cost of capital to the utility.4
Decoupling through a revenue per customer cap is
presently more prevalent in natural gas companies, but
can be a sound tool for electric companies also. Rate
design need not be affected by decoupling (see Chapter
5: Rate Design for rate design initiatives that promote
energy efficiency), and a shift of revenues from the vari-
able portion of rates to the fixed portion does not
address the throughput incentive. The initial revenue
requirement would be determined in a routine rate case,
the revenue per customer calculation would flow from
the same billing determinants used ::o set rates. Service
perfo"mance measures can be addec to assure that cost
reductions result from efficiency rather than service
reductions. Some state laws limit the use of balancing
accounts and true-ups, so legislative action would be
necessary to enable decoupling in those states.
A decoupling system can be simple or complex, depend-
ing on the needs of regulators, the utility, or other par-
ties and the value of a broad stakeholder process leading
up to a decoupling system (Kantor, 2006). As the text
box addressing lessons learned suggests, it is important
to establish the priorities that the system is being creat-
ed to address so it can be as simple as possible wiile
avoiding unintended consequences. Additionally, r: is
important to evaluate any decoupling system to ensure
it is performing as expected.5
Shifting More Utility Fixed Costs Into Fixed Customer
Charges
Traditionally, rates recover a portion of the utility's fixed
costs through volumetric rates, which helps service
remain affordable. To better assure recovery of capita!
asset costs with reduced dependence on sales, state util-
ity commissions could reduce variable rates and increase
the fixed rate component, often referred to as the fixed
charge or customer charge. This option might be partic-
ularly relevant in retail competition states because wires-
only electric utilities have relatively high proportions of
fixed costs. This shift is attractive to some natural gas
systems experiencing sales volume attrition due to
improved furnace efficiency and other trends. This shift
reduces the throughput incentive for distribution compa-
nies and is an alternative to decoupling. There are some
limiting concerns, including the effect a reduction in the
variable charge might have on consumption and con-
sumers' motivation to practice energy efficiency, and the
potential for high using consumers to benefit from the
change while low-using customers pay more.
4 The lowering of a gas utility's cost of capital because of the reduced risk introduced by a revenue decoupling mechanism was recently affirmed by Barone
(2006).
5 Two recent papers discuss decoupling in some detail: Costello, 2006 and NERA, 2006.
2-4 National Action Plan for Energy Efficiency
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The First Wave of Decoupling and Lessons Learned
In the early 1990s, several state commissions and util-
ities responded to the throughput incentive by creat-
ing decoupling systems. In all cases, decoupling was
discontinued by the end of the decade. The reasons
for discontinuation provide guidance to those consid-
ering decoupling today and indicate that the initial
idea was good, but that the execution left important
issues unaddressed.
In the case of California, decoupling was functioning
well, using forecasted revenues and true-ups to actu-
als, but the move to retail competition precipitated its
end in 1996 (CPUC, 1996). Following the energy cri-
sis of 2000-2001, California recognized the impor-
tance of long-term energy efficiency investments and
reinstated mechanisms to eliminate the throughput
incentive.
Puget Sound Energy in Washington adopted a decou-
pling plan in 1990. There were several problems. The
split between variable power costs (recovered via a
true-up based on actual experience) and fixed costs
(recovered based on a revenue-per-customer calcula-
tion) was wrong. While customer numbers (and
revenue) were increasing, new investments in trans-
mission were not needed so the fixed cost part of the
plan over-recovered. Meanwhile, new generation
from independent generators was too expensive, and
this added power cost (minus a prudence disal-
lowance, which further complicated the scene) was
passed to ratepayers. Unlike the current California
decoupling method, there was no reasonable forecast
over time for power costs. Risk of power cost increas-
es was insufficiently shared. The results were a big rate
increase and anger among customers. In retrospect,
risk allocation and the split of fixed and variable costs
were incompatible to the events that followed and
offer a useful lesson to future attempts. The true-up
process and the weather normalization process
worked well. The power costs that ignited the contro-
versy over the decoupling plan would have been
recoverable in rates under the traditional system. A
recent effort to restore decoupling with Puget
foundered over a dispute about whether the allowed
return on equity during a prior rate case should be
changed if decoupling was reinstated (Jim Lazar, per-
sonal communication, October 21, 2005).
Central Maine Power also adopted a decoupling plan
at the beginning of the 1990s. The plan was ill-
equipped, however, to account for an ensuing steep
economic downturn that reduced sales by several per-
centage points. Unfortunately, this effect far out-
weighed any benefits from energy efficiency. The
true-ups called for in the plan were onerous due to
the dip in sales, and authorities decided to delay them
in hopes that the economy would turn around. When
that did not happen, the rate change was quite large
and was attributed to the decoupling plan, even
though most of the rate increase was due to reduced
sales and would have occurred anyway. A lesson from
this experience is to not let the period between true-
ups go on too long and to consider more carefully
what happens if market prices, the economy, the
weather, or other significant drivers are well outside
expected ranges.
In both the Puget and Central Maine cases, responsibil-
ity for large rate increases was misassigned to the
decoupling plan, when high power costs from inde-
pendent power producers (Puget) or general economic
conditions (Central Maine) were primarily responsible.
That said, serious but correctable flaws in the decou-
pling plans left consumers exposed to more risk than
was necessary.
To create a sustainable, aggressive national commitment to energy efficiency
2-5
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Provide Utilities the Profit Lost Through Efficiency
Another way to address the throughput incentive is to
calculate the profits foregone to successful energy effi-
ciency. Lost Revenue Adjustment Mechanisms (LRAM)
allow a utility to directly recoup the "lost" profits and
contributions to fixed costs associated with not selling
additional units of energy because of the success of
energy efficiency programs in reducing electricity con-
sumption. The amount of lost profit can be estimated by
multiplying the fixed portion of the utility's prices by the
energy savings from energy efficiency programs or the
energy generated from DG, based on projected savings
or ex post impact evaluation studies. The amount of ost
estimated profits is then directly returned to the utility's
shareholders. Some states have adopted these mecha-
nisms either through rate cases or add-ons to the fuel
adjustment clause calculations.
Experience has shown that LRAM can allow utilities to
recover more profits than the energy efficiency program
Table 2-1. Options to Mitigate the Throughput Incentive: Pros and Cons
Policy
Pros
Cons
Traditional cost of service
plus return regulation
Familiar system for regulators and utilities.
Rate changes follow rate cases (except for fuel/
gas adjustment clause states).
urchased
Reduced sales reduce net income and contributions to
fixed costs.
Sales forecasts can be contentious.
Harder to connect good utility performance to a financial
consequence. Risks outside control of utility might be
assigned to the utility.
Decoupling (use of a forecast
of revenue or revenue per
customer, with true-ups to
actual results during a
defined timeframe)
Removes sales incentive and distributed resourcel disincen-
tives.
Authorized fixed costs covered by revenue.
All beneficial actions and policies that reduce sal ;s (distrib-
uted generation, energy efficiency programs, cod?s and
standards, voluntary actions by customers, dema
response) can be promoted by the utility without adversely
affecting net income or coverage of fixed costs.
Opportunity to easily reward or penalize utilities ased on
performance.
True-ups from balancing accounts or revenue per customer
are simple.
Easy to add productivity factors, inflation adjustments, and
performance indicators with rewards and penalti s that
can be folded into the true-up process.
Reduces volatility of utility revenue resulting frorr many
causes. Risks from abnormal weather, economic perform-
ance, or energy markets can be allocated explicit between
customers and the utility.
Lack of experience. Viewed by some as a more complex
process.
Quality of forecasts is very important.
Some consumer advocates are uncomfortable with rate
adjustments outside rate case or familiar fuel adjustment
clause.
Frequent rate adjustments from true-ups are objectionable
to those favoring rate stability who worry about accounta-
bility for rate increases.
Process of risk allocation can cause decoupling plan to
break down. Connection between reconstituted risks and
cost of capital can cause impasse.
Many issues to factor into the decoupling agreement. Past
experience with decoupling indicates that it can be hard to
"get it right," though these experiences suggest solutions.
Lost revenue adjustment
Restores revenue to utility that would have gone
ings and coverage of fixed costs but is lost by en
ciency.
Diminishes the throughput disincentive for sped
ing programs.
o earn-
rgy effi-
qualify-
Any sales reductions from efficiency initiatives outside qual-
ifying programs are not addressed, leaving the throughput
incentive in place.
Historically contentious, complex process to decide on lost
revenue adjustment. Potentially rewards under-performing
energy efficiency programs.
Independent energy efficiency
administration
Administration of energy efficiency is assigned to |an entity
without the conflict of the throughput incentive.
Utility can still promote load building. Programs that would
reduce sales outside the activities of the independent
administrator might still be discouraged due to the
throughput incentive.
2-6
National Action Plan for Energy Efficiency
-------
actually saved because the lost profit is based on project-
ed, rather than actual, energy savings. Resolving LRAM
in rate cases has been contentious in some states.
Furthermore, because utilities still earn increased profits
on additional sales, this approach still discourages utili-
ties from implementing additional energy efficiency or
supporting independent energy efficiency activities. A
comparison of decoupling and the LRAM approach is
provided in Table 2-1.
A variation is to roughly estimate the amount of lost prof-
its and make a specified portion (50 to 100 percent) avail-
able to the utility to collect based on its performance at
achieving certain program goals. This approach is simpler
and more constructive than a commission docket to cal-
culate lost revenue. It provides a visible way for the utili-
ty to earn back lost profits with program performance
and achievements consistent with the public interest. This
system translates well into employee merit pay systems,
and the goals can fit nicely into management objectives
reported to shareholders, a utility's board of directors, or
Governors. Public interest groups appreciate the connec-
tion to performance.
Non-Utility Administration
Several states, such as Oregon, Vermont and New York,
have elected to relieve utilities from the task of manag-
ing energy efficiency programs. In some cases, state gov-
ernment has taken on this responsibility, and in others, a
third party was created or hired for this purpose. The
utility still has the throughput incentive, so while effi-
ciency administration might be without conflict, the util-
ity may still engage in load-building efforts contrary to
the messages from the efficiency programs. Addressing
the throughput incentive remains desirable even where
non-utility administration is in place. Non-utility energy
efficiency administration can apply to either electricity or
natural gas. Where non-utility energy efficiency adminis-
tration is in place, cooperation with the utility remains
important to ensure that the customer receives good
service (Harrington, 2003).
Wholesale Power Markets and the Throughput
incentive
In recent years, wholesale electric power prices have
increased, driven by increases in commodity fuel costs. In
many parts of the country, these increases have created
a situation in which utilities with generation or firm
power contracts that cost less than clearing prices might
make a profit if they can sell excess energy into the
wholesale market. Some have guestioned whether or
not the situation of utilities seeing wholesale profits from
reduced retail sales diminishes or removes the through-
put incentive.
Empirically, these conditions do not appear to have
moved utilities to accelerate energy efficiency program
deployment. In states in which generation is divested
from the local utility, the companies serving retail cus-
tomers see no change to the throughput incentive.
There is little to suggest how these market conditions
will persist or change. In the absence of a more defini-
tive course change, evidence suggests that the recent
trend should not dissuade policymakers and market par-
ticipants from addressing the throughput incentive.
Recovering Costs / Providing Funding for
Energy Efficiency Programs
Removing the throughput incentive is a necessary step in
addressing the barriers many utilities face to investing more
in energy efficiency. It is unlikely to be sufficient by itself in
promoting greater investment, however, because under
traditional ratemaking, utilities might be unable to cover
the costs of running energy efficiency programs.6 To
ensure funds are available for energy efficiency, policy-
makers can utilize and establish the following mechanisms
with cooperation from stakeholders:
Revenue Requirement or Procurement Funding
Policy-makers and regulators can set clear expectations
that utilities should consider energy efficiency as a
resource in their resource planning processes, and it
should spend money to procure that resource as it would
(i See Chapter 3: Energy Resource Planning Processes for discussion of utility resource planning budgets being used to fund energy efficiency.
To create a sustainable, aggressive national commitment to energy efficiency
2-7
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for other resources. This spending would be part of the
utility revenue requirement and would likely appear as
part of the resource procurement spending for all
resources needed to meet consumer demand in all
hours. In retail competition states, the default service
provider, the distribution company, or a third party can
handle the responsibility of acquiring efficiency
resources.
Spending Budgets
To reduce regulatory disputes and create an atmosphere
of stability among utility managers, trade allies, and cus-
tomers, the legislature or regulator can determine a
budget level for energy efficiency spendinggenerally a
percentage of utility revenue. This budget level would be
set to achieve some amount of the potentially available,
cost-effective, program opportunities. The spending
budget allows administrator staff, trade allies, and con-
sumers to count on a baseline level of effort and reduces
the likelihood of spending disruptions that erode cus-
tomer expectations and destroy hard-to-replace market
infrastructure needed to deliver energy efficiency.
Unfortunately, spending budgets are sometimes treated
as a maximum spending level even if more cost-effective
efficiency can be gained. Alternatively, a spending budg-
et can be treated as a minimum if policymakers also
declare efficiency to be a resource. In that event, addi-
tional cost-effective investments would be recovered as
part of the utility revenue requirement.
Savings Target
An alternative to minimum spending levels is a mini-
mum energy savings target. This alternative could be
policy-driven (designed for consistency to obtain a cer-
tain percentage of existing sales or forecasted growth,
or as an Energy Efficiency Portfolio Standard [EEPS]) or
resource-driven (changing as system needs dictate).
Efficiency budgets can be devised annually to achieve
the targets. The use of savings targets does not address
how money is collected from customers, or how pro-
gram administration is organized. For more information
on how investments are selected, see Chapter 3: Energy
Resource Planning Processes.
Clear, Reliable, and Timely Energy Efficiency Cost
Recovery System
Utilities value a clear and timely path to cost recovery,
and a well-functioning regulatory process should provide
that. Such a process contributes to a stable regulatory
atmosphere that supports energy efficiency programs.
Cost recovery can be linked to program performance (as
discussed in the next section) so that utilities would be
responsible for prudent spending of efficiency funds.
The energy efficiency program cost recovery issue is elim-
inated from the utility perspective if a non-utility admin-
istrative structure is used; however, this approach does
not eliminate the throughput incentive. Furthermore,
funding still needs to be established for the non-uti ity
administrator.
Tariff Rider for Energy Efficiency
A tariff rider for energy efficiency allows for a periodic
rate adjustment to account for the difference between
planned costs (included in rates) and actual costs.
System Benefits Charge
In implementing retail competition, several states added
a separate charge to customer bills to collect funds for
energy efficiency programs; several other states have
adopted this idea as well. A system benefits charge (SBC)
is designed to provide a stable stream of funds for
public purposes, like energy efficiency. SBCs do have
disadvantages. If the funds enter the purview of state
government, they can be vulnerable to decisions to use
the funds for general government purposes. Also, tne
charge appears to be an add-on to bills, which can irri-
tate some consumers. This distinct funding stream can
lead to a disconnection in resource planning between
energy efficiency and other resources. Regulators and
utilities might need to take steps to ensure a comprehen-
sive planning process when dealing with this type of
funding.7
7 This device might also pool funds for other public benefit purposes, such as renewable energy system deployment and bill assistance for low-income
consumers.
2-8 National Action Plan for Energy Efficiency
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Providing Incentives for Energy Efficiency
investment
Some suggest that if energy efficiency is a cost-effective
resource, utilities should invest in it for that reason, with no
reason for added incentives. Others say that for effective
results, incentives should be considered because utilities
are not rewarded financially for energy efficiency resources
as they are for supply-side resources. This section reviews
options for utility incentives to promote energy efficiency.
When utilities invest in hard assets, they depreciate these
costs over the useful lives of the assets. Consumers pay
a return on investment for the un-depreciated balance of
costs not yet recovered, which spreads the rate effect of
the asset over time. Utilities often do not have any
opportunity to earn a return on energy efficiency spending,
as they do with hard assets. This lack of opportunity for
profit can introduce a bias against efficiency investment.
Incentives for energy efficiency should be linked to
achieving performance objectives to avoid unnecessary
expenditures, and be evaluated by regulators based on
their ability to produce cost-effective program perform-
ance. Performance objectives can also form the basis of
penalties for inferior program performance. Financial
incentives for utilities should represent revenues above
those that would normally be recovered in a revenue
requirement from a rate case.
Energy Efficiency Costs: Capitalize or Expense?
In most jurisdictions, energy efficiency costs are
expensed, which means all costs incurred for energy effi-
ciency are placed into rates during the year of the
expense. When a utility introduces an energy efficiency
program, or makes a significant increase or decrease in
energy efficiency spending, rates must change to collect
all annual costs. An increase in rates might be opposed
by consumer advocates and other stakeholders, especially
if parties disagree on whether the energy efficiency
programs are cost-effective.
To moderate the rate effect of efficiency, regulators
could capitalize efficiency costs, at least in part.8
Capitalizing helps the utility by allowing for cost recov-
ery over time but can cost consumers more than expens-
ing in the long run. Some efficiency programs can meet
short term rate-oriented cost-effectiveness tests if costs
are capitalized. However, if the choice is made to capital-
ize, the regulator still has to decide the appropriate
amortization period for program costs, balancing con-
cern for immediate rate impacts and long term costs.9
Capitalizing energy efficiency investments may be limit-
ed by the magnitude of "regulatory assets" that is
appropriate for a utility. Bond ratings might decline if the
utility asset account has too many assets that are not
backed by physical capital. The limit on capitalized effi-
ciency investment varies depending on the rest of the
utility balance sheet.
Some argue that capitalizing energy efficiency is too costly
and that rate effects from expensing are modest. Others
note that in some places, capitalizing energy efficiency is
the only way to deal with transitional rate effects and can
provide a match over time between the costs and benefits
of the efficiency investments (Arthur Rosenfeld, personal
communication, February 20, 2006).
In some cases, it might be appropriate to consider
encouraging unregulated utility affiliates to invest in and
benefit from energy efficiency and other distributed
resources.
Bonus Return, Shared Savings
To encourage energy efficiency investments over supply
investments, regulators can authorize a return on invest-
ment that is slightly higher (e.g., 5 percent) for energy
efficiency investments or offer a bonus return on equity
investment for superior performance. Another approach
is to share a percentage of the energy savings value, per-
haps 5 to 20 percent, with the utility. A shared savings
system has the virtue of linking the magnitude of the
8 Capitalizing energy efficiency also reinforces the idea of efficiency as a substitute to supply and transmission.
9 Iowa and Vermont initially capitalized energy efficiency spending, but transitioned to expense in the late 1990s.
To create a sustainable, aggressive national commitment to energy efficiency
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reward with the level of program performance A varia-
tion is to hold back some of the funds allocated to ener-
gy efficiency for award to shareholders for achieving
energy efficiency targets. Where this incentive is used,
the holdback can run between 3 and 8 percent of the
program budget. Some of these funds can be channeled
to employees to reward their efforts (Arthur Rosenfeld,
personal communication, February 20, 2006; Plunkett,
2005).
Bonus returns, shared savings, and other incentives can
raise the total cost of energy efficiency. However, if the
incentives are well-designed and effective, they will
encourage the utility to become proficient at achieving
energy efficiency savings. The utility might be motivated
to provide greater savings for consumers through more
cost-effective energy efficiency.
Energy Efficiency Lowers Risk
Energy efficiency can help the financial ratings of utilities
if it reduces the risks associated with regulatory uncer-
tainty, long-term investments in gas supply and transport
and electric power and transmission, and the risks associ-
ated with fossil fuel market prices that are subject to
volatility and unpredicted price increases. By controlling
usage and demand, utilities can also control the need for
new infrastructure and exposure to commodity markets,
providing risk management benefits. To the extent that a
return on efficiency investments is likely and the chance
of a disallowance of associated costs is minimized,
investors will be satisfied. Decoupling tends to stabilize
actual utility revenues, providing a better match to actual
cost, which should further benefit utility bond ratings.
Reversing a Short-Term Resource Acquisition
Focus: Focus on Bills, Not Just Rates
Policy-makers tend to focus on electric rates because
they can be easily compared across states. They become
a measure for business-friendliness, and companies con-
sider rate levels in manufacturing siting and expansion
decisions. But rates are not the only measure of service.
A short-term focus on low rates can lead to costly missed
nvestment opportunities and higher overall costs of
electricity service over the long run.
Over the long term, energy efficiency benefits can
extend to all consumers. Eventually, reduced capital
commitments and lower energy costs resulting from
cost-effective energy efficiency programs benefit all
consumers and lower overall costs to the economy, free-
ing customer income for more productive purposes, like
private investment, savings, and consumption.
Improved rate stability and risk management from limit-
ed sales growth tends to improve the reputation of the
utility. Incentives and removing the throughput incen-
tive make it easier for utilities to err.brace stable or
declining sales.
A commitment to energy efficiency means accepting a
new cost in rates over the short-term to gain greater sys-
tem benefits and lower long-term costs, as is the case
with other utility investments. State and local political
support with a measure of public education might be
needed to maintain stable programs in the face of per-
sistent immediate pressure to lower rates.
Related Issues With Wholesale Markets and
Long-Term Planning
Regulatory factors can hinder greater investment in cost-
effective energy efficiency programs. These factors
include the demand-side of the wholesale market not
reacting to supply events like shortages or wholesale
price spikes, and, for the electric sector, a short-term
generation planning horizon, especially in retail compe-
tition states. In addition, transmission system planning
by regional transmission organizations (RTOs) and utili-
ties tends to focus on wires and supply solutions, not
demand resources like efficiency. The value of sustained
usage reductions through energy efficiency, demand
response and distributed generation is not generally con-
sidered, nor compensated for in wholesale tariffs. These
are regulatory choices and are discussed further in
Chapter 3: Energy Resource Planning Processes.10
10 Planning and rate design implications are more thoroughly discussed in Chapters 3: Energy Resource Planning Processes and Chapter 5: Rate Design.
2-10 National Action Plan for Energy Efficiency
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Energy Efficiency Makes Wholesale Energy Markets
Work Better
In the wholesale market venue, the value of energy effi-
ciency would be revealed by a planning process that
treats customer load as a manageable resource like sup-
ply and transmission, with investment in demand-side
solutions in a way that is equivalent to (not necessarily
the same as) supply and transmission solutions. Demand
response and efficiency can be called forth that specifi-
cally reduces demand at peak times or in other strategic
ways, or that reduces demand year-round.
Declare Energy Efficiency a Resource
To underscore the importance of energy efficiency, states
can declare in statute or regulatory policy that energy
efficiency is a resource and that utilities should factor
energy efficiency into resource planning and acquisition.
States concerned with risks on the supply side can also
go one step further and designate that energy efficiency
is the preferred resource.
Link Energy and Environmental Regulation
Environmental policy-makers have observed that energy
efficiency is an effective and comparatively inexpensive
way to meet tightening environmental limits to electric
power generation, yet this attribute rarely factors into
decisions by utility regulators about deployment of ener-
gy efficiency. This issue is discussed further in Chapter 3:
Energy Resource Planning Processes.
State and Regional Examples of
Successful Solutions to Energy
Efficiency Deployment
Numerous states have previously addressed or are cur-
rently exploring energy efficiency electric and gas incen-
tive mechanisms. Experiments in incentive regulation
occurred through the mid-1990s but generally were
overtaken by events leading to various forms of restruc-
turing. States are expressing renewed interest in incen-
tive regulation due to escalating energy costs and a
recognition that barriers to energy efficiency still exist.
Many state experiences are highlighted in the following
text and Table 2-2.
Addressing the Throughput Disincentive
Direction Through Legislation
New Mexico offers a bold statutory statement directing
regulation to remove barriers to energy efficiency: "It
serves the public interest to support public utility invest-
ments in cost-effective energy efficiency and load man-
agement by removing any regulatory disincentives that
might exist and allowing recovery of costs for reasonable
and prudently incurred expenses of energy efficiency
and load management programs" (New Mexico Efficient
Use of Energy Act of 2005).
Decoupling Net Income From Sales
California adopted decoupling for its investor-owned
companies as it restored utility responsibility for acquir-
ing all cost-effective resources. The state has also
required these companies to pursue all cost-effective
energy efficiency at or near the highest levels in the
United States. A balancing account collects forecasted
revenues, and rates are reset periodically to adjust for
the difference between actual revenues and forecasts.
Because some utility cost changes are factored into
most decoupling systems, rate cases can become less
frequent, because revenues and costs track more closely
over time.11
See, for example, orders in California PUC docket A02-12-027. http://www.cpuc.ca.gov/proceedings/A0212027.htm. Oregon had used this method
successfully for PacifiCorp, but when the utility was acquired by Scottish Power, the utility elected to return to the more familiar regulatory form.
To create a sustainable, aggressive national commitment to energy efficiency
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Maryland and Oregon have decoupling mechanisms in
place for natural gas. In Maryland, Baltimore Gas and
Electric has operated with decoupling for more than
seven years, and Washington Gas recently adopted
decoupling, indicating that regulators view decoupling
as a success.12 In Oregon, Northwest Natural Gas has a
similar decoupling mechanism in place.13
The inherently cooperative nature of decoupling is
demonstrated by utilities and public interest advocates
agreeing on a system that addresses public and private
interests. In all these instances, no rate design shift was
needed to implement decouplingthe change is invisible
to customers. A new proposal for New Jersey Natural
Gas would adopt a system similar to those in use1 in
Oregon and Maryland.
See Table 2-2 for additional examples of decoupling.
Reducing Cost Recovery Through Volumetric Charges
After New York moved to retail competition and seoa-
rated energy commodity sales from the electricity deliv-
ery utility, the distribution utilities' rates were modified to
increase fixed cost recovery through per-customer
charges, and to decrease the magnitude of variable, vol-
umetric rates. Removing fixed generation costs, as these
Table 2-2. Examples of Decoupling
State
Type of Utility
Key Features
Related Rate
Design Shifts?
Political/Administrative
Factors
Investor-owned electric and gas
California
Balancing account to collect
forecasted revenue; annual
true-up.
No
Driven by commission, outcome of
energy crisis; consensus oriented.
http://www.epa.gov/cleanrgy/pdf/keystone/PrusnekPresentation.pdf
http://www.cpuc.ca,gov/Published/Final_decision/15019.htm
Investor-owned gas only
Maryland
Revenue per customer cap;
monthly true-up.
No
Revenue stability primary motive of
utility; frequent true-ups.
http://www.energetics.com/madri/pdfs/timmerman_101105.pdf
http://www.bge.com/vcmfiles/BGE/Files/Rates%20and%20Tariffs/Gas%20Service%20Tariff/Brdr_3.doc
Investor-owned gas only at pres-
ent; investor-owned electric in the
past
Revenue per customers cap;
annual true-up.
No
Revenue stability primary motive of
utility; renewed in 2005.
Oregon
http://www.raponline.org/Pubs/General/OregonPaper.pdf
http://www.advisorinsight.com/pub/indexes/600jrii/nwnjr.htrn
http://www.nwnatural.com/CMS300/uploadedFiles/24190ai.pdf
http://apps.puc.state.or.us/orders/2002ords/02-633.pdf
New Jersey
Vermont
Investor-owned gas (proposed)
Revenue per customer.
No
Explicit intent of utility to promote
energy efficiency and stabilize fixed
cost recovery.
http://www2.njresources.com/news/trans/newsrpt.asp?Year=2005 (see 1 2/05/05)
Investor-owned electric (proposed)
Forecast revenue cap and
costs; balancing account and
true-ups.
No
Legislative change promoted utility
proposal; small utility looking for
stability.
http://www.greenmountainpower.biz/atyourservice/2006ratefiling.shtml
12 BG&E's "Monthly Rate Adjustment" tariff rider is downloadable at http://www.bge.com/portal/site/bge/menuitem.6bOb255iJ3d65180159c031eOda
6176aO/.
13 The full agreement can be found in Appendix A of Order 02-634, available at http://apps.puc.state.or.us/orders/2002ords/02-634.pdf. See also Hansen
and Braithwait (2005) for an independent assessment of the Northwest Natural Gas decoupling plan prepared for the commission.
2-12 National Action Plan for Energy Efficiency
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assets were divested, dampened the effects on con-
sumers. In combination with tracking and deferral mech-
anisms to protect the utility from unanticipated costs
and savings, the utilities have little incentive to increase
electric sales.
Using a Lost Revenue Adjustment
Minnesota provided Xcel Energy with lost revenue
adjustments for energy efficiency through 1999, and
then moved to a performance-based incentive. Iowa
currently provides utilities with lost revenue adjustments
for energy efficiency. Connecticut allows lost revenue
recovery for all electric energy efficiency. Massachusetts
allows lost revenue recovery for all gas energy efficiency,
requiring the accumulated lost revenues to be recovered
within three years to prevent large accumulated bal-
ances. Oregon allows lost revenue recovery for utility
efficiency programs. Lost revenue adjustments have
been removed in many states because of their cost to
consumers. New Jersey is in the midst of a transition to
a state-run administrator and provides lost revenue for
utility-run programs in the meantime.
Non-Utility Administration
Several states have taken over the administration of
energy efficiency, including Wisconsin (Focus on
Energy), Maine (Efficiency Maine), New Jersey, and
Ohio. In other states, a third party has been set up to
administer programs, including Vermont (Efficiency
Vermont) and Oregon (Energy Trust of Oregon). The
New York State Energy Research and Development
Authority (NYSERDA), a public authority, fits into both
categories. There is no retail competition in Vermont or
Wisconsin; this change was based entirely on an expec-
tation of effectiveness. Oregon combines natural gas
and electric efficiency programs, but only for the larger
companies in each sector. Statewide branding of energy
efficiency programs is a dividend of non-utility adminis-
tration. Connecticut introduced an aspect of non-utility
administration by vesting its Energy Conservation
Management Board, a state board including state offi-
cials, utility managers, and others, with responsibility to
approve energy efficiency plans and budgets.
Recovering Costs / Providing Funding for
Energy Efficiency Programs
Revenue Requirement
When energy efficiency programs first began, they were
funded as part of a utility revenue requirement. In many
states, like Iowa, this practice has continued uninterrupted.
In California, retail competition interrupted this method of
acquiring energy efficiency, but since 2003, California is
again funding energy efficiency along with other resources
through the revenue requirement, a practice known there
as "procurement funding." California also funds energy
efficiency through SBC funding.
Capitalizing Energy Efficiency Costs
Oregon allows capitalization of costs, and the small
electrics do so. Washington, Vermont, and Iowa capital-
ized energy efficiency costs when programs began in the
1980s to moderate rate effects. Vermont, for example,
amortized program costs over five years. In the late
1990s, however, as program spending declined, these
states ended the practice of capitalizing energy efficien-
cy costs, electing to expense all costs. Currently,
Vermont stakeholders are discussing how to further
increase efficiency spending beyond the amount collected
by the SBC, and they are reconsidering moderating new
rate effects through capitalizing costs.
Spending Budgets, Tariff Riders,
and System Benefits Charges
Several states have specified percentages of net utility
revenue or a specific charge per energy unit to be spent for
energy efficiency resources. Massachusetts, for example,
specifies 2.5 mills per kilowatt-hour (kWh) (while spending
for natural gas energy efficiency is determined case by
case). In Minnesota, there is a separate percentage
designated for electric (1.5 percent of gross operating
revenues) and for natural gas (0.5 percent) utilities.
Vermont adopted a statewide SBC for its vertically inte-
grated e ectric sector, while its gas energy efficiency costs
remain embedded in the utility revenue requirement.
Strong statutory protections guard funds from government
appropriation. Wisconsin requires a charge, but leaves the
commission to determine the appropriate level for each
To create a sustainable, aggressive national commitment to energy efficiency
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utility. There is a history of SBC funds being used for gen-
eral government within the state; 2005 legislation
apparently intended to make funding more secure
(Wisconsin Act 141 of 2005).
The New York commission chose to establish an annual
spending budget for its statewide effort (exclusive of the
public authorities and utilities), increasing it to $1 50 mil-
lion in 2001 and to $175 million in 2006. Washington
tariffs include a rider that allows adjustment of rates to
recover energy efficiency costs that diverge from
amounts included in rates, with annual true-ups.
Providing Incentives for Energy Efficiency
Investment
Performance Incentives
In Connecticut, the two electric utilities managing ener-
gy efficiency programs are eligible for "performance
management fees" tied to performance goals approved
by the regulators, including lifetime energy savings,
demand savings, and other measures. Incentives are
available for a range of outcomes from 70 to 130 percent
of pre-determined goals. In 2004, the two utilities
collectively reached 130 percent of their energy savings
goals and 124 percent of their demand savings goals.
They received performance management fees totaling
$5.27 million. The 2006 joint budget anticipates $2.9
million in performance incentives.
In 1999, the Minnesota Commission adopted perform-
ance incentives for the electric and natural gas investor-
owned utilities that began at 90 percent of performance
targets and are awarded for up to 1 50 percent of target
levels. Performance targets for Minnesota utilities spend-
ing more than the minimum spending requirement are
adjusted to the minimum spending level for purposes of
calculating the performance incentive.
Rhode Island and Massachusetts offer similarly struc
tured incentives. Rhode Island sets aside roughly 5 per-
cent of the efficiency budget for performance incentives.
This amount is less than the amount that would proba-
bly be justified if a lost revenue adjustment were used. A
collaborative group of stakeholders recommends per-
formance indicators and levels to qualify for incentives
In Massachusetts, utilities achieving performance tar-
gets earn 5 percent on money spent for efficiency (in
addition to being able to expense eff ciency costs).
Efficiency Vermont operates under a contract with the
Vermont Public Service Board. The original contract
called for roughly 3 percent of the budget for efficiency
programs to be held back and paid if Efficiency Vermont
meets a variety of performance objectives.
Shared Savings
Before retail competition, California used a shared sav-
ings approach, in which the utilities received revenue
equal to a portion of the savings value produced by the
energy efficiency programs. A similar mechanism might
be reinstated in 2006 (Arthur Rosenfeld, personal
communication, February 20, 2006).
Bonus Rate of Return
Nevada allows a bonus rate of return for demand-side
management that is 5 percent higher than authorized
rates of return for supply investments. Regulations specify
programs that qualify and the process to account for
qualifying investments (Nevada Regulation of Public
Utilities Generally, 2004).
Lower Risk of Disallowance Through Multi-
Stakeholder Collaborative
California, Rhode Island, and other states employ
stakeholder collaboratives to resolve important program
and administrative issues and to provide settlements to
the regulator.
See Table 2-3 for additional examples of incentives for
energy efficiency investments.
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Table 2-3. Examples of Incentives for Energy Efficiency Investments
State
Type of Utility
Key Features
Political/Administrative Factors
California
Investor-owned electric
Shared savings
Encouraged by energy commission and utilities.
Incentive proportionate to value of savings; no cap.
http://www.raponline.org/Conferences/Minnesota/Presentations/PrusnekCAEEMinnesota.pdf
Connecticut Part of retail competition bargain; incentive limited to a
Investor-owned electric Performance incentives percentage of program budget; simple to compare
results to performance goals.
http://www.state.ct.us/dpuc/ecmb/index.html
Massachusetts, Part of retail competition bargain; incentive limited to a
Rhode Island Investor-owned electric Performance incentives percentage of program budget; simple to compare
results to performance goals.
http://www.mass.gov/dte/electric/04-11/819order.pdf (Docket 04-11)
http://www.ripuc.org/eventsactions/docket/3463^NEC-2004DSMSettle(9.12.03).pdf
Minnesota Utility-specific plan arising to resolve other regulatory
. j i i i n -i issues; incentive awarded on a sliding scale of perform-
Investor-owned electric and natural gas Performance incentives ance compared wjth goa|s; decoup|in9g not authHorized
by statute.
http://www.raponline.org/Pubs/RatePayerFundedEE/RatePayerFundedMN.pdf
Nevada | Investor-owned electric Bonus rate of return on equity Process to establish bonus is statutory.
See http://www.leg.state.nv.us/NAC/NAC-704.htmlttNAC704Sec9523
Vermont Incentive structure set by contract; result of bargain
Efficiency utility Performance incentives between commission and third-party efficiency
provider.
http://www.state.vt.us/psb/eeucontract.html
Regulatory Drivers for Efficiency in Resource
Planning and Energy Markets
Declare Energy Efficiency a Resource
In New Mexico, the legislature has declared a goal of
"decreasing electricity demand by increasing energy effi-
ciency and demand response, and meeting new genera-
tion needs first with renewable and distributed generation
resources, and second with clean fossil-fueled generation."
(New Mexico Efficient Use of Energy Act of 2005)
In California, the state has made it very clear that energy
efficiency is the most important resource (California SB
1037, 2005). After the crises of 2000 and 2001, state
leaders used energy efficiency to dampen demand
growth and market volatility. An Energy Action Plan,
adopted in 2003 by the California Public Utilities
Commission (CPUC), the California Energy Commission
(CEC), and the power authority, developed a "loading
order" for new electric resources; the Energy Action Plan
has been revised but the energy efficiency preference
remains firm. The intent of the loading order is to
"decreas(e) electricity demand by increasing energy effi-
ciency and demand response, and meeting new genera-
tion needs first with renewable and distributed generation
resources, and second with clean fossil-fueled generation"
(CEC, 2005). As a result, utilities are acquiring energy
efficiency in amounts well in excess of those that would be
procured with the SBC alone. Further, the utilities are
integrating efficiency into their resource plans and using
efficiency to solve resource problems.
Clarifying the primary regulatory status of efficiency
makes it clear that sympathetic regulation and cost
recovery policies are important. California has adopted
decoupling of net income and sales for its investor-
owned utilities to remove regulatory barriers to a full
financial commitment to energy efficiency.
To create a sustainable, aggressive national commitment to energy efficiency
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One device for implementing this policy is an energy effi-
ciency supply curve. The CEC created such a curve based
on an assessment of energy efficiency potential to provide
guidance as it reintroduced energy efficiency procurement
expectations for the utilities in 2003. Furthermore, the
CPUC cooperated with the CEC to set energy savings
targets for each of the California investor-owned utilities
based on an assessment of cost-effectiveness potential.
A different approach to declaring energy efficiency a
resource is to establish a portfolio or performance stan-
dard for energy efficiency. In 2005, Pennsylvania and
Connecticut included energy efficiency in their resource
portfolio standards. Requiring all retail sellers to acquire
sufficient certificates of energy savings will allocate rev-
enue to efficiency providers in an economically efficient
way (Pennsylvania Alternative Energy Portfolio Standards
Act of 2004; Connecticut Act Concerning Energy
Independence of 2005).
As an outcome of its electric restructuring law, Texas is
using energy efficiency as a resource to reduce demand.
Texas' spending for energy efficiency is intended to pro-
duce savings to meet 10% of forecasted electric demand
growth. Performance is exceeding this level.
Consider Energy Efficiency As a System Reliability
Solution
In New England, Independent System Operator New
England (ISO-NE) faced a reliability problem in southwest
Connecticut. A transmission line to solve the problem
was under development, but would not be ready in time.
New central station generation could not be sited in this
congested area. Because the marketplace was not provid-
ing a solution, ISO-NE issued a Request for Proposal (RFP)
for any resources that would address the reliability prob-
lem and be committed for four years. One energy efficien-
cy bid was selecteda commercial office building lighting
project worth roughly 5 megawatts (MW). Conditions of
the award were very strict about availability of the
capacity savings. This project will help to demonstrate
how energy efficiency does deliver capacity. While ISO-NE
deemed the RFP an emergency step that it would not
undertake routinely, this process demonstrates that energy
efficiency can be important to meeting reliability goals and
can be paid for through federal jurisdictional tariffs.
Other states, including Indiana, Vermont, and
Minnesota direct that energy efficiency be considered
as an alternative when utilities are proposing a power
line project (Indiana Resource Assessment, 1995;
Vermont Section 248; Minnesota Certificate of need for
large energy facility, 2005.)
Key Findings
This chapter reviews opportunities to make energy effi-
ciency an attractive business prospect by modifying elec-
tric and gas utility regulation, and by the way that
utilities collect revenue and make a profit. Key findings
of this chapter indicate:
There are real financial disincentives that hinder all util-
ities in their pursuit of energy efficiency as a resource,
even when it is cost-effective and would lead to a
lower cost energy system. Regulation, which is a key
source of these disincentives, can be modified to
remove these barriers.
Many states have experience in addressing financial
disincentives in the following areas:
Overcoming the throughput incentive.
Providing reliable means for utilities to recover energy
efficiency costs.
Providing a return on investment for efficiency programs
that is competitive with the return utilities earn on new
generation.
Addressing the risk of program costs being disallowed
and other risks.
Recognizing the full value of energy efficiency to the
utility system.
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Recommendations and Options
The National Action Plan for Energy Efficiency Leadership
Group offers the following recommendations as ways to
overcome many of the barriers to energy efficiency in util-
ity ratemaking and revenue requirements, and provides a
number of options for consideration by utilities, regulators,
and stakeholders (as presented in the Executive Summary):
Recommendation: Modify policies to align utility
incentives with the delivery of cost-effective energy
efficiency and modify ratemaking practices to promote
energy efficiency investments. Successful energy
efficiency programs would be promoted by aligning utility
incentives in a manner that encourages the delivery of
energy efficiency as part of a balanced portfolio of supply,
demand, and transmission investments. Historically, reg-
ulatory policies governing utilities have more commonly
compensated utilities for building infrastructure (e.g.,
power plants, transmission lines, pipelines) and selling
energy, while discouraging energy efficiency, even when
the energy-saving measures might cost less. Within the
existing regulatory processes, utilities, regulators, and
stakeholders have a number of opportunities to create the
incentives for energy efficiency investments by utilities and
customers. A variety of mechanisms have already been
used. For example, parties can decide to provide incentives
for energy efficiency similar to utility incentives for new
infrastructure investments, and provide rewards for
prudent management of energy efficiency programs.
Options To Consider:
Addressing the typical utility throughput incentive and
removing other regulatory and management disincentives
to energy efficiency.
Providing utility incentives for the successful manage-
ment of energy efficiency programs.
Recommendation: Make a strong, long-term commit-
ment to implement cost-effective energy efficiency as
a resource. Energy efficiency programs are most successful
and provide the greatest benefits to stakeholders when
appropriate policies are established and maintained over
the long-term. Confidence in long-term stability of the pro-
gram will help maintain energy efficiency as a dependable
resource compared to supply-side resources, deferring or
even avoiding the need for other infrastructure invest-
ments, and maintain customer awareness and support.
Establishing funding requirements for delivering long-
term, cost-effective energy efficiency.
Designating which organization(s) is responsible for
administering the energy efficiency programs.
Recommendation: Broadly communicate the benefits
of and opportunities for energy efficiency.
Experience shows that energy efficiency programs help
customers save money and contribute to lower cost ener-
gy systems. But these benefits are not fully documented
nor recognized by customers, utilities, regulators, or policy-
makers. More effort is needed to establish the business
case for energy efficiency for all decision-makers and to
show how a well-designed approach to energy efficiency
can benefit customers, utilities, and society by (1) reducing
customers' bills over time, (2) fostering financially healthy
utilities (e.g., return on equity, earnings per share, and debt
coverage ratios unaffected), and (3) contributing to posi-
tive societal net benefits overall. Effort is also necessary to
educate key stakeholders that although energy efficiency
can be an important low-cost resource to integrate into the
energy mix, it does require funding, just as a new power
plant requires funding.
Options to Consider:
Establishing and educating stakeholders on the busi-
ness case for energy efficiency at the state, utility, other
appropriate level addressing customer, utility, and
societal perspectives.
Communicating the role of energy efficiency in lowering
customer energy bills, and system costs and risks
over time.
To create a sustainable, aggressive national commitment to energy efficiency
2-17
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Recommendation: Provide sufficient, timely, and stable
program funding to deliver energy efficiency where
cost-effective. Energy efficiency programs require consis-
tent and long-term funding to effectively compete with
energy supply options. Efforts are necessary to establish
this consistent long-term funding. A variety of mecha-
nisms have been, and can be used, based on state, utility,
and other stakeholder interests. It is important to ensure
that the efficiency program providers have sufficient
long-term funding to recover program costs, and imple-
ment the energy efficiency measures that have been
demonstrated to be available and cost-effective. A number
of states are now linking program funding to the
achievement of energy savings.
Deciding on, and committing to, 6 consistent way for
program administrators to recover energy efficiency
costs in a timely manner.
Establishing funding mechanisms for energy efficiency
from among the available options, such as revenue
requirement or resource procurement funding, SEiCs,
rate-basing, shared-savings, incentive mechanisms, etc.
Establishing funding for multi-year periods.
2-18 National Action Plan for Energy Efficiency
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References
Barone, R.J. (2006, May 23). Presentation to the
Rethinking Natural Gas Utility Rate Design
Conference, Columbus, Ohio.
California Energy Commission [CEC]. (2005, July).
Implementing California's Loading Order for
Electricity Resources.
California Public Utility Commission [CPUC],
(1996, December 20). Opinion on Cost Recovery
Plans, CPUC D.96-12-077.
California SB 1037, California Statutes of 2005.
Chapter 366. (2005)
.
Connecticut, An Act Concerning Energy Independence,
Public Act No. 05-1 (House Bill No. 7501) (2005).
.
Costello, K. (2006, April). Revenue Decoupling for
Natural Gas Utilities. National Regulatory Research
Institute, .
Hansen, D.G. and Braithwait, S.D. (2005, March 31).
A Review of Distribution Margin Normalization as
Approved by the Oregon Public Utility Commission
for Northwest Natural. Madison, Wisconsin:
Christensen Associates Consulting.
Harrington, C. (2003, May). Who Should Deliver
Ratepayer Funded Energy Efficiency? Regulatory
Assistance Project, .
Indiana Resource Assessment, Indiana Administrative
Code [IAC]. 170 IAC 4-7-6, Resource assessment.
(1995) .
Kantor, G. (2006, June 20). Presentation to the 2006
Western Conference of Public Service
Commissioners, Jackson, Wyoming.
Minnesota, Certificate of need for large energy facility,
Minnesota Statutes. Chapter 2166.243(3) (2005).
.
Moskovitz, D. (2000). Profits and Progress Through
Distributed Resource. Regulatory Assistance Project.
.
Nevada, Regulation of Public Utilities Generally. Nevada
Administrative Code 704.9523: Costs of imple-
menting programs for conservation and demand
management: Accounting; recovery. (2004)
.
NERA Economic Consulting. (2006, April 20).
Distributed Resources: Incentives.
.
New Mexico, Efficient Use of Energy Act, New Mexico
Statutes. Chapt. 62-17-2 and Chapt. 62-17-3
(2005).
Pennsylvania Alternative Energy Portfolio Standards Act,
Pennsylvania Act No. 213 (SB 1030) (2004).
.
Plunkett, J., Horowitz, P., Slote, S. (2005). Rewarding
Successful Efficiency Investment in Three
Neighboring States: The Sequel, the Re-make and
the Next Generation (In Vermont, Massachusetts
and Connecticut) A 2004 ACEEE Summer Study on
Energy Efficiency in Buildings.
.
U.S. Environmental Protection Agency [EPA] (2006).
Clean Energy-Environment Guide to Action:
Policies, Best Practices, and Action Steps for States
(Section 6.2). Washington, DC.
Vermont Section 248. 30 Vermont Statutes Annotated
ง 248, 4 (A)(b). New gas and electric purchases,
investments, and facilities; certificate of public
good, .
2005 Wisconsin Act 141 (2005 Senate Bill 459).
.
To create a sustainable, aggressive national commitment to energy efficiency
2-19
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3
Energy Resource
Planning Processes
Including energy efficiency in the resource planning process is essential to real ,>::! ig its lull alue -md v-t
ting resource savings and funding targets accordingly. Many utilities, states, anil regions ^re estimating
and verifying the wide range of benefits from energy efficiency and are successfully integrating energy
efficiency into the resource planning process. This chapter of the National Action Plan for Energy Efficiency
Report discusses the barriers that obstruct incorporating energy efficiency in resource planning and pres-
ents six regional approaches to demonstrate how those barriers have been successfully overcome.
Overview
Planning is a core function of all utilities: large and small,
natural gas and electric, public and private. The decisions
made in planning affect customer costs, reliability of
service, risk management, and the environment. Many
stakeholders are closely involved and participate in plan-
ning processes and related decisions. Active participants
often include utilities, utility regulators, city councils,
state and local policy-makers, regional organizations,
environmental groups, and customer groups. Regional
planning processes organized through regional transmis-
sion organizations (RTOs) also occur with the collabora-
tions of utilities and regional stakeholders.
Different planning processes are employed within each util-
ity, state, and region. Depending on a utility's purpose and
context (e.g., electric or gas utility, vertically integrated or
restructured), different planning decisions must be made.
Local and regional needs also affect planning and resource
reguirements and the scope of planning processes. Further,
the role of states and regions in planning affects decisions
and prescribes goals for energy portfolios, such as resource
priority, fuel diversity, and emissions reduction.
Through different types of planning processes, utilities
analyze how to meet customer demands for energy and
capacity using supply-side resource procurement (includ-
ing natural gas supply contracts and building new gener-
ation), transmission, distribution, and demand-side
resources (including energy efficiency and demand
response). Such planning often requires iteration and test-
ing to find the combination of resources that offer maxi-
mum value over a range of likely future scenarios, for the
short- and long-term. The value of each of these resources
is determined at the utility, local, state and regional level,
based on area-specific needs and policy direction. In order
to fully integrate the value of all resources into planning
including energy efficiencyresource value and benefits
must be determined early in the planning process and
projected over the life of the resource plan.
Planning processes focus on two general areas: (1) energy-
related planning, such as electricity generation and
wholesale energy procurement; and (2) capacity-related
planning, such as construction of new pipelines, power
plants, or electric transmission and distribution projects.
The value of energy efficiency can be integrated into
resource planning decisions for both of these areas.
Leadership Group Recommendations
Applicable to Energy Resource
Planning Processes
Recognize energy efficiency as a high-priority energy
resource.
Make a strong, long-term commitment to implement
cost-effective energy efficiency as a resource.
Broadly communicate the benefits of, and opportuni-
ties for, energy efficiency.
Provide sufficient, timely, and stable program funding
to deliver energy efficiency where cost-effective.
A more detailed list of options specific to the objective
of promoting energy efficiency in resource planning
processes is provided at the end of this chapter.
To create a sustainable, aggressive national commitment to energy efficiency
3-1
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This chapter identifies common challenges for integrat-
ing energy efficiency into existing planning processes
and describes examples of successful energy efficiency
planning approaches that are used in six regions of the
country. Finally, this chapter summarizes ways to
address barriers, and offers recommendations and
several options to consider for specific actions that
would facilitate incorporation of energy efficiency into
resource planning.
Challenges to Incorporating Energy
Efficiency Into Planning
The challenges to incorporating energy efficiency into
resource planning have common themes for a wide
range of utilities and markets. This section describes
these challenges in the context of two central questions:
A) determining the value of energy efficiency in the
resource planning, and B) setting energy efficiency targets
and allocating budgets, which are guided by resource
planning, as well as regulatory and policy decisions.
Determining the Value of Energy Efficiency
It is generally accepted that well-designed efficiency
measures provide measurable resource savings to utili-
ties. However, there are no standard approaches on
how to appropriately quantify and incorporate those
benefits into utility resource planning. Also, there are
many different types of energy efficiency programs
with different characteristics and target customers.
Energy efficiency can include utility programs (rebates,
audits, education, and outreach) as well as building
efficiency codes and standards improvements for new
construction. Each type of program has different char-
acteristics that should be considered in the valuation
process. The program information gathered in an ener-
gy efficiency potential study can be used to create an
energy efficiency supply curve, as illustrated in Figure 3-1.
Figure 3-1. Energy Efficiency Supply Curve - Potential
in 2011 (l.evelized Cost in S/kilowatt-hours [kWh] Saved)
$1.00
$0,90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.00
0 10,000 20,000 30,000 40,000 50,000 60,000
GWh
Source: McAuliffe, 2003
Common Challenges to Incorporating Energy Efficiency
Into Planning
A. Determining the Value of Energy Efficiency
Energy Procurement
Estimating energy savings
Valuing energy savings
Capacity & Resource Adequacy
Estimating capacity savings
Valuing capacity benefits
Factors in achieving benefits
Other Benefits
Incorporating non-energy benefits
B. Setting Targets and Allocating Budget
Quantity of EE to implement
Estimating program effectiveness
Institutional difficulty in reallocating budget
Cost expenditure timing vs. benefits
Ensuring program costs are recaptured
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The analysis commonly used to value energy efficiency
compares the costs of energy efficiency resources to the
costs of the resources that are displaced by energy effi-
ciency. The sidebar shows the categories of benefits for
electric and gas utilities that are commonly evaluated.
The approach is to forecast expected future costs with
and without energy efficiency resources and then esti-
mate the level of savings that energy efficiency will pro-
vide. This analysis can be conducted with varying levels
of sophistication depending on the metrics used to com-
pare alternative resource plans. Typically, the evaluation
is made based on the expected cost difference; however,
"portfolio" approaches also evaluate differences in cost
variance and reliability, which can provide additional
rationale for including energy efficiency as a resource.
The resource benefits of energy efficiency fall into two
general categories:
(1) Energy-related benefits that affect the procurement
of wholesale electric energy and natural gas, and
delivery losses.
(2) Capacity-related benefits that affect wholesale elec-
tric capacity purchases, construction of new facilities,
and system reliability.
Estimating Energy Benefits
Estimating energy benefits requires established methods
for estimating the quantity of energy savings and the
benefits of these savings to the energy system.
I-'.limiting (jt.i.:.intity of tncniy >/i//nr/v Savings esti-
mates for a wide variety of efficiency measures have
been well studied and documented. Approaches to
estimate the level of free-riders and program partici-
pants who would have implemented the energy effi-
ciency on their own have been established. Similarly,
the expected useful lives of energy efficiency measures
and their persistence are commonly evaluated and
included in the analysis. Detailed databases of efficiency
measures have been developed for several regions,
including California and the Pacific Northwest.
However, it is often necessary to investigate and vali-
date the methods and assumptions behind those esti-
mates to build consensus around measured savings
that all stakeholders find credible. Savings estimates
can be verified through measurements and load
research. Best practices for measurement and verifica-
tion (M&V) are discussed in more detail in Chapter 6:
Energy Efficiency Program Best Practices.
The energy-related benefits of energy efficiency are rela-
tively easy to forecast. Because utilities are constantly
adjusting the amount of energy purchased, short-term
deviations in the amount of energy efficiency achieved
can be accommodated. The capacity-related benefits
occur when construction of a facility needed to reliably
serve customers can be delayed or avoided because the
need has already been met. Therefore, achieving capacity
benefits requires much more certainty in the future
success of energy efficiency programs (particularly the
measures targeting peak loads) and might be harder to
achieve in practice. However, the ability to provide
capacity benefits has been a focus in California, the
Pacific Northwest, and other regions, and it should
become easier to assess capacity savings as more pro-
grams gain experience, and capacity savings are meas-
ured and verified. Current methods for estimating energy
benefits and capacity benefits are presented here.
Benefits of Energy Efficiency in Resource Planning
Energy-related
benefits
Capacity-
related
benefits
Other benefits
Electricity
purchases
Reduced line losses
Natural Gas
Reduced wholesale energy Reduced wholesale natural
| gas purchases
4-
Reduced losses and
I unaccounted for gas
Reduced air emissions j Reduced air emissions
Production and liquified
| natural gas facilities
Generation capacity/
resource adequacy/
regional markets j
Operating reserves and j Pipeline capacity
other ancillary services
4
Transmission and
distribution capacity
! Local storage and pressure
Market price reductions (consumer surplus)
Lower portfolio risk
Local/in-state jobs
Low-income assistance and others
Jo create 3 sustainable, aggressive national commitment to energy efficiency
3-3
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ซ Qu.intityinu V'<)/uo' o/ tn?r<:iv S-.rvin r, The most readily
available benchmark for the value of energy savings is
the prevailing price of wholesale electricity and natural
gas. Even for a vertically integrated utility with its own
production, energy efficiency might decrease the need
to make market purchases; or if the utility has excess
energy, energy efficiency can allow the utility to sell
more into the market. In cases when the market prices
are not appropriate benchmarks (because of contract
limitations on reselling energy or limited market
access), contract prices or production costs can be
used. In addition, the value of losses and other variable
costs associated with energy delivery can be quantified
and are well known.
The challenge that remains is in forecasting future energy
costs beyond the period when market data are available
or contracts are in place. Long-run forecasts vary in com-
plexity from a simple escalation rate to market-based
approaches that forecast the cost of new resource addi-
tions, to models that simulate the system of existing
resources (including transmission constraints) and evalu-
ate the marginal cost of operating the system as new
generation is added to meet the forecasted load growth.
Most utilities have an established approach to forecast
long-term market prices, and the same forecasting tech-
nique and assumptions should be used for energy effi-
ciency as are used to evaluate supply-side resource
options. In addition to a forecast of energy prices, some
regions include the change in market prices as a result of
energy efficiency. Estimating these effects requires mod-
eling of complex interactions in the energy market.
Furthermore, reduced market prices are not necessarily a
gain from a societal perspective, because the gains of
consumers result in an equal loss to producers; therefore,
whether to include these savings is a policy decision.
Estimating Capacity Benefits
Estimating capacity benefits requires estimating the level
of capacity savings and the associated benefits. If energy
efficiency's capacity benefits are not considered in the
resource plan, the utility will overinvest in capital assets,
such as power plants and transmission and distribution,
and underinvest in energy efficiency.
> r^t,rna'.ing Capacity Sav:,-iqs In addition to energy sav-
ings, electric efficiency reduces peak demand and the
need for new investments in generation, transmission,
and distribution infrastructure. Natural gas efficiency
can reduce the need for a new pipeline, storage,
liquefied natural gas (LNG) facility, or other invest-
ments necessary to maintain pressure during high-load
periods. Because of the storage and pressure variation
possible in the natural gas system, capacity-related
costs are not as extreme in the natural gas system as
they are for electricity. In both cases, estimating reduc-
tions of peak demand is more difficult for electricity
than it is for natural gas, and timing is far more critical.
For peak demand savings to actually be realized, the
targeted end-use load reductions must occur, and the
efficiency measure must provide savings coincident
with the utility's peak demand. Therefore, different
energy efficiency measures that reduce load at different
times of day (e.g., commercial vs. residential lighting)
might have different capacity values. Area- and time-
specific marginal costing approaches have been devel-
oped to look at the value of coincident peak load
reductions, which have significantly higher value
during critical hours and in constrained areas of the
system (see sidebar on page 3-5).
A critical component of the resource planning process,
whether focused on demand- or supply-side resources,
is accurate, unbiased load forecasting. Inaccurate load
forecasts either cause excessive and expensive invest-
ment in resources if too aggressive, or create costly
shortages if too low. Similarly, tracking and validation
of energy efficiency programs are important for
increasing the accuracy of estimates of their effects in
future resource plans.
Estimating the capacity savings to apply to load growth
forecasts requires estimating two key factors. The first
is determining the amount of capacity reduced by
energy efficiency during critical or peak hours. The
3-4 National Action Plan for Energy Efficiency
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second factor is estimating the "equivalent reliability"
of the load reduction. This measure captures both the
probability that the savings will actually occur, and that
the savings will occur during system-constrained hours.
Applying estimates of equivalent reliability to various
types of resources allows comparison on an equal basis
with traditional capacity investments. This approach is
similar in concept to the equivalent capacity factor
used to compare renewable resources such as wind
and solar with traditional fossil-fueled generation. In
markets where capacity is purchased, "counting" rules
for different resource types determine the equivalent
reliability. The probability that savings will actually
occur during peak periods is easier to estimate with
some certainty for a large number of distributed effi-
ciency measures (e.g., air conditioners) as opposed to a
limited number of large, centralized measures (e.g.,
water treatment plants).
California Avoided Costs by Time and Location
California is a good example of the effect of area and
time-differentiation for efficiency measures that have
dramatically different impact profiles. The average
avoided cost for efficiency (including energy and capacity
cost components) in California is $71/megawatt-hour
(MWh). Applying avoided costs for each of six time of
use (TOU) periods (super-peak, mid-peak and off-peak
Comparison of Avoided Costs for
Three Implementation Approaches
$140
o
u
QJ
01
r
~o
OJ
_
01
OJ
$120
$100
B Hourly D TOU Average D Annual Average
for summer and winter seasons) increases the value of
air conditioning to $ 104/MWh or 45 percent and low-
ers the value of outdoor lighting to $57/MWh or 20 per-
cent. Refrigeration, with its consistent load profile
throughout the day and year, is unaffected. Applying
avoided costs by hour captures the extreme summer
peak prices and increases the value of air conditioning
savings still further to $123/MWh. Incorporating hourly
avoided costs increases the total benefits of air condi-
tioning load reduction by more than $50/MWh. This
type of hourly analysis is currently being used in
California's avoided cost proceedings for energy
efficiency.
Greater San Francisco Bay Area Avoided
Distribution Costs
$/MW
$42.50
S5.00
Avoided distribution capacity costs are also estimated by
region in California. The Greater San Francisco Bay Area
region is shown above in detail. In San Francisco and
Oakland, avoided capacity costs are low because those
areas are experiencing little load growth and have little
need for new distribution investment. The Stockton
area, on the other hand, is experiencing high growth
and has significant new distribution infrastructure
requirements.
To create a sustainable, aggressive national commitment to energy efficiency
3-5
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Valuing Capacity Benefits. The value of capacity bene-
fits lies in the savings of not having to build or purchase
new infrastructure, or make payments to capacity mar-
kets for system reliability. Because reliability of the
nation's energy infrastructure is critical, it is difficult to
make the decision to defer these investments without
some degree of certainty that the savings will be
achieved. Disregarding or undervaluing the transmis-
sion and generation capacity value of energy efficiency
can, however, lead to underinvestment in energy effi-
ciency. Realizing energy efficiency's capacity savings
requires close coordination between efficiency and
resource planners1 to ensure that specific planned
investments can actually be deferred as a result of
energy efficiency programs. In the long term, lower
load levels will naturally lead to lower levels of infra-
structure requirements without a change in existing
planning processes.
Targeted implementation of energy efficiency designed
to defer or eliminate traditional reliability investments in
the short term (whether generation, transmission, or dis-
tribution) requires that energy efficiency ramp up in time
to provide sufficient peak load savings before the new
infrastructure is needed. States with existing efficiency
programs can use previous experience to estimate future
adoption rates. In states that do not have previous expe-
rience with energy efficiency, however, the adoption rate
of efficiency measures is difficult to estimate, making it
hard to precisely quantify the savings that will be
achieved by a certain date. Therefore, if the infrastruc-
ture project is critical for reliability, it is difficult to rely on
energy as an alternative. The value of the targeted
reductions and project deferrals can also be a challenge
to quantify because of the uncertainty in the future
investment needs and costs. However, there are exam-
ples of how to overcome this challenge, such as the
Bonneville Power Administration (BPA) transmission
planning process (described later). Vermont Docket 7081
is another collaborative processinitiated at the direc-
tion of the legislaturethat is working on a new trans-
mission planning process that will explicitly incorporate
energy efficiency (Vermont Public Service Board, 2005).
Both BPA and Vermont Docket 7081 stress the need to
start well in advance of the need for reductions to allow
the energy efficiency program to be developed and vali-
dated. In addition, by starting early, conventional alter-
natives can serve as a back-stop if needed. Starting early
is also easier organizationally if alternatives are initiated
before project proponents are vested in building new
transmission lines.
The deferral of capacity expenditures can produce the
same reliability level for customers. In cases when an
energy efficiency program changes the expected reliability
level (either higher or lower), the value to customers
must be introduced as either a benefit or cost. A typical
approach is to use the customer's Value of Lost Load
(VOLL) as determined through Value of Service (VOS)
studies and multiply by the expected change in customer
outage hours. However, VOS studies based on customer
surveys typically show wide-ranging results and are often
difficult to substantiate.
In regions with established capacity markets, the valua-
tion process is easier because the posted market prices
are the value of capacity. The approach to value these
benefits is therefore similar to the market price forecasting
approach described to value energy benefits. Regional
planning processes can also include energy efficiency in
their resource planning. Regional electricity planning
processes primarily focus on developing adequate
resources to meet regional reliability criteria as defined in
each of the North American Electric Reliability Council
(NERC) regions. Establishing capacity and ancillary serv-
ice market rules that allow energy efficiency and
customer load response to participate can bring energy
efficiency into the planning process. For example,
Independent System Operator New England (ISO-NE)
Demand Resources Working Group will be including
1 The transmission planning process requires collaboration of regional stakeholders including transmission owners, utilities, and regulators. Distribution
planning departments of electric utilities typically make the decisions for distribution-level and local transmission facilities. Planning and development of
high-voltage transmission facilities on the bulk-supply system is done at the independent system operator (ISO)/RTO and Norn American Elect'ic
Reliability Council (NERC) regional levels. At a minimum, transmission adequacy must uphold the established NERC reliability standards.
3-6 National Action Plan for Energy Efficiency
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energy efficiency and demand response as qualifying
resources for the New England Forward Capacity
Market. Another example is PJM Interconnection (PJM),
which has recently made its Economic Load Response
Program a permanent feature of the PJM markets (in
addition to the Emergency Load Response Program that
was permanently established in 2002) and has recently
opened its Synchronized and Non-Synchronized Reserve
markets to demand response providers.
Other Benefits
Energy efficiency provides several types of non-energy
benefits not typically included in traditional resource
planning. These benefits include environmental improve-
ment, support for low-income customers, economic
development, customer satisfaction and comfort, and
other potential factors such as reduced costs for bill col-
lection and service shut-offs, improvements in household
safety and health, and increased property values. As an
economic development tool, energy efficiency attracts
and retains businesses, creates local jobs, and helps busi-
ness competitiveness and area appeal.
Environmental benefits, predominantly air emissions
reductions, might or might not have specific economic
value, depending on the region and the pollutant. The
market price of energy will include the producer's costs
of obtaining required emission allowances (e.g., nitrogen
oxides [NOX], sulfur dioxide [S02]), and emission reduc-
tion equipment. Emissions of carbon dioxide (C02), also
are affected by planning decisions of whether to consider
the value of unregulated emissions. The costs of C02
were included in California's assessment of energy effi-
ciency on the basis that these costs might become priced
in the future and the expected value of future C02 prices
should be considered when making energy efficiency
investments.2 Even without regulatory policy guidance,
several utilities incorporate the estimated future costs of
emissions such as C02 into their resources planning
process to control the financial risks associated with
future regulatory changes.3 For example, Idaho Power
Company includes an estimated future cost of C02 emis-
sions in its resource planning, and in determining the
cost-effectiveness of efficiency programs.
Many of these benefits do not accrue directly to the utility,
raising additional policy and budgeting issues regarding
whether, and how, to incorporate those benefits for
planning purposes. Municipal utilities and governmental
agencies have a stronger mandate to include a wider
variety of non-energy benefits in energy efficiency plan-
ning than do investor-owned utilities (lOUs). Regulators
of lOUs might also determine that these benefits should
be considered. Many of the benefits are difficult to
quantify. However, non-energy benefits can also be con-
sidered qualitatively when establishing the overall ener-
gy efficiency budget, and in developing guidelines for
targeting appropriate customers (e.g., low income or
other groups).
Setting Energy Efficiency Targets and
Allocating Budget
One of the biggest barriers to energy efficiency is devel-
oping a budget to fund energy efficiency, particularly at
utilities or in states that haven't had significant pro-
grams, historically. This is a not strictly a resource plan-
ning issue, but a regulatory, policy, and organizational
issue as well. The two main organizational approaches
for funding energy efficiency are resource planning
processes, which establish the energy efficiency budget
and targets within the planning process, and public
goods-funded charges, which create a separate budget
to support energy efficiency through a rate surcharge.
There are successful examples of both approaches, as
well as examples that use both mechanisms (California,
BPA, PacifiCorp, and Minnesota).
Setting targets for energy efficiency resource savings and
budgets is a collaborative process between resource
planning staff, which evaluates cost-effectiveness, and
other key stakeholders. Arguably, all energy efficiency
California established a cost of $8/ton of C02 in 2004, escalating at 5% per year (CPUC, 2005).
For further discussion, see Bokenkamp, et al., 2005.
Jo create a sustainable, aggressive national commitment to energy efficiency
3-7
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measures identified as cost effective in an integrated
resource plan (IRP) should be implemented.4 In practice,
a number of other factors must be considered. For example,
the achievable level of savings and costs, expertise and
labor, and ability to ramp up programs also affects the
size, scope, and mix of energy efficiency programs. All of
these considerations, plus the cost-effectiveness of ener-
gy efficiency, should be taken into account when estab-
lishing the funding levels for energy efficiency. The fund-
ing process might also require an iterative process that
describes the alternative plans to regulators and other
stakeholders. Some jurisdictions use a policy directive
such as "all cost-effective energy efficiency" (California)
while others allocate a fixed budget amount (New York),
specify a fixed percentage of utility revenue (Minnesota
and Oregon), or a target load reduction amount (Texas).
Implementation of a target for electric and gas energy
savings, or Energy Efficiency Resources Standard (EERS)
or Energy Efficiency Portfolio Standard (EEPS), such as
the Energy Efficiency Goal adopted in Texas (PUCT Subst.
R. ง25.181), is an emerging policy tool adopted or being
considered in a number of states (ACEEE, 2006). Some
states have adopted standards with flexibility for how
utilities meet such targets, such as savings by end users,
improvements in distribution system efficiency, and
market-based trading systems.
Resource Planning Process
If energy efficiency is considered as a resource, then the
appropriate amount of energy efficient funding will be
allocated through the utility planning process, based on
cost-effectiveness, portfolio risk, energy and capacity
benefits, and other criteria. Many utilities find that a
resource plan that includes energy efficiency yields a
lower cost portfolio, so overall procurement costs should
decline more than the increase in energy efficiency
program costs, and the established revenue requirement
of the utility will be sufficient to fund the entire supply
and demand-side resource portfolio.
A resource planning process that includes energy effi-
ciency must also include a mechanism to ensure cost-
recovery of energy efficiency spending. Most resource
planning processes are collaborative forums to ensure
that stakeholders understand and support the overall
plan and its cost recovery mechanism. In some cases,
utility costs might have to be shifted between utility
functions (e.g., generation and transmission) to enable
cost recovery for energy efficiency expenditures. For
example, transmission owners might not see energy effi-
ciency as a non-wires solution to transmission system
deficiencies because it is unclear to what extent energy
efficiency costs can be collected in the Federal Energy
Regulatory Commission (FERC) transmission tariff.
Therefore, even if energy efficiency is less costly than the
transmission upgrade, it is unclear whether the transmis-
sion upgrade budget can be shifted to energy efficiency
and still collected in rates. Another challenge for collecting
efficiency funding in the transmission tariff is allocation
of energy efficiency costs across multiple transmisson
owners, particularly if energy efficiency costs are
incurred by a single transmission owner, while transmis-
sion costs are shared among several owners.
These examples demonstrate that in order to implement
integrated resource planning, the regulatory agency
responsible for determining rates must allow rates
designed to support transmission, distribution, or other
functions to be used for efficiency. The transmission
companies in Connecticut have been allowed to include
reliability-driven energy efficiency in tariffs, although this
is noted as an emergency situation not to be repeated as
a normal course of business. These interactions between
regulatory policy and utility resource planning demon-
strate that utilities cannot be expected to act alone in
increasing energy efficiency through their planning
process.
Public Purpose- or System Benefits Charge-Funded
Programs
One way to fund energy efficiency is to develop a separate
funding mechanism, collected in rates, to support
4 Established cost-effectiveness tests, such as the total resource cost (TRC) test, are commonly used to determine the cost-effectiveness of energy efficiency
programs. Material from Chapter 6: Energy Efficiency Program Best Practices describes these tests in more detail.
3-8 National Action Plan for Energy Efficiency
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investment in energy efficiency. In deregulated markets
with unbundled rates, this mechanism can appear as a
separate customer charge, often referred to as a system
benefits charge (SBC). Establishing a public purpose
charge has the advantage of ensuring policy-makers that
there is an allocation of funding towards energy efficiency,
and can be necessary in deregulated markets where the
delivery company cannot capture the savings of energy
efficiency. This approach separates the energy efficiency
budget from the resource planning process, however.
Developing a new rate surcharge or expanding an
existing surcharge also raises many of the questions
addressed in Chapter 2: Utility Ratemaking & Revenue
Reguirements. For example, are the customer segments
paying into SBCs receiving a comparable level of energy
efficiency assistance in return, or are the increases a
cross-subsidy? Often, industrial customers prefer to
implement their own efficiency rather than contribute to
a pool. Also, if the targets are used to set shareholder
incentives, the incentives should be appropriate for the
aggressiveness of the program. Additionally, because the
targeted budget allocation in public purpose-funded
programs is often set independently of the utility's overall
resource planning process (and is not frequently
changed), utilities might not have funding available to
procure all cost-effective savings derived from energy
efficiency measures. This type of scenario can result in
potentially higher costs for customers than would occur
if each cost-effective efficiency opportunity were pursued.
Overcoming Challenges: Alternative
Approaches
Successful incorporation of energy efficiency into the
resource planning process requires utility executives,
resource planning staff, regulators, and other stakeholders
to value energy efficiency as a resource, and to be com-
mitted to making it work within the utility or regional
resource portfolio. To illustrate approaches to overcoming
these barriers, we highlight several successful energy
efficiency programs by California, the New York State
Energy Research and Development Authority (NYSER-
DA), BPA, Minnesota, Texas, and PacifiCorp. The energy
efficiency programs in these six regions demonstrate sev-
eral different ways to incorporate energy efficiency into
planning processes; in each example, the economics
generally work well for efficiency programs.
The primary driver of energy efficiency in planning is the
low levelized cost of energy savings. Table 3-1 shows the
reported levelized cost of electricity and natural gas effi-
ciency from three of the regions surveyed. The reported
utility cost of efficiency ranges between $0.01/kilowatt-
hour (kWh) and $0.03/kWh for Pacific Gas & Electric
(PG&E), NYSERDA, and the Northwest Power and
Conservation Council (NWPCC). When including both
utility program costs and customer costs, the range is
$0.03/kWh to $0.05/kWh. The range of reported benefits
for electric energy efficiency is from $0.06/kWh to
$0.08/kWh. For natural gas, only P&GE reported specific
natural gas efficiency measures; these show similarly low
levelized costs relative to benefits.
Table 3-1: Levelized Costs and Benefits From Four Regions
__^_
PG&E1
NYSERDA *
Electric ($/kWh) Natural Gas ($/therm)
Utility
Cost
0.03
0.01
NWPCC 3 1 0.024
Texas " 0.025
Utility &
Customer
Cost
0.05
0.03
N/A
N/A
Benefit
0.08
0.06
0.060
Utility
Cost
0.28
N/A
N/A
0.0606 N/A
Utility &
Customer
Cost
0.56
N/A
N/A
N/A
Benefit
0.81
N/A
N/A
N/A
i PG&E, 2005
2 NYSERDA, 2005
3 NWPCC, 2005
4 Calculated based on Texas Utility Avoided Cost (PUCT Substantive Rule
ง25.18 of 2000). $0.0268/kWh for energy and $78.50/kW-year for
capacity converted to $/kWh based on assumption of 10-year measure
life, load factor of 26.4 percent, which is calculated from Texas' 2004
efficiency-based reductions of 193 MW of peak demand and 448 GWh
of energy (Frontier Associates, 2005).
s Based on 2004 spending of $87 million, 448 GWh annual. Assumed life
of 10 years (PUCT Substantive Rule ง25.181 of 2000).
6 Based on Public Utility Commission of Texas (PUCT) Deemed Avoided
Costs of $0.0268/kWh for energy and $78.50/kW-year for capacity;
448GWh and 193MW of peak load reduction.
To create a sustainable, aggressive national commitment to energy efficiency
3-9
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California
California has had a continued commitment to energy
efficiency since the late 1970s. Two major efforts are cur-
rently being coordinated in the state that address energy
use in new buildings as well as efficiency upgrades in
existing buildings. Figure 3-2 shows the policy structure,
with the California Energy Commission (CEC) leading
the building codes and standards process, and the
California Public Utility Commission (CPUC) leading the
IOU and third-party administered efficiency programs.
Jointly, the agencies publish the Energy Action Plan that
explicitly states a goal to integrate "all cost-effective
energy efficiency." Recently, the CPUC approved an effi-
ciency budget of $2 billion over the next three years to
serve a population of approximately 35 million.
The process for designing and implementing efficiency
programs in California by the lOUs is to develop the pro-
grams (either by the utility or through third-party solici-
tation), evaluate cost-effectiveness, establish and gain
approval for the program funding, and evaluate the pro-
gram's success through M&V. Figure 3-2 illustrates this
approach.
Table 3-2 describes how California addresses barriers for
incorporating energy efficiency in planning for the IOU
process.
Figure 3-2. California Efficiency Structure Overview
New Construction
and Appliance Standards
Title 24 Building Standards for
New Construction
Establish Codes
Set Avoided Costs
Time-Dependent Valuation
Set Process for Compliance
Architects and Building Designers
Evaluate energy standard compliance
Qty and County Building Inspectors
Enforce compliance
California
Energy
Commission
California
Public Utility
Commission
Energy Action Plan II
Joint Agency Plan on Specific
Actions
KEY ACTIONS:
Require that all cost-effective
energy efficiency is integrated into
utilities' resource plans as the first
option in the resource loading
order on an equal basis with
supply-side resources.
Public Purpose Fund Program
and Procurement Funding
CPUC Efficiency Program
Approval of Plans and Budget
(Public Purpose)
$2 Billion over the next 3 years
Establish Savings Targets
MWandMWh
Decoupling
Shareholder Incentives
(upcoming proceeding)
Avoided Costs
Establish cost-effectiveness
Investor-Owned Utilities
Develop and Administer Programs
Third-Party Implementer Solicitation
Measurement and Verification
Solicitation
Regulatory Reporting
Third-Party Program Implementers
and M&V Contractors
Source: Energy and Environmental Economics, Inc.
3-10 National Action Plan for Energy Efficiency
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Figure 3-3. California investor Owned Utility (SOU) Process
CPUC Avoided
Costs
Resources and
Ramp-up Limits
Energy
Efficiency
Programs
t
Evaluate Program
Cost Effectiveness
t
Rank and
Estimate Potential
for Cost Effective
Portfolios
Determine Target
Funding Level
(through CPUC
process)
Implement
Approved
Programs to
Approved Levels
Perform M&V
and Adjust
Programs for
Next Year
Source: Energy and Environmental Economics, Inc.
Table 3-2. Incorporation of Energy Efficiency in California's Investor-Owned Utilities' Planning Processes
Barriers
California CPUC-Administered Programs
A. Determining the Value of Energy Efficiency
Energy Procurement
Estimated energy savings
Customer adoption rates are forecast into the energy efficiency plans with monthly or quarterly reporting of program
success for tracking.
Valuing energy savings
Energy savings are based on market prices of future electricity and natural gas, adjusted by loss factors. Emission savings
! are based on expected emission rates of marginal generating plants in each hour (electricity) or emissions for natural gas.
Capacity & Resource Adequacy
Estimating capacity savings
Valuing capacity benefits
Factors in achieving benefits
Other Benefits
Capacity savings are evaluated using the load research data for each measure.
Each capacity-related value is estimated by climate zone of the state and incorporated into an "all-in" energy value.
Transmission and distribution capacity for electricity is allocated based on weather in each climate zone, and by season
for natural gas. California's energy market (currently) includes both energy and capacity so there is no explicit capacity
value for electric generation.
Capacity benefits are based on the best forecast of achieved savings. There is no explicit link between forecasted benefits of
energy efficiency and actual capacity savings.
Incorporating non-energy benefits J Non-energy benefits are considered in the development of the portfolio of energy efficiency, but not explicitly quantified
(in the avoided cost calculation.
B. Setting Targets and Allocating Budget
iCPUC has approved budget and targets for the state's efficiency programs, which are funded through both a public purpose
Quantity of energy efficiency to
implement
Estimating program effectiveness
charge and procurement funding.
A portion of the public purpose funds are dedicated to evaluation, measurement, and verification with the goal of
improving the understanding and quantification of savings and benefit estimates.
Institutional difficulty in
reallocating budget
By using public purpose funds, budget doesn't have to be reallocated from other functions for energy efficiency.
Cost expenditure timing vs. benefits
Capacity benefits are based on the best forecast of achieved savings.
Ensuring the program costs are
recaptured
CPUC requires that the utilities integrate energy efficiency into their long-term procurement plans to address this issue.
To create a sustainable, aggressive national commitment to energy efficiency
3-11
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Bormeville Power Administration Transmission
Planning and Regional Roundtable
In the Northwest, BPA has been leading an industry
roundtable to work with distribution utilities, local and
state government, environmental interests, and other
stakeholders to incorporate energy efficiency and other
distributed energy resources (DER) into transmission
planning. DER includes energy efficiency as well as distri-
bution generation and other nonwires solutions. Figure
3-4 illustrates the analysis approach and data sources.
Within BPA, the Transmission Business Line (TBL) works
with the energy efficiency group in Power Business Line
<'PBL) to develop an integrated transmission plan. The
process includes significant stakeholder contributions in
both input data assumptions (led by NWPCC) anc in
reviewing the overall analysis at the roundtable.5
Table 3-3 describes how BPA works with stakeholders to
address barriers for incorporating energy efficiency in
planning processes.
Figure 3-4. BPA Transmission Planning Process
lOUs and Public Utilities
NWPCC: Regional Planning Process
Load
forecasts
I
BPA: Transmission
Business Line
Transmission
Planning
Transmission plans
I
Revise transmission
plan as appropriate, and
fund transmission and
DER investments
Transmission
costs and
required DER
load relief
Distributed resource
analysis results
i
Publicly vetted energy
price forecasts,
conservation database
BPA PBL Efficiency Group:
Evaluate cost-effective DER
based on transmission plan
and other forecasts
Regional Stakeholder Group: BPA Roundtable
Utilities, interest groups, other stakeholders discuss
issues and provide analysis review
Group
Data
Decision
Source: Energy and Environmental Economics, Inc.
1 NWPCC conducts regional energy efficiency planning. More information can be found at .
3-12 National Action Plan for Energy Efficiency
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Table 3-3. Incorporation of Energy Efficiency in BPA's Planning Processes
BPA-Administered Programs
A. Determining the Value of Energy Efficiency
Energy Procurement
Estimated energy savings
The process uses the NWPCC database to define the measure impact and costs. NWPCC maintains a publicly available
regional efficiency database that is well regarded and has its own process for stakeholder collaboration. Adoption rates
are estimated based on a range of historical program success.
Valuing energy savings
Energy savings are valued based on the NWPCC long-run forecast of energy value for the region, plus marginal losses.
Capacity & Resource Adequacy
Estimating capacity savings
Valuing capacity benefits
Capacity savings are based on expected NWPCC efficiency measure coincident peak impacts.
The deferral value of transmission investments is used to evaluate the transmission capacity value, which is the focus of
' these studies. The approach is to calculate the difference in present value revenue requirement before and after the
i energy efficiency investment (Present Worth Method).
Factors in achieving benefits
The BPA energy efficiency and transmission planning staff work together to ensure that the revised plan with Non-
Construction Alternatives (NCAs) satisfies reliability criteria. Ultimately the decision to defer transmission and rely on
NCAs will be approved by transmission planning.
Other Benefits
Incorporating non-energy benefits The analysis includes an evaluation of the environmental externalities, but no other non-energy benefits.
B. Setting Targets and Allocating Budget
Quantity of energy efficiency to
: implement
Estimating program effectiveness
The target for NCAs is established by the amount of load that must be reduced to defer the transmission line and maintain
reliability. This target is driven by the load growth forecasts of the utilities in the region.
BPA has been doing demonstrations and pilots of high-potential NCAs to refine the estimates of program penetration,
cost, necessary timeline for achieving load reductions, customer acceptance, and other factors. The results of these pilots
will help to refine the estimates used in planning studies.
Institutional difficulty in
reallocating budget
i Cost expenditure timing vs. benefits
Ensuring the program costs are
recaptured
If NCAs have lower cost than transmission, transmission capital budget will be reallocated to support NCA investments
up to the transmission deferral value. Additional costs of NCAs that are justified based on energy value are supported by
other sources (BPA energy efficiency, local utility programs, and customers).
Both transmission and NCAs require upfront investments so there is no significant time lag between costs and benefits.
The transmission savings benefit is achieved concurrently with the decision to defer the transmission investment. Energy
benefits, on the other hand, occur over a longer timeframe and are funded like other energy efficiency programs.
By developing an internal planning process to reallocate budget, it is easier to ensure that the savings occur.
New York State Energy Research and
Development Authority (NYSERDA)
In the mid-1990s, New York restructured the electric util-
ities and moved responsibility for implementing energy
efficiency programs to the NYSERDA. The following
figure shows an overview of the NYSERDA process. The
programs are funded through the SBC funds (approxi-
mately $175 million per year), and NYSERDA reports on
the program impact and cost-effectiveness to the New
York State Public Service Commission (NYS PSC)
annually.
Table 3-4 describes how NYSERDA addresses the barriers
to implementing energy efficiency.
Figure 3-5. New York Efficiency Structure Overview
New York State Energy
Research and
Development
Authority (NYSEROA)
Develop and implement
efficiency programs
(~$175 million/year)
Report on program
cost-effectiveness
New York State Public
Service Commission
(NYS PSQ
Review and monitor
program performance
Establish system
benefits charge (SBC)
Set demand reduction
charges
New York Distribution Utilities
(Central Hudson, Con Edison,
NYSEG, Niagara Mohawk, Orange
and Rockland, and Rochester Gas
and Electric)
Collect system benefits charge (SBC)
Source: Energy and Environmental Economics, Inc.
To create a sustainable, aggressive national commitment to energy efficiency
3-13
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Barriers
Table 3-4. Incorporation of Energy Efficiency in NYSERDA's Planning Processes
NYSERDA-Administered Programs
A. Determining the Value of Energy Efficiency
Energy Procurement
Estimating energy savings
Valuing energy savings
i NYSERDA internally develops estimates of savings for individual energy efficiency programs and the portfolio in aggre-
! gate. In addition, NYSERDA accounts for free-riders and spillover effects ("net to gross" ratio) when estimating energy
I savings. Savings estimates are verified and refined with an M&V program.
A long-run forecast of electricity demand is developed using a production simulation model, which is then calibrated to
, market prices. An estimate of reduced market prices due to decreased demand is also included as a benefit.
Capacity & Resource Adequacy
Estimating capacity savings
i Similar to energy savings, capacity savings are estimated for individual energy efficiency programs and the portfolio in
| aggregate. Savings estimates are verified and refined with an M&V program.
Valuing capacity benefits
Factors in achieving benefits
The value of generation capacity in New York is established by examining historical auction clearing prices in the
NYlSO's unforced capacity market. The baseline values are then escalated over time using a growth rate derived from
NYSERDA's electric system modeling results. These capacity costs are used to value those NYSERDA programs that effec-
tively lower system peak demand.
The capacity value is included as the best estimate of future capacity savings by New York utilities. There is no direct
link, however, between the forecasted savings and the actual change in utility procurement budgets.
Other Benefits
Incorporating non-energy benefits
The cost-effectiveness of NYSERDA programs is estimated using four scenarios of increasing NEB levels from (1) energy
savings benefits, (2) adding market price effects, (3) adding non-energy benefits, and (4) adding macro-economic effects
of program spending.
B. Setting Energy Efficiency Targets
Quantity of energy efficiency to
implement
Estimating program effectiveness
Institutional difficulty in
reallocating budget
Cost expenditure timing vs. benefits
Ensuring the program costs are
recaptured
The overall size of the NYSERDA program is determined by the aggregate funding level established by the NYS PSC.
NYSERDA, with advice from the SBC Advisory Group, recommends specific sub-program funding levels for approval by
the staff at NYS PSC.
NYSERDA prepares an annual report on program effectiveness including estimated and verified impacts and cost effec-
tiveness, which is then reviewed by the SBC Advisory Group and submitted to the NYS PSC.
By establishing a separate state research and development authority to administer energy efficiency, the institutional
problems of determining and allocating budget towards energy efficiency are eliminated. NYSERDA is supported
primarily by SBCs collected by the utilities at the direction of NYS PSC.
Similarly, by funding the programs through an SBC, the customers are directly financing the program, thereby making
the timing of benefits less important.
Forecasts of savings are based on the best estimate of future savings. There is no direct link to ensure these savings
actually occur.
Minnesota
The Minnesota legislature passed the Conservation
Improvement Program (CIP) in 1982. State law requires
that (1) electric utilities that operate nuclear-power
plants devote at least 2 percent of their gross operating
revenue to CIP, (2) other electric utilities devote at least
1.5 percent of their revenue, and (3) natural gas utilities
devote at least 0.5 percent. Energy is supplied predomi-
nantly by two utilities: Xcel, which provides 49 percent
of the electricity and 25 percent of the natural gas, and
CenterPoint Energy, which provides 45 percent of the
natural gas. Facilities with a peak electrical demand of at
least 20 megawatts (MW) are permitted to opt out of
CIP and avoid paying the program's rate adjustment in
their electric and natural gas bills (10 facilities have done
so). While the Minnesota Department of Commerce
oversees the CIP programs of all utilities in the state, the
department only has the authority to order changes in
the programs of the lOUs.
Utilities are required to file an IRP every 2 years, using
5-, 10- and 15-year planning horizons to determine the
need for additional resources. The statutory emphasis is
on demand-side management (DSM) and renewable
resources. A utility must first show why these resources
will not meet future needs before proposing traditional
utility investments. The plans are reviewed and approved
by the Minnesota Public Utilities Commission. CIP is the
3-14 National Action Plan for Energy Efficiency
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Table 3-5. Incorporation of Energy Efficiency in Minnesota's Planning Processes
Barriers
A. Determining the Value of Energy Efficiency
Energy Procurement
Estimating energy savings
Valuing energy savings
Capacity & Resource Adequacy
Estimating capacity savings
Valuing capacity benefits
Factors in achieving benefits
Minnesota-Administered Programs
i Energy savings and avoided costs are determined independently by each utility, resulting in a wide range of estimates
; that are not consistent. Energy costs are considered a trade secret and not disclosed publicly.
Capacity savings and avoided costs are determined independently by each utility, resulting in a wide range of estimates
I that are not consistent. Power plant, transmission, and distribution costs are considered trade secrets and are not
i disclosed publicly.
There is no direct link between the forecasted capacity savings and the actual change in utility procurement budgets.
Other Benefits
Incorporating non-energy benefits
Differences in the utilities' valuation methods produce varying estimates. In addition, the Department of Commerce
incorporates an externality avoided cost in the electric societal cost benefit test, providing utilities with values in $/ton
for several emissions, which the utilities translate to amounts in $/MWh based on each utility's emissions profile.
B. Setting Targets and Allocating Budget
Quantity of energy efficiency to
implement
Estimating program effectiveness
Institutional difficulty in
reallocating budget
Cost expenditure timing vs. benefits
Ensuring the program costs are
recaptured
The Department of Commerce approves budget and targets for each utility. Funding levels are determined by state law,
which requires 0.5 percent to 2 percent of utility revenues be dedicated to conservation programs, depending on the
type of utility.
Program effectiveness is handled by each utility. Minnesota's lOUs rely on the software tools DSManager and BENCOST
to measure electric and gas savings respectively.
Budget is not reallocated from other functions. Funding is obtained via a surcharge on customer bills.
By using a percentage of revenue set-aside, utility customers are directly financing the program; therefore timing of
benefits is not critical.
State law requires that each utility file an IRP with the Public Utilities Commission. The conservation plans approved by
the Department of Commerce are the primary mechanism by which utilities meet conservation targets included in their
IRPs.
primary mechanism by which the electric utilities achieve
the conservation targets included in their IRPs.
The Department of Commerce conducts a biennial
review of the CIP plan for each investor-owned utility.
Interested parties may file comments and suggest alter-
natives before the department issues a decision approv-
ing or modifying the utility's plan. Utilities that meet or
exceed the energy savings goals established by the
Department of Commerce receive a financial bonus,
which they are permitted to collect through a rate
increase. Both electric utilities have exceeded their goals
for the last several years. Table 3-5 describes how the
Minnesota Department of Commerce addresses barriers
to implementing energy efficiency.
Texas
Texas Senate Bill 7 (1999), enacted in the 1999 Texas
legislature, mandates that at least 10 percent of an
investor-owned electric utility's annual growth in electricity
demand be met through energy efficiency programs
each year. The Public Utility Commission of Texas (PUCT)
Substantive Rule establishes procedures for meeting this
legislative mandate, directing the transmission and distri-
bution (T&D) utilities to hire third-party energy efficiency
providers to deliver energy efficiency services to every
customer class, using "deemed savings" estimates for
each energy efficiency measure (PUCT, 2000). Approved
program costs are included in the lOU's transmission and
distribution rates, and expenditures are reported
separately in the lOU's annual energy efficiency report to
the PUCT. Actual energy and capacity savings are verified
by independent experts chosen by the PUCT. Incentives
are based on prescribed avoided costs, which are set by
To create a sustainable, aggressive national commitment to energy efficiency
3-15
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Table 3-6. Incorporation of Energy Efficiency in Texas' Planning Processes
I Barriers
A. Determining the Value of Energy Efficiency
Texas-Administered Programs
Energy Procurement
Estimating energy savings
Valuing energy savings
Energy savings are based on either deemed savings or through M&V. All savings estimates are subject to verification by
a commission-appointed M&V expert.
Avoided costs shall be the estimated cost of new gas turbine, which for energy was initially set in PUCT section 25.181-
5 to be $0.0268 /kWh saved annually at the customer's meter.
Capacity & Resource Adequacy
Estimating capacity savings [ Capacity savings are based on either deemed savings or through M&V. All savings estimates are subject to verification
] by a commission-appointed M&V expert.
Valuing capacity benefits
Avoided costs shall be the estimated cost of new gas turbine, which for capacity was initially set in PUCT section
125.181 -5 to be $78.5/kW saved annually at the customer's meter.
Other Benefits
Incorporating non-energy benefits I Environmental benefits of up to 20 percent above the cost effectiveness standard can be applied for projects in an a^ea
that is not in attainment of ambient air quality standards.
B. Setting Energy Efficiency Targets
Quantity of energy efficiency to
implement
: Estimating program effectiveness
i Institutional difficulty in
I reallocating budget
Cost expenditure timing vs. benefits
: Ensuring the program costs are
recaptured
Senate Bill 7 (SB7) mandates that, beginning in 2004, at least 10 percent of an investor-owned electric utility's annual
growth in electricity demand be met through energy efficiency programs each year (based on historic five-year growth
rate for the firm). Funding for additional programs is available if deemed cost-effective.
Each year, the utility submits to the PUCT an energy efficiency plan for the year ahead and an energy efficiency report
for the past year. The plan must be approved by the commission, and the year-end report must include information
regarding the energy and capacity saved. Also, independent M&V experts selected by the commission to verify the
achieved savings as reported in each utility's report.
Funds required for achieving the energy efficiency goal are included in transmission and distribution rates, and energy
efficiency expenditures are tracked separately from other expenditures.
By using a percentage of revenue set aside, utility customers directly finance the program; therefore timing of benefits is ]
not critical.
The annual energy efficiency report submitted by the IOU to the PUCT includes energy and capacity savings, program
| expenditures, and unspent funds. There is no verification that the estimated avoided costs are captured in utility savings.
the PUCT. El Paso Electric Company will be included in
the program beginning with an efficiency target of 5 per-
cent of growth in 2007 and 10 percent of growth in 2008.
programs were voluntarily introduced by the Texas utili-
ties." Table 3-6 describes how Texas utilities address bar-
riers to implementing energy efficiency.
The 2004 report on Texas' program accomplishments
highlights the level of savings and success of the
program: "In 2004, the investor-owned utilities in Texas
achieved their statewide goals for energy efficiency once
again. 193 MW of peak demand reduction was
achieved, which was 36% above its goal of 142 MW. In
addition, 448 gigawatt-hours (GWh) of demand
eduction was achieved. These energy savings correspond
to a reduction of 1,460,352 pounds of nitrogen oxide
(NOx) emissions. Incentives or rebates were provided to
project sponsors to offset the costs of a variety of ener-
gy efficiency improvements. Two new energy efficiency
PacifiCorp
PacifiCorp is an investor-owned utility with more than
8,400 MW of generation capacity that serves approxi-
mately 1.6 million retail customers in portions of Utah,
Oregon, Wyoming, Washington, Idaho, and California.
PacifiCorp primarily addresses its energy efficiency plan-
ning objectives as part of its IRP process. Efficiency-based
measures are evaluated based on their effect on the
overall cost of PacifiCorp's preferred resource portfolio,
defined as the overall supply portfolio with the best bal-
ance of cost and risk.
3-16 National Action Plan for Energy Efficiency
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Additionally, some states that are in PacifiCorp's service terri-
tory, such as Oregon and California, also mandate that the
company allocate funds for efficiency under related
statewide public goods regulations. "In Oregon, SB 1149
requires that investor-owned electric companies collect from
all retail customers a public purpose charge equal to 3% of
revenues collected from customers. Of this amount, 57%
(1.7% of revenues) goes toward Class 2 [energy efficiency-
based] demand side management (DSM). The Energy Trust
of Oregon (ETO) was set up to determine the manner in
which public purpose funds will be spent"(PacifiCorp,
2005). Using the IRP model to determine investment in ener-
gy efficiency, however, PacifiCorp allocates more money to
efficiency than required by state statute.
As of the 2004 IRP, PacifiCorp planned to implement a
base of 250 average megawatts (aMW) of energy
efficiency, and to seek an additional 200 aMW of new
efficiency programs if cost-effective options could be
identified. PacifiCorp models the impact of energy effi-
ciency as a shaped load reduction to their forecasted
load, and computes the change in supply costs with, and
without, the impact of DSM. This approach allows differ-
ent types of DSM to receive different values based on the
alternative supply costs in different parts of the
PacifiCorp service territory. For example, the IRP plan
indicates that "residential air conditioning decrements
produce the highest value [in the East and West].
Barriers
Table 3-7. Incorporation of Energy Efficiency in PacifiCorp's Planning Processes
PacifiCorp-Administered Programs
A. Determining the Value of Energy Efficiency
Energy Procurement
Estimating energy savings
! The load forecast in the IRP is reduced by the amount of energy projected to be saved by existing programs, existing
programs that are expanded to other states, and new cost-effective programs that resulted from the 2003 DSM request
I for proposals (RFPs). These load decrements have hourly shapes based on the types of measures installed for each program.
Valuing energy savings
\ Efficiency-based (or Class 2) DSM programs are valued based on cost effectiveness from a utility cost test perspective,
! minimizing the present value revenue requirement. The IRP (using the preferred portfolio of supply-side resources) is run
| with and without these DSM decrements, and their value in terms of cost-savings is calculated as the difference in revenue
I requirements for that portfolio with and without these Class 2 load reductions.
Capacity & Resource Adequacy
Estimating capacity savings
Valuing capacity benefits
Other Benefits
Incorporating non-energy benefits
PacifiCorp explicitly evaluates the capacity value of dispatchable and price-based DSM, or 'Class 1' DSM, and the ability to
hit target reserve margins in the system with these resources. The IRP resulted in a recommendation to defer three different
| supply-side projects. The capacity benefits of more traditional energy efficiency programs are not explicitly evaluated;
I however, the planned energy efficiency reductions are used to update the load forecast in the next year's IRP, which could
i result in additional deferrals.
Capacity savings are valued at the forecasted costs of displaced generation projects. By integrating the evaluation of DSM
into the overall portfolio, the value of energy efficiency is directly linked to specific generation projects. It does not appear
that PacifiCorp evaluates the potential for avoided transmission and distribution capacity.
j Non-energy benefits are considered in the selection of a preferred portfolio of resources, but the non-energy benefits of
efficiency are not explicitly used in the IRP.
B. Setting Energy Efficiency Targets
Quantity of energy efficiency to
implement
As part of the 2004 IRP, PacifiCorp determined that a base of 250 aMW of efficiency should be included in the goals for
the next 10 years, and that an additional 200 aMW should be added if cost-effective programs could be identified.
Estimating program effectiveness I Measurement methodology for new projects is not explicitly identified in the IRP, but values from existing programs and
I the forecasted load shapes for PacifiCorp's customers will be used to predict benefits.
Institutional difficulty in
reallocating budget
Funding is integrated into the overall process of allocating budget to resource options (both supply side and demand side), and
faces only challenges associated with any resource option, namely proof of cost-effective benefit to the resource portfolio.
Cost expenditure timing vs. benefits ! The IRP process for PacifiCorp seeks to gain the best balance of cost and risk using the present value of revenue require-
ments, which accounts for timing issues associated with any type of resource evaluated, including efficiency.
Ensuring the program costs are
recaptured
Successive IRPs will continue to evaluate the cost-effectiveness of energy efficiency programs to determine their effect on
i overall costs of the resource portfolio.
fo create a sustainable, aggressive national commitment to energy efficiency
3-17
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Programs with this end use impact provide the most
value to PacifiCorp's system because they reduce
demand during the highest use hours of the year, sum-
mer heavy load hours. The commercial lighting and sys-
tem load shapes with the highest load factors provide
the lowest avoided costs." It does not appear that
PacifiCorp recomputes the overall risk of its portfolio
with increased energy efficiency. Table 3-7 describes how
PacifiCorp addresses barriers to implementing energy
efficiency.
Energy, Capacity, and Nun-Energy Benefit CYM
Justify Robust Energy Efficiency Programs. Energy
savings alone are usually more than sufficient to justify
and fund a wide range of efficiency measures for elec-
tricity and natural gas. However, the capacity and non-
energy benefits of energy efficiency are important factors
to consider in assessing energy efficiency measures on
an equal basis with traditional utility investments. In
practice, policy, budget, expertise, and human
resources are the more limiting constraints to effectively
incorporating energy efficiency into planning.
Key Findings
This section describes the common themes in the
approaches used to navigate and overcome the barriers
to incorporating energy efficiency in the planning
process. While there are many approaches to solving
each issue, the following key findings stand out:
Cosf and Savings Data for Energy Efficiency Measures
Are Readily Available. Given the long history of energy
efficiency programs in several regions, existing
resources to assist in the design and implementation of
energy efficiency programs are widely available. Both
California and the Northwest maintain extensive, pub-
licly available online databases of energy efficiency
measures and impacts: the Database for Energy
Efficiency Resources (DEER) in California^ and NWPCC
Database in the Northwest.7 DEER includes both elec-
tricity and natural gas measures while NWPCC contains
only electricity measures. These databases incorporate a
number of factors affecting savings estimates, including
climate zones, building type, building vintage, and cus-
tomer usage patterns. Energy efficiency and resource
planning studies containing detailed information on
efficiency measures are available for regions throughout
the United States. It is often possible to adjust existing
data for use in a specific utility service area with relatively
straightforward assumptions.
Estimating the quantity and value of energy savings
is relatively straightforward. Well-established methods
for estimating the quantity and value of energy
savings have been used in many regions and forums.
All of the regional examples for estimating energy
and capacity savings for energy efficiency evaluate
the savings for an individual measure using either
measurements or engineering simulation, and then
aggregate these by the expected number of cus-
tomers who will adopt the measure. Both historical
and forward market prices are readily available, par-
ticularly for natural gas where long-term forward
markets are more developed.
Estimating capacity savings is more difficult, but
challenges are being overcome. Capacity savings
depend more heavily on regional weather conditions
and timing of the peak loads and, therefore, are
difficult to estimate. Results from one region do not
readily transfer to another. Also, publicly available
market data for capacity are not as readily available
as for energy, even though the timing and location
of the savings are critical. Because potential capacity
savings are larger for electricity energy efficiency
than natural gas, capturing capacity value is a larger
issue for electric utilities. Production simulation can
explicitly evaluate the change in power plant invest-
ment and impact of such factors as re-dispatch due
to transmission constraints, variation in load growth,
6 The DEER Web site, description, and history can be found at: http://www.energy.ca.gov/deer/. The DEER database of measures can be found at:
http://eega.cpuc.ca.gov/deer/.
7 The NWPCC Web site, comments, and efficiency measure definition can be found at: http://www.nwcouncil.org/comments/default.asp.
3-18 National Action Plan for Energy Efficiency
-------
and other factors. But these models are analytically
complex and planning must be tightly integrated
with other utility planning functions to accurately
assess savings. These challenges can and have been
overcome in different ways in regions with a long
track-record of energy efficiency programs (e.g.,
California, BPA, New York).
Estimating non-energy benefits is an emerging
approach in many jurisdictions. Depending on the
jurisdiction, legislation and regulatory commission
policies might expressly permit, and even require, the
consideration of non-energy benefits in cost-effec-
tiveness determinations. However, specific guidelines
regarding the quantification and inclusion of non-
energy benefits are still under discussion or in devel-
opment in most jurisdictions. The consideration of
both non-energy and capacity benefits of energy
efficiency programs is relatively new, compared to
the long history of valuing energy savings.
A Clear Path to Funding Is Needed to Establish a
Budget for Energy Efficiency Resources. There are
three main approaches to funding energy efficiency
investments: 1) utility resource planning processes,
2) public purpose funding, and 3) a combination of
both. In a utility resource planning process, such as the
BPA non-construction alternatives process, efficiency
options for meeting BPA's objectives are compared to
potential supply-side investments on an equal basis
when allocating the available budget. In this type of
resource planning process, budget is allocated to effi-
ciency measures from each functional area according
to the benefits provided by efficiency programs. The
advantage of this approach is that the budget for effi-
ciency is linked directly to the savings it can achieve;
however, particularly in the case of capacity-related
benefits, which have critical timing and load reduction
targets to maintain reliability, it is a difficult process.
The public purpose funding and SBC approaches in
New York, Minnesota, and other states are an alterna-
tive to budget reallocation within the planning process.
In California, funding from both planning processes
and public purpose funding is used. Public purpose
funds do not have the same direct link to energy sav-
ings, so programs might not capture all the savings
attributed to the program. Funding targets might be
set before available efficiency options have been
explored, so if other cost-effective efficiency measures
are later identified, additional funding might not be
available. This situation can result in customer costs
being higher than they would have been if all cost-
effective efficiency savings opportunities had been sup-
ported. Using public purpose funding significantly sim-
plifies the planning process, however, and puts more
control over the amount of energy efficiency in the
control of regulators or utility boards. As compared to
resource planning, far less time and effort are required
on the part of regulators or legislators to direct
a specific amount of funding to cost-effective
efficiency programs.
Integrate Energy Efficiency Early in the Resource
Planning Process. In order to capture the full value of
deferring the need for new investments in capacity,
energy efficiency must be integrated early in the plan-
ning process. This step will avoid sunk investment asso-
ciated with longer lead-time projects. Efficiency should
also be planned to target investments far enough into
the future so that energy efficiency programs have the
opportunity to ramp up and provide sufficient load
reduction. This timeline will allow the utility to build
expertise and establish a track record for energy effi-
ciency, as well as be able to monitor peak load reduc-
tions. Starting early also allows time to gain support of
the traditional project proponents before they are vested
in the outcome.
To create 3 sustainable, aggressive national commitment to energy efficiency
3-19
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Recommendations and Options
The National Action Plan for Energy Efficiency Leadership
Group offers the following recommendations as ways to
overcome many of the barriers to energy efficiency in
resource planning, and provides a number of options for
consideration for consideration by utilities, regulators and
stakeholders (as presented in the Executive Summary).
Recommendation: Recognize energy efficiency as a high
priority energy resource. Energy efficiency has not been
consistently viewed as a meaningful or dependable
resource compared to new supply options, regardless of
its demonstrated contributions to meeting load growth.
Recognizing energy efficiency as a high-priority energy
resource is an important step in efforts to capture the
benefits it offers, and lower the overall cost of energy
services to customers. Based on jurisdictional objectives,
energy efficiency can be incorporated into resource plans
to account for the long-term benefits from energy
savings, capacity savings, potential reductions of air pol-
lutants and greenhouse gases, as well as other benefits.
The explicit integration of energy efficiency resources
into the formalized resource planning processes that
exist at regional, state, and utility levels can help estab-
lish the rationale for energy efficiency funding levels and
for properly valuing and balancing the benefits. In some
jurisdictions, these existing planning processes might
need to be adapted or even created to meaningfully
incorporate energy efficiency resources into resource
planning. Some states have recognized energy efficiency
as the resource of first priority due to its broad benefits.
Options to Consider:
Establishing policies to establish energy efficiency as a
priority resource.
Integrating energy efficiency into utility, state, and
regional resource planning activities.
Quantifying and establishing the value of energy effi-
ciency, considering energy savings, capacity savings,
and environmental benefits, as appropriate.
Recommendation: Make a strong, long-term commitment
to implement cost-effective energy efficiency as a
resource. Energy efficiency programs are most success-
ful and provide the greatest benefits to stakeholders
when appropriate policies are established and main-
tained over the long-term. Confidence in long-term sta-
bility of the program will help maintain energy efficiency
as a dependable resource compared to supply-side
resources, deferring or even avoiding the need for other
infrastructure investments, and maintain customer
awareness and support. Some steps might include
assessing the long-term potential for cost-effective ener-
gy efficiency within a region (i.e., the energy efficiency
that can be delivered cost-effectively through proven
programs for each customer class within a planning hori-
zon); examining the role for cutting-edge initiatives and
technologies; establishing the cost of supply-side options
versus energy efficiency; establishing robust M&V proce-
dures; and providing for routine updates to information
on energy efficiency potential and key costs.
Options to Consider:
Establishing appropriate cost-effectiveness tests for a
portfolio of programs to reflect the long-term benefits
of energy efficiency.
Establishing the potential for long-term, cost-effective
energy efficiency savings by customer class through
proven programs, innovative initiatives, and cutting-
edge technologies.
Establishing funding requirements for delivering long-
term, cost-effective energy efficiency.
Developing long-term energy saving goals as part of
energy planning processes.
Developing robust M&V procedures.
Designating which organization(s) is responsible for
administering the energy efficiency programs.
Providing for frequent updates to energy resource plans
to accommodate new information and technology.
3-20 National Action Plan for Energy Efficiency
-------
Recommendation: Broadly communicate the benefits of,
and opportunities for, energy efficiency. Experience
shows that energy efficiency programs help customers
save money and contribute to lower cost energy sys-
tems. But these benefits are not fully documented nor
recognized by customers, utilities, regulators, or policy-
makers. More effort is needed to establish the business
case for energy efficiency for all decision-makers and to
show how a well-designed approach to energy efficiency
can benefit customers, utilities, and society by (1) reducing
customers' bills over time, (2) fostering financially
healthy utilities (e.g., return on equity, earnings per
share, and debt coverage ratios unaffected), and (3) con-
tributing to positive societal net benefits overall. Effort is
also necessary to educate key stakeholders that although
energy efficiency can be an important low-cost resource
to integrate into the energy mix, it does require funding
just as a new power plant requires funding.
Options to Consider:
Establishing and educating stakeholders on the business
case for energy efficiency at the state, utility, and other
appropriate level addressing customer, utility, and
societal perspectives.
Communicating the role of energy efficiency in lowering
customer energy bills and system costs and risks over
time.
Recommendation: Provide sufficient, timely, and stable
program funding to deliver energy efficiency where
cost-effective. Energy efficiency programs require consis-
tent and long-term funding to effectively compete with
energy supply options. Efforts are necessary to establish
this consistent long-term funding. A variety of mecha-
nisms has been and can be used based on state, utility,
and other stakeholder interests. It is important to ensure
that the efficiency program providers have sufficient
long-term funding to recover program costs and imple-
ment the energy efficiency measures that have been
demonstrated to be available and cost-effective. A number
of states are now linking program funding to the
achievement of energy savings.
Options to Consider:
Deciding on and committing to a consistent way for
program administrators to recover energy efficiency
costs in a timely manner.
Establishing funding mechanisms for energy efficiency
from among the available options, such as revenue
requirements or resource procurement funding, SBCs,
rate-basing, shared-savings, incentive mechanisms, etc.
Establishing funding for multi-year periods.
To create a sustainable, aggressive national commitment to energy efficiency
3-21
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References
American Council for an Energy Efficient Economy
[ACEEE] (2006, February). Energy Efficiency Resource
Standards: Experience and Recommendations.
.
Bokenkamp, K., LaFlash, H., Singh V, and Wang, D.
(2005, July). Hedging Carbon Risk: Protecting
Customers and Shareholders from the Financial Risk
Associated with Carbon Dioxide Emissions. The
Electricity Journal. 10(6): 11-24.
California Public Utilities Commission [CPUC]. (2005,
April 7). Interim Opinion On E3 Avoided Cost
Methodology. Order Instituting Rulemaking to
Promote Consistency in Methodology and Input
Assumptions in Commission Applications of Short-
Run and Long-run Avoided Costs, Including Pricing
for Qualifying Facilities. Rulemaking 04-04-025
(Filed April 22, 2004). .
Frontier Associates (2005, November 1). Energy
Efficiency Accomplishments on the Texas Investor
Owned Utilities (Calendar Year 2004).
McAluliffe, P. (2003, June 20). Presentation to the
California Energy Commission.
New York State Energy Research and Development
Authority [NYSERDA] (2005, May). New York
Energy $martSM Program Cost-Effectiveness
Assessment. Albany, New York.
Northwest Power and Conservation Council [NWPCC]
(2005, May). The 5th Northwest Electric Power and
Conservation Plan,
Pacific Gas & Electric Company [PG&E] (2005, June).
2006-2008 Energy Efficiency Program Portfolio,
Volume I, Prepared Testimony.
PacifiCorp. (2005, January). 2004 Integrated Resource
Plan.
Public Utilities Commission of Texas [PUCT]. (2000,
March). Substantive Rule ง25.181. Energy Efficiency
Goal,
Texas Senate Bill 7, Section 39.905 (1999)
Vermont Public Service Board (2005, July 20). Docket
7081: Investigation into Least-Cost Integrated
Resource Planning for Vermont Electric Power
Company, Inc.'s Transmission System.
3-22 National Action Plan for Energy Efficiency
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Business Case for
Energy Efficiency
A well-designed approach to energy efficiency can benefit utilities, customers, and society by (1) fostering
financially healthy utilities, (2) reducing customers' bills over time, and (3) contributing to positive societal
net benefits overall. By establishing and communicating the business case for energy efficiency across utility,
customer, and societal perspectives, cost-effective energy efficiency can be better integrated into the energy
mix as an important low-cost resource.
Overview
Energy efficiency programs can save resources, lower
utility costs, and reduce customer energy bills, but they
also can reduce utility sales. Therefore, the effect on utility
financial health must be carefully evaluated, and policies
might need to be modified to keep utilities financially
healthy (return on equity [ROE], earnings per share, debt
coverage ratios unaffected) as they pursue efficiency.
The extent of the potential economic and environmental
benefits from energy efficiency, the impact on a utility's
financial results, and the importance of modifying exist-
ing policies to support greater investment in these energy
efficiency programs depend on a number of market con-
ditions that can vary from one region of the country
to another.
To explore the potential benefits from energy efficiency
programs and the importance of modifying existing poli-
cies, a number of business cases have been developed.
These business cases show the impact of energy efficiency
investments on the utility's financial health and earnings,
customer energy bills, and social resources such as net
Leadership Group Recommendation
Applicable to the Business Case for
Energy Efficiency
Broadly communicate the benefits of and
opportunities for energy efficiency.
A more detailed list of options specific to the
objective of promoting the business case for energy
efficiency is provided at the end of this chapter.
Key Findings From the Eight Business
Cases Examined
For both electric and gas utilities, energy efficien-
cy investments consistently lower costs over time
for both utilities and customers while providing
positive net benefits to society. When enhanced
by ratemaking policies to address utility financial
barriers to energy efficiency, such as decoupling
the utility's revenues from sales volumes,
utility financial health can be maintained while
comprehensive, cost-effective energy efficiency
programs are implemented.
The costs of energy efficiency and reduced sales
volume might initially raise gas or electricity bills
due to slightly higher rates from efficiency invest-
ment and reduced sales. However, as the effi-
ciency gains help participating customers lower
their energy consumption, the decreased energy
use offsets higher rates to drive their total energy
bills down. In the eight cases examined, average
customer bills were reduced by 2 percent to
9 percent over a ten year period, compared to the
no-efficiency scenario.
Investment in cost-effective energy efficiency
programs yield a net benefit to societyon the
order of hundreds of millions of dollars in net
present value (NPV) for the illustrative case studies
(small- to medium-sized utilities).
To create a sustainable, aggressive national commitment to energy efficiency
4-t
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efficiency costs and pollutant emissions. The business
cases were developed using an Energy Efficiency Benefits
Calculator (Calculator) that facilitates evaluation of the
financial impact of energy efficiency on its major stake-
holdersutilities, customers, and society. The Calculator
allows users to examine efficiency investment scenarios
across different types of utilities using transparent input
assumptions (see Appendix B for detailed inputs and
results).1 Policies evaluated with the Calculator are
discussed in more detail in Chapter 2: Utility Ratemaking
& Revenue Requirements and Chapter 3: Energy
Resource Planning Processes.
Eight business cases are presented to illustrate the
impact of comprehensive energy efficiency programs on
utilities, their customers, and society. The eight cases
represent a range of utility types under different growth
and investment situations. Each case compares the
consequences of three scenariosno energy efficiency
programs without a decoupling mechanism, energy effi-
ciency without decoupling, and energy efficiency with
decoupling. Energy efficiency spending was assumed to
be equal to 2 percent of electricity revenue and 0.5 per-
cent of natural gas revenue across cases, regardless of
the decoupling assumption; these assumptions are similar
to many of the programs being managed in regions of
the country today.2 In practice, decoupling and share-
holder incentives often lead to increased energy efficiency
investments by utilities, increasing customer and
societal benefits.
Business Cases Evaluated
Cases 1 and 2: Investor-Owned Electric and
Natural Gas Utilities
Case 1: Low-Growth
Case 2: High-Growth
Cases 3 and 4: Electric Power Plant Deferral
Case 3: Low-Growth
Case 4: High-Growth
Cases 5 and 6: Investor-Owned Electric
Utility Structure
Case 5: Vertically Integrated Utility
Case 6: Restructured Delivery-Only Utility
Cases 7 and 8: Publicly and Cooperatively
Owned Electric Utilities
Case 7: Minimum Debt Coverage Ratio
Case 8: Minimum Cash Position
Table 4-1 provides a summary of main assump-
tions and results of the business cases.
Table 4-1 summarizes assumptions about the utility size,
energy efficiency program, and each business case. All
values shown compare the savings with and without
energy efficiency over a 15-year hcrizon. The present
value calculations are computed over 30 years, to
account for the lifetime o:F the energy efficiency invest-
ments over 15 years.
1 The Calculator was designed to assess a wide variety of utility types using easily obtainable input data. It was not designed for applications requiring
detailed data for specific applications such as rate setting, comparing different types of energy efficiency policies, cost-effectiveness testing, energy
efficiency resource planning, and consumer behavior analysis.
2 See Chapter 6: Energy Efficiency Program Best Practices for more information on existing programs.
3 Cumulative and NPV business case results are calculated using a 5 percent discount rate over 30 years to include the project life term for energy effi-
ciency investments of 15 years. All values are in nominal dollars with NPV reported in 2007 dollars (year 1 = 2007). Consistent rates are assumed in year
0 and then adjusted by the Calculator for case-specific assumptions. Reductions in utility revenue reguirement do not change with decoupling in the
Calculator, but might in practice if decoupling motivates the utility to deliver additional energy efficiency. In these cases, societal benefits conservative-
ly equals only the savings from reduced wholesale electricity purchases and capital expenditures minus utility and participant costs of energy efficiency.
Energy efficiency program costs given in $/megawatt-hour (MWh) for electric utilities and $/million British thermal units (MMBtu)
for gas utilities.
4-2 National Action Plan for Energy Efficiency
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Table 4-1. Summary of Main Assumptions and Results for Each Business Case Analyzed3
Utility Size
Annual Revenue ($MM) - Year 0
Peak Load (MW) or Sales (BcF) - Year 0
Parameter Tested
Assumptions That Differ Between
Cases
Load Growth Assumption
Average Rate - Year 1
EE Program
Cumulative Savings (EE vs No EE case)
Utility Spending as Percent of Revenue (%)
Annual Utility Spending (NPV in SMM)
EE Project Life Term (years)
Percent of Growth Saved
Total Cost of EE in Year 0 (S/MWh or S/MMBtu)
Utility Cost in Year 0 ($/MWh or $/MMBtu)
Customer Cost in Year 0 (S/MWh or S/MMBtu)
Business Case Results
(NPV in SMM)
Reduction in Revenue Requirement (SMM)
% of Total Revenue Requirement
Net Customer Savings - no decoupling (SMM)
% of Total Customer Bills
Net Customer Savings - decoupling (SMM)
% of Total Customer Bills
Net Societal Savings (SMM)
% of Total Societal Cost
Air Emission Savings
1000 Tons C02
Tons NOX
Case 1: Case 2:
Low Low
Growth Growth
Electric Electric
Utility Utility
$284 $284
600 MW 600 MW
Load Load
Growth Growth
1% 5%
$0.12/MWh $0.12/MWh
EE Program Results do not ch
8,105GWh 8,105GWh
2.0% 2.0%
$70 $70
15 15
142% 21%
$35.00 $35.00
$20.00 $20.00
$15.00 $15.00
Revenue Requirement and Ne
Business Case results are the
$396 $318
5.5% 3.0%
$504 $372
7.0% 3.5%
$344 $266
4.8% 2.5%
$289 $258
237.5% 211.9%
Air Emission Savings are the c
311 311
61 61
Case 3: Case 4:
Low Growth Low Growth
with 2009 with 2009
Power Power
Plant Plant
$284 $284
600 MW 600 MW
Load Growth Load Growth
1% 5%
$0.12/MWh $0.12/MWh
ange when decoupling is activated
8,105GWh 8,105GWh
2.0% 2.0%
$70 $70
15 15
142% 21%
$35.00 $35.00
$20.00 $20.00
$15.00 $15.00
Societal Savings do not change with dec
difference between the No EE and EE case
$476 $338
6.0% 3.0%
$608 $375
7.7% 3.3%
$424 $286
5.4% 2.5%
$332 $269
272.6% 221.0%
ifference between No EE and EE cases anc
311 311
61 61
Case 5: Case 6:
Vertical Delivery
Utility Utility
$284 $284
600 MW 600 MW
Vertical Delivery
Utility Utility
2% 2%
$0.12/MWh $0.12/MWh
8,105GWh 8,105GWh
2.0% 2.0%
$70 $70
15 15
66% 66%
$35.00 $35.00
$20.00 $20.00
$15.00 $15.00
oupling.
s.
$372 $348
4.1% 4.4%
$447 $437
6.4% 5.6%
$320 $296
4.5% 3.8%
$282 $271
6.7% 222.2%
do not change when decouplir
311 311
61 61
Case 7: Case 8:
Electric Electric
Public/Coop Public/Coop
Debt Coverage No Debt
Ratio
$237 $237
600 MW 600 MW
Debt Coverage Cash Position
Ratio
Case 1: Case 2:
High Low Growth
Growth Gas Utility
Gas Utility
$344 $344
33 BcF 33 BcF
Load Growth Load Growth
|
2% 2% 0% 2%
$0.10/MWh $0.10/MWh $1/therm $1/therm
6,754 GWh 6,754 GWh
2.0% 2.0%
$58 $58
15 15
55% 55%
$35.00 $35.00
$20.00 $20.00
$15.00 $15.00
$288 $270
4.0% 4.3%
$459 $266
6.4% 4.2%
$245 $226
43.4% 3.6%
$225 $225
222.2% 222.2%
ig is activated
259 259
51 51
31 BcF 31 BcF
0.5% 0.5%
$21 $21 ;
15 15
410% 18%
$3.00 $3.00
$1.50 $1.50
$1.50 $1.50
$211 $142
3.8% 2.2%
$258 $156
4.6% 2.4%
$1 58 $90 j
2.8% 1 .4% ,
$143 $119
338.0% 282.6%
128 128
107 107 !
o-
T5"
a
T!
BcF = billion cubic feet; CC^ = carbon dioxide; EE = energy efficiency; GWh = gigawatt-hour; NOX = nitrous oxides; $MM = million dollars; MMBtu = million British thermal units;
MWh = megawatt-hour; NPV = net present value
-------
While these eight business cases are not comprehensive,
they allow some generalizations about the likely financial
implications of energy efficiency investments. These gen-
eralizations depend upon the three different perspec-
tives analyzed:
Utility Perspective. The financial health of the utility is
modestly impacted because the introduction of energy
efficiency reduces sales. If energy efficiency is accom-
panied with mechanisms to protect shareholders
such as a decoupling mechanism to buffer revenues
and profits from sales volumesthe utility's financial
situation can remain neutral to the efficiency invest-
ments.4 This effect holds true for both public and investor-
owned utilities.
Customer Perspective. Access to energy efficiency
drives customer bills down over time. Across the eight
case studies, energy bills are reduced by 2 percent to 9
percent over a 10 to 15-year period. Even though the
efficiency investment and decreased sales drives rates
slightly higher, this increase is more than offset in
average customer bills due to a reduction in energy usage.
Societal Perspective. The monetary benefits from energy
efficiency exceed costs and are supplemented by other
benefits such as lower air emissions.
Generalizations may also be made about the impact of
policies to remove the throughput incentive, such as
decoupling mechanisms, across these business cases.5
These generalizations include:
Utility Perspective. Policies that remove the throughput
incentive can provide utilities with financial protection
from changes in throughput due to energy efficiency,
by smoothing the utility's financial performance while
lowering customer bills. Generally, the business case
results show that a decoupling mechanism benefits
utilities more if the energy savings from efficiency are a
greater percent of load growth. Also, because small
reductions in throughput have a greater effect on the
financial condition of distribution utilities, decoupling
generally benefits distribution utilities more than verti-
cally integrated utilities. A utility's actual results will
depend on the structure of its efficiency program, as
well as the specific decoupling and attrition mechanisms
Customer Perspective. Decoupling generates more fre-
quent, but smaller, rate adjustments over time because
variations in throughput require periodic rate "true-
ups." Decoupling leads to modestly higher rates earlier
for customers, when efficiency account for a high per-
cent of load growth. In all cases, energy efficiency
reduces average customer bills over time, with and
without decoupling.
Societal Perspective. The societal benefits of energy
efficiency are tied to the amount of energy efficiency
implemented. Therefore, to the extent that decoupling
encourages investment in energy efficiency, it is a positive
from a societal perspective. Decoupling itself does not
change the societal benefits of energy efficiency.
While these cases are a good starting point, each utility
will have some unique characteristics, such as differences
in fuel and other costs, growth rates, regulatory struc-
ture, and required capital expenditures. These and other
inputs can be customized in the Calculator so users can
consider the possible impacts of energy efficiency on
their unique situations. The Calculator was developed to
aid users in promoting the adoption of energy efficiency
programs, and the results are therefore geared for
education and outreach purposes.6
4 Though not modeled in these business case scenarios, incentive mechanisms can also be used to let shareholders profit from achieving efficiency goals,
further protecting shareholders. Such incentives can increase the utility and shareholder motivations for increased energy efficiency investment.
5 The decoupling mechanism assumed by the Calculator is a "generic" balancing account that adjusts rates annually to account for reduced sales
volumes, thereby maintaining revenue at target projections. Differences in utility incentives that alternative decoupling mechanisms provide are discussed
in Chapter 2: Utility Ratemaking & Revenue Requirements, but are not modeled. The decoupling mechanism does not protect the utility from
cost variations.
6 The Calculator was designed to assess a wide variety of utility types using easily obtainable input data. It was not designed for applications requiring
detailed data for specific applications such as rate setting, comparing different types of energy efficiency policies, cost effectiveness testing, energy effi-
ciency resource planning, and consumer behavior analysis.
4-4 National Action Plan for Energy Efficiency
-------
Business Case Results
The eight cases evaluated were designed to isolate the impact
of energy efficiency investments and decoupling mechanisms
in different utility contexts (e.g., low-growth and high-growth
utilities, vertically integrated and restructured utility, or cash-
only and debt-financed publicly and cooperatively owned
utilities). For each case, three energy efficiency scenarios are
evaluated (no efficiency without decoupling, efficiency with-
out decoupling, and efficiency with decoupling), while hold-
ing all other utility conditions and assumptions constant. The
eight scenarios are divided into four sets of two cases each
with contrasting assumptions.
An explanation of the key results of the business cases is
provided below, with further details provided for each
case in Appendix B.
Cases 1 and 2: Low-Growth and High-Growth
Utilities
In this first comparison, the results of implementing
energy efficiency on two investor-owned electric and
natural gas distribution utilities are contrasted. These
utilities are spending the same percent of revenue on
energy efficiency and vary only by load growth. The low-
growth electric utility (Case 1) has a 1 percent sales
growth rate and the low-growth gas utility has a 0 per-
cent sales growth rate, while the high-growth electric
utility (Case 2) has a 5 percent sales growth rate and the
high-growth gas utility has a 2 percent sales growth rate.
Table 4-2 compares the results for electric utilities, and
Table 4-3 compares the results for the natural gas utili-
ties. In both cases (and all other cases examined), the
Calculator assumes a 'current year' test year for rate-
setting. When rate adjustments are needed, the rates are
set based on the costs and sales in that same year.
Therefore, differences between forecasted and actual
growth rates do not affect the results.
Both electric and natural gas utilities show similar trends.
With low load growth, the same level of energy efficiency
investment offsets a high percentage of load growth, and
utility return on equity (ROE) falls below target until the next
rate case unless decoupling is in place.7 In contrast, the
high-growth utility has an ROE that exceeds the target rate
of return until the rates are decreased to account for the
increasing sales. In both cases, energy efficiency reduces the
utility return from what it would have been absent energy
efficiency. Generally speaking, energy efficiency investments
that account for a higher percentage of load growth expose
an electric or natural gas utility to a greater negative finan-
cial effect unless decoupling is in place.
These cases also look at the difference between the two
utilities with and without a decoupling mechanism. Both
utilities earn their target ROE in rate case years, with and
without the energy efficiency in place. (Note that in prac-
tice, decoupling does not guarantee achieving the target
ROE.) For the low-growth utility, the decoupling mecha-
nism drives a rate adjustment to reach the target ROE,
and the utility has higher ROE than without decoupling
(Case 1). In the high-growth case, decoupling decreases
ROE relative to the case without decoupling (Case 2),
and prevents the utility from earning slightly above its
target ROE from increased sales in between rate cases,
allowing customer rates to decline sooner in the high-
growth electric case if decoupling is in place.
In both electric and natural gas Case 1 and Case 2,
average customer bills decline over time. The average bill
is lower beginning in year 3 in the electric utility with no
decoupling comparison, and in year 5 with decoupling.
A similar pattern is found for the gas utility example.
Average bills decrease more when the efficiency is a
higher percent of load growth, even though rates
slightly increase due to efficiency investments and
reduced sales. The average customer bill declines more
smoothly when a decoupling mechanism is used due to
more frequent rate adjustments.
For both electricity and natural gas energy efficiency, the net
societal benefit is computed as the difference of the total
benefits of energy efficiency, less the total costs. From a soci-
etal perspective, the benefits include the value of reduced
expenditure on energy (including market price reductions
1 In Cases 1 and 2, the electric utility invests 2 percent of revenue in energy efficiency and the gas utility invests 0.5 percent of revenue.
To create a sustainable, aggressive national commitment to energy efficiency 4-5
-------
Table 4-2. High- and Low-Growth Results: Electric Utility
Case 1: Low-Growth (1%)
Return on Equity (ROE)
Without efficiency and decoupling, the low sales drive
ROE below the target return. Target ROE is achieved
with energy efficiency (EE) and decoupling. Increasing
energy efficiency without decoupling decreases ROE.
Case 2: High-Growth (5%)
Return on Equity (ROE)
With high load growth, without decoupling, the utili-
ty achieves greater than the target ROE until rates are
adjusted. With energy efficiency, sales and earnings
are reduced, reducing ROE.
Investor-Owned Utility Comparison of Return on Equity
Case 1
Case 2
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lase 2: High-Growth (5%)
Rates
Without energy efficiency, the utility sells higher
volumes than in the no efficiency scenarios and has
slightly lower rates. Rates in the energy efficiency
scenario increase primarily due to lower throughput;
rates are slightly higher in the decoupling scenario due to
increase earnings to the target ROE.
Comparison of Average Rate
Case 1
tates
the high-growth case, rates are relatively flat.
Vithout energy efficiency, the utility sells higher
olumes and has slightly lower rates. Decoupling does
ot have a great impact in this case because the ROE
; near target levels without any rate adjustments.
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4-6 National Action Plan for Energy Efficiency
-------
if any), reduced losses, reduced capital expenditures, and
reduced air emissions (if emissions are monetized).8 The
costs include both utility program and administration costs
as well as the participant costs of energy efficiency. If the net
societal benefits are positive, the energy efficiency is cost-
effective from a societal perspective. In both Case 1 and
Case 2 (and all other cases evaluated using the tool), the net
societal benefits are positive for investments in energy
Table 4-2. High- and Low-Growth Results: Electric Utility (continued)
Case 1: Low-Growth (1%)
Case 2: High-Growth (5%)
Bills
Total customer bills with energy efficiency programs
decline over time, indicating customer savings resulting
from lower energy consumption. Rate increases
through the decoupling mechanism reduce the pace
of bill savings in the decoupling case.
Percent Change in Customer Bills
Casel
Bills
Total customer bills with energy efficiency decline over
time, indicating customer savings resulting from lower
energy consumption. There is little difference between
the decoupling and no decoupling cases in the high-
growth scenario.
Case 2
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Case 1: Low-Growth (1%)
Net Societal Benefits
Over time, the savings from energy efficiency exceed
the annual costs. The societal cost and societal savings
are the same, with and without decoupling.
Delivered Costs and Benefits of EE
Case 1
Case 2: High-Growth (5%)
Net Societal Benefits
Over time, the savings from energy efficiency exceed
the annual costs. The societal cost and societal savings
are the same, with and without decoupling.
$400
$300
$200
$100
$0-
$400-
$300-
$200-
$100-
Case2
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Year
10
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Year
9 10
Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
The cases discussed in this document include conservative assumptions and do not include market price reductions or monetize air emissions in net
societal benefits.
To create a sustainable, aggressive national commitment to energy efficiency
4-7
-------
efficiency. In the low-growth case, the savings exceed costs
within two years for both the electric and natural case cases.
In the high-growth case, the savings exceed costs within five
years for the electric utility cases and four years for the nat-
ural gas utility cases. Energy efficiency has a similar effect
upon natural gas utilities, as shown in Table 4-3.
Table 4-3. High- and Low-Growth Results: Natural Gas Utility
Case 1: Low-Growth (0%)
Case 2: High-Growth (2%)
Return on Equity (ROE)
Without efficiency and decoupling, the low sales
result in ROE falling below the target return. Similarly,
energy efficiency without decoupling drops utility
return below target ROE. Target ROE is achieved with
decoupling.
Investor-Owned Utility Comparison of Return on Equity
Case 1
Return on Equity (ROE)
With high load growth, energy efficiency has less
impact on total sales and earnings. Thus, the utility
achieves close to its target ROE in the early years,
although without decoupling, ROE falls slightly in later
years as energy efficiency reduces sales over time.
Case 2
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Case
1: Low-Growth (0%) Case 2: High-Growth (2%)
Rates
Rates increase over time because of increasing rate base
and low sales growth. Without energy efficiency, the util-
ity sells higher volumes and has lower rates. Decoupling
increases rates when sales volumes are below target.
Comparison of Average Rate
lates
A/ithout energy efficiency, the utility sells higher volumes
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Table 4-3. High- and Low-Growth Results: Natural Gas Utility (continued)
Case 1: Low-Growth (0%)
Customer Bills
Total customer bills with energy efficiency decline over
time, indicating customer savings resulting from lower
energy consumption. Customer utility bills initially
increase slightly with decoupling as rates are increased to
hold ROE at the target level and spending increases
on efficiency.
Percent Change in Customer Bills
Case 1
Case 2: High-Growth (2%)
Customer Bills
Customer utility bills with energy efficiency reflect the
more limited impact of efficiency programs on rate pro-
file. Total customer bills decline over time, indicating cus-
tomer savings resulting from lower energy consumption.
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Case 2
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Change in Customer Bills (%) - EE no Decoupling
Change in Customer Bills (%) - EE and Decoupling
Case 1: Low-Growth (0%)
Net Societal Benefits
Over time, the savings from energy efficiency exceed
the annual costs. The societal cost and societal savings
are the same, with and without decoupling.
Case 2: High-Growth (2%)
Net Societal Benefits
Over time, the savings from energy efficiency exceed
the annual costs. The societal cost and societal savings
are the same, with and without decoupling.
Delivered Costs and Benefits of EE
Case 1
$0
Case 2
Year
Societal Cost ($/therm saved)
Societal Savings ($/therm saved)
create a sustainable, aggressive national commitment to energy efficiency
4-9
-------
Cases 3 and 4: Electric Power Plant Deferral
This case study examines an electric investor-owned utility
with a large capital project (modeled here as a 500-MW
combined-cycle power plant, although the conclusions
are similar for other large capital projects), planned for
construction in 2009.9 Again the effect of a 1 percent
growth rate (Case 3) is compared with a 5 percent
growth rate (Case 4) with identical energy efficiency
investments of 2 percent of electric utility revenues.
Figure 4-1 shows the capital expenditure for the project
with and without an aggressive energy efficiency plan
and a summary of the net benefits from each perspec-
tive. The length of investment deferral is based on the
percent of peak load reduced due to energy efficiency
investments. The vertical axis shows how the expendi-
ture in nominal dollars starts at $500 million in 2009, or
slightly higher (due to inflation) after deferral. With Case
3, energy efficiency investments account for a higher
percentage of peak load growth, and can defer the proj-
ect until 2013. With higher growth and the same level of
efficiency savings (Case 4), the same efficiency invest-
ment only defers the project until 2010.
In Case 3, the energy efficiency program causes a
greater reduction in revenue requirementa 30-year
reduction of $476 million rather than a Case 4 reduction
of $338 millionproviding benefits from a customer
perspective. From a societal perspective, the low-growth
case energy efficiency program yields higher net societal
benefit as well: $332 million versus $269 million.
Figure 4-1. Comparison of Deferral Length with Low- and High-Growth
Case 3: Low-Growth Investment Timing
Comparison of Investment Timing - Electric Utility
Case3
Case 4: High-Growth Investment Timing
Case 4
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30-year savings impact from EE
Low-Growth Utility High-Growth Utility
Decrease in Revenue Requirement (net present value [NPV], m
Net Customer Savings - decoupling (NPV, $MM)
Net Societal Benefit (NPV, $MM)
Ilion dollars [$MM])
$476
$319
$332
$338
$275
$269
9 This illustration demonstrates how energy efficiency can be used, including efforts to reduce peak capacity requirements, to defer a single 500 MW
combined cycle power plant. Energy efficiency can also be used to defer other, smaller investments.
4-10 National Action Plan for Energy Efficiency
-------
Table 4-4 compares the reduction in revenue requirement
due to the deferral of the power plant investment between
the two cases. In Case 3, the reduction in revenue require-
ment due to the deferral to 2013 results in present value
savings of $36 million over the three years that the plant
was deferred. In Case 4, the deferral provides present value
savings of $11 million for the one-year deferral.
Although the project is deferred longer in the low-
growth case, fewer sales overall and higher installed cap-
ital costs result in higher rates over time relative to the
high-growth case. In both cases, the increase in rates
from energy efficiency programs, starting in year 1, is
significantly less than the rate increase that occurs after
the new power plant investment is made, leading to
lower customer bills. Customer bill savings are greatest
during the years that the plant is deferred.10
Cases 5 and 6: Vertically Integrated Utility vs.
Restructured Delivery Company
In this example, a vertically integrated electric utility
(Case 5) is compared with the restructured electric delivery
Table 4-4. Power Plant Deferral Results
Case 3: Low-Growth (1 %)
Revenue Requirement
2009 project deferred to 2013, resulting in a reduc-
tion in revenue requirement due to deferring the
power plant over three years of PV$36 million.
Case 4: High-Growth (5%)
Revenue Requirement
2009 project deferred to 2010, resulting in a reduc-
tion in revenue requirement from deferring the power
plant over a year of PV$11 million.
Other Capital Expenditures
The low-growth case leads to the savings of other cap-
ital expenditures compared to the high-growth case.
Retail Rates
With low load growth, a given amount of energy
efficiency defers so much load growth that the
new power plant can be deferred for three
years, allowing the utility to conserve capital and post-
pone rate increases for several years.
Comparison of Average Rate
Case3
Other Capital Expenditures
The low-growth case leads to the savings of other cap-
ital expenditures compared to the high-growth case.
Retail Rates
With high load growth, energy efficiency reduces load
growth enough to defer the new power plant invest-
ment by one year, slowing implementation of a rela-
tively smaller rate increase.
$0.30
Case 4
234567
- - Utility Average Rate - No EE
Utility Average Rate - EE no Decoupling
Utility Average Rate - EE and Decoupling
10 The Calculator assumes that a rate case occurs in the year following a large capital investment. When a decoupling mechanism is used, a higher rate
adjustment (and immediate decrease in bill savings) occurs once a new major infrastructure investment is brought online. This charge is due to the new
level of capital expenditures at the same time a positive decoupling rate adjustment is making up for previous deficiencies.
To create a sustainable, aggressive national commitment to energy efficiency
4-11
-------
company (Case 6); both experiencing a 2 percent growth
rate and investing 2 percent of revenue in energy effi-
ciency. These cases assume that the vertically integrated
utility has more capital assets and larger annual capital
expenditures than a restructured delivery ut.lity.
In general, the financial impact of energy efficiency on
delivery utilities is more pronounced than on vertically
integrated utilities with the same number of customers and
Table 4-4. Power Plant Deferral Results (continued)
Case 3: Low-Growth (1%)
Case 4: High-Growth (5%)
Customer Bills
Although rates rise with large capital expenditures, bills
continue to fall over time as energy efficiency drives
customer volume down to offset the higher rates.
Percent Change in Customer Bills
Case3
Customer Bills
Although rates rise with large capital expenditures, bills
continue to fall over time as energy efficiency drives
customer volume down to offset the higher rates.
Case 4
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Change in Customer Bills (%) - EE and Decoupling
Case 3: Low-Growth (1%)
Case 4: High-Growth (5%)
Load Impact
Energy efficiency significantly reduces load growth
and reduces the need for new capital investment.
Comparison of Peak Load Growth
Case3
Load Impact
With high growth, energy efficiency has a limited
impact on peak load, and defers a modest amount of
rew capital investment.
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Case 4
5 6
Year
10
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5 6
Year
10
Forecasted Growth - EE and Decoupling
Forecasted Growth - No EE
4-12 National Action Plan for Energy Efficiency
-------
sales. Once divested of a generation plant, the
distribution utility is a smaller company (in terms of total
rate base and capitalization), and fluctuations in through-
put and earnings have a relatively larger impact on return.
Table 4-5 summarizes the comparison of ROE, rates, bills
and societal benefits. Without implementing energy effi-
ciency, both utilities are relatively financially healthy,
achieving near their target rate of return in each year;
Table 4-5. Vertically Integrated and Delivery Company Results
Case 5: Vertically Integrated
Case 6: Delivery Utility
Return on Equity (ROE)
Because the vertically integrated utility has a large rate
base, the impact of energy efficiency upon total earnings
is limited and it has little impact upon ROE (with or with-
out decoupling).
Investor-Owned Utility Comparison of Return on Equity
CaseS
Return on Equity (ROE)
With a smaller rate base and revenues only from kWh
deliveries, energy efficiency has a larger impact on a
ROE without decoupling than a vertically integrated utility.
Case 6
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Year
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1 (.recite ,i sustain,iblc, <;(/(//(".s/i/r /W//O/H/ (ommitmcnt to cni'igy <>fficicn(y
4-13
-------
Table 4-5. Vertically Integrated and Delivery Company Results (continued)
Case 5: Vertically Integrated
Bills
Total customer bills with energy efficiency programs
decline over time, indicating average customer savings
resulting from lower energy consumption. Customer
utility bills decrease more smoothly with decoupling
as a result of the more frequent rate adjustments.
Percent Change in Customer Bills
CaseS
Case 6: Delivery Utility
Bills
Total customer bills with energy efficiency programs
decline over time, indicating average customer savings
resulting from lower energy consumption. Customer util-
ity bills decrease more slowly in the decoupling case,
because rates are increased earlier to offset reduced sales.
Case 6
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Change in Customer Bills (%) - EE and Decoupling
Case 5: Vertically Integrated
Net Societal Benefits
Over time, the savings from energy efficiency exceed
the annual costs. The societal cost and societal savings
are the same, with and without decoupling.
Delivered Costs and Benefits of EE
Case 5
$400
$200
$100
$0
\
1 2 3 4 5 6 7 8 9 10
Year
sse 6: Delivery Utility
et Societal Benefits
with the vertically integrated utility, savings from
nergy efficiency exceed the costs over time. The
istribution utility has a lower initial societal savings
Because the distribution company reduces fewer
<}apital expenditures at the outset of the energy
efficiency investments. Over time, the societal costs
nd savings are similar to the distribution company.
$400
Case 6
$300
$100
$0-
I I I I I I I I
1 2 3 4 5 6 7 8 9 10
Year
- Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
4-14 National Action Plan for Energy Efficiency
-------
however, introducing energy efficiency reduces ROE and
earnings for both utilities unless a decoupling mecha-
nism is put in place. Customer rates increases, bill
savings, and societal benefits follow similar trends with
energy efficiency, as discussed in Cases 1 and 2.
Cases 7 and 8: Publicly and Cooperatively
Owned Electric Utilities
The first six cases used an investor-owned electric utility
to illustrate the business case for energy efficiency. The
Calculator also can evaluate the impact of efficiency
programs on publicly and cooperatively owned electric
utilities. Many of the issues related to the impact of
growth rates and capital deferral discussed in the
investor-owned utility examples apply equally to publicly
and cooperatively owned utilities. From a net societal
benefit perspective, the results are identical for publicly,
cooperatively, and privately owned utilities. The ratemaking
and utility financing perspectives are different, however.
The financial position of publicly owned utilities is evalu-
ated primarily based on either the debt coverage ratio
(which is critical to maintaining a high bond rating and
low cost capital) or the minimum cash position (for
utilities with no debt). Table 4-6 shows the results of a
publicly or cooperatively owned utility with an energy
efficiency program of 2 percent of revenue and load
growth of 2 percent. In both cases, the assumption is
made that the utility adjusts rates whenever the debt
coverage ratio or minimum cash position falls below a
threshold. This assumption makes comparisons of differ-
ent cases more difficult, but the trends are similar to the
investor-owned utilities on a regular rate case cycle. The
change in utility financial health due to energy efficiency
is relatively modest because of the ability to adjust the
retail rates to maintain financial health. The publicly and
cooperatively owned utilities will experience similar
financial health problems as investor-owned utilities if they
do not adjust rates.
Table 4-6. Publicly and Cooperatively Owned Utility Results
Case 7: Minimum Debt Coverage Ratio
Utility Financial Health
A decoupling mechanism stabilizes the utility's ability
to cover debt by adjusting rates for variations in
throughput. Without decoupling, rates are adjusted
whenever the debt coverage rate falls below a threshold
(ratio 2 in the example). The rate adjustment is
required earlier in the energy efficiency scenario.
Public Power/Cooperative Debt Coverage Ratio
Case?
Case 8: Minimum Cash Position
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1.50
1.00
Utility Financial Health
In the no decoupling cases (with and without energy
efficiency), rates are reset if the cash position falls
below a minimum threshold ($70 million in this
example). With decoupling, the utility adjusts rates to
hit the target cash level in each year. The results are
similar as long as there is an ability to reset rates when
needed to maintain a minimum cash position.
Cash Position at End of Year
CaseS
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$70
$50
$40
234567
Year
9 10
5 6
Year
10
Debt Coverage Ratio - No EE
Debt Coverage Ratio - EE no Decoupling
Debt Coverage Ratio - EE and Decoupling
Cash Position - No EE
Cash Position - EE no Decoupling
Cash Position - EE and Decoupling
To create a sustainable, aggressive national commitment to energy efficiency
4-15
-------
Table 4-6. Publicly and Cooperatively Owned Utility Results (continued)
Case 7: Minimum Debt Coverage Ratio
Customer Rates
With or without decoupling, rates are adjusted to
maintain financial health. Rates are lowest without
energy efficiency and highest with energy efficiency
and decoupling.
Comparison of Average Rate
Case?
Case 8: Minimum Cash Position
Customer Rates
Once energy efficiency is implemented, retail rate levels
are similar, with or without decoupling in place. The
decoupling case is slightly smoother with smaller,
more frequent rate adjustments.
Cases
0.25
0.20
0.15
'.10 -F-
5 6
Year
10
- - - Utility Average Rate - No EE
Utility Average Rate - EE no Decoupling
Utility Average Rate - EE and Decoupling
Case 7: Minimum Debt Coverage Ratio
Customer Bills
Average customer bills decline with energy efficiency
investments, with and without decoupling. The
'randomness' in the bill change is due to different tim-
ing of rate adjustments in the energy efficiency and
no energy efficiency cases. However, overall the trend
is downward.
Percent Change in Customer Bills
Case 7
Case 8: Minimum Cash Position
Customer Bills
Average customer bills decline with energy efficiency
investments in both the decoupling and no decoupling
cases.
CaseS
-9%
-12%
-15%
-18%
-21%
CO
c
5 6
Year
10
-12%
-15%
-18%
-21%
Change in Customer Bills (%) - EE no Decoupling
Change in Customer Bills (%) - EE and Decoupling
4-16 National Action Plan for Energy Efficiency
-------
Key Findings
Recommendations and Options
This chapter summarizes eight business cases for energy
efficiency resulting from the Energy Efficiency Benefits
Calculator. This Calculator provides simplified results
from a utility, customer, and societal perspective. As stated
on page 4-1, the key findings from the eight cases
examined include:
For both electric and gas utilities, energy efficiency
investments consistently lower costs over time for both
utilities and customers, while providing positive
net benefits to society. When enhanced by ratemaking
policies to address utility financial barriers to
energy efficiency, such as decoupling the utility's
revenues from sales volumes, utility financial health can
be maintained while comprehensive, cost-effective
energy efficiency programs are implemented.
The costs of energy efficiency and reduced sales
volume might initially raise gas or electricity bills due to
slightly higher rates from efficiency investment and
reduced sales. However, as the efficiency gains help
participating customers lower their energy consump-
tion, the decreased energy use offsets higher rates to
drive their total energy bills down. In the 8 cases exam-
ined, average customer bills were reduced by 2 percent
to 9 percent over a ten year period, compared to the
no-efficiency scenario.
Investment in cost-effective energy efficiency programs
yields a net benefit to societyon the order of
hundreds of millions of dollars in NPV for the illustrative
case studies (small- to medium-sized utilities).
The National Action Plan for Energy Efficiency Leadership
Group offers the following recommendation as a way to
overcome many of the barriers to energy efficiency, and
provides the following options for consideration by utili-
ties, regulators, and stakeholders (as presented in the
Executive Summary).
Recommendation: Broadly communicate the bene-
fits of, and opportunities for, energy efficiency.
Experience shows that energy efficiency programs help
customers save money and contribute to lower cost
energy systems. But these impacts are not fully docu-
mented nor recognized by customers, utilities, regulators
and policy-makers. More effort is needed to establish the
business case for energy efficiency for all decision-makers
and to show how a well-designed approach to energy
efficiency can benefit customers, utilities, and society by
(1) reducing customers bills over time, (2) fostering
financially healthy utilities (return on equity [ROE], earn-
ings per share, debt coverage ratios unaffected), and (3)
contributing to positive societal net benefits overall.
Effort is also necessary to educate key stakeholders that,
although energy efficiency can be an important low-cost
resource to integrate into the energy mix, it does require
funding, just as a new power plant requires funding.
Options to (onsidt r
Establishing and educating stakeholders on the busi-
ness case for energy efficiency at the state, utility, and
other appropriate level addressing relevant customer,
utility, and societal perspectives.
Communicating the role of energy efficiency in lowering
customer energy bills and system costs and risks
over time.
Reference
National Action Plan for Energy Efficiency. (2006).
Energy Efficiency Benefits Calculator.
To crc'ittp a sustainable, aggressive national commitment to energy efficiency
4-17
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5
Rate Design
Retail electricity and natural gas utility rate structures and price levels influence customer consumption,
and thus are an important tool for encouraging the adoption of energy-efficient technologies and
practices. The rate design process typically involves balancing multiple objectives, among which energy
efficiency is often overlooked. Successful rate designs must balance the overall design goals of utilities,
customers, regulators, and other stakeholders, including encouraging energy efficiency.
Overview
Retail rate designs with clear and meaningful price
signals, coupled with good customer education, can be
powerful tools for encouraging energy efficiency. At the
same time, rate design is a complex process that must
take into account multiple objectives (Bonbright, 1961;
Philips, 1988). The main priorities for rate design are
recovery of utility revenue requirements and fair appor-
tionment of costs among customers.
Other important regulatory and legislative goals include:
Stable revenues for the utility.
Stable rates for customers.
Social equity in the form of lifeline rates for essential
needs of households (PURPA of 1978).
Simplicity of understanding for customers and ease
of implementation for utilities.
Economic efficiency to promote cost-effective load
management.
This chapter considers the additional goal of encouraging
investment in energy efficiency. While it is difficult to
achieve every goal of rate design completely, considera-
tion of a rate design's impact on adoption of energy effi-
ciency and any necessary trade-offs can be included as
part of the ratemaking process.
Using Rate Design to Pr >mo:e Energy
Efficiency
In developing tariffs to encourage energy efficiency, the
following questions arise: (1) What are the key rate
design issues, and how do they affect rate designs for
energy efficiency? (2) What different rate design options
are possible, and what are their pros and cons? (3) What
other mechanisms can encourage efficiency that are not
driven by tariff savings? and (4) What are the most
successful strategies for encouraging energy efficiency
in different jurisdictions? These questions are addressed
throughout this chapter.
Leadership Group Recommendations
Applicable to Rate Design
Modify ratemaking practices to promote energy
efficiency investments.
Broadly communicate the benefits of, and
opportunities for, energy efficiency.
A more detailed list of options specific to the
objective of promoting energy efficiency in rate
design is provided at the end of this chapter.
Background: Revenues and Rates
Utility rates are designed to collect a specific revenue
requirement based on natural gas or electricity sales. As
rates are driven by sales and revenue requirements, these
three aspects of regulation are tightly linked. (Revenue
requirement issues are discussed in Chapter 2: Utility
Ratemaking & Revenue Requirements.)
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5-1
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Until the 1970s, rate structures were based on the
principle of average-cost pricing in which customer
prices reflected the average costs to utilities of serving
their customer class. Because so many of a utility's costs
were fixed, the main goal of rate design up until the
1970s was to promote sales. Higher sales allowed fixed
costs to be spread over a larger base and helped push
rates down, keeping stakeholders content with average-
cost based rates (Hyman et al., 2000).
This dynamic began to change in many jurisdictions in
the 1970s, with rising oil prices and increased emphasis
on conservation. With the passage of the 1978 Public
Utility Regulatory Policies Act (PURPA), declining block
rates were replaced by flat rates or even inverted block
rates, as utilities began to look for ways to defer new
plant investment and reduce the environmental impact
of energy consumption.
Key Rate Design Issues
Utilities and regulators must balance competing goals
in designing rates. Achieving this balance is essential
for obtaining regulatory and customer acceptance.
The main rate design issues are described below.
Provide Recovery of Revenue Requirements
and Stable Utility Revenues
A primary function of rates is to let utilities collect their
revenue requirements. Utilities often favor rate forms
that maximize stable revenues, such as declining block
rates. The declining block rate has two or more tiers of
usage, with the highest rates in the first tier. Tier 1 is
typically a relatively low monthly usage level that most
customers exceed. This rate gives utilities a high degree
of certainty regarding the number of kilowatt-hours
(kWh) or therms that will be billed in Tier 1. By designing
Tier 1 rates to collect the utility's fixed costs, the utility
gains stability in the collection of those costs. At the
same time, the lower Tier 2 rates encourage higher
energy consumption rather than efficiency, which is
detrimental to energy efficiency impacts.1 Because
energy efficiency measures are most likely to change
customer usage in Tier 2, customers will see smaller
bill reductions under declining block rates than under
flat rates. Although many utilities have phased out
declining block rates, a number of utilities continue to
offer them.2
Another rate element that provides revenue stability
but also detracts from the incentive to improve efficiency
is collecting a portion of the revenue requirement
through a customer charge that is independent of
usage. Because the majority of utility costs do not vary
with changes in customer usage level in the short run,
the customer charge also has a strong theoretical basis.
This approach has mixed benefits for energy efficiency.
On one hand, a larger customer charge means a smaller
volumetric charge (per kWh or therm), which lowers
the customer incentive for energy efficiency. On the
other hand, a larger customer charge and lower volu-
metric charge reduces the utilities profit from increased
sales, reducing the utility disincentive to promote energy
efficiency.
Rate forms like declining block rates and customer
charges promote revenue stability for the utility, but
they create a barrier to customer adoption of energy
efficiency because they reduce the savings that cus-
tomers can realize from reducing usage. In turn, elec-
tricity demand is more likely to increase, which could
lead to long-term higher rates and bills where new
supply is more costly than energy efficiency. To pro-
mote energy efficiency, a key challenge is to provide a
1 Brown and Sibley (1986) opine that a declining block structure can promote economic efficiency if the lowest tier rate can be set above marginal cost,
while inducing additional consumption by some consumers. A rising marginal cost environment suggests, however, that a declining block rate structure
with rates below the increasing marginal costs is economically inefficient.
2 A partial list of utilities with declining block residential rates includes: Dominion Virginia Power, VA; Appalachian Power Co, VA; Indianapolis Power and
Light Co., IN; Kentucky Power Co., KY; Cleveland Electric Ilium Co., OH; Toledo Edison Co., OH; Rappahannock Electric Coop, VA; Lincoln Electric System,
NE; Cuivre River Electric Coop Inc., MO; Otter Tail Power Co., ND; Wheeling Power Co., WV; Matanuska Electric Assn Inc., AK; Homer Electric Association
Inc., AK; Lower Valley Energy, NE.
5-2 National Action Plan for Energy Efficiency
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level of certainty to utilities for revenue collection
without dampening customer incentive to use energy
more efficiently.
Fairly Apportion Costs Among Customers
Revenue allocation is the process that determines the
share of the utility's total revenue requirement that will
be recovered from each customer class. In regulatory
proceedings, this process is often contentious, as each
customer class seeks to pay less. This process makes it
difficult for utilities to propose rate designs that shift
revenues between different customer classes.
In redesigning rates to encourage energy efficiency, it is
important to avoid unnecessarily or inadvertently shifting
costs between customer classes. Rate design changes
should instead focus on providing a good price signal for
customer consumption decisions.
Promote Economic Efficiency for Cost-
Effective Load Management
According to economic theory, the most efficient out-
come occurs when prices are equal to marginal costs,
resulting in the maximum societal net benefit from
consumption.
Marginal Costs
Marginal costs are the changes in costs required to pro-
duce one additional unit of energy. In a period of rising
marginal costs, rates based on marginal costs more real-
istically reflect the cost of serving different customers,
and provide an incentive for more efficient use of
resources (Bonbright, 1961; Kahn, 1970; Huntington,
1975; Joskow, 1976; Joskow, 1979).
A utility's marginal costs often include its costs of comply-
ing with local, state, and federal regulations (e.g., Clean
Air Act), as well as any utility commission policies address-
ing the environment (e.g., the use of the societal test for
benefit-cost assessments). Rate design based on the
utility's marginal costs that promotes cost-effective energy
efficiency will further increase environmental protection
by reducing energy consumption.
Despite its theoretical attraction, there are significant bar-
riers to fully implementing marginal-cost pricing in elec-
tricity, especially at the retail level. In contrast to other
commodities, the necessity for generation to match load
at all times means that outputs and production costs are
constantly changing, and conveying these costs as real
time "price signals" to customers, especially residential
customers, can be complicated and add additional costs.
Currently, about half of the nation's electricity customers
are served by organized real-time electricity markets,
which can help provide time-varying prices to customers
by regional or local area.
Notwithstanding the recent price volatility, exacerbated
by the 2005 hurricane season and current market condi-
tions, wholesale natural gas prices are generally more
stable than wholesale electricity prices, largely because
of the ability to store natural gas. As a result, marginal
costs have been historically a less important issue for
natural gas pricing.
Short-Run Versus Long-Run Price Signals
There is a fundamental conflict between whether electricity
and natural gas prices should reflect short-run or long-run
marginal costs. In simple terms, short-run costs reflect the
variable cost of production and delivery, while long-run
costs also include the cost of capital expansion. For pro-
grams such as real-time pricing in electricity, short-run
marginal costs are used for the price signals so they can
induce efficient operating decisions on a daily or hourly
basis.
Rates that reflect long-run marginal costs will promote
economically efficient investment decisions in energy
efficiency, because the long-run perspective is consistent
with the long expected useful lives of most energy effi-
ciency measures, and the potential for energy efficiency
to defer costly capital investments. For demand-response
and other programs intended to alter consumption on a
daily or hourly basis, however, rates based on short-run
To create a sustainable, aggressive national commitment to energy efficiency
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Applicability of Rate Design Issues
Implications for Clean Distributed Generation and
Demand Response. The rate issues for energy effi-
ciency also apply to clean distributed generation and
demand response, with two exceptions. Demand
response is focused on reductions in usage that occur
for only a limited number of hours in a year, and occur
at times that are not known far in advance (typically
no more than one day notice, and often no more than
a few hours notice). Because of the limited hours of
operation, the revenue erosion from demand
response is small compared to an energy efficiency
measure. In addition, it could be argued that short-
run, rather than long-run, costs are the appropriate
cost metric to use in valuing and pricing demand
response programs.
Public Versus Private Utilities. The rate issues are
essentially the same for both public and private utili-
ties. Revenue stability might be a lesser concern for
public utilities, as they could approach their city
leaders for rate changes. Frequent visits to council
chambers for rate changes might be frowned upon,
however, so revenue stability will likely remain impor-
tant to many public utilities as well.
marginal cost might be more appropriate. Therefore, in
developing retail rates, the goals of short-run and long-
run marginal based pricing must be balanced.
Cost Causation
Using long-run marginal costs to design an energy-
efficiency enhancing tariff can present another challenge
potential inconsistency with the cost-causation princi-
ple that a tariff should reflect the utility's various costs of
serving a customer. This potential inconsistency diminishes
in the long run, however, because over the long run,
some costs that might be considered fixed in the near
term (e.g., generation or transmission capacity, new
interstate pipeline capacity or storage) are actually vari-
able. Such costs can be reduced through sustained load
Gas Versus Electric. As discussed above, gas marginal
costs are less volatile than electricity marginal costs, so
providing prices that reflect marginal costs is generally
less of a concern for the gas utilities. In addition, the
nature of gas service does not lend itself to complicated
rate forms such as those seen for some electricity cus-
tomers. Nevertheless, gas utilities could implement
increasing tier block rates, and/or seasonally differen-
tiated rates to stimulate energy efficiency.
Restructured Versus Non-Restructured Markets.
Restructuring has had a substantial impact on the
funding, administration, and valuation of energy effi-
ciency programs. It is no coincidence that areas with
high retail electricity rates have been more apt to
restructure their electricity markets. The higher rates
increase the appeal of energy efficiency measures, and
the entry of third-party energy service companies can
increase customer interest and education regarding
energy efficiency options. In a retail competition envi-
ronment, however, there might be relatively little rate-
making flexibility. In several states, restructuring has
created transmission and distribution-only utilities, so
the regulator's ability to affect full electricity rates
might be limited to distribution costs and rates for
default service customers.
reductions provided by energy efficiency investment,
induced by appropriately designed marginal cost-based
rates. Some costs of a utility do not vary with a cus-
tomer's kWh usage (e.g., hookup and local distribution).
As a result, a marginal cost-based rate design may
necessarily include some fixed costs, which can be
collected via a volumetric adder or a relatively small
customer charge. However, utilities that set usage rates
near long-run marginal costs will encourage energy effi-
ciency and promote other social policy goals such as
affordability for low-income and low-use customers
whose bills might increase with larger, fixed charges.
Hence, a practical implementation of marginal-cost
based ratemaking should balance the trade-offs and
competing goals of rate design.
5-4
National Action Plan for Energy Efficiency
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Provide Stable Rates and Protect Low-Income Customers
Rate designs to promote energy efficiency must con-
sider whether or not the change will lead to bill
increases. Mitigating large bill increases for individual
customers is a fundamental goal of rate design, and
in some jurisdictions low-income customers are also
afforded particular attention to ensure that they are
not adversely affected by rate changes. In some cases,
low-income customers are eligible for special rates or
rate riders that protect them from large rate increases,
as exemplified by the lifeline rates provision in Section
114 of the 1978 PURPA. Strategies to manage bill
impacts include phasing-in rate changes to reduce the
rate shock in any single year, creating exemptions for
certain at-risk customer groups, and disaggregating
customers into small customer groups to allow more
targeted rate forms.
Because of the concern over bill impacts, new and inno-
vative rates are often offered as voluntary rates. While
improving acceptance, voluntary rate structures generally
attract a relatively small percentage of customers (less
than 20 percent) unless marketed heavily by the utility.
Voluntary rates can lead to some "free riders," meaning
customers who achieve bill reductions without changing
their consumption behavior and providing any real sav-
ings to the utility. Rates to promote energy efficiency can
be offered as voluntary, but the low participation and
free rider issues should be taken into account in their
design to ensure that the benefits of the consumption
changes they encourage are at least as great as the
resulting bill decreases.
Maintain Rate Simplicity
Economists and public policy analysts can become enam-
ored with efficient pricing schemes, but customers gen-
erally prefer simple rate forms. The challenge for
promoting energy efficiency is balancing the desire for
rates that provide the right signals to customers with the
need to have rates that customers can understand, and
to which they can respond. Rate designs that are too
complicated for customers to understand will not be
effective at promoting efficient consumption decisions.
Particularly in the residential sector, customers might pay
more attention to the total bill than to the underlying
rate design.
Addressing the Issues:
Alternative Approaches
The prior sections listed the issues that stakeholders
must balance in designing new rates. This section
presents some traditional and non-traditional rate
designs and discusses their merits for promoting energy
efficiency. The alternatives described below vary by
metering/billing reguirement, information complexity,
and ability to reflect marginal cost.3
Rate Design Options
Inclining Tier Block
Inclining tier block rates, also referred to as inverted
block rates, have per-unit prices that increase for each
successive block of energy consumed. Inclining tiered
rates offer the advantages of being simple to understand
and simple to meter and bill. Inclining rates can also
meet the policy goal of protecting small users, which
often include low-income customers. In fact, it was the
desire to protect small users that prompted the initiation
of increasing tiers in California. Termed "lifeline rates" at
the time, the intention was to provide a small base level
of electricity to all residential customers at a low rate,
and charge the higher rate only to usage above that
base level. The concept of lifeline rates continues in var-
ious forms for numerous services such as water and
sewer services, and can be considered for delivery or
commodity rates for electricity and natural gas. However,
in many parts of the country, low-income customers are
not necessarily low-usage customers, so a lifeline rate
might not protect all low-income customers from
energy bills.
3 As part of its business model, a utility may use innovative rate options for the purpose of product differentiation. For example, advanced metering that
enables a design with continuously time-varying rates can apply to an end-use (e.g., air conditioning) that is the main contributor to the utility's system
peak. Another example is the bundling of sale of electricity and consumer devices (e.g., a 10-year contract for a central air conditioner whose price
includes operation cost).
To create a sustainable, aggressive national commitment to energy efficiency
5-5
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Tiered rates also provide a good fit for regions where
the long-run marginal cost of energy exceeds the cur-
rent average cost of energy. For example, regions with
extensive hydroelectric resources might have low aver-
age costs, but their marginal cost might be set by much
higher fossil plant costs or market prices (for purchase
or export).
See Table 5-1 for additional utilities that offer inclining
tier residential rates.
Time of Use (TOU)
TOU rates establish varying charges by season or time of
day. Their designs can range from simple on- and off-
peak rates that are constant year-round to more compli-
cated rates with seasonally differentiated prices for sev-
eral time-of-day periods (e.g., on-, mid- and off-peak).
TOU rates have support from many utilities because of
the flexibility to reflect marginal costs by time of delivery.
TOU rates are commonly offered as voluntary rates for
residential electric customers,4 and as mandatory rates
for larger commercial and industrial customers. Part of
the reason for TOU rates being applied primarily to
larger users is the additional cost of TOU metering and
billing, as well as the assumed greater ability of larger
customers to shift their loads.
TOU rates are less applicable to gas rates, because the
natural storage capability of gas mains allows gas utilities
to procure supplies on a daily, rather than hourly, basis.
Additionally, seasonal variations are captured to a large
extent in costs for gas procurement, which are typically
passed through to the customer. An area with con-
strained seasonal gas transportation capacity, however,
could merit a higher distribution cost during the con-
strained season. Alternatively, a utility could recover a
higher share of its fixed costs during the high demand
season, because seasonal peak demand drives the
sizing of the mains.
As TOU rates are typically designed to be revenue-
neutral with the status quo rates, a high on-peak price
will be accompanied by a low off-peak price. Numerous
studies in electricity have shown that while the high on-
peak prices do cause a reduction in usage during that
period, the low off-peak prices lead to an increase in
usage in the low-cost period. There has also been an
Table 5-1. Partial List of Utilities With Inclining Tier Residential Rates
^^^^^^^^^^^^^^^^^^^^^^^^^B
Utility Name
Florida Power and Light
Consolidated Edison
Pacific Gas & Electric
Southern California Edison
Arizona Public Service Co
Sacramento Municipal Util Dist
Indiana Michigan Power Co
Modesto Irrigation District
Turlock Irrigation District
Granite State Electric Co
Vermont Electric Cooperative, Inc
City of Boulder
State
FL
NY
CA
CA
AZ
CA
Ml
CA
CA
NH
VT
NV
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4 For a survey of optional rates with voluntary participation, see Horowitz and Woo (2006).
5-6 National Action Plan for Energy Efficiency
-------
"income effect" observed where people buy more energy
as their overall bill goes down, due to switching con-
sumption to lower price periods. The net effect might
not be a significant decrease in total electricity usage,
but TOU rates do encourage reduced usage when that
reduction is the most valuable. Another important con-
sideration with TOU prices is the environmental impact.
Depending on generation mix and the diurnal emissions
profile of the region, shifting consumption from the on-
peak period to off-peak period might provide environ-
mental net benefits.
The Energy Policy Act of 2005 Section 7252 requires
states and non-regulated utilities, by August 8, 2007, to
consider adopting a standard requiring electric utilities to
offer a/I of their customers a time-based rate schedule
such as time-of-use pricing, critical peak pricing, real-
time pricing, or peak load reduction credits.
Dynamic Rates
Under a dynamic rate structure, the utility has the ability
to change the cost or availability of power with limited,
or no, notice. Common forms of dynamic rates include
the following:
Real-time pricing (RTP) rates vary continuously over
time in a way that directly reflects the wholesale price
of electricity.
Critical peak pricing (CPP) rates have higher rates
during periods designated as critical peak periods by
the utility. Unlike TOU blocks, the days in which critical
peaks occur are not designated in the tariff, but are
designated on relatively short notice for a limited
number of days during the year.
Non-firm rates typically follow the pricing form of the
otherwise applicable rates, but offer discounts or
incentive payments for customers to curtail usage during
times of system need (Horowitz and Woo, 2006). Such
periods of system need are not designated in advance
through the tariff, and the customer might receive little
notice before energy supply is interrupted. In some
cases, customers may be allowed to "buy through"
periods when their supply will be interrupted by paying
a higher energy charge (a non-compliance penalty). In
those cases, the non-firm rate becomes functionally
identical to CPP rates.
Dynamic rates are generally used to: 1) promote load
shifting by large, sophisticated users, 2) give large users
access to low "surplus energy" prices, or 3) reduce peak
loads on the utility system. Therefore, dynamic rates are
complementary to energy efficiency, but are more useful
for achieving demand response during peak periods
than reducing overall energy usage.
Two-Part Rates
Two-part rates refer to designs wherein a base level of
customer usage is priced at rates similar to the status
quo (Part 1) and deviations from the base level of usage
are billed at the alternative rates (Part 2). Two-part rates
are common among RTP programs to minimize the free
rider problem. By implementing a two-part rate, cus-
tomers receive the real time price only for their change
in usage relative to their base level of usage. Without the
two-part rate form, most low load-factor customers on
rates with demand charges would see large bill reduc-
tions for moving to an RTP rate.
A two-part rate form, however, could also be combined
with other rate forms that are more conducive to energy
efficiency program adoption. For example, a two-part
rate could be structured like an increasing tiered block
rate, with the Tier 1 allowance based on the customer's
historical usage. This structure would address many of
the rate design barriers such as revenue stability. Of
course, there would be implementation issues, such as
determining what historical period is used to set Part 1,
and how often that baseline is updated to reflect
changes in usage. Also, new customers would need to
be assigned an interim baseline.
ncate rt sustainable, aggmwvp national (oinrn/tment to energy
5-7
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Demand Charges
Demand charges bill customers based on their peak usage
rather than their total usage during the month. For electric-
ity, demand charges are based on usage during particular
TOU periods (e.g., peak demand) or usage during any peri-
od in the month (e.g., maximum demand). Demand
charges can also use a percentage of the highest demand
over the prior year or prior season as a minimum demand
level used for billing. For natural gas, demand can be based
on the highest monthly usage over the past year or season.
For both gas and electricity, utilities prefer demand
charges over volumetric charges because they provide
greater revenue certainty, and encourage more consis-
tent asset utilization. In contrast to a demand charge, a
customer charge that covers more of a utility's fixed costs
reduces profits from increased sales, and the utility
disincentive to promote energy efficiency.
For energy efficiency programs, demand charges could
help promote reductions in usage for those end uses
that cause the customer's peak.5 In general, however,
volumetric rates are more favorable for energy efficiency
promotion. Increasing the demand charges would
reduce the magnitude of the price signal that could be
sent through a volumetric charge.
Mechanisms Where Customer Benefits Are
Not Driven by Tariff Savings
The rate design forms discussed above allow customers
to benefit from energy efficiency through bill reductions;
however, other types of programs provide incentives that
are decoupled from the customer's retail rate.
Discount for Efficiency via Conservation Behavior
In some cases, energy efficiency benefits are passed on to
customers through mechanisms other than retail rates. For
example, in California the "20/20" program was imple-
mented in 2001, giving customers a 20 percent rebate off
their summer bills if they could reduce their electricity
consumption by 20 percent compared to the summer peri-
od the prior year. The program's success was likely due to
a combination of aggressive customer education, energy
conservation behavior (reducing consumption through lim-
iting usage of appliances and end-uses) and investment in
energy efficiency. Pacific Gas & Electric (PG&E) has just
implemented a similar program for natural gas, wherein
customers can receive a rebate of 20 percent of their last
winter's bill if they can reduce natural gas usage by 10 per-
cent this winter season. The 20/20 program was popular
and effective. It was easy for customers to understand, and
there might be a psychological advantage to a program
that gives you a rebate (a received reward), as opposed to
one that just allows you to pay less than you otherwise
would have (a lessened penalty). Applying this concept
might require some adjustments to account for changes in
weather or other factors.
Benefit Sharing
There are two types of benefit sharing with customers.5
Under the first type of shared savings, a developer (utility
or third party) installs an energy-saving device. The cus-
tomer shares the bill savings with the developer until the
customer's project load has been paid off. In the second
type of shared savings, the utility is typically the developer
and installs an energy efficiency or distributed genera-
tion device at the customer site. The customer then pays
an amount comparable to what the bill would have been
without the device or measures installed, less a portion
of the savings of the device based on utility avoided
costs. This approach decouples the customer benefits
from the utility rate, but it can be complicated to deter-
mine what the consumption would have been without
the device or energy efficiency.
PacifiCorp in Oregon tackled this problem by offering a
cash payment of 35 percent of the cost savings for residen-
tial weatherization measures, where the cost savings was
based on the measure's expected annual kWh savings and
a schedule of lifecycle savings per kWh (PacifiCorp, 2002).
5 Horowitz and Woo (2006) show that demand charges can be used to differentiate service reliability, thus implementing curtailable and interruptible seivice
programs that are useful for meeting system resource adequacy.
6 Note that benefit sharing is not the same as "shared savings," used in the context of utility incentives for promoting energy efficiency programs.
5-8 National Action Plan for Energy Efficiency
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Table 5-2. Pros and Cons of Rate Design Forms
Program Type
Increasing Tier Block
(Inverted block)
http://www.pge.com/
tariffs/pdf/E-1 .pdf
http://www.sdge.com/
tm2/pdf/DR.pdf
http://www.sdge.com/
tm2/pdf/GR.pdf
Time of Use (TOU)
http://www.nationalgridus
.com/masselectric/
home/rates/4_tou.asp
Criteria
Avoided Cost Benefits
and Utility incentives
Pro: Good match when
long-run marginal costs
are above average
costs.
Con: Might not be the
right price signal if long-
run marginal costs are
below average costs.
Pro: (1) Low implemen-
tation cost; (2) Tracks
expected marginal
costs.
Con: Unclear if marginal
costs should be short-
or long-run.
Energy anrl Peak
Reductions
- -- - - -
Pro: Can achieve annual
energy reductions.
Con: Does not encourage
reductions in any partic-
ular period (unless com-
bined with a time-based
rate like TOU).
Customer Incentive and
Bill impact
Pro: Provides strong
incentive to reduce
usage.
Con: Could result in
large bill increases for
users that cannot change
their usage level, and
could encourage more
usage by the smaller
customers.
Pro: Can achieve peak Pro: Provides customers
load relief. I with more control over
i their bills than flat rates,
Con: Might not achieve j and incentive to reduce
substantial energy peak usage.
reductions or produce
significant emissions Con: If mandatory,
benefits. could result in large bill
I increases for users that
: cannot change their
usage pattern.
Impact on Non-
Participants
Pro: If mandatory, little
impact on other customer
classes.
Con: Could not be
implemented on a
voluntary basis because
of free rider losses.
Pro: If mandatory, little
average impact, but
can be large on some
customers.
Con: If optional,
potentially large impact
due to free riders, which
can be mitigated by a
careful design.
Implementation and
Transition Issues
Pro: Simple to bill with
existing meters.
Con: Could require
phased transition to
mitigate bill impacts.
Pro: Extensive industry
experience with TOU
rate.
Con:(1) If mandatory,
likely opposed by
customers, but not
necessarily the utility;
(2) If optional, opposed
by non-participants and
possibly the utility.
Dynamic Rates: Real
Time Pricing (RTP)
http://www.exeloncorp.co
m/comed/library/pdfs/
advance_copy_tariff_
revision6.pdf
http://www.southern
company.com/
gulfpower/pricing/gulf_
rates.asp?mnuOpco=gulf
&mnuType=com&mnulte
m=er#rates
http://www.nationalgridus
.com/niagaramohawk/
non_html/rates_psc207
.pdf
Dynamic Rates:
Critical Peak Pricing
(CPP)
http://www.southerncom-
pany.com/gulfpower/
pricing/pdf/rsvp.pdf
http://www.idahopower.
com/aboutus/
regulatoryinfo/tariffPdf.
asp?id=263&.pdf
http://www.pge.com/
tariffs/pdf/E-3.pdf
-h
Pro: (1) Tracks day-
j ahead or day-of short-
| run marginal cost for
economically efficient
daily consumption
decisions; (2) RTP rates
can be set to help
allocate capacity in an
economically efficient
manner during
emergencies.
Con: No long-run price
signal for investment
decisions.
! Pro: (1) Tracks short-run
i marginal cost shortly
! before emergency; (2) If
| the CPP rates are set at
I correctly predicted
j marginal cost during
j emergency, they ration
\ capacity efficiently.
| Con: High implementa-
i tion cost.
Pro: Can achieve peak
load relief.
Con: (1) Not applicable
to gas; (2) Might not
achieve substantial
annual energy reductions
or produce significant
emissions benefits.
I Same as above.
Same as above.
Pro: Likely to achieve
load relief.
Con: Unlikely to provide
significant annual energy
reductions.
Same as above.
Pro: Little impact,
unless the utility heavily
discounts the rate for
the non-critical hours.
Con: (1) If mandatory,
likely opposed by
customers and the utility
due to complexity and
implementation cost;
(2) High implementation
cost for metering and
information system
costs.
Con: (1) If mandatory,
likely opposed by
customers and the
utility due to high
implementation cost;
(2) If optional, few would
object, unless the
implementation cost
spills over to other
customer classes.
5-9
-------
Table 5-2. Pr
Program Type
Dynamic Rates
Nonfirm
http://www.pacificorp.com
/Regulatory_Rule_Schedul
e/Regulatory Rule Sched
ule2220.pdf
Two-Part Rates
http://www.aepcustomer.
com/tariffs/Michigan/pdf/
MISTD4-28-05.pdf:
Demand Charges
http://www.sce.eom/N R/
sc3/tm2/pdf/ce30-1 2.pdf
Discount for
Efficiency, Benefit
Sharing, etc.
http://www.cpuc.ca.gov/
PUBLISHED/NEWS
RELEASE/51 362.htm
http://www.pacificorp.
com/Regulatory_Rule_
Schedule/Regulatory Rule
_Schedule7794.pdf
Energy Efficiency
Customer Rebate
Programs (e.g., 20/20
program in California)
www.sce.com/Rebatesand
Savings/2020
www.sdge.com/tm2/pdf/
20-20-TOU.pdf
www.pge.com/tariffs/pdf/
EZ-2020.pdf
os and Cons of F
Avoided Cost Benefits
and Utility Incentives
Pro: (1 ) Provides
emergency load
relief to support
system reliability;
(2) Implements
efficient rationing.
Con: (1) Does not track
costs; (2) Potentially
high implementation
cost.
Pro: Allows rate to be
set at utility avoided
cost.
Con: Requires estab-
lishing customer base-
line, which is subject
to historical usage,
weather, and other
factors.
Pro: Reflects the cus-
tomer's usage of the
utility infrastructure.
Con: Does not con-
sider the duration of
the usage (beyond 1 5
minutes or one hour
for electric).
Pro: Incentive can be
tied directly to avoided
costs, without the
need to change
overall rate design.
Con: Only a portion
of the benefits are
reflected in the incen-
tive, as rate savings
will still be a factor
for most options.
Pro: Can avoid more
drastic rationing
mechanisms when
resources are signifi-
cantly constrained.
Con: Customer
discounts are not set
based on utility cost
savings, and therefore
these programs might
over-reward cutomers
who qualify.
?ate Design Forms
Energy and Peak
Reductions
Pro: (1) Can achieve
load reductions to meet
system needs;
(2) Applicable to both
gas and electric service.
Con: Unlikely to
encourage investment
in energy efficiency
measures.
Pro: Can be used to
encourage or discourage
peak usage depending
on characteristics of
"part two" rate form.
Pro: Can achieve load
reductions.
Con: Might not achieve
substantial annual
reductions.
Pro: Utilities generally
have control over what
measures are eligible for
| an incentive, so the mix
of peak and energy sav-
ings can be determined
during program design.
Con: Impacts might be
smaller than those
attainable through
mandatory rate
programs.
Pro: (1) Links payment
of incentive directly to
metered energy savings;
i (2) Easy to measure and
verify.
Con: Focused on
throughput and not
capacity savings.
ป (continued)
Criteria
Customer Incentive and
Bill Impact
Pro: Bill savings com-
pensate customer for
accepting lower
reliability.
Pro: Provides incentives
for changes in customer's
usage. Therefore, no
change in usage results
in the same bill.
Pro: Provides customers
with incentive to reduce
peak usage and flatten
their usage profile.
Con: If mandatory,
could result in large bill
increases for users who
cannot change their
usage pattern.
Pro: (1) Provides direct
incentive for program
participation, plus
ongoing bill reductions
(for most options);
(2) Does not require rate
changes.
Con: Existing rate forms
might impede adoption
because of overly low
bill savings.
Prq:(1) Provides a dear
incentive to customers to
reduce their energy usage,
motivates customers, and
i gets them thinking about
their energy usage;
(2) Can provide significant
bill savings; (3) Doesn't
require customers to sign
up for any program and
can be offered to
| everyone.
Impact on
Non-Partiepants
Pro: Little impact,
unless the utility offers a
curtailable rate discount
that exceeds the utility's
expected cost savings.
Pro: Non-participants
are held harmless.
Pro: If mandatory, little
average impact, but can
be large on some cus-
tomers.
Con: If optional, poten-
tially large impact due
to free riders, but this
can be mitigated by a
careful design.
Pro: Reflects the
characteristics of the
underlying rate form.
Con: Shifts costs to non-
participants to the
extent that the rebate
exceeds the change in
utility cost.
\ i
Implementation arid
Transition issues
Pro: (1) If optional, non-
participants would not
object unless discount is
"excessive"; (2) If man-
datory, different levels of
reliability (at increasing
cost) would need to be
offered.
Con: Complicated
notice and monitoring
requirements.
Pro: Complexity can
be controlled through
design of "part two"
rate form.
Con: (1) Customers
might not be accustomed
to the concept;
(2) Difficult to implement
for many smaller
customers.
Con: (1 ) If mandatory,
likely opposed by
customers and the utility
due to high implementa-
tion cost; (2) If optional,
few would object, unless
the implementation cost
spills over to other
customer classes.
Pro: Implementation
simplified by the ability
to keep status quo rates.
Con: Places burden for
action on the energy
efficiency implementer,
whereas a mandatory
rate change could
encourage customers to
seek out efficiency
options.
Pro: Very successful
during periods when
public interest is served
for short-term resource
savings, (e.g. energy
crisis.)
Con: Implementation
: and effectiveness might
be reduced after being
: in place for several
years.
5-10
-------
1 !! B1': i-snaiK HHj
The primary function of on-bill financing is to remove the
barrier presented by the high first-time costs of many ener-
gy efficiency measures. On-bill financing allows the cus-
tomer to pay for energy efficiency equipment over time,
and fund those payments through bill savings. On-bill
financing can also deliver financial benefits to the partici-
pants by providing them access to low financing costs
offered by the utility. An example of on-bill financing is the
"Pay As You Save" (PAYS) program, which provides
upfront funding in return for a monthly charge that is
always less than the savings.7
Pros and Cons of Various Designs
Rate design involves tradeoffs among numerous goals.
Table 5-2 summarizes the pros and cons of the various
rate design forms from various stakeholder perspectives,
considering implementation and transition issues. In most
cases, design elements can be combined to mitigate
weaknesses of any single design element, so the table
should be viewed as a reference and starting point.
Successful Strategies
Rate design is one of a number of factors that contribute
to the success of energy efficiency programs. Along with
rate design, it is important to educate customers about
their rates so they understand the value of energy effi-
ciency investment decisions. Table 5-3 shows examples
of four states with successful energy efficiency programs
and complementary rate design approaches. Certainly,
one would expect higher rates to spur energy efficiency
adoption, and that appears to be the case for three of
the four example states. However, Washington has an
active and cost-effective energy efficiency program,
despite an average residential rate far below the national
average of 10.3 cents per kWh. (EIA, 2006)
Table 5-3. Conditions That Assist Success
California
Washington State
Massachusetts
New York
Rate Forms
and Cost
Structures
Increasing tier block rates for residen-
tial (PG&E, SCE, and SDG&E).
Increasing block rate for residential
gas (SDG&E).
http://www.pge.com/tariffs/pdf/E-1.pdf
http://www.sce.com/NR/sc3/tm2/pdf/
ce12-12.pdf
http://www.sdge.com/tm2/pdf/DR.pdf
http://www.sdge.com/tm2/pdf/GR.pdf
Increasing tier block rates for resi-
dential electric (PacifiCorp). Gas
rates are flat volumetric (Puget
Sound Electric [PSE]). High export
value for electricity, especially in
the summer afternoon.
http://www.pacificorp.com/Regulat
ory_Rule_Schedule/Regulatory_
Rule_Schedule2205.pdf
Flat electricity rates per
kWh with voluntary TOU
rates for distribution service
(Massachusetts Electric).
http://www.nationalgridus.
com/masselectric/non_html/
rates_tariff.pdf
Increasing tier rates for
residential (Consolidated
Edison).
http://www.coned.com/
documents/elec/
201-210.pdf
Resource and
Load
Characteristics
Summer electric peaks. Marginal
resources are fossil units. High mar-
ginal cost for electricity, especially in
the summer afternoon. Import transfer
capability can be constrained. Winter
gas peaks, although electric genera-
tion is flattening the difference.
http://www.ethree.com/CPUC/
E3_Avoided_Costs_Final.pdf
Winter peaking electric loads, but
summer export opportunities.
Heavily hydroelectric, so resource
availability can vary with precipita-
tion. Gas is winter peaking.
http://www.nwcouncil.org/energy/
powersupply/outlook.asp
http://www.nwcouncil.org/energy/
powerplan/plan/Default.htm
http://www.pse.com/energyEnviron
ment/supplyPDFs/ll"Summary%20
Charts%20and%20Graphs.pdf
| Part of Indpendant System
' Operator New England
(ISO-NE), which is summer
peaking.
| http://www.nepool.com/
trans/celt/report/2005/2005
! _celt_report.pdf
High summer energy costs
and capacity concerns in
the summer for the New
York City area.
http://www.eia.doe.gov/
cneaf/electricity/page/
fact_sheets/newyork.html
7 See http://www.paysamerica.org/.
5-11
-------
Table 5-3. Conditions That Assist Success (continued)
Average
Residential
Electric Rates
Market and
Utility
Structure
Political and
Administrative
A ^A*KUซ
Actors
Demand-Side
Management
(DSM) Funding
California
13.7cents/kWh
(EIA, 2006)
Competitive electric generation and
gas procurement. Regulated wires
and pipes.
http://www.energy.ca.gov/electricity/
divestiture.html
http://www.cpuc.ca.gov/static/
energy/electric/ab57_briefing_
assembly_may_1 0.pdf
Environmental advocacy in the past
and desire to avoid another energy
capacity crisis. Energy efficiency
focuses on electricity.
http://www.energy.ca.gov/
2005publications/CEC-999-2005-
015/CEC-999-2005-015.PDF
http://www.energy.ca.gov/
2005publications/CEC-999-2005-
011/CEC-999-2005-011.PDF
http://www.cpuc.ca.gov/PUBLISHED/
NEWS_RELEASE/49757.htm
http://www.cpuc.ca.gov/static/
energy/electridenergy+effidency/
about.htm
System benefits charge (SBC) and
procurement payment.
http://www.cpuc.ca.gov/static/
energy/electric/energy+efficiency/
ee_funding.htm
Washington State
6.7 cents/kWh
(EIA, 2006)
Vertically integrated.
http://www.wutc.wa.gov/
webimage.nsf/6351 7e4423a08d
e988256576006a8(0bc/fe1 5f75d
7135a7e28825657e00710928!
OpenDocument
Strong environmental commit-
ment and desire to; reduce
susceptibility to mejrket risks.
http://www.nwenergy.org/news/
news/news_conservation.html
SBC.
http://www.wutc.wa.gov/
webimage.nsf/8d71 2cfdd4796c8
888256aaa007e94b4/0b2e3934
3cObe04a88256a3b007449fe!
OpenDocument
Massachusetts
17.6cents/kWh
(EIA, 2006)
Competitive generation.
Regulated wires.
http://www.eia.doe.gov/
cneaf/electridty/page/
fact_sheets/mass.html
DSM instituted as an
alternative to new plant
construction in the late
1980s and early 1990s
(integrated resource man-
agement). Energy efficiency
now under the oversight of
Division of Energy
Resources.
http://www.mass.gov/Eoca/
docs/doer/pub_info/
ee-long.pdf
SBC.
http://www.mass.gov/Eoca/
docs/doer/pubjnfo/
ee-long.pdf
New York
15.7cents/kWh
(EIA, 2006)
Competitive generation.
Regulated wires.
http://www.nyserda.org/sep/
sepsection2-1 .pdf
PSC established policy goals
to promote competitive energy
efficiency service and provide
direct benefits to the people
of New York.
On 1/16/06, Governor George
E. Pataki unveiled "a compre-
hensive, multi-faceted plan
that will help reduce New
York's dependence on
imported energy."
http://www.getenergysmart.
org/AboutNYES.asp
http://www.ny.goV/governor/p
ress/06/01 16062.html
SBC.
http://www.getenergysmart.
org/AboutNYES.asp
Part of Washington's energy efficiency efforts can be
explained by the high value for power exports to
California, and partly by the regional focus on promoting
energy efficiency. Washington and the rest of the Pacific
Northwest region place a high social value on environ-
mental protection, so Washington might be a case
where the success of energy efficiency is fostered by
high public awareness, and the willingness of the public
to look beyond the short-term out-of-pocket costs and
consider the longer term impacts on the environment.
The other three states shown in Table 5-3 share the com-
mon characteristics of high residential rates, energy effi-
ciency funded through a system benefits surcharge, and
competitive electric markets. The formation of competi-
tive electric markets could have also encouraged energy
efficiency by: (1) establishing secure funding sources or
energy efficiency agencies to promote energy efficiency,
(2) increasing awareness of energy issues and risks
regarding future energy prices, and (3) the entrance of
new energy agents promoting energy efficiency.
5-12 National Action Plan for Energy Efficiency
-------
Key Findings
This chapter summarizes the challenges and opportuni-
ties for employing rate designs to encourage utility
promotion and customer adoption of energy efficiency.
Key findings of this chapter include:
Rate design is a complex process that balances
numerous regulatory and legislative goals. It is impor-
tant to recognize the promotion of energy efficiency in
the balancing of objectives.
Rate design offers opportunities to encourage cus-
tomers to invest in efficiency where they find it to be
cost-effective, and to participate in new programs that
provide innovative technologies (e.g., smart meters) to
help customers control their energy costs.
Utility rates that are designed to promote sales or max-
imize stable revenues tend to lower the incentive for
customers to adopt energy efficiency.
Rate forms like declining block rates, or rates with large
fixed charges reduce the savings that customers can
attain from adopting energy efficiency.
Appropriate rate designs should consider the unique
characteristics of each customer class. Some general
rate design options by customer class are listed below.
Residential. Inclining tier block rates. These rates
can be quickly implemented for all residential and
small commercial and industrial electric and gas
customers. At a minimum, eliminate declining tier
block rates. As metering costs decline, also explore
dynamic rate options for residential customers.
- Small Commercial. Time of use rates. While these
rates might not lead to much change in annual
usage, the price signals can encourage customers
to consume less energy when energy is the most
expensive to produce, procure, and deliver.
rates.
These rates provide bill stability and can be established
so that the change in consumption through adoption
of energy efficiency is priced at marginal cost. The
complexity in establishing historical baseline quantities
might limit the application of two-part rates to the
larger customers on the system.
- All Customer Classes. Seasonal price differentials.
Higher prices during the higher cost peak season
encourage customer conservation during the peak
and can reduce peak load growth. For example,
higher winter rates can encourage the purchase of
more efficient space heating equipment.
Energy efficiency can be promoted through non-tariff
mechanisms that reach customers through their utility
bill. Such mechanisms include:
Benefit Sharing Programs. Benefit sharing programs
can resolve situations where normal customer bill
savings are smaller than the cost of energy efficiency
programs.
- On-Bill Financing. Financing support can help cus-
tomers overcome the upfront costs of efficiency
devices.
Energy Efficiency Rebate Programs Programs that
offer discounts to customers who reduce their
energy consumption, such as the 20/20 rebate pro-
gram in California, offer clear incentives to cus-
tomers to focus on reducing their energy use.
More effort is needed to communicate the benefits
and opportunities for energy efficiency to customers,
regulators, and utility decision-makers.
To create a sustainable, aggressive national commitment to energy efficiency
5-13
-------
Recommendations and Options
The National Action Plan for Energy Efficiency Leadership
Group offers the following recommendations as ways to
overcome many of the barriers to energy efficiency in
rate design, and provides a number of options for con-
sideration by utilities, regulators, and stakeholders (as
presented in the Executive Summary):
Recommendation: Modify ratemaking practices to
promote energy efficiency investments. Rate design
offers opportunities to encourage customers to invest in
efficiency where they find it to be cost-effective, and to
participate in new programs that bring them innovative
technologies (e.g., smart meters) to help them control
their energy costs.
Opt/ons to Com/der
Including the impact on adoption of energy efficiency
as one of the goals of retail rate design, recognizing
that it must be balanced with other objectives.
Eliminating rate designs that discourage energy effi-
ciency by not increasing costs as customers consume
more electricity or natural gas.
Adopting rate designs that encourage energy efficiency,
considering the unique characteristics of each cus-
tomer class, and including partnering tariffs with other
mechanisms that encourage energy efficiency, such as
benefit sharing programs and on-bill financing.
Recoir.mond/itiOrr Broadly t omrnumc;.iU.- the hc-i efs rs
of. and opportunities for, energy efficiency. Experience
shows that energy efficiency programs help customers
save money and contribute to lower cost energy sys-
tems. But these impacts are not fully documented nor
recognized by customers, utilities, regulators and policy-
makers. More effort is needed to establish the business
case for energy efficiency for all decision-makers, and to
show how a well-designed approach to energy efficien-
cy can benefit customers, utilities, and society by (1)
reducing customers bills over time, (2) fostering finan-
cially healthy utilities (return on equity [ROE], earnings
per share, debt coverage ratios unaffected), and (3) con-
tributing to positive societal net benefits overall. Effort is
also necessary to educate key stakeholders that,
although energy efficiency can be an important low-cost
resource to integrate into the energy mix, it does require
funding just as a new power plant requires funding.
Further, education is necessary on the impact that energy
efficiency programs can have in concert with other energy
efficiency policies such as building codes, appliance
standards, and tax incentives.
Communicating on the role of energy efficiency in
lowering customer energy bills and system costs and
risks over time.
5-14
-------
References
Baskette, C, Horii, B., Kollman, E., & Price, S. (2006).
Avoided Cost Estimation and Post-Reform Funding
Allocation for California's Energy Efficiency
Programs. Energy, 31:6-7, 1084-1099.
Bonbright, J.C. (1961). Principles of Public Utility Rates.
New York: Columbia University Press.
Brown, S.J. and Sibley, D.S. (1986). The Theory of
Public Utility Pricing. New York: Cambridge
University Press.
Horowitz, I. and Woo, C.K. (2006). Designing Pareto-
Superior Demand-Response Rate Options. Energy,
31:6-7, 1040-1051.
Huntington, S. (1975). The Rapid Emergence of
Marginal Cost Pricing in the Regulation of Electric
Utility Rate Structures. Boston University Law
Review, 55: 689-774.
Hyman, L.S., Hyman, A.S., & Hyman, R.C. (2000).
America's Electric Utilities: Past, Present, and
Future, 7th Edition. Arlington, VA: Public Utilities
Reports.
Joskow, PL. (1976). Contributions to the Theory of
Marginal Cost Pricing. Bell Journal of Economics,
7(1): 197-206.
Joskow, P. (1979). Public Utility Regulatory Policy Act of
1978: Electric Utility Rate Reform. Natural
Resources Journal, 19: 787-809.
Kahn, A. (1970). The Economics of Regulation. New
York: John Wiley & Sons.
PacifiCorp (2002, September 30). Oregon Schedule 9
Residential Energy Efficiency Rider Optional
Weatherization Services. P.U.C. OR No. 35, Advice
No. 02-027.
Phillips, C.F. (1988). The Regulation of Public Utilities:
Theory and Practice. Arlington, VA: Public Utilities
Reports.
Public Utility Regulatory Policies Act (PURPA) of 1978,
Section 114.
U.S. Energy Information Administration [EIA] (2006).
Average Retail Price of Electricity to Ultimate
Customers by End-Use Sector, by State. Electric
Power Monthly.
5-15
-------
-------
6
Energy Efficiency
! Program Best Practices
Energy efficiency programs have been operating successfully in some parts of the country since the late
1980s. From the experience of these successful programs, a number of best practice strategies have
evolved for making energy efficiency a resource, developing a cost-effective portfolio of energy efficiency pro-
grams for all customer classes, designing and delivering energy efficiency programs that optimize budgets,
and ensuring that programs deliver results.
Overview
Cost-effective energy efficiency programs have been
delivered by large and small utilities and third-party pro-
gram administrators in some parts of the country since
the late 1980s. The rationale for utility investment in effi-
ciency programming is that within certain existing mar-
kets for energy-efficient products and services, there are
barriers that can be overcome to ensure that customers
from all sectors of the economy choose more energy-
efficient products and practices. Successful programs
have developed strategies to overcome these barriers, in
many cases partnering with industry and voluntary
national and regional programs so that efficiency pro-
gram spending is used not only to acquire demand-side
resources, but also to accelerate market-based purchases
by consumers.
Leadership Group Recommendations
Applicable to Energy Efficiency
Program Best Practices
Recognize energy efficiency as a high priority
energy resource.
Make a strong, long-term commitment to
cost-effective energy efficiency as a resource.
Broadly communicate the benefits of, and oppor-
tunities for, energy efficiency.
Provide sufficient and stable program funding to
deliver energy efficiency where cost-effective.
A list of options for promoting best practice energy
efficiency programs is provided at the end of
this chapter.
Challenges that limit greater utility
investment in energy efficiency include
the following:
The majority of utilities recover fixed operating costs
and earn profits based on the volume of energy they
sell. Strategies for overcoming this throughput disin-
centive to greater investment in energy efficiency are
discussed in Chapter 2: Utility Ratemaking & Revenue
Requirements.
Lack of standard approaches on how to quantify and
incorporate the benefits of energy efficiency into
resource planning efforts, and institutional barriers at
many utilities that stem from the historical business
model of acquiring generation assets and building
transmission and distribution systems. Strategies
for overcoming these challenges are addressed in
Chapter 3: Incorporating Energy Efficiency in
Resource Planning.
Rate designs that are counterproductive to energy
efficiency might limit greater efficiency investment by
large customer groups, where many of the most
cost-effective opportunities for efficiency program-
ming exist. Strategies for encouraging rate designs
that are compatible with energy efficiency are dis-
cussed in Chapter 5: Rate Design.
Efficiency programs need to address multiple cus-
tomer needs and stakeholder perspectives while
simultaneously addressing multiple system needs, in
many cases while competing for internal resources.
This chapter focuses on strategies for making energy
efficiency a resource, developing a cost-effective port-
folio of energy efficiency programs for all customer
classes, designing and delivering efficiency programs
that optimize budgets, and ensuring that those pro-
grams deliver results are the focus of this chapter.
To create a sustainable, aggressive national commitment tu energy effiaei.: y
-------
Programs that have been operating over the past
decade, and longer, have a history of proven savings in
megawatts (MW), megawatt-hours (MWh), and therms,
as well as on customer bills. These programs show that
energy efficiency can compare very favorably to supply-
side options.
This chapter summarizes key findings from a portfolio-
level1 review of many of the energy efficiency programs
that have been operating successfully for a number of
years. It provides an overview of best practices in the
following areas:
Political and human factors that have led to increased
reliance on energy efficiency as a resource.
Key considerations used in identifying target measures2 for
energy efficiency programming in the near- and long-term.
Program design and delivery strategies that can maxi-
mize program impacts and increase cost-effectiveness.
The role of monitoring and evaluation in ensuring that
program dollars are optimized and that energy efficiency
investments deliver results.
Background
Best practice strategies for program planning, design
and implementation, and evaluation were derived from
a review of energy efficiency programs at the portfolio
level across a range of policy models (e.g., public benefit
charge administration, integrated resource planning).
The box on page 6-3 describes the policy models and
Table 6-1 provides additional details and examples of
programs operating under various policy models. This
chapter is not intended as a comprehensive review of the
energy efficiency programs operating around the country,
but does highlight key factors that can help improve and
accelerate energy efficiency program success.
Organizations reviewed for this effort have a sustained
history of successful energy efficiency program imple-
mentation (See Tables 6-2 and 6-3 for summaries of
these programs) and share the following characteristics:
Significant investment in energy efficiency as a
resource within their policy context.
Development of cost-effective programs that deliver
results.
Incorporation of program design strategies that work
to remove near- and long-term market barriers to invest-
ment in energy efficiency.
Willingness to devote the necessary resources to make
programs successful.
Most of the organizations reviewed also have conducted
full-scale impact evaluations of their portfolio of energy
efficiency investments within the last few years.
The best practices gleaned from a review of these organ-
izations can assist utilities, their commissions, state energy
offices, and other stakeholders in overcoming barriers to
significant energy efficiency programming, and begin
tapping into energy efficiency as a valuable and clean
resource to effectively meet future supply needs.
1 For the purpose of this chapter, portfolio refers to the collective set of energy efficiency programs offered by a utility or third-party energy efficiency
program administrator.
2 Measures refer to the specific technologies (e.g., efficient lighting fixture) and practices (e.g., duct sealing) that are used to achieve energy savings.
6-2 National Action Plan for Energy Efficiency
-------
Energy Efficiency Programs Are Delivered Within Many Policy Models
Systems Benefits Charge (SBC) Model
In this model, funding for programs comes from an SBC
that is either determined by legislation or a regulatory
process. The charge is usually a fixed amount per
kilowatt-hour (kWh) or million British thermal units
(MMBtu) and is set for a number of years. Once funds
are collected by the distribution or integrated utility,
programs can be administered by the utility, a state
agency, or a third party. If the utility implements the
programs, it usually receives current cost recovery and
a shareholder incentive. Regardless of administrative
structure, there is usually an opportunity for stake-
holder input.
This model provides stable program design. In some
cases, funding has become vulnerable to raids by
state agencies. In areas aggressively pursuing energy
efficiency as a resource, limits to additional funding
have created a ceiling on the resource. While predom-
inantly used in the electric sector, this model can, and
is, being used to fund gas programs.
integrated Resource Plan (iRP) Model
In this model, energy efficiency is part of the utility's
IRP. Energy efficiency, along with other demand-side
options, is treated on an equivalent basis with supply.
Cost recovery can either be in base rates or through a
separate charge. The utility might receive a sharehold-
er incentive, recovery of lost revenue (from reduced
sales volume), or both. Programs are driven more by
the resource need than in the SBC models. This gen-
erally is an electric-only model. The regional planning
model used by the Pacific Northwest is a variation on
this model.
Request For Proposal (RFP) Model
In this case, a utility or an independent system opera-
tor (ISO) puts out a competitive solicitation RFP to
acquire energy efficiency from a third-party provider
to meet demand, particularly in areas where there are
transmission and distribution bottlenecks or a gener-
ation need. Most examples of this model to date have
been electric only. The focus of this type of program
is typically on saving peak demand.
Portfolio Standard
In this model, the program adminstrator is subject to
a portfolio standard expressed in terms of percentage
of overall energy or demand. This model can include
gas as well as electric, and can be used independent-
ly or in conjunction with an SBC or IRP requirement.
Municipal Utility/Electric Cooperative Mode!
In this model, programs are administered by a munic-
ipal utility or electric cooperative. If the utility/cooper-
ative owns or is responsible for generation, the energy
efficiency resource can be part of an IRP. Cost recovery
is most likely in base rates. This model can include gas
as well as electric.
(3 :
-------
Table 6-1. Overview of Energy Efficiency Programs
Policy Model/
Examples
SBC with utility
implementation:
California
Rhode Island
Connecticut
Massachusetts
SBC with state
or third-party
implementation:
New York
Vermont
Wisconsin
IRP or gas
planning model:
Nevada
Arizona
Minnesota
Bonneville Power
Administration (BPA)
(regional planning
model as well)
Vermont Gas
Keyspan
RFP model
for full-scale
programs and
congestion relief
Portfolio standard
model (can be
combined with
SBC or IRP):
Nevada
California
Connecticut
Texas
Municipal
utility & electric
cooperative:
Sacramento
Municipal Utility
District (CA)
City of Austin (TX)
Great River Energy
(MN)
Funding
Type
Separate charge
Separate charge
Varies: in rates,
capitalized, or
separate charge
Varies
Varies
In rates
Shareholder
Incentive1
Usually
No
In some cases
No
Varies
No
Lead
Administrator
Utility
State agency
Third party
Utility
Utility buys from
third party
Utility may
implement
programs or
buy to meet
standard
Utility
Role in
Resource
Acquisition
Depends on
whether utility
owns generation
None or limited
Integrated
Integrated - can
be T&D only
Standard portfolio
Depends on
whether utility
owns generation
Scope of
Programs
Programs for all
customer classes
Programs for all
customer classes
Program type
dictated by
resource need
Program type
dictated by
resource need
Programs for all
customer classes
Programs for all
customer classes
Political
Context
Most programs of
this type came out
of a restructuring
settlement in states
where there was an
existing infrastruc-
ture at the utilities
Most programs of
this type came out
of a restructuring
settlement
Part of IRP
requirement;
may be combined
with other models
Connecticut and
Con Edison going
out to bid to reduce
congestion
Generally used
in states with
existing programs
to increase program
activity
Based on customer
and resource needs;
can be similar to IRP
model
1 A shareholder incentive is a financial incentive to a utility (above those that would normally be recovered in a rate case) for achieving set goals for
energy efficiency program performance.
6-4
National Action Plan for Energy Efficiency
-------
Key Findings
Overviews of the energy efficiency programs reviewed
for this chapter are provided in Table 6-2 and 6-3. Key
findings drawn from these programs include:
Energy efficiency resources are being acquired on aver-
age at about one-half the cost of the typical new
power sources, and about one-third of the cost of nat-
ural gas supply in many casesand contribute to an
overall lower cost energy system for rate-payers (EIA,
2006).
Many energy efficiency programs are being delivered at
a total program cost of about $0.02 to $0.03 per life-
time kilowatt-hour (kWh) saved and $0.30 to $2.00
per lifetime million British thermal units (MMBtu)
saved. These costs are less than the avoided costs seen
in most regions of the country. Funding for the majority
of programs reviewed ranges from about 1 to 3 per-
cent of electric utility revenue and 0.5 to 1 percent of
gas utility revenue.
Even low energy cost states, such as those in the Pacific
Northwest, have reason to invest in energy efficiency,
as energy efficiency provides a low-cost, reliable
resource that reduces customer utility bills. Energy effi-
ciency also costs less than constructing new genera-
tion, and provides a hedge against market, fuel, and
environmental risks (Northwest Power and Conservation
Council, 2005).
Well-designed programs provide opportunities for cus-
tomers of all types to adopt energy savings measures
and reduce their energy bills. These programs can help
customers make sound energy use decisions, increase
control over their energy bills, and empower them to
manage their energy usage. Customers can experience
significant savings depending on their own habits and
the program offered.
Consistently funded, well-designed efficiency programs
are cutting electricity and natural gas loadproviding
annual savings for a given program year of 0.15 to 1
percent of energy sales. These savings typically will
accrue at this level for 10 to 15 years. These programs
are helping to offset 20 to 50 percent of expected
energy growth in some regions without compromising
end-user activity or economic well being.
Research and development enables a continuing source
of new technologies and methods for improving energy
efficiency and helping customers control their
energy bills.
Many state and regional studies have found that pur-
suing economically attractive, but as yet untapped
energy efficiency could yield more than 20 percent sav-
ings in total electricity demand nationwide by 2025.
These savings could help cut load growth by half or
more, compared to current forecasts. Savings in direct
use of natural gas could similarly provide a 50 percent
or greater reduction in natural gas demand growth.
Potential varies by customer segment, but there are
cost-effective opportunities for all customer classes.
Energy efficiency programs are being operated success-
fully across many different contexts: regulated and
unregulated markets; utility, state, or third-party
administration; investor-owned, public, and coopera-
tives; and gas and electric utilities.
Energy efficiency resources are being acquired through
a variety of mechanisms including system benefits
charges (SBCs), energy efficiency portfolio standards
(EEPSs), and resource planning (or cost of service)
efforts.
Cost-effective energy efficiency programs for electricity
and natural gas can be specifically targeted to reduce
peak load.
Effective models are available for delivering gas and
electric energy efficiency programs to all customer classes.
Models may vary based on whether a utility is in the ini-
tial stages of energy efficiency programming, or has
been implementing programs for a number of years.
To create a sustainable, aggre^ive national commitment to encigy efficiency
6-5
-------
Table 6-2. Efficiency Measures of Natural Gas Savings Programs
Keyspan
Program Administrator
(MA)
Policy Model Gas
Period 2004
Vermont Gas
(VT)
Gas
2004
SoCal Gas
(CA)
Gas
2004
Program Funding
Average Annual Budget ($MM) 12
I
% of Gas Revenue 1 .00%
1.1
1 .60%
21
0.53%
Benefits
Annual MMBtu Saved 1 (OOOs MMBtu) I 500
Lifetime MMBtu Saved 2 (OOOs MMBtu) 6,000
60
700
1,200
15,200
Cost-Effectiveness
i I
Cost of Energy Efficiency ($/lifetime MMBtu) 2 2
i
I !
Retail Gas Prices ($/thousand cubic feet [Mcf]) 1 1 9
Cost of Energy Efficiency (% Avoided Energy Cost) 1 9% 1 8%
Total Avoided Cost (2005 $/MMBtu) 3 12 11
j
1
8
18%
7
1 SWEEP, 2006; Southern California Gas Company, 2004.
2 Lifetime MMBtu calculated as 12 times annual MMBtu saved where not reported (not reported for Keyspan or Vermont Gas).
3 VT and MA avoided cost (therms) represents all residential (not wholesale) cost considerations (ICF Consulting, 2005).
Energy efficiency programs, projects, and policies ben-
efit from established and stable regulations, clear
goals, and comprehensive evaluation.
Energy efficiency programs benefit from committed
program administrators and oversight authorities, as
well as strong stakeholder support.
Most large-scale programs have improved productivity,
enabling job growth in the commercial and industrial sectors.
Large-scale energy efficiency programs can reduce
wholesale market prices.
Lessons learned from the energy efficiency programs
operated since inception of utility programs in the late
1980s are presented as follows, and cover key aspects of
energy efficiency program planning, design, implemen-
tation, and evaluation.
Summary of Best Practices
In this chapter, best practice strategies are organized and
explained under four major groupings:
Making Energy Efficiency a Resource
Developing an Energy Efficiency Plan
Designing and Delivering Energy Efficiency Programs
Ensuring Energy Efficiency Investments Deliver Results
For the most part, the best practices are independent of
the policy model in which the programs operate. Where
policy context is important, it is discussed in relevant sec-
tions of this chapter.
6-6 Ndtiontil Action Plan for Energy Efficiency
-------
Making Energy Efficiency a Resource
Energy efficiency is a resource that can be acquired to
help utilities meet current and future energy demand. To
realize this potential requires leadership at multiple levels,
organizational alignment, and an understanding of the
nature and extent of the energy efficiency resource.
Leadership at multiple levels is needed to establish the
business case for energy efficiency, educate key stake-
holders, and enact policy changes that increase invest-
ment in energy efficiency as a resource. Sustained
leadership is needed from:
Key individuals in upper management at the utility
who understand that energy efficiency is a resource
alternative that can help manage risk, minimize long-
term costs, and satisfy customers.
State agencies, regulatory commissions, local govern-
ments and associated legislative bodies, and/or consumer
advocates that expect to see energy efficiency considered
as part of comprehensive utility management.
Businesses that value energy efficiency as a way to
improve operations, manage energy costs, and con-
tribute to long-term energy price stability and availabili-
ty, as well as trade associations and businesses, such as
Energy Service Companies (ESCOs), that help members
and customers achieve improved energy performance.
Public interest groups that understand that in order
to achieve energy efficiency and environmental
objectives, they must help educate key stakeholders
and find workable solutions to some of the financial
challenges that limit acceptance and investment in
energy efficiency by utilities.3
Organizational alignment. With policies in place to sup-
port energy efficiency programming, organizations need
to institutionalize policies to ensure that energy efficiency
goals are realized. Factors contributing to success include:
Strong support from upper management and one or
more internal champions.
A framework appropriate to the organization that
supports large-scale implementation of energy effi-
ciency programs.
Clear, well-communicated program goals that are tied
to organizational goals and possibly compensation.
Adequate staff resources to get the job done.
- A commitment to continually improve business
processes.
Understanding of the efficiency resource is necessary
to create a credible business case for energy efficiency.
Best practices include the following:
- Conduct a "potential study" prior to starting programs
to inform and shape program and portfolio design.
Outline what can be accomplished at what costs.
Review measures for all customer classes including
those appropriate for hard-to-reach customers, such
as low income and very small business customers.
Developing an Energy Efficiency Plan
An energy efficiency plan should reflect a long-term per-
spective that accounts for customer needs, program
cost-effectiveness, the interaction of programs with
other policies that increase energy efficiency, the oppor-
tunities for new technology, and the importance of
addressing multiple system needs including peak load
reduction and congestion relief. Best practices include
the following:
Offer programs for all key customer classes.
Align goals with funding.
3 Public interest groups include environmental organizations such as the National Resources Defense Council (NRDC), Alliance to Save Energy (ASE), and
American Council for an Energy Efficient Economy (ACEEE) and regional market transformation entities such as the Northeast Energy Efficiency
Partnerships (NEEP), Southwest Energy Efficiency Project (SWEEP), and Midwest Energy Efficiency Alliance (MEEA).
To create a sustainable, aggressive national commitment to energy efficiency
6-7
-------
Table 6-3. Efficiency Measures of Electric and Combination Programs
Policy Model
Period
Program Funding
Spending on Electric Energy
Efficiency ($MM) 1
Budget as % of Electric Revenue 2
Avg Annual Budget Gas (SMM)
% of Gas Revenue
Benefits
Annual MWh Saved / MWh Sales **
Lifetime MWh Saved 5 (OOOs MWh)
Annual MW Reduction
Lifetime MMBtu Saved * (OOOs MMBtu)
Annual MMBtu Saved (OOOs MMBtu}
Non-Energy Benefits
Avoided Emissions (tons/yr for 1
program year)
(could include benefits from load response,
renewable, and DG programs)
Cost-Effectiveness
NYSERDA
(NY)
SBC w/State Admin
2005
138
1.3%
NR1ฐ
NRio
0.2%
6,216
172
17,124
1,427
$79M bill
reduction
NOX: 470
S02: 850
C02: 400,000
Efficiency
Vermont
(VT)
SBC w/3rd Party Admin
... __
2004
14
3.3%
NA
NA
0.9%
700
15
470
40
" " ' --
37,200 CCF of water
Unspecified pollutants:
460,000 over
MA Utilities
(MA)
SBC w/Utility Admin
2002
123
3.0%
i
- - .- _
311
NA
0.4%
3,428
48
850
70
$21 M bill
reduction
2,090 new jobs
created
NOX:135
S02: 395
C02: 161,205
Wl Department
of
Administration12
SBC w/State Admin
2005
63
1 .4%
NA
j
NA
0.1%
1,170
81
11,130
930
- - -
Value of
non-energy benefits:
Residential: $6M
C/l: $36M
- " " ~'~
NOX: 2,167
S02: 4,270
C02: 977,836
(annual savings from 5
program years)
!
CA Utilities
(CA)
SBC w/Utility Admin
& Portfolio Standard
2004
317
1.5%
NA
NA
1.0%
22,130
377
43,410
3,620
NR
NR
Cost of Energy Efficiency
S/lifetime (kWh) 6
$/lifetime (MMBtu)
Retail Electricity Prices (S/kWh)
Retail Gas Prices (S/mcf)
Avoided Costs (2005$) ',ซ
Energy ($/kWh)
Capacity ($/kW)9
On-Peak Energy ($/kWh)
Off-Peak Energy ($/kWh)
Cost of Energy Efficiency as % Avoided
Energy Cost
0.02
NA
0.13
NA
I
0.03
28.20
89%
0.02
NA
0.11
NA
0.07 ,
3.62
29%
0.03
0.32
0.11
L NR
0.07
6.64
0.08
0.06
10%
6.05 I
NA I
r _ j_.
NA~ " "[~~
f 0.02 to 0.06 "
i
90%
i
0.01
NA
0.13
NA
0.06
23%
C/l = Commercial and Industrial; C02 = Carbon Dioxide; SMM = Million Dollars; N/A = Not Applicable; NR = Not Reported; NOX = Nitrogen Oxides;
S02 = Sulfur Dioxide
1 NYSERDA 2005 spending derived from subtracting cumulative 2004 spending from cumulative 2005 spending; includes demand response and
research and development (R&D).
2 ACEEE, 2004; Seattle City Light, 2005.
3 Annual MWh Saved averaged over program periods for Wisconsin and California Utilities. NYSERDA 2005 energy efficiency Sewings derived from
subtracting cumulative 2004 savings from 2005 cumulative reported savings.
4 EIA, 2006; Austin Energy, 2004; Seattle City Light, 2005. Total sales for California Utilities in 2003 and SMUD in 2004 were derived based on
growth in total California retail sales as reported by EIA.
5 Lifetime MWh savings based on 12 years effective life of installed eguipment where not reported for NYSERDA, Wisconsin, Nevada, SMUD, BPA,
and Minnesota. Lifetime MMBtu savings based on 12 years effective life of installed equipment.
6-8
-------
Table 6-3. Efficiency Measures of Electric and Combination Programs (continued)
Nevada
IRPwith
Portfolio
Standard
2003
CT Utilities
(CT)
SBC w/Utility Admin
& Portfolio Standard
2005
SMUD
(CA)
Municipal
Utility
2004 "
Seattle City
Light (WA)
Municipal Utility
2l)04"
Austin Energy
Municipal Utility
2005
Bonneville Power
Administration
(ID, MT, OR, WA)
Regional Planning
2004
MINI Electric and
Gas Investor-Owned
Utilities (MM)
IRP and Conservation
Improvement Program
"2"003
Program Funding
11 65
0.5% ! 3.1%
NA NA
NA """" "NA
30
___ _.._..._
1.5%
NA
NA
20
.._
3.4%
NA
25
78
1.9% NR
NA NA
NA | NA ~[ NA
52
NR
$14
0.50%
Benefits
0.1%
420"
16
NA
NA
-
NR
. - . _
NR
1.0%
0.5%
4,4"00 I" 630
135
..- _.
NA
NA
lifetime savings of
$550M on bills
NOX: 334
S02:123
C02: 198,586
14
NA
NA
NR
NOX:18
0.7%
1,000
7 -
NA
NA
lifetime savings of
S430M on bills
created
f
C02:353,100
(cummulative
annual savings for
1 3 years)
0.9%
930
50
10,777
1,268
Potentially over 900
jobs created
Residential: $6M
C/l: $36M
NOX: 640
S02:104
C02: 680,000
over lifetime
! 0.5%
3,080
3,940
47.2 ! 129
NA ; 22,010
NA , 1,830
NR NR
NR
NR
Cost-Effectiveness
01)3
NA
0.09
NA
36.06
0.01"
NA""
0.10
" NA
0.03
NA
0.10
NA""
0.07
2033"" f '
| i 0.08
" ; " aoe
... . j. .1
Not calculated
, ,
21%
63%
0.02 j 0.03 T" 0.03 F 0.01
NA I 2-32 NA
0.06 I 0.12 Wholesaler - NA
NA NA | NA
0.06
0.06
5.80
NR
..._
|
NR { Wholesaler - NA NR
I
I
~ - - ~ -
Not calculated Not calculated
Not calculated
6 Calculated for all cases except SMUD; SMUD data provided by J. Parks, Manager, Energy Efficiency and Customer R&D, Sacramento Municipal
Utility District (personal communication, May 19, 2006).
7 Avoided cost reported as a consumption ($/kWh) not a demand (kW) figure.
s Total NSTAR avoided cost for 2006.
9 Avoided capacity reported by NYSERDA as the three-year averaged hourly wholesale bid price per MWh.
'o NYSERDA does not separately track gas-related project budget, revenue, or benefits.
11 NSTAR Gas only.
12 Wisconsin has a portfolio that includes renewable distributed generation; some comparisons might not be appropriate.
13 Range based on credits given for renewable distributed generation.
6-9
-------
Use cost-effectiveness tests that are consistent with
long-term planning.
Consider building codes and appliance standards when
designing programs.
1 Plan to incorporate new technologies.
Keep funding (and other program characteristics) as
consistent as possible.
Invest in education, training, and outreach.
Leverage customer contact to sell additional efficien-
cy and conservation.
Consider efficiency investments to alleviate transmis- Leverage private sector expertise, external funding,
sion and distribution constraints. and financing.
Create a roadmap of key program components, Leverage manufacturer and retailer resources
milestones, and explicit energy use reduction goals. through cooperative promotions.
Designing and Delivering Energy Efficiency Programs
Program administrators can reduce the time to market
and implement programs and increase cost-effectiveness
by leveraging the wealth of knowledge and experience
gained by other program administrators throughout the
nation and working with industry to deliver energy effi-
ciency to market. Best practices include the following:
Begin with the market in mind.
Conduct a market assessment.
Solicit stakeholder input.
Listen to customer and trade ally needs.
Use utility channels and brands.
Promote both energy and non-energy (e.g.,
improved comfort, improved air quality) benefits of
energy efficient products and practices to customers.
Coordinate with other utilities and third-party pro-
gram administrators.
Leverage the national ENERGY STAR program.
Keep participation simple.
Leverage state and federal tax credits and other tax
incentives (e.g., accelerated depreciation, first-year
expensing, sales tax holidays) where available.
Build on ESCO and other financing program options.
Consider outsourcing some programs to private and
not-for-profit organizations that specialize in
program design and implementation through a
competitive bidding process.
Stan with demonstrated program modelsbuild
infrastructure for the future.
- Start with successful program approaches from
other utilities and program administrators and adapt
them to local conditions to accelerate program
design and effective implementation.
Determine the right incentives, and if incentives are finan-
cial, make sure that they are set at appropriate levels.
Invest in educating and training the service industry
(e.g., home performance contractors, heating and cool-
ing technicians) to deliver increasingly sophisticated
energy efficiency services.
Evolve to more comprehensive programs.
6-10 National Action Plan for Energy Efficiency
-------
Change measures over time to adapt to changing
markets and new technologies.
Pilot test new program concepts.
Ensuring Energy Efficiency Investments Deliver Results
Program evaluation helps optimize program efficiency
and ensure that energy efficiency programs deliver
intended results. Best practices include the following:
Budget, plan and initiate evaluation from the
onset; formalize and document evaluation plans
and processes.
Develop program and project tracking systems that
support evaluation and program implementation
needs.
Conduct process evaluations to ensure that programs
are working efficiently.
Conduct impact evaluations to ensure that mid- and
long-term goals are being met.
Communicate evaluation results to key stakeholders.
Include case studies to make success more tangible.
Making Energy Efficiency a Resource
Energy efficiency programs are being successfully operated
across many different contexts including electric and gas
uti ities; regulated and unregulated markets; utility, state,
and third-party administrators; and investor-owned, pub-
lic, and cooperatively owned utilities. These programs are
reducing annual energy use by 0.15 to 1 percent at spend-
ing levels between 1 and 3 percent of electric, and 0.5 and
1.5 percent of gas revenuesand are poised to deliver
substantially greater reductions over time. These organi-
zations were able to make broader use of the energy
efficiency resource in their portfolio by having:
Leadership at multiple levels to enact policy change.
Organizational alignment to ensure that efficiency
goals are realized.
A well-informed understanding of the efficiency
resource including, the potential for savings and the
technologies for achieving them.
Examples of leadership, organizational alignment, and
the steps that organizations have taken to understand
the nature and extent of the efficiency resource are
provided in the next sections.
Leadership
Many energy efficiency programs reviewed in this chapter
began in the integrated resource plan (IRP) era of the
electric utilities of the 1980s. As restructuring started in
the late 1990s, some programs were suspended or halted.
In some cases (such as California, New York,
Massachusetts, Connecticut, and Rhode Island), however,
settlement agreements were reached that allowed
restructuring legislation to move forward if energy effi-
ciency programming was provided through the distribu-
tion utility or other third-party providers. In many cases,
environmental advocates, energy service providers, and
state agencies played active roles in the settlement
process to ensure energy efficiency was part of the
restructured electric utility industry. Other states (such as
Minnesota, Wisconsin, and Vermont) developed legisla-
tion to address the need for stable energy efficiency pro-
gramming without restructuring their state electricity
markets. In addition, a few states (including California,
Minnesota, New Jersey, Oregon, Vermont, and
Wisconsin) enacted regulatory reguirements for utilities
or other parties to provide gas energy efficiency pro-
grams (Kushler, et al., 2003). Over the past few years,
the mountain states have steadily ramped up energy
efficiency programs.
In all cases, to establish energy efficiency as a resource
reguired leadership at multiple levels:
Leadership is needed to establish the business case for
energy efficiency, educate key stakeholders, and enact
policy changes that increase investment in energy
efficiency as a resource. Sustained leadership is
needed from:
To create a sustainable, aggressive national commitment to energy efficiency
6-11
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Key individuals in upper management at the utility
who understand that energy efficiency is a resource
alternative that can help manage risk, minimize long-
term costs, and satisfy customers.
State agencies, regulatory commissions, local gov-
ernments and associated legislative bodies, and/or
consumer advocates that expect to see energy efficien-
cy considered as part of comprehensive utility manage-
ment.
Businesses that value energy efficiency as a way to
improve operations, manage energy costs, and con-
tribute to long-term energy price stability and avail-
ability, as well as trade associations and businesses,
such as ESCOs, that help members and customers
achieve improved energy performance.
-Public interest groups that understand that in order to
achieve energy efficiency and environmental objectives,
they must help educate key stakeholders and find work-
able solutions to some of the financial challenges that limit
acceptance and investment in energy efficiency by utilities.
The following are examples of how leadership has resulted
in increased investment in energy efficiency:
In Massachusetts, energy efficiency was an early con-
sideration as restructuring legislation was discussed.
The Massachusetts Department of Public Utilities
issued an order in D.P.U. 95-30 establishing principles
to "establish the essential underpinnings of an electric
industry structure and regulatory framework designed
to minimize long-term costs to customers while main-
taining safe and reliable electric service with minimum
impact on the environment." Maintaining demand side
management (DSM) programs was one of the
major principles the department identified during
the transition to a restructured electric industry.
The Conservation Law Foundation, the Massachusetts
Energy Efficiency Council, the National Consumer Law
Center, the Division of Energy Resources, the Union of
Concerned Scientists, and others took leadership roles
in ensuring energy efficiency was part of a restructured
industry (MDTE, 1995).
Leadership at multiple levels led to significantly
expanded programming of Nevada's energy efficiency
program, from about $2 million in 2001 to an estimated
$26 million to $33 million in 2006:
"There are 'champions' for expanded energy efficiency
efforts in Nevada, either in the state energy office or in
the consumer advocate's office. Also, there have been
very supportive individuals in key positions within the
Nevada utilities. These individuals are committed to
developing and implementing effective DSM programs,
along with a supportive policy framework"
(SWEEP, 2006).
Public interest organizations, including SWEEP, also
played an important role by promoting a supportive pol-
icy framework (see box on page 6-13, "Case Study:
Nevada Efficiency Program Expansion" for additional
information).
Fort Collins City Council (Colorado) provides an example
of local leadership. The council adopted the Electric
Energy Supply Policy in March 2003. The Energy Policy
includes specific goals for city-wide energy consump-
tion reduction (10 percent per capita reduction by
2012) and peak demand reduction (15 percent oer
capita by 2012). Fort Collins Utilities introduced a variety
of new demand-side management (DSM) programs
and services in the last several years in pursuit of the
energy policy objectives.
Governor Huntsman's comprehensive policy on energy
efficiency for the state of Utah, which was unveiled in
April 2006, is one of the most recent examples of lead-
ership. The policy sets a goal of increasing the state's
energy efficiency by 20 percent by the year 2015. One
key strategy of the policy is to collaborate with utilities,
regulators, and the private sector to expand energy
efficiency programs, working to identify and remove
barriers, and assisting the utilities in ensuring that
efficiency programs are effective, attainable, and feasible
to implement.
6-12 National Action Plan for Energy Efficiency
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Organizational Alignment
Adequate staff resources to get the job done.
Once policies and processes are in place to spearhead
increased investment in energy efficiency, organizations
often institutionalize these policies to ensure that goals
are realized. The most successful energy efficiency pro-
grams by utilities or third-party program administrators
share a number of attributes. They include:
Clear support from upper management and one or
more internal champions.
Clear, well-communicated program goals that are tied to
organizational goals and, in some cases, compensation.
A framework appropriate to the organization that sup-
ports large-scale implementation of energy efficiency
programs.
Strong regulatory support and policies.
A commitment to continually improve business processes.
"Support of upper management is critical to program
success" (Komor, 2005). In fact, it can make or break a
program. If the CEO of a company or the lead of an
agency is an internal champion for energy efficiency, it
will be truly a part of how a utility or agency does busi-
ness. Internal champions below the CEO or agency level
are critica as well. These internal champions motivate
their fellow employees and embody energy efficiency as
part of the corporate culture.
Case Study: Nevada Efficiency Program Expansion
Nevada investor-owned utilities (lOUs), Nevada Power, and
Sierra Pacific Power Company phased-out DSM programs
in the mid-1990s. After 2001, when the legislature
refined the state's retail electric restructuring law to permit
only large customers (>1 megawatt [MW]) to purchase
power competitively, utilities returned to a vertically
integrated structure and DSM programs were restarted, but
with a budget of only about $2 million that year.
As part of a 2001 IRP proceeding, a collaborative process
was established for developing and analyzing a wider
range of DSM program options. All parties reached an
agreement to the IRP proceeding calling for $11.2 million
per year in utility-funded DSM programs with an emphasis
on peak load reduction but also significant energy sav-
ings. New programs were launched in March 2003.
In 2004, the Nevada public utilities commission also
approved a new policy concerning DSM cost recovery,
allowing the utilities to earn their approved rate of return
plus 5 percent (e.g., a 15 percent return if the approved
rate is 10 percent) on the equity-portion of their DSM
program funding. This step gave the utilities a much
greater financial incentive to expand their DSM programs.
In June 2005, legislation enacted in Nevada added energy
savings from DSM programs to the state's Renewable
Portfolio Standard. This innovative policy allows energy
savings from utility DSM programs and efficiency meas-
ures acquired through contract to supply up to 25 percent
of the requirements under the renamed clean energy
portfolio standard. The clean energy standard is equal to
6 percent of electricity supply in 2005 and 2006 and
increases to 9 percent in 2007 and 2008, 12 percent from
2009 to 2010, 15 percent in 2011 and 2012, 18 percent
in 2013 and 2014, and 20 percent in 2015 and there-
after. At least half of the energy savings credits must
come from electricity savings in the residential sector.
Within months of passage, the utilities proposed a large
expansion of DSM programs for 2006. In addition to the
existing estimated funding of $26 million, the Nevada util-
ities proposed adding another $7.5 million to 2006 DSM
programs. If funding is approved, the Nevada utilities esti-
mate the 2006 programs alone will yield gross energy sav-
ings of 153 gigawatt-hours/yr and 63 MW (Larry Holmes,
personal communication, February 28, 2006).
Source: Geller, 2006.
To create a sustainable, aggressive national commitment to energy efficiency
6-13
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Tying energy efficiency to overall corporate goals and
compensation is important, particularly when the utility is
the administrator of energy efficiency programs. Ties to
corporate goals make energy efficiency an integral part of
how the organization does business as exemplified below:
Bonneville Power Administration (BPA) includes energy
efficiency as a part of its overall corporate strategy, and
its executive compensation is designed to reflect how
well the organization meets its efficiency goals. BPA's
strategy map states, "Development of all cost-effective
energy efficiency in the loads BPA serves facilitates
development of regional renewable resources, and
adopts cost-effective non-construction alternatives to
transmission expansion" (BPA, 2004).
National Grid ties energy efficiency goals to staff and
executive compensation (P. Arons, personnel communi-
cation, June 15, 2006).
Sacramento Municipal Utility District (SMUD) ties energy
efficiency to its reliability goal: "To ensure a reliable energy
supply for customers in 2005, the 2005 budget includes
sufficient capacity reserves for the peak summer season.
We have funded all of the District's commercial and resi-
dential load management programs, and on-going effi-
ciency programs in Public Good to continue to contribute
to peak load reduction" (SMUD, 2004a).
Nevada Power's Conservation Department had a
"Performance Dashboard" that tracks costs, participating
customers, kWh savings, kW savings, $/kWh, $/kW,
customer contribution to savings, and total customer
costs on a real time basis, both by program and overall.
Austin Energy's Mission Statement is "to deliver clean,
affordable, reliable energy and excellent customer serv-
ices" (Austin Energy, 2004).
Seattle City Light has actively pursued conservation as
an alternative to new generation since 1977 and has
tracked progress toward its goals (Seattle City Light,
2005). Its longstanding, resolute policy direction estab-
lishes energy conservation as the first choice resource.
In more recent years, the utility has also been guided by
the city's policy to meet of all the utility's future load
growth with conservation and renewable resources
(Steve Lush, personal communication, June 2006).
From Pacific Gas and Electric's (PG&E's)
Second Annual Corporate Responsibility
Report (2004):
"One of the areas on which PG&E puts a lot of
emphasis is helping our customers use energy
more efficiently."
"For example, we plan to invest more than $2
billion on energy efficiency initiatives over the
next 10 years. What's exciting is that the most
recent regulatory approval we received on this
was the result of collaboration by a large and
broad group of parties, including manufacturers,
customer groups, environmental groups, and the
state's utilities."
Beverly Alexander, Vice President,
Customer Satisfaction, PG&E
Having an appropriate framework within the organiza-
tion to ensure success is also important. In the case of
the utility, this would include the regulatory framework
that supports the programs, including cost recovery and
potentially shareholder incentives and/or decoupling. l:or
a third-party administrator, an appropriate framework
might include a sound bidding process by a state agency
to select the vendor or vendors and an appropriate reg-
ulatory arrangement with the utilities to manage the
funding process.
Adequate resources also are critical to successful imple-
mentation of programs. Energy efficiency programs
need to be understood and supported by departments
outside those that are immediately responsible for pro-
gram delivery. If information technology, legal, power
supply, transmission, distribution, and other depa't-
ments do not share and support the energy efficiency
goals and programs, it is difficult for energy efficiency
programs to succeed. When programs are initiated, the
need for support from other departments is greatest.
Support from other departments needs to be considered
in planning and budgeting processes.
6-14 National Action Plan for Energy Efficiency
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As noted in the Nevada case study, having a shareholder
incentive makes it easier for a utility to integrate effi-
ciency goals into its business because the incentive off-
sets some of the concerns related to financial treatment
of program expenses and potential lost revenue from
decreased sales. For third-party program administrators,
goals might be built into the contract that governs the
overall implementation of the programs. For example,
Efficiency Vermont's contract with the Vermont
Department of Public Service Board has specific per-
formance targets. An added shareholder return will not
motivate publicly and cooperatively owned utilities,
though they might appreciate reduced risks from expo-
sure to wholesale markets, and the value added in
improved customer service. SMUD, for example, cites
conservation programs as a way to help customers
lower their utility bills (SMUD, 2004b). These compa-
nies, like lOUs, can link employee compensation to
achieving energy efficiency targets.
Business processes for delivering energy efficiency pro-
grams and services to customers should be developed
and treated like other business processes in an organiza-
tion and reviewed on a regular basis. These processes
should include documenting clear plans built on explicit
assumptions, ongoing monitoring of results and plan
inputs (assumptions), and regular reassessment to
improve performance (using improved performance
itself as a metric).
Understanding the Efficiency Resource
Energy efficiency potential studies provide the initial jus-
tification (the business case) for utilities embarking on or
expanding energy efficiency programs, by providing
information on (1) the overall potential for energy effi-
ciency and (2) the technologies, practices, and sectors
with the greatest or most cost-effective opportunities for
achieving that potential. Potential studies illuminate the
nature of energy efficiency resource, and can be used by
legislators and regulators to inform efficiency policy and
programs. Potential studies can usually be completed in
three to eight months, depending on the level of detail,
availability of data, and complexity. They range in cost
from $100,000 to $300,000 (exclusive of primary data
collection). Increasingly, many existing studies can be
drawn from to limit the extent and cost of such an effort.
The majority of organizations reviewed in developing this
chapter have conducted potential studies in the past five
years. In addition, numerous other studies have been con-
ducted in recent years by a variety of organizations inter-
ested in learning more about the efficiency resource in
their state or region. Table 6-4 summarizes key findings
for achievable potential (i.e., what can realistically be
achieved from programs within identified funding param-
eters), by customer class, from a selection of these studies.
It also illustrates that this potential is well represented
across the residential, commercial, and industrial sectors.
The achievable estimates presented are for a future time
period, are based on realistic program scenarios, and rep-
resent potential program impacts above and beyond nat-
urally occurring conservation. Energy efficiency potential
studies are based on currently available technologies. New
technologies such as those discussed in Table 6-9 will con-
tinuously and significantly increase potential over time.
The studies show that achievable potential for reducing
overall energy consumption ranges from 7 to 32 percent
for electricity and 5 to 19 percent for gas, and that
demand for electricity and gas can be reduced by about
0.5 to 2 percent per year. For context, national electricity
consumption is projected to grow by 1.6 percent per
year, and gas consumption is growing 0.7 percent per
year (EIA, 2006a).
The box on page 6-17, "Overview of a Well-Designed
Potential Study" provides information on key elements
of a potential study. Related best practices for efficiency
programs administrators include:
Conducting a "potential study" prior to starting programs.
Outlining what can be accomplished at what cost.
Reviewing measures appropriate to all customer classes
including those appropriate for hard-to-reach customers,
such as low income and very small business customers.
Jo create a sustainable, aggressive national commitment to energy efficiency
6-15
-------
Table 6-4. Achievable Energy Efficiency Potential From Recent Studies
State/Region
U.S. (Clean
Energy Future) '
Con Edison !
Pacific NW 3
Puget Sound '
Connecticut s
California '
Southwest'
Illinois9
Study
Length
(Years)
20
10
20
20
8
9
17
19
17
Achievable
Demand
Reduction (MW)
Residential
n/a
n/a
n/a
133
240
1,800
n/a
3,584
n/a
Commercial
n/a
n/a
n/a
148
575
2,600
n/a
8,180
n/a
Industrial
n/a
n/a
n/a
16
93
1,550
n/a
602
n/a
Achievable Gas
Consumption
Reduction (MMBtu)
Residential
500,000,000
11,396,700
n/a
n/a
n/a
27,500,000
n/a
"
n/a
n/a
Commercial
300,000,000
10,782,100
n/a
n/a
n/a
20,600,000
n/a
n/a
n/a
Industrial
1,400,000,000
231,000
n/a
n/a
n/a
n/a
n/a
n/a
Achievable
GWh Reduction
Residential
392,732
n/a
11,169
1,169
1,655
9,200
24,593
15,728
Commercial
281,360
n/a
9,715
1,293
2,088
11,900
50,291
2,948
Industrial
292,076
n/a
5,011
139
723
8,800
8,180
67,000
AVERAGE:
Demand
Savings as
% of 2004
State
Mameplate
Capacity 10
Annual
%MW
Savings
Electricity
n/a
n/a
n/a
9.3%
12.5%
9.6%
n/a
23.1%
n/a
n/a
n/a
n/a
0.5%
1 .6%
1.1%
n/a
1 .2%
n/a
1.1%
Electricity
Savings as
% of Total
2004 State
Usage "
Annual
% GWh
Savings
Electricity
24%
n/a
12.5%
9.5%
13.4%
11.8%
32.8%
14.3%
43.2%
1 .2%
n/a
0.6%
0.5%
1 .7%
1.3%
1 .9%
0.8%
2.5%
1.3%
Gas Savings
as % of Total
2004 State
Usage"
Annual %
MMBtu
Savings
Gas
10%
19%
n/a
n/a
n/a
10%
_
n/a
n/a
n/a
0.5%
1 .9%
n/a
n/a
n/a
1.1%
n/a
n/a
n/a
1.2%
o
m
MW = Megawatt; MMBtu = Million British thermal units.
1 ORNL, 2000.
' NYSERDA/OE, 2006.
NPCC, 2005.
; Puget Sound Fnerny; 2003.
GDS Associates and Quantum Consulting, 2004.
' KEMA, 2002; KEMA & XENERGY, 2003a; KEMA & XENERGY, 2003b.
' SWEEP, 2002.
NYSERDA/OE, 2003.
'ACEEE, 1998.
"' EIA, 2005a.
' EIA, 2005b.
'' EIA, 2006b.
-------
Overview of a Well-Designed Potential Study
Well-designed potential studies assess the following types
of potential:
Technical potential assumes the complete penetration of
all energy-conservation measures that are considered
technically feasible from an engineering perspective.
Economic potential refers to the technical potential of
those measures that are cost-effective, when compared to
supply-side alternatives. The economic potential is very
large because it is summing up the potential in existing
equipment, without accounting for the time period during
which the potential would be realized.
Maximum achievable potential describes the economic
potential that could be achieved over a given time period
under the most aggressive program scenario.
Achievable potential refers to energy saved as a result
of specific program funding levels and incentives. These
savings are above and beyond those that would occur
naturally in the absence of any market intervention.
Naturally occurring potential refers to energy saved as
a result of normal market forces, that is, in the absence of
any utility or governmental intervention.
The output of technical and economic potential is the size
of the energy efficiency resource in MW, MWh, MMBtu
and other resources. The potential is built up from savings
and cost data from hundreds of measures and is typically
summarized by sector using detailed demographic infor-
mation about the customer base and the base of appli-
ances, building stock, and other characteristics of the
relevant service area.
After technical and economic potential is calculated, typi-
cally the next phase of a well-designed potential study is
to create program scenarios to estimate actual savings
that could be generated by programs or other forms of
intervention, such as changing building codes or
appliance standards.
Program scenarios developed to calculate achievable
potential are based on modeling example programs and
using market models to estimate the penetration of the
program. Program scenarios require making assumptions
about rebate or incentive levels, program staffing, and
marketing efforts.
Scenarios can also be developed for different price
assumptions and load growth scenarios, as shown below
in the figure of a sample benefit/cost output from a
potential study conducted for the state of California.
Benefits and Costs of Eiectric Energy-
Efficiency Savings, 2002-2011
$25
$20
$15
$10
$5
Net Benefits:
S5.5B
$11. 9B
"
Business-as-Usual Advanced Efficiency
Source: KEMA, 2002
6-1?
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Ensuring that potential state and federal codes and stan-
dards are modeled and included in evaluation scenarios
Developing scenarios for relevant time periods.
In addition, an emerging best practice is to conduct
uncertainty analysis on savings estimates, as well as
other variables such as cost.
With study results in hand, program administrators are
well positioned to develop energy efficiency goals, iden-
tify program measures and strategies, and determine
funding requirements to deliver energy efficiency pro-
grams to all customers. Information from a detailed
potential study can also be used as the basis for calculating
program cost-effectiveness and determining measures
for inclusion during the program planning and design
phase. Detailed potential studies can provide informa-
tion to help determine which technologies are replaced
most frequently and are therefore candidates to deliver
early returns (e.g., an efficient light bulb), and how long
the savings from various technologies persist and there-
fore will continue to deliver energy savings. For example,
an energy efficient light bulb might last six years, where-
as an efficient residential boiler might last 20 years.
(Additional information on measure savings and life-
times can be found in Resources and Expertise, a forth-
coming product of the Action Plan Leadership Group.)
Developing an Energy Efficiency Plan
The majority of organizations reviewed for this chapter
are acquiring energy efficiency resources for about
$0.03/lifetime kWh for electric programs and about
$1.30 to $2.00 per lifetime MMBtu for gas program (as
shown previously in Tables 6-1 and 6-2). In many cases,
energy efficiency is being delivered at a cost that is sub-
stantially less than the cost of new supplyon the order
of half the cost of new supply. In addition, in all cases
where information is available, the costs of saved energy
are less than the avoided costs of energy. These organi-
zations operate in diverse locations under different
administrative and regulatory structures. They do, how-
ever, share many similar best practices when it comes :o
program planning, including one or more of the following:
Provide programs for all key customer classes.
Align goals with funding.
Use cost-effectiveness tests that are consistent with
long-term planning.
Consider building codes and appliance standards when
designing programs.
Plan for developing and incorporating new technology.
Consider efficiency investments to alleviate transmis-
sion and distribution constraints.
Create a roadmap that documents key program com-
ponents, milestones, and explicit energy reduction goals.
Provide Programs for All Customer Classes
One concern sometimes raised when funding energy
efficiency programs is that all customers are required to
contribute to energy efficiency programming, though
not all customers will take advantage of programs once
they are available, raising the issue that non-participants
subsidize the efficiency upgrades of participants.
While it is true that program participants receive the
direct benefits that accrue from energy efficiency
upgrades, all customer classes benefit from well-
managed energy efficiency programs, regardless of
whether or not they participate directly. For example, an
evaluation of the New York State Energy Research and
Development Authority's (NYSERDA's) program portfolio
concluded that: "total cost savings for all customers,
including non participating customers [in the New York
Energy $mart Programs] is estimated to be $196 million
for program activities through year-end 2003, increasing
to $420 to $435 million at full implementation" (NYSER-
DA, 2004).
6-18 National Action Plan for Energy Efficiency
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In addition, particularly for programs that aim to accelerate
market adoption of energy efficiency products or services,
there is often program "spillover" to non-program
participants. For example, an evaluation of National
Grid's Energy Initiative, Design 2000plus, and other small
commercial and industrial programs found energy
efficient measures were installed by non-participants due
to program influences on design professionals and
vendors. The analysis indicated that "non-participant
spillover from the programs amounted to 12,323,174
kWh in the 2001 program year, which is approximately
9.2 percent of the total savings produced in 2001 by the
Design 2000plus and Energy Initiative programs
combined" (National Grid, 2002).
Furthermore, energy efficiency programming can help
contribute to an overall lower cost system for all cus-
tomers over the longer term by helping avoid the need
to purchase energy, or the need to build new infrastruc-
ture such as generation, transmission and distribution
lines. For example:
The Northwest Power Planning and Conservation
Council found in its Portfolio Analysis that strategies
that included more conservation had the least cost and
the least risk (measured in dollars) relative to strategies
that included less conservation. The most aggressive
conservation case had an expected system cost of $1.8
billion lower and a risk factor of $2.5 billion less than
the strategy with the least conservation (NPPC, 2005).
In its 2005 analysis of energy efficiency and renewable
energy on natural gas consumption and price, ACEEE
states, "It is important to note that while the direct
benefits of energy efficiency investment flow to partic-
ipating customers, the benefits of falling prices accrue
to all customers." Based on their national scenario of
cost-effective energy efficiency opportunities, ACEEE
found that total costs for energy efficiency would be
$8 billion, and would result in consumer benefits of
$32 billion in 2010 (Elliot & Shipley, 2005).
'Through cost-effective energy efficiency investments in
2004, Vermonters reduced their annual electricity use
by 58 million kWh. These savings, which are expected
to continue each year for an average of 14 years, met
44 percent of the growth in the state's energy needs in
2004 while costing ratepayers just 2.8 cents per kWh.
That cost is only 37 percent of the cost of generating,
transmitting, and distributing power to Vermont's
homes and businesses (Efficiency Vermont, 2004).
The Massachusetts Division of Energy noted that
cumulative impact on demand from energy efficiency
measures installed from 1998 to 2002 (excluding
reductions from one-time interruptible programs) was
significantreducing demand by 264 megawatt
(MW). During the summer of 2002, a reduction of this
magnitude meant avoiding the need to purchase $19.4
million worth of electricity from the spot market
(Massachusetts, 2004).
Despite evidence that both program participants and
non-participants can benefit from energy efficiency pro-
gramming, it is a best practice to provide program
opportunities for all customer classes and income levels.
This approach is a best practice because, in most cases,
funding for efficiency programs comes from all customer
classes, and as mentioned above, program participants
will receive both the indirect benefits of system-wide
savings and reliability enhancements and the direct
benefits of program participation.
All program portfolios reviewed for this chapter include
programs for all customer classes. Program administrators
usually strive to align program funding with spending
based on customer class contributions to funds. It is not
uncommon, however, to have limited cross-subsidization
for (1) low-income, agricultural, and other hard-to-reach
customers; (2) situations where budgets limit achievable
potential, and the most cost-effective energy efficiency
savings are not aligned with customer class contributions
to energy efficiency funding; and (3) situations where
energy efficiency savings are targeted geographically
based on system needsfor example, air conditioner
To create a sustainable, aggressive national commitment to energy efficiency
6-19
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turn-ins or greater new construction incentives that are
targeted to curtail load growth in an area with a supply
or transmission and distribution need. For programs tar-
geting low-income or other hard-to-reach customers, it
is not uncommon for them to be implemented with a
lower benefit-cost threshold, as long as the overall energy
efficiency program portfolio for each customer class (i.e.,
residential, commercial, and industrial) meets cost-
effectiveness criteria.
NYSERDA's program portfolio is a good example of pro-
grams for all customer classes and segments (see Table 6-5).
Table 6-5. NYSERDA 2004 Portfolio
Sector
Residential
Low Income
Business
Program
Small Homes
Keep Cool
ENERGY STAR Products
Program Marketing
Multifamily
Awareness/Other
Assisted Multifamily
Assisted Home Performance
Direct Install
All Other
Performance Contracting
Peak Load Reduction
Efficient Products
New Construction
Technical Assistance
All Other
% of Sector
Budget
23%
19%
20%
16%
10%
12%
59%
17%
8%
16%
36%
12%
9%
23%
10%
10%
Nevada Power/Sierra Pacific Power Company's portfolio
provides another example with notable expansion of
program investments in efficient air conditioning, ENERGY
STAR appliances, refrigerator collection, and renewable
energy investments within a one-year timeframe (see
Table 6-6).
Align Goals With Funding
Regardless of program administrative structure and policy
context, it is a best practice for organizations to align
funding to explicit goals for energy efficiency over the
near-term and long-term. How quickly an organization is
able to ramp up programs to capture achievable poten-
tial can vary based on organizational history of running
DSM programs, and the sophistication of the market-
place in which a utility operates (e.g., whether there is a
network of home energy raters, ESCOs, or certified heating,
ventilation, and air conditioning [HVAC] contractors).
Utilities or third-party administrators should set long-
term goals for energy efficiency designed to capture a
significant percentage of the achievable potential energy
savings identified through an energy efficiency potential
study. Setting long-term goals is a best practice for
administrators of energy efficiency program portfolios,
regardless of policy models and whether they are an
investor-owned or a municipal or cooperative utility, or a
third-party program administrator. Examples of how
long-term goals are set are provided as follows:
In states where the utility is responsible for integrated
resource planning (the IRP Model), energy efficiency must
be incorporated into the IRP This process generally
requires a long-term forecast of both spending and sav-
ings for energy efficiency at an aggregated level that is
consistent with the time horizon of the IRPgenerally at
least 10 years. Five- and ten-year goals can then be devel-
oped based on the resource need. In states without an
SBC, the budget for energy efficiency is usually a revenue
requirement expense item, but can be a capital invest-
ment or a combination of the two. (As discussed in
Chapter 2: Utility Ratemaking & Revenue Requirements,
capitalizing efficiency program investments rather than
expensing them can reduce short-term rate impacts.)
Municipal or cooperative utilities that own generation
typically set efficiency goals as part of a resource plan-
ning process. The budget for energy efficiency is usually
a revenue requirement expense item, a capital expendi-
ture, or a combination of the two.
6-20 National Action Plan for Energy Efficiency
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Table 6-6. Nevada Resource Planning Programs
Air Conditioning Load Management
High-Efficiency Air Conditioning
Commercial Incentives
Low-Income Support
Energy Education
ENERGY STAR Appliances
School Support
Refrigerator Collection
Commercial New Construction
Other - Miscellaneous & Technology
Total Nevada Resource Planning Programs
SolarGenerations
Company Renewable - PV
California Program
Sierra Natural Gas Programs
Total All Programs
2005 Budget
$3,450,000
2,600,000
2,300,000
1,361,000
1,205,000
1,200,000
850,000
700,000
600,000
225,000
$14,491,000
1,780,075
1,000,000
370,000
$17,641,075
2006 Budget
$3,600,000
15,625,000
2,800,000
1,216,000
1,243,000
2,050,000
850,000
1,915,000
600,000
725,000
$30,624,000
7,220,000
1,750,000
563,000
820,000
$40,977,000
A resource portfolio standard is typically set at a per-
centage of overall energy or demand, with program
plans and budgets developed to achieve goals at the
portfolio level. The original standard can be developed
based on achievable potential from a potential study,
or as a percentage of growth from a base year.
1 In most SBC models, the funding is determined by a
small volumetric charge on each customer's utility bill.
This charge is then used as a basis for determining the
overall budget for energy efficiency programming
contributions by each customer class are used to
inform the proportion of funds that should be targeted
to each customer class. Annual goals are then based on
these budgets and a given program portfolio. Over
time, the goal of the program should be to capture a
large percentage of achievable potential.
In most gas programs, funding can be treated as an
expense, in a capital budget, or a combination (as is
the case in some of the electric examples shown previ-
ously). Goals are based on the budget developed for
the time period of the plan.
Once actual program implementation starts, program
experience is usually the best basis for developing future
budgets and goals for individual program years.
Use Cost-Effectiveness Tests That Are Consistent
With Long-Term Planning
All of the organizations reviewed for this chapter use
cost-effectiveness tests to ensure that measures and pro-
grams are consistent with valuing the benefits and costs
of their efficiency investments relative to long-term
To create a sustainable, aggressive national commitment to energy efficiency
6-21
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supply options. Most of the organizations reviewed use
either the total resource cost (TRC), societal, or program
administrator test (utility test) to screen measures. None
of the organizations reviewed for this chapter used the
rate impact measure (RIM) test as a primary decision-
making test.5 The key cost-effectiveness tests are
described as follows, per Swisher, et al. (1997), with key
benefits and costs further illustrated in Table 6-7.
Total Resource Cost CIRO Te^t Compares the total
costs and benefits of a program, including costs and
benefits to the utility and the participant and the avoided
costs of energy supply.
Societal Test. Similar to the TRC Test, but includes the
effects of other societal benefits and costs such as envi-
ronmental impacts, water savings, and national security.
Utility/Program Administrator Test Assesses benefits
and costs from the program administrator's perspective
(e.g., benefits of avoided fuel and operating capacity
costs compared to rebates and administrative costs).
Participant Test. Assesses benefits and costs from a par-
ticipant's perspective (e.g., the reduction in customers'
bills, incentives paid by the utility, and tax credits
received as compared to out-of-pocket expenses such
as costs of equipment purchase, operation, and main-
tenance).
Rate Impact Measure (RIM). Assesses the effect of
changes in revenues and operating costs caused by a
program on customers' bills and rates.
Another metric used for assessing cost-effectiveness is
the cost of conserved energy, which is calculated in cents
per kWh or dollars per thousand cubic feet (Mcf). This
measure does not depend on a future projection of energy
prices and is easy to calculate; however, it does not fully
capture the future market price of energy.
An overall energy efficiency portfolio should pass the
cost-effectiveness test(s) of the jurisdiction. In an IRP sit-
uation, energy efficiency resources are compared to new
supply-side options-essentially the program administra-
tor or utility test. In cases where utilities have divested
generation, a calculated avoided cost or a wholesale
market price projection is used to represent the genera-
tion benefits. Cost-effectiveness tests are appropriate to
screen out poor program design, and to identify pro-
grams in markets that have been transformed and might
need to be redesigned to continue. Cost-effectiveness
analysis is important but must be supplemented by other
aspects of the planning process.
If the TRC or societa tests are used, "other resource bene-
fits" can include environmental benefits, water savings, and
other fuel savings. Costs include all program costs (admin-
istrative, marketing, incentives, and evaluation) as well as
customer costs. Future benefits from emissions trading (or
other regulatory approaches that provide payment for emis-
sion credits) could be treated as additional benefits in any of
these models. Other benefits of programs can include job
impacts, sales generated, gross state product added,
impacts from wholesale price reductions, and personal
income (Wisconsin, 2006; Massachusetts, 2004).
Example of Other Benefits
The Massachusetts Division of Energy Resources
estimates that its 2002 DSM programs produced
2,093 jobs, increased disposable income by $79
; million, and provided savings to all customers of
' $19.4 million due to lower wholesale energy clear-
ing prices (Massachusetts, 2004).
At a minimum, regulators require programs to be cost-
effective at the sector level (residential, commercial, and
industrial) and typically at the program level as well.
Many program administrators bundle measures under a
single program umbrella when, in reality, measures are
delivered to customers through different strategies and
marketing channels. This process allows program admin-
5 The RIM test is viewed as less certain than the other tests because it is sensitive to the difference between long-term projections of marginal or mgrke~:
costs and long-term projections of rates (CEC, 2001).
6-22 National Action Plan for Energy Efficiency
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Table 6-7. Overview of Cost-Effectiveness Tests
Benefits
Costs
Energy Demand
Externalities Benefits Benefits
G.T&D G.T&D
lota! Resource
Cost Test
Societal Test
Utility Test-'
Administrator
fest
Rate Impact
Test
P.-irticipant Tost
G, T&D = Generation, Transmission, and Distribution
X
x
.1
x
x
X
X
X
X
X
X
Other
Resource
Benefits
X
X
Impact Program Program rnซ*nmor
On Implementation Evaluation t-uซฐ'ner
Rates Costs Costs Losts
X
X
X
X
X
V-
X
X
X
1 -
x
istrators to adjust to market realities during program
implementation. For example, within a customer class or
segment, if a high-performing and well-subscribed pro-
gram or measure is out-performing a program or meas-
ure that is not meeting program targets, the program
administrator can redirect resources without seeking
additional regulatory approval.
Individual programs should be screened on a regular basis,
consistent with the regulatory scheduletypically, once a
year. Individual programs in some customer segments,
such as low income, are not always required to be cost-
effective, as they provide other benefits to society that
might not all be quantified in the cost-effectiveness tests.
The same is true of education-only programs that have
hard-to-quantify benefits in terms of energy impacts. (See
section on conducting impact evaluations for information
related to evaluating energy education programs.)
Existing measures should be screened by the program
administrator at least every two years, and new meas-
ures should be screened annually to ensure they are per-
forming as anticipated. Programs should be reevaluated
and updated from time to time to reflect new methods,
technologies, and systems. For example, many programs
today include measures such as T-5 lighting that did not
exist five to ten years ago.
Consider Building Codes and Appliance
Standards When Designing Programs
Enacting state and federal codes and standards for new
products and buildings is often a cost-effective opportunity
for energy savings. Changes to building codes and appli-
ance standards are often considered an intervention that
could be deployed in a cost-effective way to achieve
results. Adoption of state codes and standards in many
states requires an act of legislation beyond the scope of
utility programming, but utilities and other third-party
program administrators can and do interact with state
and federal codes and standards in several ways:
In the case of building codes, code compliance and
actual building performance can lag behind enactment
of legislation. Some energy efficiency program admin-
istrators design programs with a central goal of
improving code compliance. Efficiency Vermont's
ENERGY STAR Homes program (described in the box
on page 6-24) includes increasing compliance with
Vermont Building Code as a specific program objective.
6-23
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The California investor owned utilities also are working
with the national ENERGY STAR program to ensure
availability of ENERGY STARATitle 24 Building Code-
compliant residential lighting fixtures and to ensure
overall compliance with their new residential building
code through their ENERGY STAR Homes program.
Some efficiency programs fund activities to advance
codes and standards. For example, the California lOUs
are funding a long-term initiative to contribute expertise,
research, analysis, and other kinds of support to help the
California Energy Commission (CEC) develop and adopt
energy efficiency standards. One rationale for utility
investment in advancing codes and standards is that util-
ities can lock in a baseline of energy savings and free up
program funds to work on efficiency opportunities that
could not otherwise be realized. In California's case, the
lOUs also developed a method for estimating savings
associated with their codes and standards work. The
method was accepted by the California Public Utilities
Commission, and is formalized in the California
Energy Efficiency Evaluation Protocols: Technical,
Methodological, and Reporting Require-ments for
Evaluation Professionals (CPUC, 2006).
Regardless of whether they are a component of an energy
efficiency program, organizations have found that it is
essential to coordinate across multiple states and regions
when pursuing state codes and standards, to ensure that
retailers and manufacturers can respond appropriately in
delivering products to market.
Program administrators must be aware of codes and
standards. Changes in codes and standards affect the
baseline against which future program impacts are
measured. Codes and standards should be explicitly con-
sidered in planning to prevent double counting. The
Northwest Power and Conservation Council (NWPCC)
explicitly models both state codes and federal standards
in its long-term plan (NWPCC, 2005).
Plan for Developing and Incorporating New
Technology
Many of the organizations reviewed have a history of
providing programs that change over time to accommo-
date changes in the market and the introduction of new
technologies. The new technologies are covered using
one or more of the following approaches:
They are included in research and development (R&D)
budgets that do not need to pass cost-effectiveness
tests, as they are, by definition, addressing new or
experimental technologies. Sometimes R&D funding
Efficiency Vermont ENERGY STAR Homes Prog
In the residential new construction segment, Efficiency
Vermont partners with the national ENERGY STAR pro-
gram to deliver whole house performance to its cus-
tomers and meet both resource acquisition and
market transformation goals. Specific objectives of
Efficiency Vermont's program are to:
Increase market recognition of superior construction
Increase compliance with the Vermont Building Code
Increase penetration of cost-effective energy
efficiency measures
Improve occupant comfort, health, and safety
(including improved indoor air quality)
am
Institutionalize Home Energy Rating Systems (HERS)
articipating homebuilders agree to build to the pro-
gram's energy efficiency standards and allow homes
o be inspected by an HERS rater. The home must
core 86+ on the HERS inspection and include four
energy efficient light fixtures, power-vented or sealed
rombustion equipment, and an efficient mechanical
entilation system with automatic controls. When a
iome passes, builders receive a rebate check, pro-
gram certificate, an ENERGY STAR Homes certificate,
md gifts Efficiency Vermont ENERGY STAR
-lomes Program saved more than 700 MWh
with program spending of $1.4 million in 2004.
>ource: Efficiency Vermont, 2005
6-24 National Action Plan for Energy Efficiency
-------
comes from sources other than the utility or state
agency. Table 6-8 summarizes R&D activities of several
organizations reviewed.
They are included in pilot programs that are funded as
part of an overall program portfolio and are not indi-
vidually subject to cost-effectiveness tests.
They are tested in limited quantities under existing pro-
grams (such as commercial and industrial custom
rebate programs).
Technology innovation in electricity use has been the cor-
nerstone of global economic progress for more than 50
years. In the future, advanced industrial processes, heating
and cooling, and metering systems will play very impor-
tant roles in supporting customers' needs for efficient
use of energy. Continued development of new, more
efficient technologies is critical for future industrial and
commercial processes. Furthermore, technology innovation
that targets improved energy efficiency and energy man-
agement will enable society to advance and sustain ener-
gy efficiency in the absence of government-sponsored or
regulatory-mandated programs. Robust and competitive
consumer-driven markets are needed for energy efficient
devices and energy efficiency service.
The Electric Power Research Institute (EPRI)/U.S.
Department of Energy (DOE) Gridwise collaborative and
the Southern California Edison (SCE) Lighting Energy
Efficiency Demand Response Program are two examples
of research and development activities:
The EPRI IntelliGnd Consortium is an industry-wide ini-
tiative and public/private partnership to develop the
technical foundation and implementation tools to
evolve the power delivery grid into an integrated energy
and communications system on a continental scale. A
key development by this consortium is the IntelliGrid
Architecture, an open-standards-based architecture
Table 6-8. Research & Development (R&D) Activities of Select Organizations
Program
Administrator
PG&E
NYSERDA
BPA
SCE
R&D Funding Mechanism(s)
CEC Public Interest Energy Research (PIER) performs research from
California SBC funding (PG&E does not have access to their bills'
SBC funds); other corporate funds support the California Clean
Energy Fund
SBC funding
In rates
CEC Public Interest Energy Research (PIER) performs research from
California SBC funding (SCE does not have access to their bills'
SBC funds). Procurement proceedings and other corporate funds
support Emerging Technologies and Innovative Design for Energy
Efficiency programs.
R&D as % of Energy
Efficiency Budget
1%a,b
13%c-d
6%e'f
5%9'h.'
Examples of R&D Technologies/
Initiatives Funded
California Clean Energy Fund - New
technologies and demonstration projects
Product development, demonstration
and evaluation, university research, tech-
nology market opportunities studies
PNL / DOE GridWise Collaborative,
Northwest Energy Efficiency Alliance,
university research
Introduction of emerging technologies
(second D of RD&D)
a [Numerator] $4 million in 2005 for Californial Clean Energy Fund (CCEF, 2005).
b [Denominator] $867 million to be spent 2006-2008 on energy efficiency projects not including evaluation, measurement, and validation (CPUC,
2005). 1/3 of full budget used for single year budget ($289 million).
c [Numerator] $17 million for annual energy efficiency R&D budget consists of "residential ($8 M), industrial ($6 M), and transportation ($3 M)"
(G. Walmet, NYSERDA, personal communication, May 23, 2006).
d [Denominator] $134 M for New York Energy $mart from 3/2004-3/2005 (NYSERDA, 2005b).
e [Numerator] BPA funded the Northwest Energy Efficiency Alliance with $10 million in 2003. [Denominator] The total BPA energy efficiency alloca-
tion was $138 million (Blumstein, et al., 2005).
' [Note] BPA overall budgeting for energy efficiency increased in subsequent years (e.g., $170 million in 2004 with higher commitments going to an
average of $245 million from 2006-2012) (Alliance to Save Energy, 2004).
g Funding for the statewide Emerging Technologies program will increase in 2006 to $10 million [Numerator] out of a total budget of $581 million
[Denominator] for utility energy-efficiency programs (Mills and Livingston, 2005).
h [Note] Data from Mills and Livingston (2005) differs from $675 million 3-yr figure from CPUC (2005).
i Additional 3% is spent on Innovative Design for Energy Efficiency (InDEE) (D. Arambula, SCE, personal communication, June 8, 2006).
To cieate a sustainable, aggressive national commitment to energy efficien
6-25
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for integrating the data communication networks and
smart equipment on the grid and on consumer prem-
ises. Another key development is the consumer portal
essentially, a two-way communication link between
utilities and their customers to facilitate information
exchange (EPRI, 2006). Several efficiency program admin-
istrators are pilot testing GridWise/lntelligrid as
presented in the box below.
The Lighting Energy Efficiency l)etn,:'ina *?(-">/
Program is a program proposed by SCE. It will use
Westinghouse's two-way wireless dimmable energy effi-
ciency T-5 fluorescent lighting as a retrofit for existing
T-12 lamps. SCE will be able to dispatch these lighting
systems using wireless technology. The technology will be
piloted in small commercial buildings, the educational
sector, office buildings, and industrial facilities and could
give SCE the ability to reduce load by 50 percent on those
installations. This is an excellent example of combining
energy efficiency and direct load control technologies.
Both EPRI and ESource (a for-profit, membership-based
energy information service) are exploring opportunities
to expand their efforts in these areas. ESource is also
considering developing a database of new energy
efficiency and load response technologies. Leveraging
R&D resources through regional and national partnering
efforts has been successful in the past with energy effi-
ciency technologies. Examples include compact fluores-
cent lighting, high-efficiency ballasts and new washing
machine technologies. Regional and national efforts
send a consistent signal to manufacturers, which can be
critical to increasing R&D activities.
Programs must be able to incorporate new technologies
over time. As new technologies are considered, the pro-
grams must develop strategies to overcome the barriers
specific to these technologies to increase their acceptance.
Table 6-9 provides some examples of new technologies,
challenges, and possible strategies for overcoming these
challenges. A cross-cutting challenge for many of these
technologies is that average rate designs do not send a
price signal during periods of peak demand. A strategy
for overcoming this barrier would be to investigate time-
sensitive rates (see Chapter 5: Rate Design for additional
information).
Pilot Tests of GridWise/lntelligrid
GridWise Pacific Northwest Demonstration Projects
These projects are designed to demonstrate how
advanced, information-based technologies can be
used to increase power grid efficiency, flexibility, and
reliability while reducing the need to build additional
transmission and distribution infrastructure. These
pilots are funded by DOE's Office of Electricity
Delivery and Energy Reliability.
Olympic Peninsula Distributed Resources
Demonstration
This project will integrate demand response and dis-
tributed resources to reduce congestion on the grid,
including demand response with automated control
technology, smart appliances, a virtual real-time
market, Internet-based communications, contract
options for customers, and the use of distributed
(generation.
rid-Friendly Appliance Demonstration
n this project, appliance controllers will be used in
Doth clothes dryers and water heaters to detect fluc-
:uations in frequency that indicate there is stress in
he grid, and will respond by reducing the load on
that appliance.
These pilots include: Pacific Northwest National
Laboratory, Bonneville Power Administration,
'adficCorp, Portland General Electric, Mason County
3UD #3, Clallam County PUD, and the city of Port
Angeles.
6-26 National Action Plan for Energy Efficiency
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Table 6-9. Emerging Technologies for Programs
* Description Availability
Program r '
Smart Grid/
i
Smart grid technologies include both customer-side Available in pilot
GridWise and grid-side technologies that allow for more i situations
technologies efficient operation of the grid. i
Smart
appliances/
Smart Homes
Homes with gateways that would allow for control
of appliances and other end-uses via the Internet.
Load control of
A/C via smart
thermostat
A/C controlled via smart thermostat.
Communication can be via wireless, power line
carrier (PLC) or Internet.
i
i
Dynamic Providing customers with either real time or critical
pricing/critical
peak pricing/
thermostat
control with
enhanced
metering
Control of
lighting via
wireless, power
line carrier
or other
communication
technologies
peak pricing via a communication technology.
Communication can be via wireless, PLC, or
Internet. Customers can also be provided with
educational materials.
Using direct control to control commercial lighting
during high price periods.
.
T-5s j Relatively new lighting technology for certain
New generation
tankless water
heaters
applications.
Tankless water heaters do not have storage tanks
and do not have standby losses. They can save
Available
Widely available
Available
Recently available
Widely available
Widely available
energy relative to conventional water heaters in
some applications. Peak demand implications are
not yet known.
i
.
Key Key _ .
Challenges Strategies txampies
Cost Pilot programs
Customer R&D programs
Acceptance
Communication
Protocols
..
Cost Pilot programs
Customer Customer education
Acceptance
GridWise pilot
in Pacific NW
GridWise pilot
in Pacific NW
Communication
Protocols ;
Cost Used to control
loads in congested
Customer
acceptance
Cost
Customer
acceptance
Split incentives in
deregulated markets
Regulatory barriers
Cost
Customer
acceptance
Contractor
acceptance
Cost
Customer
acceptance
Contractor
acceptance
Cost
Customer
acceptance
Contractor
situation
Pilot and full-scale
programs
Customer education
Pilot and full-scale
Programs
Used in
Long Island Power
Authority (LIPA),
Austin Energy,
Utah Power and
Light, ISO New
England
Georgia (large
users) Niagara
Mohawk, California
Peak Pricing
congested areas j Experiment, Gulf
Power
Customer
education
j
R&D programs
Pilot programs
Add to existing
SCE pilot using
wireless
NYSERDA pilot
with power line
carrier control
Included in
programs as a most large-scale
new measure programs
Add to existing
programs as a
More common
in the EU
new measure
!
acceptance i
Some load control technologies will require more than
R&D activities to become widespread. To fully capture
and utilize some of these technologies, the following
four building blocks are needed:
,; ; .,,' ' Interactive communica-
tions that allow for two-way flow of price information
and decisions would add new functionality to the
electricity system.
6-27
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Innovative rates ana requ/af/on Regulations are needed
to provide adequate incentives for energy efficiency
investments to both suppliers and customers.
Innovative markets Market design must ensure that
energy efficiency and load response measures that are
advanced by regulation become self-sustaining in the
marketplace.
Smart end-use devices. Smart devices are needed to
respond to price signals and facilitate the management of
the energy use of individual and networked appliances.
In addition, the use of open architecture systems is the
only long-term way to take existing non-communicating
equipment into an energy-efficient future that can use
two-way communications to monitor and diagnose
appliances and equipment.
Consider Efficiency Investments to Alleviate
Transmission and Distribution Constraints
Energy efficiency has a history of providing value by reduc-
ing generation investments. It should also be considered
with other demand-side resources, such as demand
response, as a potential resource to defer or avoid invest-
ments in transmission and distribution systems. Pacific Gas
and Electric's (PG&E) Model Energy Communities Project (the
Delta Project) provides one of the first examples of this
approach. This project was conceived to test whether
demand resources could be used as a least cost resource to
defer the capital expansion of the transmission and distribu-
tion system in a constrained area. In this case, efforts were
focused on the constrained area, and customers were
offered versions of existing programs and additional meas-
ures to achieve a significant reduction in the constrained
area (PG&E, 1993). A recently approved settlement at the
Federal Energy Regulatory Commission (FERC) allows energy
efficiency along with load response and distributed genera-
tion to participate in the Independent System Operator New
England (ISO-NE) Forward Capacity Market (FERC, 2006;
FERC, 2005). In addition. Consolidated Edison has success-
fully used a Request For Proposals (RFP) approach to defer
distribution upgrades in four substation areas with contracts
totaling 45 MW. Con Ed is currently in a second round of
solicitations for 150 MW (NAESCO, 2005). Recent pilots
using demand response, energy efficiency, and intelligent
grid are proving promising as shown in the BPA example in
the box on page 6-29.
To evaluate strategies for deferring transmission and distribu-
tion investments, the benefits and costs of energy efficiency
and other demand resources are compared to the cost of
deferring or avoiding a distribution or transmission upgrade
(such as a substation upgrade) in a constrained area. This
cost balance is influenced by location-specific transmission
and distribution costs, which can vary greatly.
Create a Roadmap of Key Program Components,
Milestones, and Explicit Energy Use Reduction
Goals
Decisions regarding the key considerations discussed
throughout this section are used to inform the develop-
ment of an energy efficiency plan, which serves as a
roadmap with key program components, milestones,
and explicit energy reduction goals.
A well-designed plan includes many of the elements dis-
cussed in this section including:
Budgets (see section titled "Leverage Private-Sector
Expertise, External Funding, and Financing" for informa-
tion on the budgeting processes for the most
common policy models)
Overall
By program
Kilowatt, kWh, and Mcf savings goals overall and by
program
Annual savings
Lifetime savings
Benefits and costs overall and by program
Description of any shareholder incentive mechanisms
6-28 National Action Plan for Energy Efficiency
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Bonneville Power Administration (BPA) Transmission Planning
BPA has embarked on a new era in transmission
planning. As plans take shape to address load
growth, constraints, and congestion on the transmis-
sion system, BPA is considering measures other than
building new lines, while maintaining its commit-
ment to provide reliable transmission service. The
agency, along with others in the region, is exploring
"non-wires solutions" as a way to defer large
construction projects.
BPA defines non-wires solutions as the broad array
of alternatives including, but not limited to, demand
response, distributed generation, conservation meas-
ures, generation siting, and pricing strategies that
individually, or in combination, delay or eliminate the
need for upgrades to the transmission system. The
industry also refers to non-wires solutions as non-
construction alternatives or options.
BPA has reconfigured its transmission planning
process to include an initial screening of projects to
assess their potential for a non-wires solution. BPA is
now committed to using non-wires solutions screening
criteria for all capital transmission projects greater
than $2 million, so that it becomes an institutional-
ized part of planning. BPA is currently sponsoring a
number of pilot projects to test technologies, resolve
institutional barriers, and build confidence in using
non-wires solution.
For each program, the plan should include the following:
Program design description
Objectives
Target market
Eligible measures
Marketing plan
Implementation strategy
Incentive strategy
Evaluation plan
Benefit/cost outputs
Metrics for program success
Milestones
The plan serves as a road-map for programs. Most pro-
gram plans, however, are modified over time based on
changing conditions (e.g., utility supply or market changes)
and program experience. Changes from the original
roadmap should be both documented and justified. A plan
that includes all of these elements is an appropriate start-
ing point for a regulatory filing. A well-documented plan is
also a good communications vehicle for informing and
educating stakeholders. The plan should also include a
description of any pilot programs and R&D activities.
Energy Efficiency Program Design
and Delivery
The organizations reviewed for this chapter have learned
that program success is built over time by understanding
the markets in which efficient products and services are
delivered, by addressing the wants and needs of their
customers, by establishing relationships with customers
and suppliers, and by designing and delivering programs
accordingly.
They have learned that it is essential to program suc-
cess to coordinate with private market actors and other
influential stakeholders, to ensure that they are well
informed about program offerings and share this
information with their customers/constituents.
To create a sustainable, aggressive national commitment to energy efficiency
6-29
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Many of the organizations reviewed go well beyond
merely informing businesses and organizations, by
actually partnering with them in the design and delivery
of one or more of their efficiency programs.
Recognizing that markets are not defined by utility
service territory, many utilities and other third-party
program administrators actively cooperate with one
another and with national programs, such as ENERGY
STAR, in the design and delivery of their programs.
This section discusses key best practices that emerge
from a decade or more of experience designing and
implementing energy efficiency programs.
Begin With the Market in Mind
Energy efficiency programs should complement, rather
than compete with, private and other existing markets
for energy efficient products and services. The rationale
for utility or third-party investment in efficiency program-
ming is usually based on the concept that within these
markets, there are barriers that need to be overcome to
ensure that an efficient product or service is chosen over
a less efficient product or standard practice. Barriers
might include higher initial cost to the consumer, lack of
knowledge on the part of the supplier or the customer,
split incentives between the tenant who pays the utility
bills and the landlord who owns the building, lack of
supply for a product or service, or lack of time (e.g., to
research efficient options, seek multiple bidsparticularly
during emergency replacements).
Conduct a Market Assessment
Understanding how markets function is a key to successful
program implementation, regardless of whether a program
is designed for resource acquisition, market transforma-
tion, or a hybrid approach. A market assessment can be a
valuable investment to inform program design and imple-
mentation. It helps establish who is part of the market
(e.g., manufacturers, distributors, retailers, consumers),
what the key barriers are to greater energy efficiency from
the producer or consumer perspectives, who are the key
trend-setters in the business and the key influencers in
consumer decision-making, and what approaches rright
work best to overcome barriers to greater supply and
investment in energy efficient options, end/or uptake of a
program. A critical part of completing a market assessment
is a baseline measurement of the goods and services
involved and the practices, attitudes, behaviors, factors,
and conditions of the marketplace (Feldman, 1994). In
addition to informing program design and implementa-
tion, the baseline assessment also helps inform program
evaluation metrics, and serves as a basis for which future
program impacts are measured. As such, market assess-
ments are usually conducted by independent third-party
evaluation professionals. The extent and needs of a market
assessment can vary great y. For well-established program
models, market assessments are somewhat less involved,
and can rely on existing program experience and literature,
with the goal of understanding local differences and estab-
lishing the local or regional baseline for the targeted energy
efficiency product or service.
Table 6-10 illustrates some of the key stakeholders, bar-
riers to energy efficiency, and program strategies that are
explored in a market assessment, and are useful for
considering when designing programs.
Solicit Stakeholder Input
Convening stakeholder advisory groups from the onset
as part of the design process is valuable for obtaining
multiple perspectives on the need and nature of planned
programs. This process also serves to improve the pro-
gram design, and provides a base of program support
within the community
Once programs have been operational for a while, sta
-------
Table 6-10. Key Stakeholders, Barriers, and Program Strategies
by Customer Segment
Customer
Segment
Large
Commercial
(4 Industrial
Retrofit
Sm.ili
Commercial
Commercial &
industrial New
Construction
Residential
Lxisting Homes
Residential
New Homes
i family
~>vu Income
Key Stakeholders
Contractors
> Building owners and operators
i Distributors: lighting, HVAC, motors, other
> Product manufacturers
i Engineers
' Energy services companies
> Distributors: lighting, HVAC, other
Building owners
Business owners
Local independent trades
Architects
Engineers
> Building and energy code officials
> Building owners
> Potential occupants
> Distributors: appliances, HVAC, lighting
> Retailers: appliance, lighting, windows
Contractors: HVAC, insulation, remodeling
> Homeowners
Contractors: general and HVAC
Architects
Code officials
Builders
Home buyers
ป Real estate agents
Financial institutions
ซ Owners and operators
Contractors
Code officials
Tenants
Service providers: Weatherization
Assistance Program (WAP), Low-Income
Home Energy Assistance Program (LIHEAP)
Social service providers: state and local
agencies
NGOs and advocacy groups
Credit counseling organizations
Tenants
Key Program Barriers
Access to capital
Competing priorities
ซ Lack of information
Short-term payback (<2 yr) mentality
> Access to capital
Competing priorities
> Lack of information
> Project/program timing
Competing priorities
> Split incentives (for rental property)
' Lack of information
Higher initial cost
Higher initial cost
Lack of information
Competing priorities
> Inexperience or prior negative experience
w/technology (e.g., early compact
florescent lighting)
Emergency replacements
ป Higher initial cost
Split incentives: builder is not the
occupant
* Split incentives
* Lack of awareness
Program funding
Program awareness
Bureaucratic challenges
Key Program Strategies
Financial incentives (rebates)
Performance contracting
Performance benchmarking
Partnership with ENERGY STAR
> Low interest financing
Information from unbiased sources
Technical assistance
Operations and maintenance training
Financial incentives (rebates)
Information from unbiased sources
Direct installation
Partnership with ENERGY STAR
Early intervention (ID requests for hook-up)
Design assistance
Performance targeting/benchmarking
Partnership with ENERGY STAR
> Training of architects and engineers
Visible and ongoing presence in design
community
Education on life cycle costs
> Financial incentives
. Partnership with ENERGY STAR
Information on utility Web sites, bill inserts,
and at retailers
Coordination with retailers and contractors
> Partnership with ENERGY STAR
Linking efficiency to quality
Working with builders
Building code education & compliance
Energy efficient mortgages
Financial incentives
Marketing through owner and operator
associations
i Consistent eligibility requirements with
existing programs
Direct installation
Leveraging existing customer channels for
promotion and delivery
Fuel blind approach
To be successful, stakeholder groups should focus on the
big picture, be well organized, and be representative.
Stakeholder groups usually provide input on budgets,
allocation of budgets, sectors to address, program
design, evaluation, and incentives.
usu-;: to C.u-itoswt and Trade Ally Needs
Successful energy efficiency programs do not exist without
customer and trade ally participation and acceptance of
these technologies. Program designs should be tested
with customer market research before finalizing offerings.
Customer research could include surveys, focus groups,
6-31
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Best Practice: Solicit Stakeholder Input
Minnesota's Energy Efficiency Stakeholder Process
exemplifies the best practice of engaging stake-
holders in program design. The Minnesota Public
Utility Commission hosted a roundtable with the
commission, utilities, and other stakeholders to
review programs. Rate implications and changes to
the programs are worked out through this collabo-
rative and drive program design (MPUC, 2005).
Successful stakeholder processes generally have the
following attributes:
Neutral facilitation of meetings.
Clear objectives for the group overall and for each
meeting.
Explicit definition of stakeholder group's role in
program planning (usually advisory only).
Explicit and fair processes for providing input.
A timeline for the stakeholder process.
forums, and in-depth interviews. Testing of incentive levels
and existing market conditions by surveying trade allies
is critical for good program design.
Use Utility Channels and Brand
Utilities have existing channels for providing information
and service offerings to their customers. These include
Web sites, call centers, bill stuffers, targeted newsletters,
as well as public media. Using these channels takes
advantage of existing infrastructure and expertise, and
provides customers with energy information in the way
that they are accustomed to obtaining it. These methods
reduce the time and expense of bringing information to
customers. In cases where efficiency programming is
delivered by a third party, gaining access to customer
data and leveraging existing utility channels has been
highly valuable for program design and implementation.
In cases such as Vermont (where the utilities are not
responsible for running programs), it has been helpful to
have linkages from the utility Web sites to Efficiency
Vermont's programs, and to establish Efficiency Vermont
as a brand that the utilities leverage to deliver information
about efficiency to their customers.
Promote the Other Benefits of Energy Efficiency
and Energy Efficient Equipment
Most customers are interested in reducing energy con-
sumption to save money. Many, however, have other
motivations for replacing equipment or renovating space
that are consistent with energy efficiency improvements.
For example, homeowners might replace their heating
system to improve the comfort of their home. A furnace
with a variable speed drive fan will further increase com-
fort (while saving energy) by providing better distribution
of both heating and cooling throughout the home and
reducing fan motor noise. It is a best practice for pro-
gram administrators to highlight these features where
non-energy claims can be substantiated.
Coordinate With Other Utilities and Third-Party
Program Administrators
Coordination with other utilities and third-party program
administrators is also important. Both program allies and
customers prefer programs that are consistent across
states and regions. This approach reduces transaction
costs for customers and trade allies and provides consis-
tent messages that avoid confusing the market. Some
programs can be coordinated at the regional level by
entities such as Northeast Energy Efficiency Partnership
(NEEP), the Northwest Energy Efficiency Alliance, and the
Midwest Energy Efficiency Alliance. Figure 6-1 illustrates
the significant impact that initiative sponsors of the
Northeast Lighting and Appliance Initiative (coordinated
regionally by NEEP) have been able to have on the mar-
ket for energy-efficient clothes washers by working in
coordination over a long time period. NEEP estimates
the program is saving an estimated 36 million kWh
per year, equivalent to the annual electricity needs
of 5,000 homes (NEEP, undated).
Similarly, low-income programs benefit from coordina-
tion with and use of the same eligibility criteria as the
federal Low-Income Home Energy Assistance Program
(LIHEAP) or Weatherization Assistance Program (WAP).
These programs have existing delivery channels that can
6-32 National Action Plan for Energy Efficiency
-------
Figure 6-1. Impacts of the Northeast Lighting and Appliance Initiative
0.6
U
Sponsor states with initiative
National average
Sponsor states absent initiative
lftiei.il Minimum rtfxtvr
Sponsor states
(with initiative)
.2003: Nation;)! ttothes washers
(.smpdign kicks off
2004 More *trmqent ENERGY
STAR sp*c iaksn effect
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
be used to keep program costs down while providing
substantial benefit to customers. On average, weather-
ization reduces heating bills by 31 percent and overall
energy bills by $274 per year for an average cost per
home of $2,672 per year. Since 1999, DOE has been
encouraging the network of weatherization providers to
adopt a whole-house approach whereby they approach
residential energy efficiency as a system rather than as a
collection of unrelated pieces of equipment (DOE, 2006).
The Long Island Power Authority's (LIRA) program shown
at right provides an example.
Leverage the National ENERGY STAR Program
Nationally, ENERGY STAR provides a platform for pro-
gram implementation across customer classes and
defines voluntary efficiency levels for homes, buildings,
and products. ENERGY STAR is a voluntary, public-private
partnership designed to reduce energy use and related
greenhouse gas emissions. The program, administered
by the U.S. Environmental Protection Agency (EPA) and
the DOE, has an extensive network of partners including
equipment manufacturers, retailers, builders, ESCOs, pri-
vate businesses, and public sector organizations.
Since the late 1990s, EPA and DOE have worked with
utilities, state energy offices, and regional nonprofit
organizations to help leverage ENERGY STAR messaging,
tools, and strategies to enhance local energy efficiency
programs. Today more than 450 utilities (and other effi-
ciency program administrators), servicing 65
percent of U.S. households, participate in the ENERGY
STAR program. (See box on page 6-34 for additional
information.) New Jersey and Minnesota provide examples
of states that have leveraged ENERGY STAR.
Long Island Power Authority (LIRA):
Residential Energy Affordability
Partnership Program (REAP)
This program provides installation of comprehen-
sive electric energy efficiency measures and energy
education and counseling. The program targets
customers who qualify for DOE's Low-Income
Weatherization Assistance Program (WAP), as well
as electric space heating and cooling customers
who do not qualify for WAP and have an income
of no more than 60 percent of the median house-
hold income level. LIPA's REAP program has saved
2.5 MW and 21,520 MWh 1999 to 2004 with
spending of $12.4 million.
Source: LIPA, 2004
Jo create a sustainable, aggressive national commitment to energy efficiency
6-33
-------
V'- C/i'j;; hn-rr.- /V<;i.". ' The New Jersey
Board of Public Utilities, Office of Clean Energy has incor-
porated ENERGY STAR tools and strategies since the
inception of its residential products and Warm Advantage
(gas) programs. Both programs encourage customers to
purchase qualified lighting, appliances, windows, pro-
grammable thermostats, furnaces, and boilers. The New
Jersey Clean Energy Program also educates consumers,
retailers, builders, contractors, and manufacturers about
ENERGY STAR. In 2005, New Jersey's Clean Energy
Program saved an estimated 60 million kWh of elec-
tricity, 1.6 million therms of gas, and 45,000 tons of
carbon dioxide
ENERGY STAR Program Investments
In support of the ENERGY STAR program, EPA and
DOE invest in a portfolio of energy efficiency efforts
that utilities and third-party program administrators
can leverage to further their local programs including:
Education and Awareness Building. ENERGY STAR
sponsors broad-based public campaigns to educate
consumers on the link between energy use and air
emissions, and to raise awareness about how products
and services carrying the ENERGY STAR label can
protect the environment while saving money.
Establishing Performance Specifications and
Performing Outreach on Efficient Products. More
than 40 product categories include ENERGY STAR-
qualifying models, which ENERGY STAR promotes
through education campaigns, information
exchanges on utility-retailer program models, and
extensive online resources. Online resources include
qualifying product lists, a store locator, and information
on product features.
Establishing Energy Efficiency Delivery Models to
Existing Homes. ENERGY STAR assistance includes
an emphasis on home diagnostics and evaluation,
improvements by trained technicians/building pro-
fessionals, and sales training. It features online
consumer tools including the Home Energy Yardstick
and Home Energy Advisor.
Establishing Performance Specifications and
Performing Outreach for New Homes. ENERGY
STAR offers builder recruitment materials, sales
toolkits, consumer messaging, and outreach that
help support builder training, consumer education,
and verification of home performance.
Improving the Performance of New and Existing
Commercial Buildings. EPA has designed an Energy
Performance Rating System to measure the energy
performance at the whole-building level, to help go
beyond a component-by-component approach that
misses impacts of design, sizing, installation,
controls, operation, and maintenance. EPA uses this
tool and other guidance to help building owners
and utility programs maximize energy savings.
Additional information on strategies, tools, and
resources by customer segment is provided in the fact
sheet "ENERGY STARA Powerful Resource for
Saving Energy," which can be downloaded from
www.epa.gov/cleanenergy/pd f/napee_energystar-
factsheet.pdf.
6-34 National Action Plan for Energy Efficiency
-------
.'.'!',). /-,'/!/(>/- I nmjy Mima %
-------
10 percent of the overall energy efficiency budget, but
information, training, and outreach might comprise a
larger portion of some programs that are designed to
affect long-term markets, when such activities are tied to
explicit uptake of efficiency measures and practices. This
approach might be particularly applicable in the early
years of implementation, when information and training
are most critical for building supply and demand for
products and services over the longer term. KeySpan and
Flex Your Power are examples of coordinating education,
training, and outreach activities with programs.
Leverage Customer Contact to Sell Additional Efficiency
and Conservation Measures
Program providers can take advantage of program contact
with customers to provide information on other program
KeySpan Example
KeySpan uses training and certification as critical parts
of its energy efficiency programs. KeySpan provides
building operator certification training, provides
training on the Massachusetts state building code,
and trains more than 1,000 trade allies per year.
Source: Johnson, 2006
California: Flex Your Power Campaign
The California Flex Your Power Campaign was ini-
tiated in 2001 in the wake of California's rolling
black-outs. While initially focused on immediate
conservation measures, the campaign has transi-
tioned to promoting energy efficiency and long-
term behavior change. The program coordinates
with the national ENERGY STAR program as well as
the California investor-owned utilities to ensure
that consumers are aware of energy efficiency
options and the incentives available to them
through their utilities.
offerings, as well as on no or low-cost opportunities to
reduce energy costs. Information might include proper use
or maintenance of newly purchased or installed equipment
or general practices around the home or workplace for
efficiency improvements. Education is often included in
low-income programs, which generally include direct
installation of equipment, and thus already include in-home
interaction between the program provider and customer.
The box below provides some additional considerations for
low-income programs.
Leverage Private-Sector Expertise, External Funding,
and Financing
Well-designed energy efficiency programs leverage
external funding and financing to stretch available dollars
and to take advantage of transactions as they occur in
Low-Income Programs
Most utilities offer energy efficiency programs targeted
to low-income customers for multiple reasons:
Low-income customers are less likely to take
advantage of rebate and other programs,
because they are less likely to be purchasing
appliances or making home improvements.
The "energy burden" (percent of income spent
on energy) is substantially higher for low-income
customers, making it more difficult to pay bills.
Programs that help reduce energy costs reduce
the burden, making it easier to maintain regular
payments.
Energy efficiency improvements often increase
the comfort and safety of these homes.
Utilities have the opportunity to leverage federal
programs, such as LIHEAP and WAP, to provide
comprehensive services to customers.
Low-income customers often live in less efficient
housing and have older, less efficient appliances.
Low-income customers often comprise a sub-
stantial percentage (up to one-third) of utility
residential customers and represent a large
potential for efficiency and demand reduction.
Using efficiency education and incentives in
conjunction with credit counseling can be very
effective in this sector.
6-36 National Action Plan for Energy Efficiency
-------
the marketplace. This approach offers greater financial
incentives to the consumer without substantially increas-
ing program costs. It also has some of the best practice
attributes discussed previously, including use of existing
channels and infrastructure to reach customers. The fol-
lowing are a few opportunities for leveraging external
funding and financing:
Leverage Manufacturer and Retailer Resources Through
Cooperative Promotions. For example, for mass market
lighting and appliance promotions, many program
administrators issue RFPs to retailers and manufacturers
asking them to submit promotional ideas. These RFPs
usually require cost sharing or in-kind advertising and
promotion, as well as requirements that sales data be
provided as a condition of the contract. This approach
allows competitors to differentiate themselves and
market energy efficiency in a way that is compatible
with their business model.
Leverage State and Federal Tax Credits Where Available.
Many energy efficiency program administrators are
now pointing consumers and businesses to the new
federal tax credits and incorporating them in their pro-
grams. In addition, program administrators can edu-
cate their customers on existing tax strategies, such as
accelerated depreciation and investment tax strategies,
to help them recoup the costs of their investments
faster. Some states offer additional tax credits, and/or
offer sales tax "holidays," where sales tax is waived at
point of sale for a specified period of time ranging
from one day to a year. The North Carolina Solar
Center maintains a database of efficiency incentives,
including state and local tax incentives, at
www. dsireusa. org.
Build on ESCO and Other Financing Program Options.
This is especially useful for large commercial and
industrial projects.
The NYSERDA and California programs presented at
right and on the following page are both good examples
of leveraging the energy services market and increasing
ESCO presence in the state.
New York Energy Smart Commercial/
Industrial Performance Program
The New York Energy Smart Commercial/Industrial
Performance Program, which is administered by
NYSERDA, is designed to promote energy savings
and demand reduction through capital improve-
ment projects and to support growth of the energy
service industry in New York state. Through the
program, ESCOs and other energy service
providers receive cash incentives for completion of
capital projects yielding verifiable energy and
demand savings. By providing $111 million in per-
formance-based financial incentives, this nationally
recognized program has leveraged more than
$550 million in private capital investments. M&V
ensures that electrical energy savings are achieved.
Since January 1999, more than 860 projects
were completed in New York with an estimat-
ed savings of 790 million kWh/yr.
Sources: Thorne-Amann and Mendelsohn, 2005;
AESP, 2006
Training Opportunities. Many organizations provide
education and training to their members, sometimes
on energy efficiency. Working with these organizations
provides access to their members, and the opportunity
to leverage funding or marketing opportunities provided
by these organizations.
In addition, the energy efficiency contracting industry
has matured to the level that many proven programs
have been "commoditized." A number of private firms
and not-for-profit entities deliver energy efficiency pro-
grams throughout the United States or in specific
regions of the country. "The energy efficiency industry is
now a $5 billion to $25 billion industry (depending on
how expansive one's definition) with a 30-year history of
developing and implementing all types of programs for
To create a sustainable, aggressive national commitment to energy efficiency
6-37
-------
California Non-Residential Standard
Performance Contract (NSPC) Program
The California NSPC program is targeted at cus-
tomer efficiency projects and is managed on a
statewide basis by PG&E, SCE, and San Diego Gas
& Electric. Program administrators offer fixed-price
incentives (by end use) to project sponsors for
measured kilowatt-hour energy savings achieved
by the installation of energy efficiency measures.
The fixed price per kWh, performance measurement
protocols, payment terms, and other operating
rules of the program are specified in a standard
contract. This program has helped to stimulate the
energy services market in the state. In program
year 2003, the California NSPC served 540 cus-
tomers and saved 336 gigawatt-hours and
6.54 million therms.
Source: Quantum Consulting Inc., 2004
The Building Owners & Managers
Association (BOMA) Energy Efficiency
Program
The BOMA Foundation, in partnership with the
ENERGY STAR program, has created an innovative
operational excellence program to teach property
owners and managers how to reduce energy con-
sumption and costs with proven no- and low-cost
strategies for optimizing equipment, people and
practices. The BOMA Energy Efficiency Program
consists of six Web-assisted audio seminars (as well
as live offerings at the BOMA International
Convention). The courses are taught primarily by
real estate professionals who speak in business
vernacular about the process of improving
performance. The courses are as follows:
* Introduction to Energy Performance
* How to Benchmark Energy Performance
8 Energy-Efficient Audit Concepts & Economic
Benefits
utilities and projects for all types of customers across the
country" (NAESCO, 2005). These firms can quickly get a
program up and running, as they have the expertise,
processes, and infrastructure to handle program activi-
ties. New program administrators can contract with
these organizations to deliver energy efficiency program
design, delivery, and/or implementation support in their
service territory.
Fort Collins Utilities was able to achieve early returns for
its Lighting with a Twist program (discussed on page 6-
39) by hiring an experienced implementation contractor
through a competitive solicitation process and negotiating
cooperative marketing agreements with national retail chains
and manufacturers, as well as local hardware stores.
* No- and Low-Cost Operational Adjustments to
Improve Energy Performance
"Valuing Energy Enhancement Projects & Financial
Returns
* Building an Energy Awareness Program
The commercial real estate industry spends
approximately $24 billion annually on energy and
contributes 18 percent of the U.S. C02 emissions.
According to EPA and ENERGY STAR Partner
observations, a 30 percent reduction is readily
achievable simply by improving operating standards.
6-38 National Action Plan for Energy Efficiency
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Fort Collins Utilities Lighting
With a Twist
Fort Collins Utilities estimates annual savings
of 2,023 MWh of electricity with significant
winter peak demand savings of 1,850 kW at a
total resource cost of $0.018/kWh from its
Lighting with a Twist program, which uses
ENERGY STAR as a platform. The program was
able to get off to quick and successful start by hiring
an experienced implementation contractor and
negotiating cooperative marketing agreements
with retailers and manufacturersfacilitating the
sale of 78,000 compact fluorescent light bulbs
through six retail outlets from October to
December 2005 (Fort Collins Utilities, et al., 2005).
Start Simply With Demonstrated Program Models:
Build Infrastructure for the Future
Utilities starting out or expanding programs should look to
other programs in their region and throughout the country
to leverage existing and emerging best programs. After
more than a decade of experience running energy efficiency
programs, many successful program models have emerged
and are constantly being refined to achieve even more cost-
effective results.
While programs must be adapted to local realities, utilities
and state utility commissions can dramatically reduce their
learning curve by taking advantage of the wealth of data
and experience from other organizations around the
country. The energy efficiency and services community has
numerous resources and venues for sharing information
and formally recognizing best practice programs. The
Association of Energy Service Professionals (www.aesp.org),
the Association of Energy Engineers (www.aeecenter.org),
and the American Council for an Energy Efficient Economy
(www.aceee.org) are a few of these resources.
Opportunities for education and information sharing are
also provided via national federal programs such as ENERGY
STAR (www.energystar.gov) and the Federal Energy
Management Program (www.eere.energy.gov/femp).
Additional resources will be provided in Energy Efficiency
Best Practices Resources and Expertise (a forthcoming
product of the Leadership Group). Leveraging these
resources will reduce the time and expense of going to
market with new efficiency programs. This will also increase
the quality and value of the programs implemented.
Start With Demonstrated Program Approaches That Can
Easily Be Adapted to New Localities
Particularly for organizations that are new to energy effi-
ciency programming or have not had substantial energy
efficiency programming for many years, it is best to start
with tried and true programs that can easily be transferred
to new localities, and be up and running quickly to achieve
near term results. ENERGY STAR lighting and appliance pro-
grams that are coordinated and delivered through retail
sales channels are a good example of this approach on the
residential side. On the commercial side, prescriptive incen-
tives for technologies such as lighting, packaged unitary
heating and cooling equipment, commercial food service
equipment, and motors are good early targets. While issues
related to installation can emerge, such as design issues for
lighting, and proper sizing issues for packaged unitary heat-
ing and cooling equipment, these technologies can deliver
savings independent from how well the building's overall
energy system is managed and controlled. In the early
phase of a program, offering prescriptive rebates is simple
and can garner supplier interest in programs, but as
programs progress, rebates might need to be reduced or
transitioned to other types of incentives (e.g., cooperative
marketing approaches, customer referrals) or to more
comprehensive approaches to achieving energy savings. If
the utility or state is in a tight supply situation, it might make
sense to start with proven larger scale programs that
address critical load growth drivers such as increased air
conditioning load from both increased central air
conditioning in new construction and increased use of
room air conditioners.
Determine the Right Incentives and Levels
There are many types of incentives that can be used to
spur increased investment in energy-efficient products
and services. With the exception of education and
To create a sustainable, aggressive national commitment to energy efficiency
6-39
-------
Table 6-11. Types of Financial Incentives
Financial Incentives
Prescriptive Rebate
Custom Rebate
Description
Usually a predetermined incentive payment per item or per kW or kWh saved. Can be
provided to the customer or a trade ally.
A rebate that is customized by the type of measures installed. Can be tied to a specific
payback criteria or energy savings. Typically given to the customer.
Performance Contracting Incentive
Low Interest Financing
A program administrator provides an incentive to reduce the risk premium to the ESCO
installing the measures.
A reduced interest rate loan for efficiency projects. Typically provided to the customer.
Cooperative Advertising
Retailer Buy Down
Involves providing co-funding for advertising or promoting a program or product. Often
involves a written agreement.
A payment to the retailer per item that reduces the price of the product.
MW Auction
IA program administrator pays a third party per MW and/or per MWh for savings.
training programs, most programs offer some type of
financial incentive. Table 6-11 shows some of the most
commonly used financial incentives. Getting incentives
right, and at the right levels, ensures program success and
efficient use of resources by ensuring that programs do
not "overpay" to achieve results. The market assessment
and stakeholder input process can help inform initial
incentives and levels. Ongoing process and impact
evaluation (discussed below) and reassessment of cost-
effectiveness can help inform when incentives need to be
changed, reduced, or eliminated.
Invest in the Service Industry Infrastructure
Ultimately, energy efficiency is implemented by people
home performance contractors, plumbers, electricians,
architects, ESCOs, product manufacturers, and others
who know how to plan for, and deliver, energy efficiency
to market.
While it is a best practice to incorporate whole house
and building performance into programs, these pro-
grams cannot occur unless the program administrator
has a skilled, supportive community of energy service
professionals to call upon to deliver these services to
market. In areas of the country lacking these talents,
development of these markets is a key goal and critical
part of the program design.
In many marketseven those with well established effi-
ciency programsit is often this lack of infrastructure or
supply of qualified workers that prevents wider deploy-
ment of otherwise cost-effective energy efficiency
programs. Energy efficiency program administrators
often try to address this lack of infrastructure through
various program strategies, including pilot testing
programs that foster demand for these services and help
create the business case for private sector infrastructure
development, and vocational training and outreach to
universities, with incentives or business referrals to spur
technician training and certification.
Examples of programs that have leveraged the ESCO
industry were provided previously. One program with an
explicit goal of encouraging technical training for the
residential marketplace is Home Performance with
ENERGY STAR, which is an emerging program model
being implemented in a number of states including
Wisconsin, New York, and Texas (see box on page 6-41
for an example). The program can be applied in the gas
or electric context, and is effective at reducing peak
load, because the program captures improvements in
heating and cooling performance.
6-40 National Action Plan for Energy Efficiency
-------
Austin Energy: Home Performance
with ENERGY STAR
In Texas, Austin Energy's Home Performance with
ENERGY STAR program focuses on educating cus-
tomers, and providing advanced technical training
for professional home performance contractors to
identify energy efficiency opportunities, with an
emphasis on safety, customer comfort, and energy
savings. Participating Home Performance contrac-
tors are given the opportunity to receive technical
accreditation through the Building Performance
Institute.
Qualified contractors perform a top-to-bottom
energy inspection of the home and make cus-
tomized recommendations for improvements.
These improvements might include measures such
as air-sealing, duct sealing, adding insulation,
installing energy efficient lighting, and installing
new HVAC equipment or windows, if needed. In
2005, Austin Energy served more than 1,400
homeowners, with an average savings per cus-
tomer of $290 per year. Collectively, Austin
Energy customers saved an estimated
$410,000 and more than 3 MW through the
Home Performance with ENERGY STAR program.
Source: Austin Energy, 2006
Evolve to More Comprehensive Programs
A sample of how program approaches might evolve over
time is presented in Table 6-12. As this table illustrates,
programs typically start with proven models and often
simpler approaches, such as providing prescriptive
rebates for multiple technologies in commercial/industrial
existing building programs. In addition, early program
options are offered for all customer classes, and all of the
programs deliver capacity benefits in addition to energy
efficiency. Ultimately, the initial approach taken by a
program administrator will depend on how quickly the
program needs to ramp up, and on the availability of
service industry professionals who know how to plan for,
and deliver, energy efficiency to market.
As program administrators gain internal experience and
a greater understanding of local market conditions, and
regulators and stakeholders gain greater confidence in
the value of the energy efficiency programs being
offered, program administrators can add complexity to
the programs provided and technologies addressed. The
early and simpler programs will help establish internal
relationships (across utility or program provider depart-
ments) and external relationships (between program
providers, trade allies and other stakeholders). Both the
program provider and trade allies will better understand
roles and relationships, and trade allies will develop
familiarity with program processes and develop trust in
the programs. Additional complexity can include alternative
financing approaches (e.g., performance contracting),
the inclusion of custom measures, bidding programs,
whole buildings and whole home approaches, or addi-
tional cutting edge technologies. In addition, once
programs are proven within one subsector, they can
often be offered with slight modification to other sectors;
for example, some proven residential program offerings
might be appropriate for multi-family or low-income cus-
tomers, and some large commercial and industrial offerings
might be appropriate for smaller customers or multifamily
applications. Many of the current ENERGY STAR market-
based lighting and appliance programs that exist in
many parts of the country evolved from customer-based
lighting rebates with some in-store promotion. Many of
the more complex commercial and industrial programs,
such at NSTAR and National Grid's Energy Initiative program
evolved from lighting, HVAC, and motor rebate programs.
The Wisconsin and Xcel Energy programs discussed on
page 6-43 are also good examples of programs that
have become more complex over time.
Change Measures Over Time
Program success, changing market conditions, changes
in codes, and changes in technology require reassessing
the measures included in a program. High saturations in
the market, lower incremental costs, more rigid codes, or
To create a sustainable, aggressive national commitment to energy efficiency
6-41
-------
Table 6-12. Sample Progression of Program Designs II
Sector
Program Ramp Up i Ener9y * ^i;1^86"65
3 r i (In Addition to kWh)
Early Midterm
(6 Months -2 YRS) (2-3 YRS)
Residential:
Existing Homes
Market-based
lighting & appliance
program
Home performance
with ENERGY STAR
pilot
Residential: [ENERGY STAR
New Homes pilot (in areas
Construction
without existing
infrastructure)
Low-Income
Multifamily
Commercial:
Existing
Buildings
Commercial:
New
Construction
Small Business
Education and
coordination with
weatherization
programs
Lighting, audits
Lighting, motors,
HVAC, pumps,
refrigeration, food
service equipment
prescriptive rebates
ESCO-type program
Lighting, motors,
HVAC, pumps,
refrigeration, food
Home performance
with ENERGY STAR
HVAC rebate
J.
ENERGY STAR
Homes
Direct install
Direct install
Custom measures
service equipment
prescriptive rebates
Custom measures
and design
assistance
J.
Lighting and
HVAC rebates
Direct install
Peak 1 II
Longer Term other Fuels K-Summpr Watcr Othsr II
(3 To 7 YRS) Other Fuels ^-jjger. Savjngs Other II
i i II
X
Add HVAC practices
X
X
X
j
Add ENERGY STAR
Advanced Lighting
Package
Add home repair
X
X
X
-_._.._._
S,W ' X
S,W
S
s,w
s,w
1
w
s,w
X
X
s,w
s,w ;
S,W :
Comprehensive
S,W X
approach
S,W
| S,W X
1
s,w
s,w
Bill savings and
reduced emissions
Bill savings and
reduced emissions
Bill savings and
reduced emissions
Improved bill
payment
Improved comfort
Bill savings and
reduced emissions
Bill savings and
reduced emissions
Bill savings and
reduced emissions
Bill savings and
reduced emissions
the availability of newer, more efficient technologies are
all reasons to reassess what measures are included in a
program. Changes can be incremental, such as limiting
incentives for a specific measure to specific markets or
specific applications. As barriers hindering customer
investment in a measure are reduced, it might be appro-
priate to lower or eliminate financial incentives altogether.
It is not uncommon, however, for programs to continue
6-42 Nation,)! Action Pl.in for Energy Efficiency
-------
Wisconsin Focus on Energy:
Comprehensive Commercial Retrofit
Program
Wisconsin Focus on Energy's Feasibility Study Grants
and Custom Incentive Program encourages commer-
cial customers to implement comprehensive, multi-
measure retrofit projects resulting in the long-term,
in-depth energy savings. Customers implementing
multi-measure projects designed to improve the whole
building might be eligible for an additional 30 percent
payment as a comprehensive bonus incentive. The
Comprehensive Commercial Retrofit Program
saved 70,414,701 kWh, 16.4 MW, and 2 million
therms from 2001 through 2005.
Sources: Thorne-Amann and Mendelsohn, 2005;
Wisconsin, 2006.
monitoring product and measure uptake after programs
have ceased or to support other activities, such as con-
tinued education, to ensure that market share for products
and services are not adversely affected once financial
incentives are eliminated.
Pilot New Program Concepts
New program ideas and delivery approaches should be ini-
tially offered on a pilot basis. Pilot programs are often very
limited in duration, geographic area, sector or technology,
depending upon what is being tested. There should be a
specific set of questions and objectives that the pilot pro-
gram is designed to address. After the pilot period, a quick
assessment of the program should be conducted to deter-
mine successful aspects of the program and any problem
areas for improvement, which can then be addressed in a
more full-scale program. The NSTAR program shown
below is a recent example of an emerging program type
that was originally started as a pilot.
Xcel Energy Design Assistance
Energy Design Assistance offered by Xcel, targets
new construction and major renovation projects. The
program goal is to improve the energy efficiency of
new construction projects by encouraging the design
team to implement an integrated package of energy
efficient strategies. The target markets for the pro-
gram are commercial customers and small business
customers, along with architectural and engineering
firms. The program targets primarily big box retail,
public government facilities, grocery stores, health-
care, education, and institutional customers. The
program offers three levels of support depending on
project size. For projects greater than 50,000 square
feet, the program offers custom consulting. For proj-
ects between 24,000 and 50,000 square feet, the
program offers plan review. Smaller projects get a
standard offering. The program covers multiple
HVAC, lighting, and building envelope measures.
The program also addresses industrial process
motors and variable speed drives. Statewide, the
Energy Design Assistance program saved 54.3
GWh and 15.3 MW at a cost of $5.3 million in 2003.
Source: Minnesota Office of Legislative Auditor,
2005; Quantum Consulting Inc., 2004
Table 6-13 provides a summary of the examples pro-
vided in this section.
NSTAR Electric's ENERGY STAR
Benchmarking Initiative
NSTAR is using the ENERGY STAR benchmarking
and portfolio manager to help its commercial cus-
tomers identify and prioritize energy efficiency
upgrades. NSTAR staff assist the customer in using
the ENERGY STAR tools to rate their building relative
to other buildings of the same type, and identify
energy efficiency upgrades. Additional support is
provided through walk-through energy audits and
assistance in applying for NSTAR financial incentive
programs to implement efficiency measures.
Ongoing support is available as participants monitor
the impact of the energy efficiency improvements
on the building's performance.
6-43
-------
Table 6-13. Program Examples for Key Customer Segments
Customer
Segment
Program
All | Training and
certification
I components
Commercial, Non-residential
Industrial j performance
j contracting
I program
Commercial, Energy design
Industrial, assistance
New
Construction
Commercial,
Industrial
Large
Commercial,
Industrial
Large
Commercial,
Industrial
Small
Commercial
Residential
Residential -
Low Income
Custom incentive
program
NY Performance
Contracting
Program
ENERGY STAR
Benchmarking
Smart business
Flex Your Power
Residential
affordability
program
Program
Administrator
KeySpan
California Utilities
XCEL
Wisconsin Focus on
Energy
NYSERDA
NSTAR
Seattle City Light
California lOU's
LIPA
Program Description/
Strategies
KeySpan's programs include a signifi-
cant certification and training compo-
nent. This includes building operator
certification, building code training and
training for HVAC installers. Strategies
include training and certification.
This program uses a standard contract
approach to provide incentives for
measured energy savings. The key
strategy is the provision of financial
incentives.
This program targets new construction
and major renovation projects. Key
strategies are incentives and design
assistance for electric saving end uses.
This program allows commercial and
industrial customers to implement a
wide array of measures. Strategies
include financial assistance and
technical assistance.
Comprehensive Performance
Contracting Program provides incen-
tives for measures and leverages the
energy services sector. The predomi-
nant strategies are providing incen-
tives and using the existing energy
services infrastructure.
Program Model
Proven Emerging
X
X
X
X Does allow for
technologies
to be added
over time
NSTAR uses EPA's ENERGY STAR X
benchmarking and Portfolio Manager
to assist customers in rating their
buildings.
This program has per unit incentives
for fixtures and is simple to participate
in. It also provides a list of pre-
qualified contractors.
This is an example of the CA utilities
working together on a coordinated cam-
paign to promote ENERGY STAR prod-
ucts. Lighting and appliances were
among the measures promoted.
Strategies include incentives and
advertising.
Comprehensive low-income program
that installs energy saving measures and
also provides education. Strategies are
incentives and education.
X
X
X
Key Best
Practices
Don't underinvest in
education, training, and
outreach. Solicit stake-
holder input. Use utilities
channels and brand.
Build upon ESCO and
other financing program
options. Add program
complexity over time.
Keep participation
simple.
Keep participation simple.
Add complexity over
time.
Keep participation simple.
Add complexity over
time.
Leverage customer con-
tact to sell additional
measures. Add program
complexity over time.
Keep participation simple.
Build upon ESCO and
other financing options.
Coordinate with other
programs. Keep partici-
pation simple. Use utility
channels and brand.
Leverage ENERGY STAR.
Use utility channels and
brand. Leverage cus-
tomer contact to sell
additional measures.
Keep funding consistent.
Don't underinvest in edu-
cation, training, and out-
reach. Solicit stakeholder
input. Use utilities chan-
nels and brand.
Coordinate with other
programs. Leverage man-
ufacturer and retailer
resources. Keep participa-
tion simple. Leverage
ENERGY STAR.
Coordinate with other
programs. Keep participa-
tion simple. Leverage
customer contact to sell
additional measures.
6-44 National Action Plan for Energy Efficiency
-------
Table 6-13. Program Examples for Key Customer Segments (continued)
Customer
Segment
Program
Program
Administrator
Program Description/
Strategies
Program Model
Proven Emerging
Key Best
Practices
Residential
Existing
Homes
Home
Performance with
ENERGY STAR
Residential ' ENERGY STAR
New i Homes
Construction
Residential Residential
Existing program
Homes
Residential
Existing
Homes
Commercial
Existing
New Jersey
Clean Energy
Program
Education and
training
Austin Energy | Whole house approach to existing ' X : Start with proven mod-
homes. Measures include: air sealing, [ : : els. Use utilities channels
insulation, lighting, duct-sealing, and : and brand. Coordinate
replacing HVAC. i ' with other programs.
Efficiency Vermont ! Comprehensive new construction pro- X ; Don't underinvest in
; gram based on a HERS rating system. : : education, training, and
Measures include HVAC, insulation ; ; outreach. Solicit stake-
! lighting, windows, and appliances. : holder input. Leverage
i ; state and federal tax
credits. Leverage
ENERGY STAR.
Great River Coop Provides rebates to qualifying appli-
1 ances and technologies. Also provides
training and education to customers
and trade allies. Is a true dual-fuel
program.
New Jersey BPU
BOMA
Provides rebates to qualifying appli-
ances and technologies. Also provides
training and education to customers
and trade allies. Is a true dual-fuel
program.
Designed to teach members how to
reduce energy consumption and costs
through no- and low-cost strategies.
*
X
Start with proven mod-
els. Use utilities chan-
nels and brand.
Coordinate with other
programs.
Start with proven mod-
els. Coordinate with
other programs.
Leverage organizations
and outside education
and training opportuni-
ties. Leverage ENERGY
STAR.
Ensuring Energy Efficiency
Investments Deliver Results
Program evaluation informs ongoing decision-making,
improves program delivery, verifies energy savings claims,
and justifies future investment in energy efficiency as a
reliable energy resource. Engaging in evaluation during
the early stages of program development can save time
and money by identifying program inefficiencies, and sug-
gesting how program funding can be optimized. It also
helps ensure that critical data are not lost.
The majority of organizations reviewed for this paper have
formal evaluation plans that address both program
processes and impacts. The evaluation plans, in general,
are developed consistent with the evaluation budget cycle
and allocate evaluation dollars to specific programs and
activities. Process and impact evaluations are performed
for each program early in program cycles. As programs
and portfolios mature, process evaluations are less
frequent than impact evaluations. Over the maturation
period, impact evaluations tend to focus on larger
programs (or program components), and address more
complex impact issues.
Most programs have an evaluation reporting cycle that is
consistent with the program funding (or budgeting) cycle.
In general, savings are reported individually by sector and
totaled for the portfolio. Organizations use evaluation
results from both process and impact evaluations to
improve programs moving forward, and adjust their port-
folio of energy efficiency offerings based on evaluation
findings and other factors. Several organizations have
adopted the International Performance Measurement and
Verification Protocol (IPMVP) to provide guidelines for
evaluation approaches. California has its own set of for-
mal protocols that address specific program types. Key
methods used by organizations vary based on program
type and can include billing analysis, engineering analysis,
metering, sales data tracking, and market effects studies.
Table 6-14 summarizes the evaluation practices of a
subset of the organizations reviewed for this study.
To create a sustainable, aggressive national commitment to energy efficiency
6-45
-------
^H Table 6-14 Evaluation Approaches
Oj
5'
3'
rri
"^
ง'
Policy Model
Program Funding Source
Program Budgeting Cycle
Evaluation Funding Cycle
Evaluation Reporting
Cycle
Role of Deemed Savings
(i.e., pre-determined
savings)
Report Gross Savings
(usually kWh, kW)
Report Net Savings
(usually kWh, kW)
Net Savings Components
Installation Verification
Engineering Review
Free Ridership
Spillover or Market Effects
Retention
Non-Energy Benefits
Other Not Specified
NYSERDA !
(NY) i
; SBC w/state
administration
1 Annual appropriation, j
' 8-year renewable
portfolio standard
program. 5-year
: public benefit i
programs.
Annual
Annual
Quarterly and
annually
Estimate savings.
Program planning
and goals.
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Efficiency
Vermont
(VT)
SBC w/3" party
administration
Not available
3 years
Not available
Annually and as
needed
Estimate savings.
No
Yes
Yes
Yes
Yes
i Electric Utilities
NSTAR (MA)
SBC w/utility
administration
: SBC
Annual from SBC
Annual; evaluation is a
line item in budgeting
process.
Annually but not every
program every year
DOER for report to
legislature. Program
planning and design.
Yes
:Yes
Yes
Yes
Yes
Yes
Yes
Wl Department of j CA Utilities
Administration ! (CA)
(Wl) |
SBC w/state : SBC w/utility
: administration ; administration
SBC - electric ratepayers : Not available
Annual Current funding cycle
is 3 years. Previous
periods were only 2
years.
Annual Ongoing, every year.
Upcoming contracts
will be 3 year evaluation
with annual reporting.
Twice per year Annual
Estimate savings. Program Planning. Inputs for
planning and goals. TRC analysis. Adjusted
regularly based on
evaluation results.
Yes Yes
Yes ; Yes
Yes Yes
Yes Yes
Yes Yes
Yes Yes
Yes
MN Electric and
Gas Investor-
Owned Utilities
(MN)
IRP and Conservation
Improvement Program
Utilities, by order of state
legislature, to spend a
percent of revenues on
efficiency programs.
Currently a 2-year cycle,
but a 4-year cycle is rec-
ommended. Natural gas
submits plans 1 year;
electricity the next.
Funded as needed
Annual status reports
Not available
Not available
Not available
Yes
Yes
Yes
Bonneville Power
Administration
(ID, MT, OR , WA)
Regional Planning Model
Not available
Dependent upon rate case, can
be every 2 to 5 years. Generally
amortized annually.
Evaluation funded periodically
when necessary. Starting to do
more frequent evaluations than
in previous years.
Not available
Determine payment schedule
for efficiency measures with
established savings records.
Yes. Gross savings forms basis
for regional power plans.
Yes. Used to evaluate the effi-
ciency of measures and fine-
tune programs. Savings netted
out depends upon program.
Not available
Not available
Not available
Not available
Not available
Not available
-------
Table 6-14. Evaluation Approaches (continued) ^^^^^|
NYSERDA
(NY)
Education and Training in Yes
EE Budget
Education and Training Yes
Evaluated
Evaluation Funding as Not available
Efficiency
Vermont
(VT)
Not available
Not available
<1%
Electric Utilities
NSTAR (MA)
Yes
Depends on program
2%
Wl Department of CA Utilities
Administration (CA)
(Wl)
Not available Yes
Initial years only Yes
8% increase from 4.25% No more than 3% of
MN Electric and
Gas Investor-
Owned Utilities
(MN)
Not available
Not available
<1%
Bonneville Power
Administration
(ID, MT, OR , WA)
Yes
No
Percent of Program
Budget
Evaluation Budget
Financial Evaluation
Cost-Effectiveness
Analysis
Timing
Test Used (RIM, TRC, Utility,
Other)
Who Evaluates
Oversight of evaluation
Protocols
Not available
Not available
Varies annually dependent Not Available
upon project portfolio and
other demands.
minimum efficiency
spending requirement.
$160MM over 3 years. Not available
$1MM
Internal CPA
State Comptroller
CPA
Yes
Annually
TRC; Other
Independent
evaluators
Yes
Triennially
Internal CPA
Yes
CPA
Yes
Not avaiable
Yes
Internal. Reviewed by Internal
Department of Commerce.
Reviewed by Legislature.
Varies annually dependent Periodically (less frequent Not available
upon project portfolio and than funding cycle)
other demands.
Yes
2 years
Yes
Periodically
Utility Cost Test and TRC
Societal Cost-
Benefit Test
Societal; also includes
economic impacts
TRCPAC (program
administrator test)
Societal; Utility; Participant; TRC
Ratepayer
Independent Utilities manage inde- One independent team of Independent evalua- Department of Independent evaluators
experts under con- pendent evaluators evaluators tors hired for each pro- Commerce Legislature Audit
tract to DPS through RFP process gram via RFP process Commission, if deemed
necessary
NYSERDA Department of
provides ongoing Public Service
oversight.
Public Utilities
Commission final
audience.
Evaluations are reviewed Wl Department of
in collaborative and filed Administration
with the Massachusetts
Department of
Telecommunications and
Energy
California Public
Utilities Commission
and CEC
Department of Commerce Power Council
IPMVP
Not available
Not available
None
Has had statewide pro- Not available
tocols for many years.
New protocols were
recently adopted.
IPMVP as reference
-------
Best practices for program evaluation that emerge from
review of these organizations include the following:
Budget, plan, and initiate evaluation from the onset.
Formalize and document evaluation plans.
Develop program tracking systems that are compatible
with needs identified in evaluation plans.
Conduct process evaluations to ensure that programs
are working efficiently.
Conduct impact evaluations to ensure that mid- and
long-term goals are being met.
Communicate evaluation results.
Budget, Plan, and Initiate Evaluation From
the Onset
A well-designed evaluation plan addresses program
process and impact issues. Process evaluations address
issues associated with program delivery such as marketing,
staffing, paperwork flow, and customer interactions, to
understand how they can be improved to better meet
program objectives. Impact evaluations are designed to
determine the energy or peak savings from the program.
Sometimes evaluations address other program benefits
such as non-energy benefits to consumers, water savings,
economic impacts, or emission reductions. Market research
is often included in evaluation budgets to assist in
assessing program delivery options, and for establishing
baselines. An evaluation budget of 3 to 6 percent of pro-
gram budget is a reasonable spending range. Often eval-
uation spending is higher in the second or third year of
"We should measure the performance of DSM
programs in much the same way and with the
same competence and diligence that we monitor
the performance of power plants."
Eric Hirst (1990), Independent Consultant
and Former Corporate Fellow, Oak Ridge
National Laboratory
a program. Certain evaluation activities such as estab-
lishing baselines are critical to undertake from the onset
to ensure that valuable data are not lost.
Develop Program and Project Tracking Systems
That Support Evaluation Needs
A well-designed tracking system should collect sufficiently
detailed information needed for program evaluation and
implementation. Data collection can vary by program
type, technologies addressed, and customer segment;
however, all program tracking systems should include:
Participating customer information. At a minimum,
create an unique customer identifier that can be linked
to the utility's Customer Information System (CIS).
Other customer or site specific information might be
valuable.
Measure specific information. Record equipment type,
equipment size or quantity, efficiency level and estimated
savings.
Program tracking information. Track rebates or other
program services provided (for each participant) and
key program dates.
All program cost information. Include internal staffing
and marketing costs, subcontractor and vendor costs,
and program incentives.
Efficiency Vermont's tracking system incorporates all of
these features in a comprehensive, easy-to-use relational
database that includes all program contacts including,
program allies and customers, tracks ell project savings
and costs, shows the underlying engineering estimates
for all measures, and includes billing data from all of the
Vermont utilities.
6-48 National Action Plan for Energy Efficiency
-------
Conduct Process Evaluations to Ensure Programs
Are Working Efficiently
Process evaluations are a tool to improve the design and
delivery of the program and are especially important for
newer programs. Often they can identify improvements
to program delivery that reduce program costs, expedite
program delivery, improve customer satisfaction, and
better focus program objectives. Process evaluation can
also address what technologies get rebates or determine
rebate levels. Process evaluations use a variety of qualita-
tive and quantitative approaches including review of pro-
gram documents, in-depth interviews, focus groups, and
surveys. Customer research in general, such as regular
customer and vendor surveys, provides program admin-
istrators with continual feedback on how the program is
working and being received by the market.
Conduct Impact Evaluations to Ensure Goals
Are Being Met
Impact evaluations measure the change in energy usage
(kWh, kW, and therms) attributable to the program.
They use a variety of approaches to quantify energy sav-
ings including statistical comparisons, engineering esti-
mation, modeling, metering, and billing analysis. The
impact evaluation approach used is a function of the
budget available, the technology(ies) addressed, the
certainty of the original program estimates, and the level
of estimated savings. The appliance recycling example
shown at right is an example of how process and impact
evaluations have improved a program over time.
Measurement and Verification (M&V)
The term "measurement and verification" is often
used in regard to evaluating energy efficiency
programs. Sometimes this term refers to ongoing
M&V that is incorporated into program operations,
such as telephone confirmation of installations by
third-party installers or measurement of savings for
selected projects. Other times, it refers to external
(program operations) evaluations to document savings.
California Residential Appliance
Recycling Program (RARP)
The California RARP was initially designed to
remove older, inefficient second refrigerators from
participant households. As the program matured,
evaluations showed that the potential for removing
old second refrigerators from households had
decreased substantially as a result of the program.
The program now focuses on pick-up of older
refrigerators that are being replaced, to keep these
refrigerators out of the secondary refrigerator market.
Organizations are beginning to explore the use of the EPA
Energy Performance Rating System to measure the energy
performance at the whole-building level, complement
traditional M&V measures, and go beyond component-
by-component approaches that miss the interactive impacts
of design, sizing, installation, controls, and operation and
maintenance.
While most energy professionals see inherent value in
providing energy education and training (lack of infor-
mation is often identified as a barrier to customer and
market actor adoption of energy efficiency products and
practices), few programs estimate savings directly as a
result of education efforts. Until 2004, California
assigned a savings estimate to the Statewide Education
and Training Services program based on expenditures.
Capturing the energy impacts of energy education pro-
grams has proven to be a challenge for evaluators for
several reasons. First, education and training efforts are
often integral to specific program offerings. For example,
training of HVAC contractors on sizing air conditioners
might be integrated into a residential appliance rebate
program. Second, education and training are often a
small part of a program in terms of budget and estimated
savings. Third, impact evaluation efforts might be expensive
compared to the education and training budget and
anticipated savings. Fourth, education and training
efforts are not always designed to achieve direct benefits.
They are often designed to inform participants or market
actors of program opportunities, simply to familiarize
them with energy efficiency options. Most evaluations of
To create a sustainable, aggressive national commitment to energy efficiency
6-49
-------
Best Practices in Evaluation
Incorporating an overall evaluation plan and budget
into the program plan.
Adopting a more in-depth evaluation plan each
program year.
ซ Prioritizing evaluation resources where the risks are
highest. This includes focusing impact evaluation
activities on the most uncertain outcomes and highest
potential savings. New and pilot programs have the
most uncertain outcomes, as do newer technologies.
Allowing evaluation criteria to vary across some
program types to allow for education, outreach,
and innovation.
Conducting ongoing verification as part of the
program process.
energy education and training initiatives have focused
on process issues. Recently, there have been impact eval-
uations of training programs, especially those designed
to produce direct energy savings, such as Building
Operator Certification.
In the future, energy efficiency will be part of emissions
trading initiatives (such as the Regional Greenhouse Gas
Initiative [RGGI]) and is likely to be eligible for payments for
reducing congestion and providing capacity value such as
in the ISO-NE capacity market settlement. These emerging
opportunities will require that evaluation methods become
more consistent across states and regions, which might
necessitate adopting consistent protocols for project-level
verification for large projects, and standardizing sampling
approaches for residential measures such as compact fluo-
rescent lighting. This is an emerging need and should be a
future area of collaboration across states.
Communicate Evaluation Results to Key
Stakeholders
Communicating the evaluation results to program
administrators and stakeholders is essential to enhancing
program effectiveness. Program administrators need to
understand evaluation approaches, findings, and espe-
cially recommendations to improve program processes
Establishing a program tracking system that
includes necessary information for evaluation.
Matching evaluation techniques to the situation in
regards to the costs to evaluate, the level of precision
required, and feasibility.
1 Maintaining separate staff for evaluation and for
program implementation. Having outside review of
evaluations (e.g., state utility commission), especially
if conducted by internal utility staff.
Evaluating regularly to refine programs as needed
(changing market conditions often require program
changes).
and increase (or maintain) program savings levels.
Stakeholders need to see that savings from energy effi-
ciency programs are realized and have been verified
independently.
Evaluation reports need to be geared toward the audi-
ences reviewing them. Program staff and regulators
often prefer reports that clearly describe methodologies,
limitations, and findings on a detailed and program level.
Outside stakeholders are more likely to read shorter eval-
uation reports that highlight key findings at the cus-
tomer segment or portfolio level. These reports must be
written in a less technical manner and highlight the
impacts of the program beyond energy or demand savings.
For example, summary reports of the Wisconsin Focus
on Energy programs highlight energy, demand, and
therm savings by sector, but also discuss the environ-
mental benefits of the program and the impacts of energy
savings on the Wisconsin economy. Because the public
benefits budget goes through the state legislature, the
summary reports include maps of Wisconsin showing
where Focus on Energy projects were completed.
Examples of particularly successful investments, with the
customer's permission, should be part of the evaluation.
These case studies can be used to make the success
more tangible to stakeholders.
6-50 National Action Plan for Energy Efficiency
-------
Recommendations and Options
The National Action Plan for Energy Efficiency Leadership
Group offers the following recommendations as ways to
promote best practice energy efficiency programs, and
provides a number of options for consideration by utili-
ties, regulators, and stakeholders.
Recommendation: Recognize energy efficiency as a high-
priority energy resource. Energy efficiency has not been
consistently viewed as a meaningful or dependable
resource compared to new supply options, regardless of
its demonstrated contributions to meeting load growth.
Recognizing energy efficiency as a high priority energy
resource is an important step in efforts to capture the
benefits it offers and lower the overall cost of energy
services to customers. Based on jurisdictional objectives,
energy efficiency can be incorporated into resource plans
to account for the long-term benefits from energy sav-
ings, capacity savings, potential reductions of air pollu-
tants and greenhouse gases, as well as other benefits.
The explicit integration of energy efficiency resources
into the formalized resource planning processes that
exist at regional, state, and utility levels can help estab-
lish the rationale for energy efficiency funding levels and
for properly valuing and balancing the benefits. In some
jurisdictions, existing planning processes might need to
be adapted or new planning processes might need to be
created to meaningfully incorporate energy efficiency
resources into resource planning. Some states have rec-
ognized energy efficiency as the resource of first priority
due to its broad benefits.
Quantifying and establishing the value of energy effi-
ciency, considering energy savings, capacity savings,
and environmenta benefits, as appropriate.
Recommendation: Make a strong, long-term commit-
ment to cost-effective energy efficiency as a resource.
Energy efficiency programs are most successful and provide
the greatest benefits to stakeholders when appropriate
policies are established and maintained over the long-
term. Confidence in long-term stability of the program
will help maintain energy efficiency as a dependable
resource compared to supply-side resources, deferring or
even avoiding the need for other infrastructure invest-
ments, and maintains customer awareness and support.
Some steps might include assessing the long-term
potential for cost-effective energy efficiency within a
region (i.e., the energy efficiency that can be delivered
cost-effectively through proven programs for each
customer class within a planning horizon); examining the
role for cutting-edge initiatives and technologies; estab-
lishing the cost of supply-side options versus energy
efficiency; establishing robust M&V procedures; and
providing for routine updates to information on energy
efficiency potential and key costs.
Establishing appropriate cost-effectiveness tests for a
portfolio of programs to reflect the long-term benefits
of energy efficiency.
Establishing the potential for long-term, cost-effective
energy efficiency savings by customer class through
proven programs, innovative initiatives, and cutting-
edge technologies.
Establishing funding requirements for delivering long-
term, cost-effective energy efficiency.
Developing long-term energy saving goals as part of
energy planning processes.
Developing robust M&V procedures.
Designating which organization(s) is responsible for
administering the energy efficiency programs.
Providing for frequent updates to energy resource plans
to accommodate new information and technology.
Recommendation: Broadly communicate the benefits of,
and opportunities for, energy efficiency. Experience
shows that energy efficiency programs help customers
save money and contribute to lower cost energy
systems. But these impacts are not fully documented nor
6-51
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recognized by customers, utilities, regulators, and policy-
makers. More effort is needed to establish the business
case for energy efficiency for all decision-makers, and to
show how a well-designed approach to energy efficiency
can benefit customers, utilities, and society by (1) reducing
customers bills over time, (2) fostering financially healthy
utilities (return on equity [ROE], earnings per share, debt
coverage ratios), and (3) contributing to positive societal
net benefits overall. Effort is also necessary to educate
key stakeholders that, although energy efficiency can be
an important low-cost resource to integrate into the
energy mix, it does require funding, just as a new power
plan requires funding. Further, education is necessary on
the impact that energy efficiency programs can have in
concert with other energy efficiency policies such as
building codes, appliance standards, and tax incentives.
Options to Consider:
Communicating the role of energy efficiency in lowering
customer energy bills and system costs and risks over time.
Communicating the role of building codes, appliance
standards, tax and other incentives.
Recommendation: Provide sufficient and stable program
funding to deliver energy efficiency where cost-
effective. Energy efficiency programs require consistent
and long-term funding to effectively compete with energy
supply options. Efforts are necessary to establish this
consistent long-term funding. A variety of mechanisms
have been, and can be, used based on state, utility, and
other stakeholder interests. It is important to ensure that
the efficiency programs providers have sufficient pro-
gram funding to recover energy efficiency program costs
and implement the energy efficiency that has been
demonstrated to be available and cost-effective. A number
of states are now linking program funding to the
achievement of energy savings.
Option to Consider:
Establishing funding for multi-year periods.
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7:
Report Summary
This report presents a variety of policy, planning, and program approaches that tan be used to help natu-
ral gas and electric utilities, utility regulators, and partner organizations pursue the National Action Plan
for Energy Efficiency recommendations and meet their commitments to energy efficiency. This chapter
summarizes these recommendations and the energy efficiency key findings discussed in this report.
Overview
This National Action Plan for Energy Efficiency (Action
Plan) is a call to action to bring diverse stakeholders
together at the national, regional, state, or utility level,
as appropriate, to foster the discussions, decision-
making, and commitments necessary to take investment
in energy efficiency to a new level. The overall goal is to
create a sustainable, aggressive national commitment to
energy efficiency through gas and electric utilities, utility
regulators, and partner organizations.
Based on the policies, practices, and efforts of many
organizations previously discussed in this report, the
Leadership Group offers five recommendations as ways
to overcome many of the barriers that have limited
greater investment in programs to deliver energy effi-
ciency to customers of electric and gas utilities (Figure 7-1).
These recommendations may be pursued through a
number of different options, depending on state and
utility circumstances.
As part of the Action Plan, leading organizations are
committing to aggressively pursue energy efficiency
opportunities in their organizations and to assist others
who want to increase the use of energy efficiency in their
regions. The commitments pursued under the Action Plan
have the potential to save Americans many billions of dollars
on energy bills over the next 10 to 15 years, contribute to
energy security, and improve the environment.
Recommendations and Options
to Consider
The Action Plan Report provides information on the bar-
riers that limit greater investment in programs to deliver
energy efficiency to customers of electric and gas utili-
ties. Figure 7-2 illustrates the key barriers and how they
relate to policy structure, utility resource planning, and
program implementation.
Figure 7-1. National Action Plan for Energy Efficiency Recommendations
Recognize energy efficiency as a high-priority energy resource.
Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource.
Broadly communicate the benefits of and opportunities for energy efficiency.
Promote sufficient, timely, and stable program funding to deliver energy efficiency where cost-effective.
Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and
modify ratemaking practices to promote energy efficiency investments.
To create a sustainable, aggressive national commitment to energy efficiency
7-1
-------
Several options exist for utilities, regulators, and partner
organizations to overcome these barriers and pursue the
Action Plan recommendations. Different state and utility
circumstances affect which options are pursued. Table 7-1
provides a list of the Leadership Group recommendations
along with sample options to consider. The table also
provides a cross reference to supporting discussions in
Chapters 2 through 6 of this report.
Key Findings
The key finding of the Action Plan Report is that energy
efficiency can be a cost-effective resource and can pro-
vide multiple benefits to utilities, customers, and society.
These benefits, also discussed in more detail in Chapter
1: Introduction and Background,1 include:
Lower energy bills, greater customer control, and
greater customer satisfaction.
Lower cost than only supplying new generation from
new power plants.
Advantages from being modular and quick to deploy.
Significant energy savings.
Environmental benefits.
Economic development: opportunities.
Energy security.
Figure 7-2: National Action Plan for Energy Efficiency Report Addresses Actions to Encourage Greater Energy Efficiency
Timeline: Actions to Encourage Greater Energy Efficiency
Policy Structure
Develop Utility Incentives
for Energy Efficiency
Develop Rate Designs to
Encourage Energy Efficiency
Utility Resource
Planning
Include Energy Efficiency
in Utility Resource Mix
Program
Implementation
Revise Plans and Policies Based on Results
Action Plan Report Chapter Areas and Key Barriers
Utility Ratemaking
& Revenue
Requirements
Planning
Processes
Rate Design
Energy efficiency reduces
utility earnings
Planning does not
incorporate demand-
side resources
Rates do not
encourage energy
efficiency investments
Limited information on
existing best practices
Chapter 6: Energy Efficiency Program Best Practices also provides more information on these benefits.
7-2 National Action Plan for Energy Efficiency
-------
I Table 7-1 . Leadership Group Recommendations and Options to Consider, by Chapter
Leadership Group Chapter 2: Chapter 3:
Recommendations utility Energy
(With Options To ConsideO Ratemaking & Resource
Revenue Planning
Requirements Processes
Recognize energy efficiency as a high X
priority energy resource.
Establishing policies to establish energy ; ; X
efficiency as a priority resource. '.
- - - j - - --
Integrating energy efficiency into utility, state, X
and regional resource planning activities. i
Quantifying and establishing the value of energy ! X
efficiency, considering energy savings, capacity j
savings, and environmental benefits, as \
appropriate. j
Make a strong, long-term commitment ! X X
to cost effective energy efficiency as a
resource.
Establishing appropriate cost-effectiveness X
tests for a portfolio of programs to reflect the
long-term benefits of energy efficiency.
Establishing the potential for long-term, cost ; X
effective energy efficiency savings by customer
class through proven programs, innovative '
initiatives, and cutting-edge technologies. i
Establishing funding requirements for delivering X ; X
long-term, cost-effective energy efficiency.
Developing long-term energy saving goals as ! X
part of energy planning processes.
Developing robust measurement and X
verification (M&V) procedures.
Designating which organization(s) is responsi- X X
ble for administering the energy efficiency
programs. \
Providing for frequent updates to energy \ X
resource plans to accommodate new ;
information and technology.
Broadly communicate the benefits of, X X
and opportunities for, energy efficiency.
Establishing and educating stakeholders on the X , X
business case for energy efficiency at the state, :
utility, and other appropriate level addressing rele-
vant customer, utility, and societal perspectives. :
Communicating the role of energy efficiency X ! X
in lowering customer energy bills and system | '
costs and risks over time. i :
Communicating the role of building codes, !
appliance standards, and tax and other :
incentives. !
Chapter 4: j Chapter 5: Chapter 6:
Business Case : Rate Design j Energy
for Energy Efficiency
Efficiency Program Best
Practices
i X
j |
1 ... - t- - - - ....
X
X
X
] I
! i
i
! ' "x
X
X
X
I -
X
i . . .
< X
XXX
X !
X [ X | X
X
7-3
-------
Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter (continued)
Leadership Group
Recommendations
(With Options To Consider)
Chapter 2:
Utility
Ratemaking &
Revenue
Requirements
Chapter 3:
Energy
Resource
Plcinning
Processes
Chapter 4:
Business Case
for Energy
Efficiency
Chapter 5:
Rate Design
Chapter 6:
Energy
Efficiency
Program Best
Practices
Provide sufficient, timely, and stable
program funding to deliver energy
efficiency where cost-effective.
Deciding on and committing to a consistent
way for program administrators to recover
energy efficiency costs in a timely manner.
Establishing funding mechanisms for energy
efficiency from among the available options
such as revenue requirement or resource
procurement funding, system benefits charges,
rate-basing, shared-savings, incentive
mechanisms, etc.
Establishing funding for multi-year periods.
Modify policies to align utility incentives
with the delivery of cost-effective energy
efficiency and modify ratemaking
practices to promote energy efficiency
investments.
Addressing the typical utility throughput
incentive and removing other regulatory and
management disincentives to energy efficiency.
Providing utility incentives for the successful
management of energy efficiency programs.
Including the impact on adoption of energy
efficiency as one of the goals of retail rate
design, recognizing that it must be balanced
with other objectives.
Eliminating rate designs that discourage energy j
efficiency by not increasing costs as customers
consume more electricity or natural gas.
Adopting rate designs that encourage energy
efficiency by considering the unique character-
istics of each customer class and including
partnering tariffs with other mechanisms that
encourage energy efficiency, such as benefit
sharing programs and on-bill financing.
7-4 National Action Plan for Energy Efficiency
-------
As discussed in Chapter 2: Utility Ratemaking & Revenue
Requirements, financial disincentives exist that hinder utilities
from pursuing energy efficiency, even when cost-effective.
Many states have experience in addressing utility financial
disincentives in the following areas:
Overcoming the throughput incentive.
Providing reliable means for utilities to recover energy
efficiency costs.
Providing a return on investment for efficiency programs
that is competitive with the return utilities earn on new
generation.
Addressing the risk of program costs being disallowed,
along with other risks.
Recognizing the full value of energy efficiency to the
utility system.
Chapter 3: Energy Resource Planning Processes found that
there are many approaches to navigate and overcome the
barriers to incorporating energy efficiency in planning
processes. Common themes across approaches include:
Cost and savings data for energy efficiency measures
are readily available.
Energy, capacity, and non-energy benefits can justify
robust energy efficiency programs.
A clear path to funding is needed to establish a budg-
et for energy efficiency resources.
Parties should integrate energy efficiency early in the
resource planning process.
Based on the eight cases examined using the Energy
Efficiency Benefits Calculator in Chapter 4: Business
Case for Energy Efficiency, energy efficiency investments
were found to provide consistently lower costs over time
for both utilities and customers, while providing positive
net benefits to society. Key findings include:
Ratemaking policies to address utility financial barriers
to energy efficiency maintain utility health while com-
prehensive, cost-effective energy efficiency programs
are implemented.
The costs of energy efficiency and the reduction in utility
sales volume initially raise gas or electricity bills due to
slightly higher rates, but efficiency gains will reduce aver-
age customer bills by 2 to 9 percent over a 10-year period.
Energy efficiency investments yielded net societal benefits
on the order of hundreds of millions of dollars for each of
the eight small- to medium-sized utility cases examined.
Chapter 5: Rate Design found that recognizing the
promotion of energy efficiency is an important factor to
balance along with the numerous regulatory and legislative
goals addressed during the complex rate design process.
Additional key findings include:
Several rate design options exist to encourage customers
to invest in efficiency and to participate in new programs
that provide innovative technologies (e.g., smart meters).
Utility rates that are designed to promote sales or maxi-
mize stable revenues tend to lower customer incentives
to adopt energy efficiency.
Some rate forms, like declining block rates or rates with
large fixed charges, reduce the savings that customers
can attain from adopting energy efficiency.
Appropriate rate designs should consider the unique
characteristics of each customer class.
Energy efficiency can be promoted through non-tariff
mechanisms that reach customers through their utility bill.
More effort is needed to communicate the benefits
and opportunities for energy efficiency to customers,
regulators, and utility decision-makers.
Chapter 6: Energy Efficiency Program Best Practices
provided a summary of best practices, as well as general
program key findings. The best practice strategies for
program planning, design, implementation, and evalua-
tion are found to be independent of the policy model in
which the program operates. These best practices,
organized by four major groupings, are provided below:
Making Energy Efficiency A Resource
-- Require leadership at multiple levels.
To create a sustainable, aggressive national commitment to energy efficiency
7-5
-------
- Align organizational goals.
Understand the efficiency resource.
Developing An Energy Efficiency Plan
Offer programs for all key customer classes.
Align goals with funding.
Use cost-effectiveness tests that are consistent with
long-term planning.
Consider building codes and appliance standards
when designing programs.
Plan to incorporate new technologies.
Consider efficiency investments to alleviate transmis-
sion and distribution constraints.
Create a roadmap of key program components,
milestones, and explicit energy use reduction goals.
Designing and Delivering Energy Efficiency Programs
Begin with the market in mind.
Leverage private sector expertise, external funding,
and financing.
Start with demonstrated program modelsbuild
infrastructure for the future.
Ensuring Energy Efficiency Investments Deliver Results
Budget, plan, and initiate evaluation.
Develop program and project tracking systems.
Conduct process evaluations.
- Conduct impact evaluations.
Communicate evaluation results to key stakeholcers.
The key program findings in Chapter 6 are drawn from the
programs reviewed for this report.2 These findings include:
Energy efficiency resources are being acquired on average
at about one-half the cost of typical new power
sources and about one-third of the cost of natural gas
supply in many casescontributing to an overall
lower-cost energy system for rate-payers (EIA, 2006).
Many energy efficiency programs are being delivered at a
total program cost of about $0.02 to $0.03 per lifetime
kilowatt-hour (kWh) saved and $1,30 to $2.00 per life-
time million British thermal units (MMBtu) saved. These
costs are less than the avoided costs seen in most regions
of the country. Funding for the majority of programs
reviewed ranges from about 1 to 3 percent of electric
utility revenue and 0.5 to 1 percent of gas utility revenue.
Even low energy cost states, such as those in the Pacific
Northwest, have reason to invest in energy efficiency
because energy efficiency provides a low-cost, reliable
resource that reduces customer utility bills. Energy efficien-
cy also costs less than constructing new generation and
provides a hedge against market, fuel, and environmental
risks (NWPCC, 2005).
Well-designed energy efficiency programs provide
opportunities for customers of all types to adopt energy
saving measures and reduce their energy bills. These
programs can help customers make sound energy-use
decisions, increase control over their energy bills, and
empower them to manage their energy usage.
Customers can experience significant savings depending
on their own habits and the program offered.
Consistently funded, well-designed efficiency programs
are cutting electricity and natural gas loadproviding
annual savings for a given program year of 0.15 to 1
percent of energy sales. These savings typically will
See Chapter 6: Energy Efficiency Program Best Practices, Tables 6-2 and 6-3, for more information on energy efficiency programs reviewed.
7-6 National Action Plan for Energy Efficiency
-------
accrue at this level for 10 to 15 years. These programs
are helping to offset 20 to 50 percent of expected
energy growth in some regions without compromising
end-user activity or economic well being.
Research and development enables a continuing source of
new technologies and methods for improving energy
efficiency and helping customers control their energy bills.
Many state and regional studies have found that pursuing
economically attractive, but as yet untapped, energy
efficiency could yield more than 20 percent savings in total
electricity demand nationwide by 2025. These savings
could help cut load growth by half or more compared to
current forecasts. Savings in direct use of natural gas could
similarly provide a 50 percent or greater reduction in
natural gas demand growth. Energy savings potential
varies by customer segment, but there are cost-effective
opportunities for all customer classes.
Energy efficiency programs are being operated successfully
across many different contexts: regulated and unregulated
markets; utility, state, or third-party administration;
investor-, publicly-, and cooperatively-owned utilities; and
gas and electric utilities.
Energy efficiency resources are being acquired through a
variety of mechanisms including system benefits charges
(SBC), energy efficiency portfolio standards (EEPS), and
resource planning (or cost-of-service) efforts.
> Cost-effective energy efficiency programs exist for
electricity and natural gas, including programs that can
be specifically targeted to reduce peak load.
Effective models exist for delivering gas and electric energy
efficiency programs to all customer classes. Models might
vary for some programs based on whether a utility is in the
initial stages of energy efficiency programming or has been
implementing programs for years.
Energy efficiency programs, projects, and policies benefit
from established and stable regulations, clear goals, and
comprehensive evaluation.
Energy efficiency programs benefit from committed
program administrators and oversight authorities, as
well as strong stakeholder support.
Most large-scale energy efficiency programs have
improved productivity, enabling job growth in the
commercial and industrial sectors.
Large-scale energy efficiency programs can reduce
wholesale market prices.
References
Northwest Power and Conservation Council [NWPCC]
(2005, May). The 5th Northwest Electric Power and
Conservation Plan,
-------
-------
Additional Guidance
Appendix on Removing the
A: Throughput Incentive
The National Action Plan for Energy Efficiency provides policy recommendations and options to support a
strong commitment to cost-effective energy efficiency in the United States. One policy that receives a
great deal of attention is reducing or eliminating the financial incentive for a utility to sell more
energythe throughput incentive. Options exist to address the throughput incentive, as discussed in more
detail in this appendix.
Overview
In order to eliminate the conflict between the public
service objectives of least-cost service on the one hand,
and a utility's profitability objectives on the other hand,
it is necessary to remove the throughput incentive. Some
options for removing the throughput incentive are gen-
erally called decoupling because these options "decouple"
profits from sales volume. In its simplest form, decou-
pling is accomplished by periodically adjusting tariff
prices so that the utility's revenues (and hence its profits)
are, on a total company basis, held relatively constant in
the face of changes in customer consumption.
This appendix explains options to address the throughput
incentive by changing regulations and the way utilities
make money, to ensure that utility net income and cover-
age of fixed costs are not affected solely by sales volume.
Types of Decoupling
Utilities and regulators have implemented a variety of
different approaches to remove the throughput incen-
tive. Regardless of which approach is used, a frame of
reference is created, and used to compare with actual
results. Periodic tariff price adjustments true up actual
results to the expected results and are critical to the
decoupling approach.
Average revenue-per-customer. This approach is often
considered for utilities, where their underlying costs
during the period between rate adjustments do not
vary with consumption. Such can be the case for a
wires-only distribution company, where the majority of
investments are in the wires and transformers used to
deliver the commodity.
forecast revenues over a ;. eriod of nmc ind u-iC ,) /w/-
ancing account. This approach is often considered for
utilities where a significant portion of the costs (primarily
fuel) vary with consumption. For these cases, it might
be best to use a price-based decoupling mechanism for
the commodity portion of electric service (which gives
the utility the incentive to reduce fuel and other vari-
able costs), while using a revenue-per-customer
approach for the "wires" costs. Alternatively, regula-
tors can use traditional tariffs for the commodity por-
tion and apply decoupling only to the wires portion of
the business.
Sample Approach to Removing the
Throughput Incentive1
Implementing decoupling normally begins with a tradi-
tional revenue requirement rate case. Decoupling can
also be overlaid on existing tariffs where there is a high
confidence that those tariffs continue to represent the
utility's underlying revenue requirements.
Under traditional rate of return regulation:
Price (Rates) = Revenue Requirement/Sales
(test year or forecasted)
In this section, the revenue per customer approach is discussed, but can be easily adapted to a revenue forecast approach.
To create a sustainable, aggressive national commitment to energy efficiency
Appendix A-1
-------
The revenue requirement as found in the rate case will not
change again until the next rate case. Note that the rev-
enue requirement contains an allowance for profit and
debt coverage. Despite all the effort in the rate case to cal-
culate the revenue requirement, what really matters after
the rate case is the price the consumer pays for electricity.
After the rate case:
Actual revenues = Price * Actual Sales
And
Actual Profit = Actual Revenue -Actual Costs
Based on the rate case "test year" data, an average revenue-
per-customer value can then be calculated for each
rate class.
Revenue Requirement t0 /number of customers t0 =
revenue per customer (RPC)
Thus, at time "zero"(t0), the company's revenues equal
its number of customers multiplied by the revenues per
customer, while the prices paid by customers equal the
revenues to be collected divided by customers' con-
sumption units (usually expressed as $/kW for metered
demand and $/kWh for metered energy). Looking for-
ward, as the number of customers changes, the revenue
to be collected changes.
Revenue Requirement tn = RPC * number of customers tn
For each future period (t1( t2..., tn), the new revenue to
be collected is then divided by the expected consump-
tion to periodically derive a new price, the true-up.
Price (Rates) tn = Revenue Requirement tn / Sales tn
True up = Price tn - Price t0
Prices can also be trued-up based on deviations between
revenue and cost forecasts and actual results, where a
forecast approach is used. Note that no redesign of rates
is necessary as part of decoupling. Rate redesign might
be desirable for other reasons (for more information on
changes that promote energy efficiency, see Chapter 5:
Rate Design), and decoupling does not interfere with
those reasons.
The process can be augmented by various features that,
for example, explicitly factor in utility productivity,
exogenous events (events of financial significance, out
of control of the utility), or factors that might change
RPC over time.
Timing of Adjustments
Rates can be adjusted monthly, quarterly, or annually
(magnitude of any tn). By making the adjustments more
often, the magnitude of any price change is minimized.
However, frequent adjustments will impose some addi-
tional administrative expense. A plan that distinguishes
commodity cost from other costs could have more fre-
quent adjustments for more volatile commodities (if
these are not already being dealt with by an adjustment
clause). Because the inputs used for these adjustments
are relatively straight-forward, coming directly from the
utility's billing information, each filing should be largely
administrative and not subject to a significant controversy
or litigation. This process can be further streamlined
through the use of "deadbands," which allow for small
changes in either direction in revenue or profits with no
adjustment in rates.
Changes to Utility Incentives
With decoupling in place, a prudently managed utility will
receive revenue from customers that will cover its fixed
costs, including profits. If routine costs go up, the utility will
absorb those costs. A reduction in costs produces the
opportunity for additional earnings. The primary driver for
profitability growth, however, will be the addition of new
customers, and the greatest contribution to profits will be
from customers who are more efficientthat is, whose
incremental costs are the lowest.
Appendix A-2 National Action Plan for Energy Efficiency
-------
An effective decoupling plan should lower utility risk to
some degree. Reduced risk should be reflected in the
cost of capital and, for investor-owned utilities, can be
realized through either an increase in the debt/equity
ratio, or a decrease in the return on equity investment.
For all utilities, these changes will flow through to debt
ratings and credit requirements.
In addition, decoupling can be combined with perform-
ance indicators to ensure that service quality is main-
tained, and that cost reductions are the result of gains in
efficiency and not a decline in the level of service. Other
exogenous factors, such as inflation, taxes, and economic
conditions, can also be combined with decoupling; how-
ever, these factors do not address the primary purpose of
removing the disincentive to efficiency. Also, if there is a
distinct productivity for the electric utility as compared
with the general economy, a factor accounting for it can
be woven into the revenue per customer calculations
over time.
Allocation of Weather Risk
One specific factor that is implicit in any regulatory
approach (whether it be traditional regulation or decou-
pling) is the allocation of weather risk between utilities
and their customers. Depending on the policy position of
the regulatory agency, the risk of weather changes can
be allocated to either customers or the utility. This deci-
sion is inherent to the rate structure, even if the regula-
tory body makes no cognizant choice.
Under traditional regulation, weather risk is usually
largely borne by the utility, which means that the utility
can suffer shortfalls if the weather is milder than normal.
At the same time, it can enjoy windfalls if the weather is
more extreme than normal. These scenarios result
because, while revenues will change with weather, the
underlying cost structure typically does not. These situa-
tions translate directly into greater earnings variability,
which implies a higher required cost of capital. In order
to allocate the weather risk to the utility, the "test year"
information used to compute the base revenue-per-cus-
tomer values should be weather normalized. Thereafter,
with each adjustment to prices, the consumption data
would weather normalize as well.
Potential Triggers and
Special Considerations in
Decoupling Mechanisms
Because decoupling is a different way of doing business
for regulators and utilities, it is prudent to consider off-
ramps or triggers that can avoid unpleasant surprises.
The following are some of the approaches that might be
appropriate to consider:
Banding of rate adjustments. To minimize the magni-
tude of adjustments, the decoupling mechanism could
be premised on a "dead band" within which no adjust-
ment would be made. The effect would be to reduce
the number of tariff changes and possibly, but not
necessarily, the associated periodic filings.
The plan can also cap the amount of any single rate
adjustment. To the extent it is based on reasonable
costs otherwise recoverable under the plan, the excess
could be set aside in a regulatory account for later
recovery.
Banding of earnings. To control the profit level of the
regulated entity within some bounds, earnings greater
and/or less than certain limits can be shared with cus-
tomers. For example, consider a scenario in which the
earnings band is 1 percent on return on equity (either
way) compared to the allowed return found in the most
recent rate case. If the plan would share results outside
the band 50-50, then if the utility earns +1.5 percent of
the target, an amount equal to 0.25 percent of earnings
(half the excess) is returned to consumers through a price
adjustment. If the utility earns -1.3 percent of the target,
however, an amount equal 0.15 percent of earnings (half
the deficiency) is added to the price. Designing this band
To dilate a sustainable, aggressive national commitment to energy efficiency
Appendix A-3
-------
should leave the utility with ample incentive to make
and benefit from process engineering improvements
during the plan, recognizing that a subsequent rate
case might result in the benefits accruing in the long
run to consumers. While the illustration is "symmetri-
cal," in practice, the band can be asymmetrical in size
and sharing proportion to assure the proper balance
between consumer and utility interests.
1 Course corrections for customer count changes, major
changes for unique major customers, and large
changes in revenues-per-customer. Industrial con-
sumers might experience more volatility in average use
per customer calculations because there are typically a
small number of these customers and they can be quite
varied. For example, the addition or deletion of one
large customer (or of a work shift for a large customer)
might make a significant difference in the revenue per
customer values for that class, or result in appropriate
shifting of revenues among customers. To address this
problem, some trigger or off-ramp might be appropriate
to review such unexpected and significant changes,
and to modify the decoupling calculation to account
for them. In some cases, a new rate case might be
warranted from such a change.
'Accounting tor utilities whose marginal a?ซ"Me.-> /<(
customer are significantly different than their embedded
average revenue per customer If a utility's revenue per
customer has been changing rapidly over time, imposi-
tion of a revenue-per-customer decoupling mechanism
will have the effect of changing its profit growth path.
For example, if incremental revenues per customer are
growing rapidly, decoupling will have the effect of low-
ering future earnings, although not necessarily below
the company's allowed rate of return. On the other
hand, if incremental revenues per customer are declin-
ing, decoupling will have the effect of increasing future
earnings. Where these trends are strong and there is a
desire to make decoupling "earnings neutral," vis-a-vis
the status quo earning path, the revenue-per-customer
value can be tied to an upward or downward growth
rate. This type of adjustment is more oriented toward
maintaining neutrality than reflecting any underlying
economic principle. Care should be taken to exclude
recent growth in revenues per customer that are driven
by inefficient consumption (usually tied to the utility
having a pro-consumption marketing program).
Appendix A-4 National Action Plan for Energy Efficiency
-------
TT KX 'Y
Appendix Business Case
B: Details
To help natural gas and electric utilities, utility regulators, and partner organi. tior :c Mimunitdte thf>
business case for energy efficiency, the National Action Plan for Energy Effici- icy . r i\ides an Energy
Efficiency Benefits Calculator (Calculator available at www.epa.gov/cleanenergyeea< ?/ tnplan.htm). This
Calculator examines the financial impact of energy efficiency on major stakeholders and was used to
develop the eight cases discussed in Chapter 4: Business Case for Energy Efficiency. Additional details on
these eight cases are described in this appendix.
Overview
A business case is an analysis that shows the benefits of
energy efficiency to the utility, customers, and society
within an approach that can lead to actions by utilities,
regulators, and other stakeholders. Making the business
case for energy efficiency programs requires a different
type of analysis than that required for traditional supply-
side resources. Because adoption of energy efficiency
reduces utility sales and utility size, traditional metrics
such as impact on rates and total earnings do not
measure the benefits of energy efficiency. However, by
examining other metrics, such as customer bills and utility
earnings per share, the benefits to ,111 stakeholders of
adopting energy efficiency can be demonstrated. These
benefits include reduced customer bills, decreased cost
per unit of energy provided, increased net resource sav-
ings, decreased emissions, and decreased reliance on
energy supplies.
This appendix provides more detailed summary and inter-
pretation of results for the eight cases discussed in
Chapter 4: Business Case for Energy Efficiency. All
results are from the Energy Efficiency Benefits Calculator's
interpretation tab.
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-1
-------
Case 1: Low-Growth Electric and Gas Utility
Utility Perspective
Utility Financial Health - Small Changes
The change in utility financial health depends on whether or not there are decoupling mechanisms in place, if there are share-
holder incentives in place (for investor-owned utilities), the frequency of rate adjustments, and other factors. Depending on
the type of utility, the measure of financial health changes. Investor-owned utility health is measured by return on equity
(ROE), while publicly or cooperatively owned utility health is measured by cash position or debt coverage ratio.
Electric
Gas
Investor-Owned Utility Comparison of
R
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turn on
1 5% -
12% -
9% -
6% -
3% -
Equity
'*"ป.. * " " " ซ * *
I I I I I I I I
2 3 4 5 6 7 8 9 10
Year
" - ROE% - No EE
ROE% - EE no Decoupling
^~~~~~ ROE% - EE and Decoupling
- Target ROE%
In
RE
i
LU
0
X
I
-------
Customer Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the cost of the EE program has not yet produced savings. Total cus-
tomer bills decline over time, usually within the first three years, indicating customer savings resulting from lower energy
consumption.
Electric
Gas
Percent Change in Customer Bills
3% -
>o 0% "
o^
j/, -3% -
CD -6% '
c
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01 no/ -
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^^^^"^v
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2 3 4 5 6 7 8 9 10
Year
Change in Customer Bills (%) - EE no Decoupling
^~" Change in Customer Bills (%) - EE and Decoupling
Percent Change in Customer Bills
2%
^0
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c
en
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^^*.
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1 1 1 ! 1 1 1 1
2 3 4 5 6 7 8 9 10
Year
Change in Customer Bills (%) - EE no Decoupling
^^ Change in Customer Bills (%) - EE and Decoupling
Utility Rates - Mild Increase
The rates customers pay ($/kWh, $/therm) increase when avoided costs are less than retail rates, which is typically the case
for most EE programs. Rates increase because revenue requirements increase more quickly than sales.
Cc
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Utility Average Rate - EE no Decoupling
^- " Utility Average Rate - EE and Decoupling
10
Comparison of Average Rate
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c
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1 2 3 4 5 6 7 8 9 10
Year
Utility Average Rate - No EE
Utility Average Rate - EE no Decoupling
"""^^~ Utility Average Rate - EE and Decoupling
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-3
-------
Societal Perspective
Societal Net Savings - Increase
The net savings are the difference of total utility costs, including EE program costs, with EE and without EE. In the firs~ year,
the cost of the EE program is a cost to society. Over time, cumulative EE savings lead to a utility production cost savings
that is greater than the EE program cost. The graph shape is therefore upward sloping. Total Societal Net Savings is the
same with and without decoupling; therefore, only one line is shown.
Electric
Gas
Annual Total Societal Net Savings
OJ
c
OJ
CD
~5
"S
'u
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Total Societal Net Savings ($M)
Annual Total Societal Net Savings
Ol
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m
-510
-$15
Total Societal Net Savings ($M)
Total Societal Cost Per Unit - Declines
Total cost of providing each unit of energy (MWh, therm) declines over time because of the impacts of energy savings,
decreased peak load requirements, and decreased costs during peak periods. Well-designed EE programs can deliver
energy at an average cost less than that of new power sources. When the two lines cross, the annual cost of EE equals the
annual savings resulting from EE. The Societal Cost and Societal Savings are the same with and without decoupling.
Delivered Costs and Benefits of EE
$400
$300
$200
$100
2 3
9 10
Year
Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
Delivered Costs and Benefits of EE
S5
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so -
\
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^- .
I 1 I I I I I I
2 3 4 5 6 / 8 9 10
Year
^~^~ Societal Cost ($/therm saved)
Societal Savings ($/therm saved)
Appendix B-4 National Action Plan for Energy Efficiency
-------
Emissions and Cost Savings Increase
Annual tons of emissions saved increases. Emissions cost savings increases when emissions cost is monetized. Emissions
costs and savings are the same with and without decoupling.
Electric
Annual Emissions Savings
50
-Tons N0_ Saved
Tons PM-10 Saved
ซ - Tons SO Saved
*Tons CO Saved
Tons VOC Saved
.1000 Tons CO, Saved
O
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Gas
Annual Emissions Savings
Year
Growth Offset by EE - Increase
As EE programs ramp up, energy consumption declines. This comparison shows the growth with and without EE, and illus-
trates the amount of EE relative to load growth. Load growth and energy savings are not impacted by decoupling. With
load growth assumed at zero, no load or percent growth offset shown.
Percent Growth Offset by Energy Efficiency
160%
Year
1 Energy Savings - EE (GWh)
Load Growth - No EE (GWh)
Growth Offset by EE (%)
Percent Growth Offset by Energy Efficiency
7,000-
15%
25%
10%
5%
5 6
Year
10
- - - - Energy Savings - EE (Mcf)
Load Growth - No EE (Mcf)
Growth Offset by Et (%)
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-5
-------
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity savings are captured due to EE measures. Peak load is not impacted
by decoupling.
Electric
Gas
Comparison of Peak Load Growth
>
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1 50%
130%
100% J
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1 2 3 4 5 6 7 8 9 10
Year
Forecasted Growth - No EE
"""" Forecasted Growth - EE and Decoupling
Comparison of Peak Load Growth
u">
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' 1 1 0%
S 100% -
90%
2 3 4 5 6 7 8 9 10
Year
" - Forecasted Growth - No EE
-^ Forecasted Growth - EE and Decoupling
Appendix B-6 National Action Plan for Energy Efficiency
-------
Case 2: High-Growth Electric and Gas Utility
Utility Perspective
Utility Financial Health - Small Changes
The change in utility financial health depends on whether or not there are decoupling mechanisms in place, if there are share-
holder incentives in place (for investor-owned utilities), the frequency of rate adjustments, and other factors. Depending on
the type of utility, the measure of financial health changes. Investor-owned utility health is measured by ROE, while publicly
or cooperatively owned uti ity health is measured by cash position or debt coverage ratio.
Electric
Gas
In
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vestor-Owned Utility Comparison of
^turn on Equity
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2 3 4 5 6 7 8 9 10
Year
ROE% - No EE
ROE% - EE no Decoupling
ROE% - EE and Decoupling
- - Target ROE%
Investor-Owned Utility Comparison of
Return on
1 5% -
g 12%-
LU
0
x 9%-
03
(
QJ
| 6% -
3%-
Equity
2 3 4 5 6 7 8 9 10
Year
- ' - ROE% - No EE
ROE% - EE no Decoupling
ROE% - EE and Decoupling
- - Target ROE%
Utility Earnings - Results Vary
Utility earnings depend on growth rate, capital investment, frequency of rate adjustments, and other factors. If EE reduces
capital investment, the earnings will be lower in the EE case, unless shareholder incentives for EE are introduced. However,
utility return (ROE or earnings per share) may not be affected.
U1
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Customer Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the cost of the EE program has not yet produced savings. Total cus-
tomer bills decline over time, usually within the first three years, indicating customer savings resulting from lower energy
consumption.
Electric
Gas
Percent Change in Customer Bills
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2 3 4 5 6 7 8 9 10
Year
Change in Customer Bills (%) - EE no Decoupling
~~ Change in Customer Bills (%) - EE and Decoupling
Percent Change in Customer Bills
4%
2% -
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$0.25 -
$0.20 -
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$0.10-
1
n of Average Rate
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Year
Utility Average Rate - No EE
Utility Average Rate - EE no Decoupling
"~~^^^~ Utility Average Rate - EE and Decoupling
10
Comparison of Average Rate
1
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Societal Perspective
Societal Net Savings - Increase
The net savings are the difference of total utility costs, including EE program costs, with EE and without EE. In the first year,
the cost of the EE program is a cost to society. Over time, cumulative EE savings lead to a utility production cost savings
that is greater than the EE program cost. The graph shape is therefore upward sloping. Total Societal Net Savings is the
same with and without decoupling; therefore, only one line is shown.
Electric
Gas
Annual Total Societal Net Savings
i
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-------
Emissions and Cost Savings - Increase
Annual tons of emissions saved increases. Emissions cost savings increases when emissions cost is monetized. Emissions
costs and savings are the same with and without decoupling.
Electric
Annual E
70 y
60-
1
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10-
0 i
missions Savings
Tons N0i Saved
Tons PM-10 Saved
x Tons S02 Saved
* Tons CO Saved
Tons VOC Saved
ป 1000 Tons C0; Saved
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Year
Gas
Annual Emissions Savings
90 -i
70 -
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10 -
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Tons PM-10 Saved
* Tons SO, Saved
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1000 Tons CO, Saved
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1 2 3 4 5 6 7 8 9 10
Year
Growth Offset by EE - Increase
As EE programs ramp up, energy consumption declines. This comparison shows the growth with and without EE, and illus-
trates the amount of EE relative to load growth. Load growth and energy savings are not impacted by decoupling. With
load growth assumed at zero, no load or percent growth offset shown.
Percent Growth Offset by Energy Efficiency
_c
C3
./
/ -
/
/
/
/ . . - -
_S- * ~ *
^ - ' '
^<* ' '
- 140%
- 120%
- 100%
- 80%
- 60%
- 40%
- 20%
u T 1 1 1 1 1 1 1 1 u/0
1 2 3 4 5 6 7 8 9 10
Year
- - - - Energy Savings - EE (GWh)
Load Growth - No EE (GWh)
Growth Offset by EE {%)
Percent Growth Offset by Energy Efficiency
7,000
6,000
5,000
M_ 4,000
u
3,000
2,000
1,000
0 i
/
/
/ -
/
/
/ J
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- 20%
- 15%
- 10%
- 5%
234 5 6 7 8 9 10
Year
- - - Energy Savings - EE (Mcf)
Load Growth - No EE (Mcf)
Growth Offset by EE (%)
Appendix B-10 National Action Plan for Energy Efficiency
-------
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity savings are captured due to EE measures. Peak load is not impacted
by decoupling.
Electric
Gas
Cc
>mparison
160%'
> 1 50%
ii 140% -
ฐ 130%
~0 120%-
03
O
' 110%-
CO
ai 1 00% "
90% H
of Peak Load Growth
Jx
,^s^
^^X"^^
jx"x'^
^^^
2 3 4 5 6 7 8 9 10
Year
Forecasted Growth - No EE
Forecasted Growth - EE and Decoupling
Comparison of Peak Load Growth
>
V
u_
'c
^
~c
fT
C
-^
rc
a
Q_
100%-
2 3 4 5 6 7 8 9 10
Year
Forecasted Growth - No EE
- -^ Forecasted Growth - EE and Decoupling
To creafe a sustainable, aggressive national commitment to energy efficiency
Appendix B-11
-------
Case 3: Low-Growth with Power Plant Deferral
Utility Perspective
Utility Financial Health - Small Changes
The change in uti ity financial health depends on whether or
not there are decoupling mechanisms in place, if there are
shareholder incentives in place (for investor-owned utilities),
the frequency of rate adjustments, and other factors.
Depending on the type of utility, the measure of financial
health changes. Investor-owned utility health is measured by
ROE, while publicly or cooperatively owned utility health is
measured by cash position or debt coverage ratio.
Utility Earnings - Results Vary
Utility earnings depend on growth rate, capital investment,
frequency of rate adjustments, and other factors. If EE reduces
capital investment, the earnings will be lower in the EE case,
unless shareholder incentives for EE are introduced. However,
utility return (ROE or earnings per share) may not be affected.
In
Re
i
LLJ
0
X
ro
1
1
i/estor-C
turn on
15%T
12%-
9%-
6%-
3% -
wned Utility Comparison of
Equity
i i
* *
f *
\ i
'
1 1 1 1 1 1 1 1
2 3 4 5 6 7 8 9 10
Year
" ' ROE% - No EE
ROE% - EE no Decoupling
ROE% - EE and Decoupling
- - Target ROE%
Utility Earnings
-------
Customer Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the
cost of the EE program has not yet produced savings. Total
customer bills decline over time, usually within the first
three years, indicating customer savings resulting from
lower energy consumption.
Percent Change in Customer Bills
OJ
CTi
Change in Customer Bills (%) - EE no Decoupling
Change in Customer Bills (%) - EE and Decoupling
Utility Rates - Mild Increase
The rates customers pay ($/kWh) increase when avoided
costs are less than retail rates, which is typically the case for
most EE programs. Rates increase because revenue require-
ments increase more quickly than sales.
Comparison of Average Rate
$0.30
$0.25
Utility Average Rate - No EE
Utility Average Rate - EE no Decoupling
Utility Average Rate - EE and Decoupling
Societal Perspective
Societal Net Savings - Increase
The net savings are the difference of total utility costs,
including EE program costs, with EE and without EE. In the
first year, the cost of the EE program is a cost to society.
Over time, cumulative EE savings lead to a utility production
cost savings that is greater than the EE program cost. The
graph shape is therefore upward sloping. Total Societal Net
Savings is the same with and without decoupling; there-
fore, only one ine is shown.
Annual Total Societal Net Savings
OJ
C
o
un
-$400
-$600
Year
Total Societal Net Savings ($M)
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-13
-------
Total Societal Cost Per Unit - Declines
Total cost of providing each unit of energy (MWh) declines
over time because of the impacts of energy savings,
decreased peak load requirements, and decreased costs
during peak periods. Well-designed EE programs can
deliver energy at an average cost less than that of new
power sources. Societal savings increase when an infra-
structure project is delayed and then decrease when built.
When the two lines cross, the annual cost of EE equals the
annual savings resulting from EE.
Growth Offset by EE - Increase
As EE programs ramp up, energy consumption declines.
This comparison shows the growth with and without EE,
and illustrates the amount of EE relative to load growth.
Load growth and energy savings are not impacted by
decoupling. With load growth assumed at zero, no load or
percent growth offset shown.
Delivered Costs and Benefits of EE
_C
^
$o -
23456789
Year
Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
10
Percent Growth Offset by Energy Efficiency
1,400 -
1,200
600
10
- - Energy Savings - EE (GWh)
Load Growth - No EE (GWh I
Growth Offset by EE (%)
Emissions and Cost Savings - Increase
Annual tons of emissions saved increases. Emissions cost
savings increases when emissions cost is monetized.
Emissions costs and savings are the same with and with-
out decoupling.
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity
savings are captured due to EE measures. Peak load is not
impacted by decoupling.
Annual 1
60-
50-
T3
> 40
LO
0
10-
Oi
Emissions Savings
Tons NO, Saved
Tons PM-10 Saved
x Tons SO, Saved
. * Tons CO Saved
Tons VOC Saved
1000 Tons C0; Saved
/
y
S^
'/ S-
x^X^"'
y^^
^^
- 200
- 180
-160 -o
- 140 TO
- 120 o"
U
- 100 un
-80 ฃ
-60 8
o
- 40 <-
- 20
\ I I I I 1 1 1 u
2 3 4 5 6 7 8 9 10
Year
Comparison of Peak Load Growth
>
1/1
in
*o
S?
"D
-------
Case 4 High-Growth With Power Plant Deferral
Utility Perspective
Utility Financial Health - Small Changes
The change in utility financial health depends on whether or
not there are decoupling mechanisms in place, if there are
shareholder incentives in place (for investor-owned utilities),
the frequency of rate adjustments, and other factors.
Depending on the type of utility, the measure of financial
health changes. Investor-owned utility health is measured by
ROE, while publicly or cooperatively owned utility health is
measured by cash position or debt coverage ratio.
Utility Earnings - Results Vary
Utility earnings depend on growth rate, capita investment,
frequency of rate adjustments, and other factors. If EE
reduces capital intvestment, the earnings will be lower in
the EE case, unless shareholder incentives for EE are intro-
duced. However, utility return (ROE or earnings per share)
may not be affected.
Investor-Owned Utility Comparison of
Return on Equity
O
Ol
<
15%
12%
9%
~T 1 T~
5 6 7
Year
ROE% -NoEE
ROE% - EE no Decoupling
ROE% - EE and Decoupling
Target ROE%
Ut
i
5
s
<~r
c
c
c
n:
LL
ility Ea
$100 n
$80-
$60-
i
$40-
$20-
$0-
rnings
/-*-*-
J ^~~~
1 1 1 1 1 1 1 1
234567891
Year
Earnings $MM - No EE
Earnings $MM - EE no Decoupling
Earnings $MM - EE and Decoupling
3
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-15
-------
Customer Perspective
Societal Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the
cost of the EE program has not yet produced savings. Total
customer bills decline over time, usually within the first
three years, indicating customer savings resulting from
lower energy consumption.
Percent Change in Customer Bills
v
l/1
(E
c
a
c
c
ft
_c
L-
n no/ -
NSfc^
^^^"^^^Ssv^ x^-^
^Ss*^/^^*^x
2 3 4 5 6 7 8 9 10
Year
Change in Customer Bills (%) - EE no Decoupling
Change in Customer Bills (%) - EE and Decoupling
Societal Net Savings - Increase
The net savings are the difference of total utility costs,
including EE program costs, with EE and without EE. In the
first year, the cost of the EE program is a cost to society.
Over time, cumulative EE savings lead to a utility production
cost savings that is greater than the EE program cost. The
graph shape is therefore upward sloping. Total Societal Net
Savings is the same with and without decoupling; there-
fore, only one line is shown.
Utility Rates - Mild Increase
The rates customers pay ($/kWh) increase when avoided
costs are less than retail rates, which is typically the case for
most EE programs. Rates increase because revenue require-
ments increase more quickly than sales.
Annual Total Societal Net Savings
Total Societal Net Savings ($M)
Comparison of Average Rate
fn ^n
ฃ
_^
&
OJ
'S
en
OJ
0
2
OJ
3
1
As
- / - ,. - . .
JIV. IV | | | | | | | |
1 2 3 4 5 6 7 8 9 10
Year
- - - ' Utility Average Rate - No EE
Utility Average Rate - EE no Decoupling
^ Utility Average Rate - EE and Decoupling
Appendix B-16 National Action Plan for Energy Efficiency
-------
Total Societal Cost Per Unit - Declines
Total cost of providing each unit of energy (MWh) declines
over time because of the impacts of energy savings,
decreased peak load requirements, and decreased costs
during peak periods. Well-designed EE programs can
deliver energy at an average cost less than that of new
power sources. Societal savings increase when an infra-
tructure project is delayed and then decrease when built.
When the two lines cross, the annual cost of EE equals the
annual savings resulting from EE.
Growth Offset by EE - Increase
As EE programs ramp up, energy consumption declines. This
comparison shows the growth with and without EE, and
illustrates the amount of EE relative to load growth. Load
growth and energy savings are not impacted by decoupling.
With load growth assumed at zero, no load or percent
growth offset shown.
Delivered Costs and Benefits of EE
$10,000-
$7,500-
$5,000-
$2,500-
$o-
-$2,500-
-$5,000-
1 2
5 6
Year
Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
Percent Growth Offset by Energy Efficiency
_C
13
200 -
X
/.
/
/
/
/
^
- 140%
- 120%
- 100%
- 80%
- 60%
r 40%
- 20%
r i i i i i i i i u/o
1 2 3 4 5 6 7 8 9 10
Year
" " " " Energy Savings - EE (GWh)
Load Growth - No EE 40-
CD
un
O
1
10-
0'
1
missions Savings
Tons NO, Saved
Tons PM- 10 Saved
* Tons S02 Saved
- Tons VOC Saved
y
A
//'
f S-
/^^^
^^^ '.
J$-^
^^
23456
Year
'- 180
-160 -a
r 140 ง
l/l
- 120 cT1
u
- 100 w
-80 ^
- 60 o
o
- 40 ^
- 20
7 8 9 10
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity sav-
ings are captured due to EE measures. Peak load is not
impacted by decoupling.
Comparison of Peak Load Growth
>
LL.
"o
^
-0
TO
O
J*;
01
ฃ
ibuyo
1 50% "
140% "
130% "
120% "
110% "
100%-
.X
^x^^
^s^
^^^^
^^^
au% i i i i i i i i
1 2 3 4 5 6 7 8 9 10
Year
Forecasted Growth - No EE
^~^~" Forecasted Growth - EE and Decoupling
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-17
-------
Case 5: Vertically Integrated Utility
Utility Perspective
Utility Financial Health - Small Changes
The change in uti ity financial health depends on whether or
not there are decoupling mechanisms in place, if there are
shareholder incentives in place (for investor-owned utilities),
the frequency of rate adjustments, and other factors.
Depending on the type of uti ity, the measure of financial
health changes. Investor-owned utility health is measured by
ROE, while publicly or cooperatively owned utility health is
measured by cash position or debt coverage ratio.
Utility Earnings - Results Vary
Utility earnings depend on growth rate, capital investment,
frequency of rate adjustments, and other factors. If EE
reduces capital investment, the earnings will be lower in the
EE case, unless shareholder incentives for EE are introduced.
However, utility return (ROE or earnings per share) may not
be affected.
Investor-Owned Utility Comparison of
Re
i
LLJ
0
OL
X
CO
h-
a
<
turn on
15% -
12% -
9%-
6% -
3%-
Equity
2 3 4 5 6 7 8 9 10
Year
- - - RQE% - No EE
ROE% - EE no Decoupling
" ROE% - EE and Decoupling
Target ROE%
ut
fL
ฃ
b
L
ility Earnings
nnn
$80
>
- \ts\
/i
^n
~ t40
T3
JJ
Of} _
-------
Customer Perspective
Societal Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the
cost of the EE program has not yet produced savings. Total
customer bills decline over time, usually within the first
three years, indicating customer savings resulting from
lower energy consumption.
Percent Change in Customer Bills
CO
c
O)
en
-15%
-18%
-21%
Year
Change in Customer Bills (%) - EE no Decoupling
Change in Customer Bills (%) - EE and Decoupling
Societal Net Savings - Increase
The net savings are the difference of total utility costs,
including EE program costs, with EE and without EE. In the
first year, the cost of the EE program is a cost to society.
Over time, cumulative EE savings lead to a utility production
cost savings that is greater than the EE program cost. The
graph shape is therefore upward sloping. Total Societal Net
Savings is the same with and without decoupling; there-
fore, only one line is shown.
Utility Rates - Mild Increase
The rates customers pay ($/kWh) increase when avoided
costs are less than retail rates, which is typically the case for
most EE programs. Rates increase because revenue require-
ments increase more quickly than sales.
Annual Total Societal Net Savings
+-. $15
c $10
-------
Total Societal Cost Per Unit - Declines
Total cost of providing each unit of energy (MWh) declines
over time because of the impacts of energy savings,
decreased peak load requirements, and decreased costs
during peak periods. Well-designed EE programs can
deliver energy at an average cost less than that of new
power sources. When the two lines cross, the annual cost
of EE equals the annual savings resulting from EE. The
Societal Cost and Societal Savings are the same with and
without decoupling.
Delivered Costs and Benefits of EE
$400-
$300-
$200-
$100-
$0-
\
~T 1 1 1 1 l~
234567
Year
10
Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
Emissions and Cost Savings - Increase
Annual tons of emissions saved increases. Emissions cost
savings increases when emissions cost is monetized.
Emissions costs and savings are the same with and with-
out decoupling.
Growth Offset by tiE - Increase
As EE programs ramp up, energy consumption declines.
This comparison shows the growth with and without EE,
and illustrates the amount of EE relative to load growth.
Load growth and energy savings are not impacted by
decoupling. With load growth assumed at zero, no load or
percent growth offset shown.
Percent Growth Offset by Energy (Efficiency
-C
..
.^^*~^~^~
^^^^^
- 140%
- 120%
,- 100%
- 80%
- 60%
- 40%
- 20%
rw_
1 2 3 4 5 6 7 8 9 10
Year
- - - - Energy Savings - EE (GWh)
Load Growth - No EE (GWh)
Growth Offset by EE (%)
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity
savings are captured due to EE measures. Peak load is not
impacted by decoupling.
Annual Emissions Savings
Tons N0x Saved
Tons PM-10 Saved
Tons S02 Saved
Tons CO Saved
Tons VOC Saved
1000 Tons CO, Saved
T3
OJ
o
u
1/1
c
o
t
o
o
o
-- 20
10
Comparison of Peak Load Growth
1 DU7o
> 1 50%
u. 1 40% ~
ฐ 130%
~o 1 20% "I
03
o
^ 110%"
St 100%-
ป* ~ *
^^-*-*-^~'
aU7o ; i i i i i i i
1 2 3 4 5 6 7 8 9 10
Year
- - - Forecasted Growth - No EE
"~~ ^^ Forecasted Growth - EE and Decoupling
Appendix B-20 National Action Plan for Energy Efficiency
-------
Case 6: Restructured Delivery-Only Utility
Utility Perspective
Utility Financial Health - Small Changes
The change in utility financial health depends on whether or
not there are decoupling mechanisms in place, if there are
shareholder incentives in place (for investor-owned utilities),
the frequency of rate adjustments, and other factors.
Depending on the type of utility, the measure of financial
health changes. Investor-owned utility health is measured by
ROE, while publicly or cooperatively owned utility health is
measured by cash position or debt coverage ratio.
Utility Earnings - Results Vary
Utility earnings depend on growth rate, capital investment,
frequency of rate adjustments, and other factors. If EE
reduces capital investment, the earnings will be lower in the
EE case, unless shareholder incentives for EE are introduced.
However, utility return (ROE or earnings per share) may not
be affected.
Investor-Owned Utility Comparison of
Re
i
LLJ
O
X
ra
I
turn on
15%-
12%-
aj
Equity
i i i i i ii
234567891
Year
- - ' ROE% - No EE
ROE% - EE no Decoupling
'^^ ROE% - EE and Decoupling
- Target ROE%
0
Utility Earnings
ttnn
s~~
2
55
tn
D
C
'c
0]
LU
ton
$60-
i
on
tn
n""-" '" " ' !,<
*u 1 1 1 1 1 1 1 1
1 2 3 4 5 6 7 8 9 10
Year
- - Earnings $MM - No EE
Earnings $MM - EE no Decoupling
"~^ Earnings $MM - EE and Decoupling
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-21
-------
Customer Perspective
Societal Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the
cost of the EE program has not yet produced savings. Total
customer bills decline over time, usually within the first
three years, indicating customer savings resulting from
lower energy consumption.
Percent Change in Customer Bills
i
ui
m
c
OJ
0
c
re
_c
O
-3% -
"* 1}%
1QO/ __
TIOA _
*^^.
^^
i i i i i i i i
2 3 4 5 6 7 8 9 10
Year
Change in Customer Bills (%) - EE no Decoupling
^^ Change in Customer Bills (%) - EE and Decoupling
Societal Net Savings - Increase
The net savings are the difference of total utility costs,
including EE program costs, with EE and without EE. In the
first year, the cost of the EE program is a cost to society.
Over time, cumulative EE savings lead to a utility production
cost savings that is greater than the EE program cost. The
graph shape is therefore upward sloping. Total Societal Net
Savings is the same with and without decoupling; there-
fore, only one line is shown.
Utility Rates - Mild Increase
The rates customers pay ($/kWh) increase when avoided
costs are less than retail rates, which is typically the case for
most EE programs. Rates increase because revenue require-
ments increase more quickly than sales.
Annual Total Societal Net Savings
trie
S2
QJ
C
OJ
CO
"re
"a
c
on
-------
Total Societal Cost Per Unit - Declines
Total cost of providing each unit of energy (MWh) declines
over time because of the impacts of energy savings,
decreased peak load requirements, and decreased costs
during peak periods. Well-designed EE programs can
deliver energy at an average cost less than that of new
power sources. When the two lines cross, the annual cost
of EE equals the annual savings resulting from EE. The
Societal Cost and Societal Savings are the same with and
without decoupling.
Delivered Costs and Benefits of EE
> onn
$100
$0
\
V
^
2 3 4 5 6 7 8 9 10
Year
Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
Emissions and Cost Savings - Increase
Annual tons of emissions saved increases. Emissions cost
savings increases when emissions cost is monetized.
Emissions costs and savings are the same with and with-
out decoupling.
Annual Emissions Savings
70 -p
60--
50--
-Tons NQf Saved
Tons PM-10 Saved
-* Tons SO, Saved
-*Tons CO Saved
Tons VOC Saved
-ป1000 Tons CO. Saved
200
o
u
!/!
(2
8
o
10
Growth Offset by EE - increase
As EE programs ramp up, energy consumption declines.
This comparison shows the growth with and without EE,
and illustrates the amount of EE relative to load growth.
Load growth and energy savings are not impacted by
decoupling. With load growth assumed at zero, no load or
percent growth offset shown.
Percent Growth Offset by Energy Efficiency
_C
5
(5
;
^.^
^^^^^^
- 140%
- 120%
- 100%
- 80%
- 60%
- 40%
- 20%
no/..
r 1 i I 1 1 i I IT"'"
1 2 3 4 5 6 7 8 9 10
Year
- - - - Energy Savings - EE (GWh)
Load Growth - No EE (GWh)
Growth Offset by EE (%)
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity
savings are captured due to EE measures. Peak load is not
impacted by decoupling.
Comparison of Peak Load Growth
5 6
Year
10
Forecasted Growth - No EE
Forecasted Growth - EE and Decoupling
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-23
-------
Case 7: Electric Publicly and Cooperatively Owned Debt Coverage Ratio
Utility Perspective
Utility Financial Health - Small Changes
The change in utility financial health depends on whether or
not there are decoupling mechanisms in place, if there are
shareholder incentives in place (for investor-owned utilities),
the frequency of rate adjustments, and other factors.
Depending on the type of utility, the measure of financial
health changes. Investor-owned utility health is measured by
ROE, while publicly or cooperatively owned utility health is
measured by cash position or debt coverage ratio.
Utility Earnings - Results Vary
Utility earnings depend on growth rate, capital investment,
frequency of rate adjustments, and other factors. If EE
reduces capital investment, the earnings will be lower in the
EE case, unless shareholder incentives for EE are introduced.
However, utility return (ROE or earnings per share) may not
be affected.
Pu
Oe
c
1
QJ
O
ro
Ol
blic Pow
;bt Cove
2.50 -i
T 2.00 -
o
~ 1.50 -i
Q
1.00 -1
er/Cooperative
rage Ratio
* ..
23456789
Year
Debt Coverage Ratio - No EE
Debt Coverage Ratio - EE no Decoupling
^ ^^ Debt Coverage Ratio - EE and Decoupling
1
0
Utility Earnings
I
Si
c t/in -
03
LLJ
tn _
_
-rr- ^ . .'
123456789 10
Year
Earnings $MM - No EE
Earnings $MM - EE no Decoupling
^___^ Earnings $MM - EE and Decoupling
Appendix B-24 National Action Plan for Energy Efficiency
-------
Customer Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the
cost of the EE program has not yet produced savings. Total
customer bills decline over time, usually within the first
three years, indicating customer savings resulting from
lower energy consumption.
Percent Change in Customer Bills
CO
c
0)
01
c
-21%
Change in Customer Bills (%) - EE no Decoupling
Change in Customer Bills (%) - EE and Decoupling
Societal Perspective
Societal Net Savings - Increase
The net savings are the difference of total utility costs,
including EE program costs, with EE and without EE. In the
first year, the cost of the EE program is a cost to society.
Over time, cumulative EE savings lead to a utility production
cost savings that is greater than the EE program cost. The
graph shape is therefore upward sloping. Total Societal Net
Savings is the same with and without decoupling; there-
fore, only one line is shown.
Utility Rates - Mild Increase
The rates customers pay ($/kWh) increase when avoided
costs are less than retail rates, which is typically the case for
most EE programs. Rates increase because revenue require-
ments increase more quickly than sales.
Annual Total Societal Net Savings
v=
.ป
'a
c
a
QC
ฃ
"a
'i~
c
tr;
tc
+->
mpariso
$0.30 -|
$0.25 -
$0.20 -
$0.15-
$0.10 -
n of Average Rate
^*^
x-^-^
1 I I I I I I I
234567891
Year
Utility Average Rate - No EE
Utility Average Rate - EE no Decoupling
^ Utility Average Rate - EE and Decoupling
0
Jo create a sustainable, aggressive national commitment to energy efficiency
Appendix B-25
-------
Total Societal Cost Per Unit - Declines
Total cost of providing each unit of energy (MWh) declines
over time because of the impacts of energy savings,
decreased peak load requirements, and decreased costs
during peak periods. Well-designed EE programs can
deliver energy at an average cost less than that of new
power sources. When the two lines cross, the annual cost
of EE equals the annual savings resulting from EE. The
Societal Cost and Societal Savings are the same with and
without decoupling.
Delivered Costs and Benefits of EE
-C
t^
fn
\
V
^- __
1 1 1 1 1 1 1 1
2 3 4 5 6 7 8 9 10
Year
Societal Cost {$/MWh saved)
Societal Savings ($/MWh saved)
Emissions and Cost Savings - Increase
Annual tons of emissions saved increases. Emissions cost
savings increases when emissions cost is monetized.
Emissions costs and savings are the same with and with-
out decoupling.
Annual
60-
o
il 40
ro
in
r3 30
O
I
10-
1
Emissions Savings
Tons N0i Saved
Tons PM- 10 Saved
x Tons SO, Saved
* Tons CO Saved
Tons VOC Saved
/
//
// ,/-
^.^^]
^/'^ :
^^^
^ i
- 180
-160 -o
r 140 ro
- 120 o"
- 100 ^
c
on O
- OU |
[ 60 o
O
40 ^
- 20
2 3 4 5 6 7 8 9 10
Year
Growth Offset by EE - Increase
As EE programs ramp up, energy consumption declines.
This comparison shows the growth with and without EE,
and illustrates the amount of EE relative to load growth.
Load growth and energy savings are not impacted by
decoupling. With load growth assumed at zero, no load or
percent growth offset shown.
Percent Growth Offset by Energy Efficiency
-C
u
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1,200
1,000
800
o-
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^' '
- 140%
- 120%
- 100%
- 80%
- 60%
- 40%
- 20%
r i ii ii ii i u/ฐ
2 3 4 5 6 7 8 9 10
Year
- - - - Energy Savings - EE (GWh)
Load Growth - No EE (GWh)
Growth Offset by EE (%)
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity
savings are captured due to EE measures. Peak load is not
impacted by decoupling.
Comparison of Peak Load Growth
ic no/
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03
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Case 8: Electric Publicly and Cooperatively Owned Cash Position
Utility Perspective
Utility Financial Health - Small Changes
The change in utility financial health depends on whether or
not there are decoupling mechanisms in place, if there are
shareholder incentives in place (for investor-owned utilities),
the frequency of rate adjustments, and other factors.
Depending on the type of utility, the measure of financial
health changes. Investor-owned utility health is measured by
ROE, while publicly or cooperatively owned utility health is
measured by cash position or debt coverage ratio.
Utility Earnings ~ Results Vary
Utility earnings depend on growth rate, capital investment,
frequency of rate adjustments, and other factors. If EE
reduces capital investment, the earnings will be lower in the
EE case, unless shareholder incentives for EE are introduced.
However, utility return (ROE or earnings per share) may not
be affected.
Cash Position at End of Year
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Year
Cash Position - No EE
Cash Position - EE no Decoupling
"""" Cash Position - EE and Decoupling
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ility Earnings
-------
Customer Perspective
Societal Perspective
Customer Bills - Decrease
In the first year, customer utility bills increase because the
cost of the EE program has not yet produced savings. Total
customer bills decline over time, usually within the first
three years, indicating customer savings resulting from
lower energy consumption.
Percent Change in Customer Bills
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1 2 3 4 5 6 7 8 9 10
Year
Change in Customer Bills (%) - EE no Decoupling
Change in Customer Bills (%) - EE and Decoupling
Societal Net Savings - Increase
The net savings are the difference of total utility costs,
including EE program costs, with EE and without EE. In the
first year, the cost of the EE program is a cost to society.
Over time, cumulative EE savings lead to a utility production
cost savings that is greater than the EE program cost. The
graph shape is therefore upward sloping. Total Societal Net
Savings is the same with and without decoupling; there-
fore, only one line is shown.
Utility Rates - Mild Increase
The rates customers pay ($/kWh) increase when avoided
costs are less than retail rates, which is typically the case for
most EE programs. Rates increase because revenue require-
ments increase more quickly than sales.
Annual Total Societal Met Savings
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$25
$20
$15
$10
$5
$0
$5
-$10
-$15
5 6
Year
10
Total Societal Net Savings ($M)
Comparison of Average Rate
I
-------
Total Societal Cost Per Unit - Declines
Total cost of providing each unit of energy (MWh) declines
over time because of the impacts of energy savings,
decreased peak load requirements, and decreased costs
during peak periods. Well-designed EE programs can
deliver energy at an average cost less than that of new
power sources. When the two lines cross, the annual cost
of EE equals the annual savings resulting from EE. The
Societal Cost and Societal Savings are the same with and
without decoupling.
Growth Offset by EE - Increase
As EE programs ramp up, energy consumption declines.
This comparison shows the growth with and without EE,
and illustrates the amount of EE relative to load growth.
Load growth and energy savings are not impacted by
decoupling. With load growth assumed at zero, no load or
percent growth offset shown.
Delivered Costs and Benefits of EE
$400
$300
$200
$100
$0
5 6
Year
10
Societal Cost ($/MWh saved)
Societal Savings ($/MWh saved)
Percent Growth Offset by Energy Efficiency
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5
e;
^^.
*^*^
-~*^*^~*^
- 140%
- 120%
- 100%
- 80%
- 60%
L 40%
- 20%
i i i i ii i ii u
2 3 4 5 6 7 8 9 10
Year
" " " Energy Savings - EE (GWh)
*^^^^^ Load Growth - No EE (GWh)
Growth Offset by EE (%)
Emissions and Cost Savings - Increase
Annual tons of emissions saved increases. Emissions cost sav-
ings increases when emissions cost is monetized. Emissions
costs and savings are the same with and without decoupling.
Peak Load Growth - Decrease
Peak load requirements decrease because peak capacity
savings are captured due to EE measures. Peak load is not
impacted by decoupling.
Annual Emissions Savings
T3
> 40.
Saved
Tons PM-10 Saved
x Tons S0; Saved
Tons VOC Saved
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234567891
Year
180
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120 cT
- 100 w
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-60 8
o
- 40 -
20
0
0
Comparison of Peak Load Growth
4-
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s
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- -__!_r
- - -
1 2 3 4 5 6 7 8 9 10
Year
Forecasted Growth - No EE
^~~^~ Forecasted Growth - EE and Decoupling
To create a sustainable, aggressive national commitment to energy efficiency
Appendix B-29
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