United States
Environmental Protection
Agency
Advancing State Clean Energy Funds
-------
Advancing State Clean Energy Funds
Options for Administration and Funding
Prepared for the U.S.Environmental Protection Agency's
Climate Protection Partnerships Division
by Optimal Energy, Inc.
For more information, contact:
Niko Dietsch dietsch.nikolaas@epa.gov
202.343.9299
May 2008
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Contents
Executive Summary 1
Chapter 1. Background and Purpose 5
1.1 Clean Energy Funds as a Policy Option 5
1.2 Structure of this Manual 6
1.3 Key Questions Answered by This Manual 7
Chapter 2. Introduction to Clean Energy Funds 9
2.1 Experience with Clean Energy Funds 9
2.2 Current Status of Clean Energy Funds 10
2.3 Benefits of Clean Energy Funds 12
Chapters. Administrative Models 13
3.1 The Utility Model 13
3.2 The State Model 15
3.3 The Third Party Model 16
3.4 Evaluating Administrative Models 18
3.5 Overcoming Administrative Disadvantages 19
Chapter 4. Funding Models 21
4.1 Utility Cost Recovery 21
4.2 System Benefits Charge 23
4.3 Using Taxes for Clean Energy Funds 24
4.4 Leveraging other Revenue Sources 25
4.5 Selecting a Funding Mechanism 25
4.6 Determining a CEF Funding Level 27
Chapters. Policy Interactions 29
5.1 Other Policies for Promoting Clean Energy 29
5.2 Interactions between Clean Energy Funds and Related Policies 30
Chapter 6. Other Considerations for Clean Energy Funds 33
6.1 Program Design Concepts 33
6.2 Best Practices in Program Design 35
6.3 Evaluation, Measurement, and Verification 38
Chapter 7. Summary of Findings 41
Appendix A: References 43
Appendix B: Decision-Making 47
Example: Vermont 47
Example: New York State "15x15" Initiative 49
Example: Illinois Program Administration 51
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Executive Summary
Importance of Clean Energy Funds
Improving the energy efficiency of homes,
businesses, schools, governments, and industries-
which consume more than 70 percent of the natural
gas and electricity used in the United States-is
often the most cost-effective option for addressing
the challenges of high energy prices, energy
security and independence, environmental concerns,
and global climate change in the near term.
Other technologies that address these challenges
include renewable energy (e.g., solar thermal,
solar photovoltaic, wind, hydro, biomass), clean
distributed generation, and combined heat and
power (CHP). Despite a range of well-documented
benefits, several persistent barriers limit greater
investment in clean energy. Focused policies are
necessary to overcome barriers and enable these
resources to play an increasing role in meeting our
nation's energy needs.
States are increasingly using Clean Energy Funds
(CEF) as a means to establish effective funding
sources and clean energy delivery mechanisms that
can overcome the barriers to these investments
faced by individuals, facility owners and operators,
and public sector entities. The objectives of these
CEF policies include:
Saving energy and avoiding new generation
through long-lasting improvements in energy
efficiency,
Accelerating the development of renewable
energy and CHP within a state,
Lowering energy demand and reducing air
pollution and greenhouse gas emissions, and
Reducing customer energy costs.
CEFs can provide a source for stable, long-term
funding that helps place clean energy resources
on a level playing field with traditional options
for meeting energy needs. CEFs can advance these
objectives through a variety of strategies, including
lowering equipment costs, addressing market
barriers, and providing customer education and
outreach (EPA 2006a).
The important role of CEFs is recognized in the
National Action Plan for Energy Efficiency (Action
Plan) Vision for2025, which provides a framework
for policies and approaches aimed at achieving all
cost-effective energy efficiency by the year 2025.
Goal Five of the V/s/on'sTen Implementation Goals
encourages states to clearly establish an entity to
administer energy efficiency programs and establish
energy saving targets and the necessary funding on
a multi-year basis (NAPEE 2007a, p. 2-3). While
the Action Plan focuses on efficiency, the goals
discussed here are relevant to the advancement of
other clean energy technologies.
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Status of Clean Energy Funds
There is substantial experience with CEFs across the
United States. Most states have implemented some
form of CEF for either efficiency or renewables,
even if it is the straightforward use of general
state funds for low-income efficiency programs or
home energy audits. According to the American
Council for an Energy Efficiency Economy (ACEEE),
at least 46 states and the District of Columbia made
some investment in efficiency in 2004 (Eldridge
et. al 2007). Nevertheless, most of these states
are well-positioned to capture substantially more
cost-effective energy savings and reap related
societal benefits, including greenhouse gas (GHG)
and air pollution reductions, water savings, and
economic development opportunities. Significant
opportunities exist for advancing CEFs at lower cost
compared to traditional generation resources.
States are structuring their CEFs using a variety
of funding and administration approaches, based
on what makes sense in a particular area. These
approaches are discussed at length in this manual
and are summarized below in Table ES-1.
Table ES-2 provides a snapshot of various state-
level approaches to administration and funding.
Where a state appears more than once, this
indicates that multiple CEFs exist or that aspects of
CEFs are handled in different ways. For example,
a recent settlement in Illinois resulted in joint CEF
administration by the utilities and the state. In
the case of California, the CEF is funded by both
utility cost recovery and a public benefits fund.
Of the top-ten spending states, 8 use a system
benefits charge (SBC) as their primary funding
mechanism and 2 rely on utility cost recovery (UCR).
Nationwide, approximately 20 states have SBCs for
clean energy (DSIRE 2007).
As far as total spending, several states in New
England and the Pacific Northwest now allocate
approximately 2 percent of annual utility revenues
to electric efficiency. These states include
Vermont, Massachusetts, Oregon, Washington, and
Connecticut. Other top states - those spending
between approximately 1.2 and 1.6 percent of
revenues - are widely distributed around the country,
including New Jersey, Minnesota, and California.
Table ES-1. Summary of CEF Administrative and Funding Mechanisms
Administrative Approaches
Utility
State
Third Party
Delivered by utilities, usually distribution-only utilities in restructured markets or traditional
utilities in regulated markets
Delivered by existing or newly-created state entity, typically relying on contractors to perform
many functions
Delivered by independent entity whose sole purpose is to administer energy efficiency
programs
Funding Mechanisms
Utility Cost
Recovery
System Benefits
Charges (SBCs)
Taxes
Leveraging
Recovered by utilities directly from ratepayers through a separate surcharge (similar to fuel
adjustment surcharges) or through base rates at the time of a new rate case
Recovered from ratepayers through a surcharge levied on consumption, usually at distribution
level rather than generation level
Funded through tax collections, usually from general funds
Funded by revenue collected as a result of clean energy investments, typically from, emissions
or energy markets
1 Although some of this spending may have been in the form of tax credits or incentives, which do not fall under the definition of CEF used in this
Manual, CEF spending as defined here is certainly widespread.
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Table ES-2. State Approaches to CEF Administration and Funding
^^^^^H Administrative Options
Utility Cost
Recovery
SBC
Taxes
Leveraging
Utility
Kansas, Texas, California, New York,
Illinois, Iowa, Minnesota (efficiency)
Massachusetts (efficiency),
Connecticut, California
N/A
Connecticut
State
Illinois
Massachusetts (renewables),
New York, New Jersey,
Maine
Minnesota (renewables)
Third Party
N/A
Vermont, Oregon
N/A
Vermont
Structure and Use of this Manual
This manual is intended to help policy and program
decision-makers identify the clean energy funding
and administration approaches that make sense
for their jurisdiction. For each approach, it provides
an overview of advantages and disadvantages,
implementation options, and state examples. The
manual also references other policies for promoting
clean energy and briefly describes interactions
and considerations related to establishing a Clean
Energy Fund. After reviewing the manual, readers
will be able to answer the following questions:
What is a Clean Energy Fund, and how can it
benefit my state economy, my constituents, other
stakeholders, and the environment?
What are the options for administering a CEF and
what factors should I consider in selecting an
entity to administer a CEF?
What are the potential funding sources for a CEF
and what factors should I consider in choosing
one?
How do CEFs interact with other policies that
promote clean energy and energy efficiency
investments?
What do I need to know about program design,
evaluation, and other topics in relation to CEFs?
Table ES-3. Summary Evaluation of
Administrative Model Characteristics
State Utility
Model Model
Model
Resistance to fund
raids
Administrative
efficiency
Reduces Transition
Costs
Avoids conflicts of
interest
Facilitates Market
Transformation
Flexibility of Programs
L
M
M
M
H
L
H
L
H
L
L
H
M
H
L
H
M
H
H=high, M=medium, L=low
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Table ES-4. Summary Evaluation of Funding Model Characteristics
^^^^^^^H Recl^ Funds' Be"efitS Taxes Leveraging
Legislative or Regulatory Approval?
Sustainability and Flexibility
Supports Integrated Resource Planning
Limits Short- Term Rate Impacts
Regulatory
M
H
M
Legislative
M
M
M
Legislative
L
L
H
Regulatory
L
H
H
H=high, M=medium, L=low
Summary of Findings
Clean Energy Funds can be administered by utilities,
states, third-party entities, or a combination of
these. Each of these comes with strengths and
weaknesses, but in any given situation one or two
may be better choices. Table ES-3 summarizes
some of the important characteristics of the
administrative models and their relative strengths
in each area.
Clean Energy Funds can be capitalized by ratepayers
through System Benefits Charges/Public Benefits
Funds (SBCs/PBFs) or as part of electric rates,
by the public through taxes, or through other
sources such as monies leveraged from energy and
emissions markets. As with administrative models,
these approaches have strengths and weaknesses
(highlighted in Table ES-4).
Consideration of the above factors leads to the
conclusion that successful CEFs facilitate a long-
term commitment to implementing cost-effective
clean energy resources. This requires a structure
that can be responsive to changing economic,
technological, and political conditions while
maintaining a long-term focus and supporting
consistent and sustained clean energy investments.
Administrative mechanisms must also be supported
by timely, consistent, and stable program funding
that is sufficient to achieve all cost-effective clean
energy resources.
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Chapter 1
Background and Purpose
1.1 Clean Energy Funds as a Policy
Option
Improving the energy efficiency of our homes,
businesses, schools, governments, and industries is
often the most cost-effective option for meeting
the combined challenges of growing energy
demand, energy security, and climate change.
Other technologies that address these challenges
include renewable energy (e.g., solar thermal,
solar photovoltaic, wind, hydro, biomass), clean
distributed generation, and combined heat and
power (CHP). Policy-makers in many states and
regions are working to advance these "clean energy"
resources and increase their role in meeting future
energy needs.
A Clean Energy Fund (CEF) is a policy that secures:
(1) a source of funding and (2) an administrative
delivery mechanism for clean energy resources.2 A
well-designed and administered CEF can increase
public and private sector investment in clean
energy, resulting in reduced energy costs for energy
customers, lower emissions, and increased energy
reliability. CEFs can advance these objectives
through a variety of strategies, including lowering
equipment costs, addressing market barriers,
and providing customer education and outreach
(EPA 2006a). This manual is intended to help
policy and program decision-makers develop
National Action Plan for Energy Efficiency
Recommendations
The Leadership Group of the National Action
Plan for Energy Efficiency developed the Action
Plan Report to present policy recommendations
for creating a sustainable, aggressive national
commitment to energy efficiency. Listed below,
the recommendations are likewise applicable to
efforts aimed at expanding commitments to other
clean energy resources.
Clean Energy Funds are a key policy option
for addressing the two recommendations
highlighted below.
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.
Provide 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.
Source: NAPEE2006.
2 Not included in the definition of Clean Energy Funds are efficiency savings requirements, renewable portfolio standards, or research programs.
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CEFs by identifying the clean energy funding and
administration approaches that make sense for their
jurisdiction.
Many states have initiated CEFs as a key strategy
for increasing the use of clean energy to meet
resource needs and for moving towards longer
term objectives such as acquiring "achievable"
clean energy potential and lowering greenhouse
gas emissions. This is consistent with the National
Action Plan for Energy Efficiency Vision for2025
report, which sets a primary objective of achieving
all cost-effective energy efficiency by 2025 (NAPEE
2007a). This document builds from the initial
Nation Action Plan Report (see sidebar on page 5),
and includes ten goals that provide a framework for
implementing the recommendations of the Action
Plan and achieving the 2025 goal. Of particular
relevance to this manual is Goal Five: "Establishing
Effective Energy Efficiency Delivery Mechanisms,"
which recommends that states (e.g., energy offices,
public utility commissions, legislatures) clearly
establish an entity to administer energy efficiency
programs and establish goals and funding on a
multi-year basis (NAPEE 2007a, p. 2-3).
This manual also builds from the EPA Clean
Energy-Environment Guide to Action (EPA 2006a,
www.epa.gov/cleanenergy), which identifies
and describes sixteen clean energy policies and
strategies - including Clean Energy Funds - for
delivering environmental, economic, and energy
benefits for states. The information presented here
expands upon the Guide to Action chapters on
Funding and Incentives (section 3.4) and System
Benefits Charge (section 4.2) for energy efficiency
and renewable energy.
1.2 Structure of this Manual
This manual is intended to help policy and program
decision-makers identify the clean energy funding
and administration approaches that make sense
for their jurisdiction. For each approach, it provides
an overview of advantages and disadvantages,
implementation options, and state examples. The
manual also references other policies for promoting
clean energy and briefly describes interactions and
considerations related to establishing a CEF.
For purposes of this manual, we define clean energy
to encompass energy efficiency and conservation
programs, renewable energy (e.g., solar thermal,
solar photovoltaic, wind, hydro, biomass), and clean
distributed generation including combined heat
and power (CHP). Most state experience to-date is
with energy efficiency, so the analysis, discussion,
and examples are focused accordingly. Relevant
similarities and differences to other clean energy
resources are noted, as applicable.
This manual is structured as follows:
Section 2 provides an overview of experience to
date with CEFs, describes their current status
(including states' spending/savings levels), and
addresses typical objectives and benefits.
Section 3 addresses options for clearly
establishing an entity to administer programs.
The administrative options considered are utility,
state, and third party models.
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Section 4 outlines options for establishing goals
and funding on a multi-year basis.3 Funding
sources here include system benefits charge
(also referred to as public benefits funds, system
benefits charges or "wires charges"); utility-
collected funds; taxes or other governmental
funds; and funds leveraged from other markets or
regulatory mechanisms.
Sections 5 and 6 deal with the interactions
between CEFs and related policies and describe
related program design concepts and evaluation
practices.
1.3 Key Questions Answered by This
Manual
The sections of this manual each provide the
answer to a question or set of questions about CEFs.
These are:
stakeholders, and the environment? (Section 2)
What are the options for administering a CEF and
what factors should I consider in selecting an
entity to administer a CEF? (Section 3)
What are the potential funding sources for a CEF
and what factors should I consider in choosing
one? (Section 4)
How do CEFs interact with other policies that
promote clean energy and energy efficiency
investments? (Section 5)
What do I need to know about program design,
evaluation, and other topics in relation to CEFs?
(Section 6)
The manual provides references to other resources
throughout the text. A full reference list is provided
in Appendix A.
What is a Clean Energy Fund, and how can it
benefit my state economy, my constituents, other
3 The information presented in these sections supports Goal Five of the Vision for 2025report "Establishing Effective Energy Efficiency Delivery
Mechanisms."
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Chapter 2
Introduction to Clean Energy Funds
This section provides an overview of experience
to date with CEFs, describes their current status
(including states' spending/savings levels), and
addresses typical objectives and benefits.
2.1 Experience with Clean Energy
Funds
The first Clean Energy Funds were utility-run
efficiency programs developed in the late 1970s and
1980s. The impetus for increased efficiency came
from the oil supply shocks in 1973 and 1979, as the
greatly increased price of oil resulted in substantial
fuel switching in electricity generation and
attention to conservation and efficiency in energy-
consuming sectors. The second impetus came from
changes in the regulatory climate which saw utility
regulators begin to question the high construction
costs of new generation facilities, particularly
nuclear power plants, which electric utilities were
seeking to recover through their rates.
In the 1980s, regulatory commissions disallowed
billions of dollars in utility costs and began to
require least cost planning (LCP), also referred
to as "integrated resource planning" (IRP). This
approach required utilities to evaluate both supply
and demand-side resource options for meeting their
load. Least-cost planning provided an opportunity
to demonstrate that energy efficiency and demand
side management (DSM) options could be lower
cost alternatives to constructing or purchasing new
generation. Utilities recovered the costs for energy
efficiency programs approved under least-cost
planning through rate cases in the same way they
recovered costs for new generation facilities. By
the mid-1980s, several states had adopted least-
cost planning regulations. Utility spending on DSM
grew rapidly, as did the number and scope of utility
energy efficiency programs. These investments
continued to grow, peaking in 1993 when an
estimated $2.7 billion was spent on utility DSM
programs (DOE 2007).
The next major influence on clean energy funding
was the restructuring and deregulation of wholesale
electricity markets during the mid 1990s. In brief,
deregulation and restructuring raised the concern
that including efficiency program costs in rates
might place the incumbent utilities at a competitive
disadvantage-customers might avoid the charge
by switching to a new, competing supplier.
This problem was addressed by creating "non
bypassable" charges. In states that restructured,
most energy-efficiency programs are now funded by
ratepayers through a separate public benefit fund
(PBF) or system benefits charge (SBC) included in
their electric bill (Blumstein 2003).
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2.2 Current Status of Clean Energy
Funds
With the exception of electricity efficiency
programs, good data are difficult to find for
most clean energy fund programs. Electric
sector efficiency programs are the most widely
implemented and have the longest history. Several
states in New England the Pacific Northwest
spend in the neighborhood of 2 percent of annual
utility revenues on electric efficiency, including
Vermont, Massachusetts, Oregon, Washington, and
Connecticut. Other top states spend between 1.2
and 1.6 percent and are more widely distributed
around the country, including states such as New
Jersey, Minnesota, and California. Many of the
top-spending states use system benefits charges
(SBCs) as their funding mechanism, with only 2 of
the top 10 relying on utility cost recovery (UCR).
Nationwide, approximately 20 states have SBCs
for clean energy (DSIRE 2007). Table 1 summarizes
recent spending levels in the ten states with highest
spending as a percentage of total annual electric
utility revenues. Note that the median value is well
below the average, indicating that many states
spend very little on efficiency: 13 states spent 0.01
percent or less. The table also shows spending on
renewable energy programs in these states, where
data are available. With the exception of New
Jersey, spending on renewables lags spending on
efficiency among the top 10 efficiency states.
Differences in spending on efficiency programs
translates directly into differences in the results of
these programs. Although there is some variability
across programs, greater spending generates
greater savings. The specifics of program design
do influence the cost of saved energy, but Figure
1 shows that there is a relatively consistent
Table 1. Electricity Efficiency and Renewables Program Spending as Percent of Utility Revenue
^^^^^^^^1 Efficiency Spending Renewables Spending .... ,. . . Funding
^^^^^^^^^^H .,'..., , , .. . . Funding Mechanism- ,. . .
^^^^^^^^^H as % of annual total as % of annual total Fff. . Mechanism-
^^^^^^^^| revenue (2004) revenue (2006) Renewables
Vermont
Massachusetts
Oregon
Washington
Connecticut
Rhode Island
Minnesota
California
New Hampshire
New Jersey
2003 US Average
2003 US Median
2.2%
2.2%
2.2%
1.9%
1.9%
1.6%
1.4%
1.3%
1.2%
1.2%
0.5%
0.13%
1.0%
0.3%
0.4%
N/A
0.4%
0.2%
0.3%
0.4%
N/A
2.0%
N/A
N/A
SBC
SBC
SBC
UCR
SBC
SBC
UCR
SBC
SBC
SBC
N/A
N/A
SBC
SBC
SBC
N/A
SBC
SBC
Taxes
SBC
N/A
SBC
N/A
N/A
Source: Eldridge et. al 2007; York and Kushler 2005; DSIRE database; Optimal Energy research.
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relationship between program spending and realized
savings. Note that some of the variability in the
ratio of spending to savings is due to differences in
the way savings are calculated across jurisdictions.
Also note that energy savings as measured in
kWh is not the only metric of interest to CEF
administrators: peak kW reduction, greenhouse
gas reductions, fossil fuel savings, and difficult-
to-measure effects such as market transformation,
education, and public outreach are all valuable
results generated by program spending. To the
extent that programs are designed to emphasize
these benefits over energy savings, the resulting
cost of saved energy may not convey a complete
picture of program benefits.
On the renewables side, good data on total
spending by state are sparse. One reason is that,
compared to energy efficiency, tax incentives
are more frequently used to advance renewables
programs. Estimates of total program costs (in the
form of lost tax revenues) are available, but there
Figure 1. State Energy Efficiency Savings as a Function of Annual Budget, ca. 2003.
1000
800
en
I 600
co
|
400
< 200 -
o -
CA
TX
NY
wi
MA
NJ
NH
OR
VT
0
50
100 150
Annual Budget ($ millions)
Source: Graphic by S. Stratton; data from Kushler et al (2004).
200
250
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is typically no separate fund or account that tracks
total spending. Furthermore, the technologies
supported by the state programs vary widely. Some
states have only solar photovoltaic (PV) programs,
while others cover a wide range of clean energy
technologies (e.g. hydroelectric, biomass, fuel cells).
Geothermal heat pumps, which can be considered
an energy efficiency measure, are also frequently
included in renewable energy programs.
2.3 Benefits of Clean Energy Funds
States implement clean energy funds for a variety
of reasons, but they are generally designed to
increase the implementation of efficiency measures
or renewable energy technologies and therefore
capture the benefits that these clean energy
resources can provide.
Environmental Benefits
Reduces pollution since most, if not all, clean
energy technologies generate less pollution per
kWh than traditional fossil-fuel fired generation.
Efficiency generates no emissions for each kWh
saved, and most renewable technologies have
zero or low net emissions.
Reduces the need for new power plants or
transmission lines, thereby reducing all of the
environmental impacts associated with power
plant or transmission line siting and construction.
Energy Benefits
Reduces the risks associated with price and
supply of fossil fuels and avoids the costs of
unanticipated increases in future fuel prices.
Reduces peak demand, thus reducing stress on
generation and local transmission and distribution
systems, potentially deferring expensive new
power plants and T&D upgrades or mitigating
local transmission congestion problems.
Improves the overall reliability of the electricity
system, also derived from peak demand
reductions.
Improves the overall efficiency of fuel usage.
Economic Benefits
Lowers cost of electricity (generally from
efficiency, although biomass and CHP may also be
less expensive than traditional generation), which
lowers overall system costs and therefore reduces
customers' electricity bills.
Promotes local economic development by
increasing the disposable income of citizens
and making businesses and industries more
competitive. They also create local jobs in the
energy efficiency and renewable manufacturing
and service sectors. In contrast, traditional
power production often entails large export of
local capital for the importation of power plant
equipment, fuel, or power purchased from outside
the utility service territory.
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Chapter 3.
Administrative Models
This section discusses three administrative models
for clean energy funds which differ primarily based
on the identity of the program administrator:
utilities, state governmental entities, and third
parties.4 Each model has distinct pros and cons,
and certain models may be more or less effective in
specific circumstances and depending on the policy
environment and infrastructure of the state.
The National Action Plan for Energy Efficiency
highlights the designation of the entity responsible
for administering energy efficiency programs as
a key option to consider. This step is critical to
pursuing the second of the Action Plan's initial
five recommendations, which is to make a strong,
long-term commitment to implement cost-effective
energy efficiency as a resource. The Vision for
2025 report, which establishes an implementation
framework for the Action Plan, also highlights the
importance of this step (see Goal Five of the Ten
Implementation Goals).
The administrative model chosen for a CEF, relative
to the policy environment and energy marketplace,
plays a large role in the effectiveness with which
the program is delivered. Questions that decision-
makers should ask when considering which model
to implement include:
Will the Program Administrator be able to operate
efficiently and without concern over appropriation
of clean energy funds by other organizations?
What are the costs, if any, to transition from the
current administrative model to the new one?
How will the Program Administrator avoid
conflicts of interest?
Does the administrative structure facilitate
market transformation activities?
the Program Administrator have the flexibility
to respond to changing market conditions, policy
interests, and funding levels?
Are there additional policies or actions that can
limit the potential disadvantages of a particular
administrative model?
3.1 The Utility Model
In the utility model, efficiency programs are funded
by the ratepayers or a SBC and run by the electric
and/or gas utilities. The utility model can be further
divided into two subcategories: those administered
by distribution-only utilities in states that have
undergone restructuring and those administered
by traditional vertically-integrated utilities in
states that have not.5 Before the restructuring of
the 1990's, many vertically integrated utilities ran
4 While these categories are useful for illustration, state implementation often occurs on a continuum across these models, and some overlap
between them exists.
5 Note that some states that have restructured still allow vertically integrated utilities to serve as both distributor and retail service providers
(notably Texas), but this is not the norm.
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large and effective efficiency programs, spending
an average of 1.4 percent of revenues on efficiency.
This represents twice the amount utilities spent in
2002 (Lin 2005).
The utility model, while quite common for efficiency
programs, is rarely used for renewables programs.
Examples of the Utility Model
In Massachusetts, efficiency programs are
administered by the state's investor-owned
distribution utilities.6 Program plans and
designs are created only after extensive
input from a collaborative consisting of the
Department of Energy Resources (DOER), low-
income representatives, and various business,
environmental and consumer advocate groups.
This collaborative helps ensure that the utilities'
programs are aligned with public interest, and that
efficiency efforts enjoy continued support from the
stakeholders. Other states that use the utility model
include: California, Colorado, Connecticut, Florida,
Kansas, Minnesota, New Hampshire, Rhode Island,
Texas and Washington.
Advantages of the Utility Model
Efficiency can easily be included in utilities'
Integrated Resource Plans (IRPs). Other issues of
coordination and integration are minimized with
utility administration.
Efficiency programs of both vertically integrated
and distribution only utilities benefit from pre-
existing relationships with the customers and
distributors. This allows customers to engage
with a familiar entity and may reduce the level of
marketing needed to inform customers of clean
energy policies and programs. Utilities also benefit
from added contact with their customers.
Many utilities have long-running efficiency
programs, and there can be significant transition
costs and time associated with dismantling
the existing infrastructure and re-establishing
it elsewhere. For this reason, moving CEF
administration away from utilities should be done
cautiously and with good reason.
Utilities have access to valuable customer data on
energy usage patterns which can be leveraged to
increase understanding of the market for energy
efficiency and clean energy resources.
Disadvantages of the Utility Model
There is significant potential for conflicts of
interest: utilities may have financial disincentives
for efficiency and alternative generation, since
their profits and recovery of their operating
costs often depend on how much electricity they
sell once rates are set. Even in states where the
legislature or regulators have separated profits
from sales and created financial incentives for
efficiency, the internal culture at the utility may
require some time to adjust to this change.
When more than one utility in a state offers the
same standard efficiency programs, there will
be some administrative redundancy. Utilities
may also have differences in their program
designs and implementation procedures. This
can cause confusion in the market, since most
market actors (e.g., architects, engineers, lighting
designers, vendors and contractors) work across
utility boundaries and large customers may have
buildings in multiple service territories. This was
an important factor in Vermont's decision to
shift to a third-party model: Vermont has over 20
individual utilities serving a total population of
approximately 600,000 people.
In many states that use the utility model, the
small municipal utilities do not offer programs.
6 Renewable energy programs in Massachusetts are separately administered by a state entity, as described under that heading.
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Compelling them to offer efficiency requires an
act of legislation (they are not often regulated
by the state utility commission). Further, small
municipal and cooperative utilities may not have
the human capital to deliver substantial program
portfolios, and when they do the administrative
redundancies become much more significant. This
means that residents and firms in their service
areas may not have access to programs.
Market transformation7 activities typically need
to address geographic areas that are larger than
any single utility's service area. This is less true
in places such as California, where the utilities
serve enormous territories, and have aligned their
programs well.
Larger utilities are developing efficiency programs
that are consistent throughout their multi-state
service areas. While this can provide economies
of scale, it also requires that all states in which
the utility operates have implemented the utility
model. Where part of the service territory is in
states with other administrative models, these
economies of scale cannot be realized.
3.2 The State Model
In the state model, the efficiency program is
administered by an existing or newly created state
entity. In this model, the state typically relies on
contractors to perform some functions but retains
overall program administration and financial
responsibilities. Under this model, state agencies are
intimately involved in program designs and details.
Examples of the State model
States that administer CEFs include New Jersey,
Maine, Ohio, and to a certain extent Illinois, New
York and Massachusetts. Illinois retains 25 percent
of their CEF for state-implemented programs,
with the remaining 75 percent administered by
the utilities. New York has a hybrid of all three
administrative models, including the New York
State Energy Research and Development Authority
(NYSERDA), a state public benefit corporation
funded by a SBC. NYSERDA is responsible for energy
efficiency programming for much of the state, as
well as clean energy research and development
For more about New York state, see the sidebar on
page 20 titled, "Hybrid Administrative Models." In
Massachusetts, renewable energy programs are
administered by the Massachusetts Technology
Collaborative, another public benefit corporation
funded by a SBC.
Advantages of the State Model
A single statewide entity avoids redundant
administrative costs that can occur when multiple
utilities run their own programs. Examples of
efficiencies include, but are not limited to:
development and maintenance of data tracking
systems; administrative staff and overhead;
marketing, education and training materials and
resources; monitoring and evaluation functions;
and planning and program development resources.
State administration removes the potential
or real conflicts of interest inherent in utility
program administration. Because the state's
overriding purpose is the public interest rather
than shareholder profits, it can focus on
capturing societal benefits without countervailing
influences. However, the state model is not
immune to the effects of utility rate increases and
other stakeholder concerns faced by utilities and
third party administrators.
States are generally significantly larger than
utility service areas, resulting in more consistent
messaging and program offerings across large
geographic areas. This can have significant
7 Market transformation refers to a reduction in market barriers resulting from an intervention, as evidenced by a set of market effects, that lasts
after the intervention has been withdrawn, reduced, or changed.
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benefits for market transformation programs,
where consistency across numerous market actors
and channels is essential and may improve the
ability to influence upstream market actors such
as equipment manufacturers.
State models ensure that all residents and
businesses within a state are eligible for services.
Under the utility model, customers of small
municipal utilities may not be well-served by
clean energy programs.
Under the state model, program implementation
is typically accomplished through private
contractors, which can help create competitive
and experienced energy service companies. This
same effect can be achieved through utility or
third-party models, but in practice states are
more likely to rely on outside contractors than are
utilities or third-party program administrators.
Disadvantages of the State Model
States are often challenged in their ability to hire
and contract rapidly, which has direct effects on
the period required for program ramp-up.
State administered energy efficiency programs
can put the state in the electricity market as a
competitor to supply-side providers and energy
service companies. This can create conflicts, and
raise broader political issues.
State agency funds are vulnerable to being re-
appropriated to other programs, departments or
staff that have little to do with clean energy.
It may be hard to attract the most qualified
people to work for the public sector, which
typically pays less than private employment.
State agencies may not have the speed and
flexibility to change program goals with
changing market climates, especially for market
transformation programs. Depending on the
structure, state models may suffer from higher
levels of bureaucracy and operating restrictions
than other models.
If there is no separation between the program
administrator and the oversight agency (as
in Maine) the program may lack effective
measurement and evaluation and the ability
to timely and effectively correct deficiencies in
program design or scale.
In general, state agencies may be more
susceptible to influences by external politics that
have little to do with clean energy or efficiency, or
that are in contradiction with CEF objectives.
3.3 The Third Party Model
The third party model creates an independent
efficiency entity whose sole purpose is to
administer energy efficiency programs. They
are typically selected by a proposal and bidding
process and enter into contracts with the state
that specify spending and performance targets
and associated compensation schedules. Because
state programs typically rely on contractors to
achieve their savings, and because the state often
regulates programs administered by a third party,
there is often a fine line between the state model
and the third party model. However, in third party
models there is more separation between the
administrator and the government: contracts with
the program administrator typically specify only
a budget, performance goals, targeted customer
segments, and a time frame. This allows the third-
party administrator great latitude in reaching its
goals. The state may be involved in evaluation,
measurement, and verification (EM&V), but day to
day operation is left in the hands of the third party.
Another distinction between state and third party
models is that in some cases states have created
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a new non-governmental entity with its own
charter and purpose that transcends beyond the
contractor(s) chosen for implementation. Examples
include Oregon and Vermont.
Examples of the Third Party Model
In 1999, the Vermont legislature decided that
the structure of the electric industry in Vermont
(consisting of many very small utilities) and other
factors rendered utility-administered efficiency
programs an undesirable option. As an alternative,
the Vermont Public Service Board (PSB) issued an
RFP for a contractor to fulfill the role of an energy
efficiency utility (EEU).
Under the Vermont structure, the PSB has the
power to issue RFPs, hire the EEU contractor, and
approve EEU plans, programs and major budget
changes. Details of program administration, design,
marketing, delivery and implementation are left to
the EEU. The PSB also mandates the avoided cost
calculations used in cost-effectiveness screenings.
A separate governmental entity, the Vermont
Department of Public Service (DPS), advises the
PSB on these avoided costs and on EEU program or
budget changes. It also evaluates the PSB-approved
and EEU-designed programs, and verifies the EEU's
savings claims.
An important innovation of the Vermont system is
the establishment of an independent fiscal agent
(FA) to collect funds from the distribution utilities
and disburse them to the EEU. The FA is hired by
the PSB through a competitive bidding process,
reports directly to the PSB, and provides monthly,
quarterly, and annual financial statements. Despite
the close connection between the FA and the PSB,
the EEU funds are never owned by the State and
are therefore well-protected from raids by the
Executive or Legislative bodies.
Hybrid Administrative Models
It is possible to construct a hybrid administrative
model that combines aspects of the models
described in this section. In 1998, for example,
New York tasked NYSERDA, an existing quasi-
governmental agency, with administering
clean energy programs. NYSERDA was
created by the state legislature and its Board
of Directors is appointed by the governor, yet it
has considerable freedom to develop specific
program designs. In this way, it is like a third-
party administrator.
NYSERDA is dedicated exclusively to clean
energy programs and clean energy-related
research. It has successfully implemented both
market transformation and resource acquisition
programs and is widely viewed as more agile
and efficient than traditional state agencies. As
a matter of practice, NYSERDA relies heavily on
independet contractors to deliver and design
programs. In this regard, it operates somewhat
more like a state-administered entity.
New York's approach also includes significant
reliance on utility-administered programs. The
two state power authoritiesLong Island Power
Authority (LI PA) and New York Power Authority
(NYPA)deliver their own programs to their
customers.
As of this writing, New York is seeing renewed
interest in investor-owned utilities delivering
their own programs in tandem with those
provided by NYSERDA. This was spurred by a
mandate from the Public Service Commission
to decouple utility sales from shareholder
profits, thereby eliminating a major disincentive
for utilities to pursue efficiency (NY PSC Case
03-E-0640,20 April 2007). A recent PSC order
mandating an Energy Efficiency Portfolio
Standard has also had a major impact on utility
efficiency plans (NY PSC Case 07-M-0548,15
June 2007).
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Other states that have implemented versions
of the third party model are Oregon and New
Jersey. New Jersey's approach is very similar to
Wisconsin's state model, but is included here to
illustrate the continuum from one administrative
model to another. New Jersey follows a more
arms length approach (similar to Oregon and
Vermont) by allowing contractors wide latitude
over program decisions while focusing primarily on
overall performance criteria. Until recently, clean
energy programs in New Jersey were managed and
implemented by the utilities.
Advantages of the Third Party Model
A clear and specific mission without conflicting
business objectives
The ability to react swiftly to changes in the
marketplace and maintain flexibility while
avoiding bureaucracy.
Elimination of redundant administrative
mechanisms, as discussed under the State Model.
Serves entire states, or even multi-state regions,
therefore maintaining broad eligibility and
consistency across large areas, as discussed under
the State Model.
Funds collected and distributed under contract
to a third party are typically harder to raid for
extraneous purposes than with a state model,
although they may be more susceptible than
those in the utility model.
States may competitively bid for services and
change providers if performance is not acceptable.
Nevertheless, changing the delivery entity could
entail significant transaction costs and should be
considered with caution.
Disadvantages of the Third Party Model
There may be a large initial cost to creating an
independent agency, which effectively involves
dismantling existing utility infrastructure and
developing it elsewhere. In addition, transitioning
existing programs from utilities to the third party
may be difficult and cause confusion on the part
of customers, particularly if the transition does
not simultaneously occur across the entire state.
Effort is frequently required to engage utilities
in active cooperation with the new entity, both
in terms of sharing data and marketing to their
customers.
Third party entities do not initially have the
contacts and relationships with customers that
utilities maintain. Where data is freely shared
between the utilities and program administrators,
and where utilities cooperate in marketing the
program to their customers, this can be overcome
relatively quickly.
3.4 Evaluating Administrative
Models
The three administrative models described in this
section each have strengths and weaknesses.
Any one of them may be appropriate in a given
state, depending on the specific circumstances
and priorities of the stakeholders, regulators, and
legislators who determine how best to administer a
CEF.
In real world implementation, the specific workings
of all these models vary depending on the political
and regulatory environment. Furthermore, there
are a wide variety of program strategies employed
under all models, and program administrators
do not calculate program costs and savings in
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a consistent way. This makes it very difficult to
compare the efficacy of the three models on an
even playing field.
Studies conducted by the American Council for an
Energy Efficient Economy (ACEEE) have found that
there is no single best approach to administration
of public benefits funds despite an apparent shift
towards non-utility administration (either state or
third-party) between 2000 and 2004 (Kushler et al
2004). This finding is likewise supported by other
independent studies of administrative options (e.g.,
Harrington 2003, Biewald, et. al. 2003). In short,
any of the models can be successful, and ultimate
determination of the best approach for a specific
state will depend on its unique situation and the
details of how the particular model is administered.
The table below provides a summary of the
relative advantages of each of the administrative
Table 2. Summary of Key Characteristics of
Administrative Models
Table 3. Administrative Approaches
State Utility
Model Model
Model
Resistance to fund
raids
Administrative
efficiency
Reduces Transition
Costs
Avoids conflicts of
interest
Facilitates Market
Transformation
Flexibility of Programs
L
M
M
M
H
L
H
L
H
L
L
H
M
H
L
H
M
H
H=high, M=medium, L=low
Administrative Approaches
Utility
State
Third Party
Delivered by utilities, usually
distribution-only utilities in
restructured markets or traditional
utilities in regulated markets
Delivered by existing or newly-
created state entity, typically
relying on contractors to perform
many functions
Delivered by independent
entity whose sole purpose is to
administer energy efficiency
programs
models with respect to a set of Clean Energy Fund
objectives and issues. These qualitative judgments
are not intended to be definitive evaluations of any
one model.
3.5 Overcoming Administrative
Disadvantages
Most of the disadvantages noted in this chapter are
not insurmountable and can be overcome by careful
administrative and program design. Depending
on circumstances, any of the three approaches
can result in exemplary programs or a failure
to penetrate the market. For example, despite
observed disadvantages of state administration, two
nationally regarded programs - in New York and
Wisconsin - follow this model.
As previously noted, the three models are not
discreet options but exist along a continuum. For
this reason, elements of each can be adopted
and combined to best suit local circumstances.
For example, states could allow utilities to
competitively bid to serve as the contractor under a
state or third party model.
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One disadvantage inherent in the utility model is
the potential for disincentives to energy efficiency
investment; a utility's main source of income is
from sales of electricity, so selling less electricity
means less revenue. States have tried to eliminate
this disincentive through "decoupling" and
shareholder performance incentives:
Decoupling breaks the link between utility
revenue and electricity sales volume. There are
variations among decoupling schemes, but the
general concept is that rates are automatically
adjusted downwards if the sales volume turns
out to be higher than the forecast and upwards if
the volume is lower than the forecast. The total
revenue earned stays constant, or nearly so, to
allow for recovery of fixed costs.
Shareholder performance incentives involve
mechanisms that reward the utility with a
financial incentive tied to performance, in
addition to direct recovery of expenditures.
Incentives can be related to the level of
investment or set as a share of the estimated
societal benefits from the efficiency program.
For a thorough discussion of this topic, readers
can see the Action Plan report on aligning utility
incentives with energy efficiency investments
(NAPEE 2007d).
These strategies for overcoming administrative
disadvantages can be effective even in states that
do not use the utility model to administer clean
energy funds. Oregon, for example, is one of the
leading states in rate decoupling even though its
clean energy programs are run by an independent
non-profit organization. Similarly, New York has
recently mandated decoupling for regulated gas
and electric utilities even though it uses a state-
like hybrid model. Decoupling is still useful in this
context because it minimizes utility disincentives
for both delivering clean energy programs and
actively cooperating with and promoting these
programs to utility customers. It can also modify
their position on policy initiatives such as higher
efficiency buildings codes, equipment standards,
and increased SBC funding. Implementing
decoupling or performance incentives may also
avoid conflicts between utilities and regulators on
clean energy issues.
Regardless of structure, clean energy programs
can overcome administrative disadvantages by
achieving the following three characteristics
(Harrington 2003):
Clarity. Well-outlined policy rationale and
clear, objective goals are critical, as are a clear
administrative and decision-making framework.
Performance metrics should be explicitly stated to
facilitate evaluation and to provide oversight and
guidance to inform interventions or redesigns.
Consistency. It takes time to build an effective
program infrastructure and even more time to
realize the full savings of a program. Frequent
changes to program infrastructure, goals,
and design can significantly weaken results.
A program administrator who is assured of a
certain period of stability during which programs
can mature and begin to demonstrate success
will typically perform better than one who
is concerned that funding will be removed
or program goals modified if results do not
materialize in an unrealistically short timeframe.
Consensus. Key stakeholders should be in
agreement about important issues. At the very
least, utilities, regulators, various customer classes
(e.g., industrial, low-income, businesses), and
environmental stakeholders should be engaged in
discussion about important structural questions.
This is likely to generate a more robust and
sustainable outcome.
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Chapter 4.
Funding Models
The Vision for2025 report establishes a goal of
"Establishing Effective Energy Efficiency Delivery
Mechanisms." Among the actions recommended
to meet this objective are to establish goals and
funding on a multi-year basis, a topic addressed
in this Section. The Action Plan also suggests
that establishing funding mechanisms for energy
efficiency is an option to consider in providing
sufficient, timely, and stable program funding for
delivering cost-effective energy efficiency.
There are a number of funding mechanisms for
capitalizing CEFs. Broadly, these fall into four major
categories or combinations thereof:
Utility Cost Recovery: utilities collect funds
through rates or surcharges
System Benefits Charges (SBCs): funds collected
from energy users, usually as part of their bill
(also known as Public Benefits Funds, Public Good
Funds, or Wires Charges)
Taxes or other general government funds
Leveraging funds from local, state or regional
market or regulatory mechanisms
Questions that decision-makers should ask when
considering which model to implement include:
Under whose authority will funds be collected,
and which governing bodies, if any, must grant
that authority?
Does the funding mechanism provide a balance
between sustainability (i.e., consistency over
time) and flexibility (i.e., the ability to respond to
changing conditions)?
How will funding levels be determined? Will
funding levels be determined in whole or in part
by Integrated Resource Planning or other energy
system planning processes?
How will fund collection affect utility rates and/or
energy prices?
4.1 Utility Cost Recovery
Prior to restructuring in the mid 1990s, most
utility-delivered energy efficiency programs were
funded by utility cost recovery (UCR). It is still
widely used, typically in states with lower efficiency
spending as a percentage of revenue.8 Under this
approach, utilities recover monies directly from
their ratepayers through a separate surcharge
(similar to fuel adjustment surcharges) or through
base rates at the time of a new rate case.
8 According to ACEEE's 2006 State Energy Efficiency Scorecard and data from the Database of State Incentives for Renewable Energy (DSIRE),
only 3 of the top 15 states in spending as a percentage of revenue used this funding model: Washington, Iowa, and Minnesota (Eldridge etal 2007;
DSIRE 2007)
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Impact of Clean Energy Funds on Consumers
When CEFs are proposed as a mechanism to increase
investment in energy efficiency and clean energy
technologies, some stakeholders express concern
a bout the cost of the program to consumers. In
particular, they often note that additional utility
spending, particularly on clean energy investments,
will result in higher rates. They argue that because
rates are expressed in dollars per unit energy (e.g., 8.5
cents per kilowatt-hour) and efficiency programs both
increase costs (in the short term) and decrease the
amount of energy sold, rate increases will necessarily
follow. While it is true thatall else equalutilities
will need to raise rates to recover their largely-fixed
costs if the amount of kilowatt-hours they sell goes
down, it is also true that total bills (i.e., total customer
spending on energy) will decrease for all customers
on an aggregate basis, assuming the investments
are cost-effective. Customers that take advantage
of efficiency programs will consume less energy
and therefore have lower bills than in the absence
of the program, even accounting for higher rates.
Other customers may in fact be faced with higher
bills, in the near term, but if the investments made by
efficiency programs are cost-effective (i.e., generate
savings in excess of their costs), total customer
spending will decrease and all customer bills will be
reduced in the long term. Ultimately, energy efficiency
has been found to be the cheapest way to lower total
spending on energy.
With UCR, utilities typically collect funds as they
spend them, usually accounted for on an annual
basis. This generates a discrepancy between the
costs and benefits of clean energy investments
because the measures are paid for up-front
(through incentives, payments to contractors, or
in-house administrative costs) while the resulting
savings accrue over a longer time period. Another
option is to amortize the cost recovery with interest
over some longer period, potentially up to the
duration of the savings that will accrue. This serves
to minimize short-term rate impacts and distribute
the costs in line with the benefits. This approach
treats clean energy resources more like traditional
power plant capital costs, which are amortized
over their expected life.
Rate-Basing
For an investor-owned utility, the rate-base is the
total value of all the utility's assets, on which they
receive an authorized rate of return. Efficiency and
other clean energy investments are usually not
included in the rate-base; rather, utilities typically
recover these costs as they are incurred through
separate surcharges. Treating these resources as
investment assets, similar to traditional power
plants, would allow utilities to recover their
investment over time. This approach may also
mean an investor-owned utility's shareholders are
automatically earning a rate of return on its clean
energy investments, including efficiency. Although
earning a return on investment can provide a
strong inducement to pursue efficiency, rate-
basing ties the return to spending, as opposed to
performance. Under this scenario, even spending
that does not translate into cost-effective savings
might be rewarded, potentially creating perverse
incentives. This can be avoided through various
regulatory mechanisms that tie a utility's rate of
return to measurable performance outcomes.
The Procurement Approach
California has recently adopted a procurement
approach, or "loading order," for electricity
resources that provides an example of how
applicable agencies can pursue cost-effective
energy efficiency. While not a funding
mechanism, per se, this procurement policy
directs administrators to prioritize clean energy
resources over traditional supply using existing
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funding channels. In California, utility cost recovery
methods and public benefits funds are both in
place, but instead of a full integrated resource
plan, funding levels for efficiency programs are
based on a hierarchy of descending priorities.
Energy efficiency is considered the highest priority
resource, and utilities are not permitted to procure
any other electricity resource until all cost effective
efficiency is implemented. In descending order,
the resource priorities in California are efficiency,
demand response, renewables and distributed
generation, and clean fossil-fuel generation.
4.2 System Benefits Charge
System benefits charges (SBCs) emerged in the
mid-1990s as utility deregulation gained traction.
Many traditional utility cost recovery methods were
dropped due to concerns about rate impacts and
competition for market share on very slim price
margins. Because utilities in deregulated markets
were no longer vertically integrated, the benefits of
clean energy investments would accrue to different
parties (i.e., customers, generators, distribution
firms, and transmission owners), making it less
attractive for any one entity to bear the upfront
investment costs. In addition, generators were no
longer in a position to deliver efficiency programs
while marketing power to customers in non-
contiguous areas, sometimes from large distances.
SBCs were developed to replace traditional utility
cost recovery in a way that would "level the playing
field" for all generators selling into a deregulated
electric market. Like the UCR model, SBCs recover
funds from ratepayers through a surcharge levied
on consumption, but at the distribution level rather
than the generation level. These "non-bypassable"
charges essentially ensure that the same charge
is paid for every unit of energy delivered-termed
a "volumetric" charge-regardless of the retail or
generation utility. One advantage is that SBCs can
apply to all distribution utilities, including small
municipal and cooperative utilities that often are
not regulated by state commissions or that are
small enough to avoid participation in other utility-
administered CEFs.
While SBCs work similarly to UCR, they are
generally set by legislators rather than regulators.9
This means they may be harder to adjust over time
as clean energy investment opportunities change.
In addition, SBC levels may be based more on
political realities and negotiation than on careful
planning and analysis of the available resource
and the relative costs and benefits of different
amounts of clean energy spending. As a result, SBCs
are typically divorced from the process of utility
integrated resource planning, and often preclude
higher levels of investment without passage of
additional legislation.
For example, Massachusetts legislators established
a SBC and mandated that it be the only mechanism
for collecting ratepayer expenditures on efficiency.
Although there has recently been widespread
agreement among numerous stakeholders within
the Massachusetts Efficiency Collaborative
(including by the utilities) that increasing
expenditures would be beneficial, the Department
of Public Utilities is prevented from approving any
increased expenditures until new legislation is
passed.
Another potential drawback to funding with SBCs
is that distribution of funds typically occurs in the
same period in which they are collected. In contrast,
traditional generation resources are amortized
overtime, minimizing short-term rate impacts.
This makes clean energy resources appear more
expensive compared to supply options.
9 In most cases (e.g., Vermont), legislators have passed enabling legislation allowing regulators to establish and implement a SBC. In the case of
New York, a SBC was established directly by the Public Service Commission without the need for new legislation.
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Leveraging ISO-NE's Forward Capacity
Market
The Independent System Operator (ISO) in New
England has begun implementation of a market
for electric system capacity. This market provides
payments for either supply- or demand-side
resources that are available to meet system peak
loads. The market includes an auction for future
capacity to encourage commitments to acquire new
resources in advance of when itis needed. Because
demand-side resources are eligible to participate,
the market provides an additional revenue stream
to entities that bid in energy efficiency, renewable
energy, and distributed generation investments. For
example, a utility that pays incentives for solar PV
installations may receive payments for delivering that
capacity to the market, thus reducing the total cost
of supporting clean energy investments from more
traditional sources and providing additional funding
for future CEF activities.
According to the Database of State Incentives for
Renewables and Efficiency (www.dsireusa.org), 19
states have SBCs for energy efficiency and 17 states
have SBCs for renewable energy. In many cases
states have both, as does the District of Columbia.10
4.3 Using Taxes for Clean Energy
Funds
Some CEFs have been funded through taxes or
other general public funds rather than strictly
from ratepayers. This approach is rare in the
U.S. for efficiency programs but somewhat more
common for renewable energy programs. It has also
been used to a varying degree in Canada, where
provincial utilities are public corporations.
Because virtually everyone uses electricity, the
entities contributing to a tax-funded CEF are
generally the same as those contributing through
UCR or a SBC. Unlike those two approaches,
general government funds may be collected in very
different proportion to energy use, redistributing
costs (and benefits) compared to a volumetric
charge to ratepayers. Funds collected from taxes are
also likely to be even more susceptible to political
influence and raiding than ratepayer funded SBCs.
It is important to note the difference between using
tax revenue to fund a clean energy program and
using the tax system itself to influence behavior.
Clean Energy programs might pay incentives to
consumers that cover investment in efficient
equipment or clean energy generation. These
program incentives can be funded by SBCs, tax
revenue, or utility cost recovery. Programs usually
have a limited budget such that once it is expended,
no additional incentives can be paid. Tax credits or
deductions, by contrast, encourage clean energy
investment by offering reductions in an individual's
or corporation's tax liability. They typically have no
set budget; the state incurs costs in the form of
lower tax revenue in proportion to the number of
credits or deductions claimed. Tax deductions or
credits for clean energy exist in a number of states
and also at the federal level. Because there is no set
budget or cap for these tax revenue losses, it is very
difficult to collect data on total spending using this
mechanism.
In Minnesota, funds for renewable energy programs
are collected from a utility operating nuclear power
plants in the state in exchange for permission to
store spent nuclear fuel at the sites. In effect, the
state is taxing this activity and using the funds for
clean energy. The Renewables Development Fund
(RDF) supports both research and development of
new renewable-energy sources and projects that
produce renewable energy.
J For more detailed examples, see Section 4.2 of the Clean Energy-Environment Guide to Action: www.epa.gov/cleanenergy
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4.4 Leveraging other Revenue
Sources
In addition to collecting dedicated funds for CEFs,
there may be regulatory or market mechanisms
that can provide an income stream to help
capture clean energy resources. These include
emissions trading schemes and congestion pricing
mechanisms. Examples of these in the U.S. are the
Forward Capacity Market run by the New England
Independent System Operator (ISO-NE) (see box on
page 24) and the Northeast's Regional Greenhouse
Gas Initiative. Many of these mechanisms are just
emerging and in most cases leveraging these funds
is an opportunity to supplement already-established
funding mechanisms. However, overtime,
particularly if carbon trading schemes develop with
a high clearing price, it may be possible that these
revenue streams will be sufficient to capitalize CEFs
on their own.
4.5 Selecting a Funding Mechanism
This section presents several factors to consider
when developing a funding mechanism for clean
energy. Table 3, below, summarizes this information
and approximates how well - on a scale of High,
Medium or Low - each funding mechanism
addresses these factors.
Political and Regulatory Environment
A key question to consider is whether an approach
will require legislative approval, action by
regulatory bodies, or some combination of both. In
the cases of SBCs and taxes, legislative enactment
is generally required. This may or may not be a
barrier depending on the current political climate.
UCR and leveraging are generally decided in the
regulatory arena, although the latter may occur on
the basis of external markets with no local political
involvement. Depending on the current make up of
utility commissions, the positions of stakeholders,
and other factors, one can weigh the likelihood of a
positive outcome under different approaches.
Sustainability and Flexibility
For a CEF to be sustainable and flexible, it should
be relatively immune to extraneous influences that
might result in uncertainty about the consistency
of funding. It should also be flexible, so that
modifications can be made in response to changing
opportunities and conditions.
UCR is generally considered flexible, and can be
modified on the basis of integrated resource planning
(IRP) and analyses of the cost-effective clean energy
resource potential. In contrast, modifying SBCs
and taxes typically requires legislative action and
may therefore be politically difficult. In addition,
there have been instances (e.g., Connecticut and
Wisconsin) where the state "raided" these funds
when faced with budget deficits. Even with funds
coming directly from ratepayers, SBCs and taxes tend
to be viewed as general funds that can be redirected
by the executive or legislative branches. While UCR
can be viewed as more sustainable and flexible than
SBCs or taxes, states have taken steps in recent
years to insulate the latter forms of funding from
redirection.
The issues of sustainability and flexibility are
typically not applicable to funds leveraged from
external markets because they are not under the
control of the program administrator or regulator.
Integrated Resource Planning
Integrated Resource Planning (IRP) seeks to place
all potential energy resources, including clean
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energy and demand-side assets, on an equal footing
with supply-side options. The goal is to develop
the least cost solution to a region's energy needs,
subject to safety and reliability requirements and
other relevant criteria.
The funding mechanism that best facilitates a
comparative analysis of supply side resources and
cost-effective clean energy is UCR. This is because
funding can vary by service territory and be tailored
to the resources available and reliability needs of
each utility. UCR also spreads cost recovery over
a longer time frame than other funding options
(as discussed above under "Rate-basing"), further
supporting an integrated approach to energy supply
planning.
SBCs may be integrated with IRP, but this requires
a high level of coordination and interaction among
multiple utilities and regulatory bodies, in addition
to the flexibility to modify the funding level over
time. Integrating funds acquired by leveraging into
IRP likewise faces barriers but can be accomplished
in a similar manner. CEFs funded by taxes or that
use the tax code to provide incentives are not easily
integrated into IRP because the effects of tax code
changes and the quantity of actual tax collections
is difficult to know a priori.
Rate and Bill Impacts
Clean energy resources that cost less than
traditional supply serve to lower overall energy
costs to society, translating to lower overall energy
bills. However, impacts on near-term rates are a
contentious issue, and concerns about them can
limit willingness to pursue all cost-effective clean
energy resources. Energy efficiency investments, in
particular, can raise energy rates for the following
two reasons: (1) greater efficiency means that total
usage decreases and utilities are required to recover
their fixed costs over a smaller volume of energy
sales, resulting in higher per-kilowatt-hour energy
rates, and (2) the utility incurs the cost of running
efficiency programs (assuming a ratepayer funded
CEF), which requires additional cost recovery from
customers.
While the overall customer base benefits because
total costs go down, those customers that do not
participate in programs and improve their efficiency
will be exposed to higher costs from rate increases
in the near term. However, customers who do
participate in cost-effective programs will save
more in aggregate than the additional spending by
those who do not. In the long term all customers
will benefit through lower bills, because efficiency
is typically less expensive than new generating
capacity. This reduces the cost of meeting energy
loads for all customers. In considering a funding
mechanism, policy-makers should evaluate not
only the impact on short-term rates, but the overall
energy costs to society and the effect on energy
bills paid by customers.
Funding Mechanisms
Utility Cost Recovery - Recovered by utilities directly
from ratepayers through a separate surcharge
(similar to fuel adjustment surcharges) or through
base rates at the time of a new rate case.
System Benefits Charge (SBC) - Recovered
from ratepayers through a surcharge levied on
consumption, usually at distribution level rather than
generation level.
Taxes - Funded through tax collections, usually from
general funds.
Leveraging - Funded by revenue collected as a result
of clean energy investments, typically from, emissions
or energy markets.
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Table 4. Summary of Key Characteristics of Funding Models
^^^^^^^^H Reel0"' Funds' ^"^ Taxes Leveraging
Political or Regulatory Approval?
Sustainability and Flexibility
Supports Integrated Resource Planning
Limits Short- Term Rate Impacts
Regulatory
M
H
M
Legislative
M
M
M
Legislative
L
L
H
Regulatory
L
H
H
H=high, M=medium, L=low
One option for addressing rate increases is
amortizing costs over a time frame consistent with
the stream of clean energy benefits. This approach
is particularly important for aggressive CEFs striving
to capture the "maximum achievable" clean energy
potential. To date, however, SBCs and most UCR
approaches spend funds in the same period in
which they are collected resulting in higher short-
term rate increases compared to a case where costs
are amortized. While amortization is relatively
straightforward with UCR, amortizing SBC funding
has not been attempted to date. Using taxes as a
funding source is another way to eliminate the need
to recover CEF costs through rates.
Solutions to the distributional effects include
allocating program funding in a way that ensures
an equitable distribution of incentives across
customer classes and geographic areas. Particular
care with distribution issues must be taken in cases
where retail electricity supply is deregulated to
ensure that all customers participate, regardless of
their electricity supply arrangements. SBCs are a
good solution in this regard, as they are typically
levied at the distribution level and are non-
bypassable for most customers.
4.6 Determining a CEF Funding
Level
The long-term goal for the National Action Plan for
Energy Efficiency Vision for2025 (NAPEE 2007a) is
to achieve all cost-effective energy efficiency by
the year 2025. Identifying the spending necessary
to accomplish this goal - and broadened to include
all cost-effective clean energy resources - typically
requires a potential study that estimates both the
size of the clean energy resource and the potential
costs and benefits of acquiring it11
Even when supported by rigorous analysis, the
funding level for a CEF is typically the result
of a political negotiation between the public,
stakeholders, interest groups, and the state itself.
These discussions consider the economic costs
and benefits of alternative funding decisions, and
may involve non-energy considerations. Because
stakeholders have a variety of interests other than
acquiring all cost-effective clean energy resources,
actual funding levels in most jurisdictions fall
short of achieving this goal (Biewald et al, 2003).
Nevertheless, several states have recently set clean
energy funding at levels tied to the achievement
11 More information on potential studies is available in two reports conducted for the National Action Plan for Energy Efficiency (Action Plan): the
Guidebook for Conducting Energy Efficiency Potential Studies and the Guide to Resource Planning with Energy Efficiency. These guides describe
several approaches to estimating energy efficiency potential, although many of the analytic approaches can be applied to analyses of renewable
energy and other clean energy resources. For the purpose of determining an overall funding level, an estimate that addresses real-world market
barriers to achieving clean energy investments is most appropriate.
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of all cost effective energy efficiency. California,
Vermont, Massachusetts, and New York are
examples.
It should be noted that, as with many public
policies, the benefits of expenditures do not accrue
exclusively to those who bear the costs. In the
case of clean energy programs, spending may come
from utility ratepayers or the public sector while
the benefits accrue primarily to direct program
participants. Therefore, decision-makers working to
identify spending levels should present economic
information related to investments in clean energy
in ways that clearly define and distinguish between
spending and savings and identify to whom these
obligations and benefits accrue.
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Chapter 5.
Policy Interactions
5.1 Other Policies for Promoting
Clean Energy
A Clean Energy Fund is any fund established by the
government - through the methods described in
Chapter 3 - to advance renewable energy, clean
distributed generation including CHP, and/or energy
efficiency. Other governmental policies that can be
used to promote clean energy are tax deductions
and credits, renewable or efficiency portfolio
standards (RPS or EPS), energy or emissions
markets, and building codes and equipment
standards. These and other state policies are also
an important objective of the Vision for2025
framework, as described in Goal Six: Developing
State Policies to Ensure Robust Energy Efficiency
Practices.
Tax Deductions and Credits
Clean Energy Funds are differentiated from tax
deductions or credits in that the CEF is (typically) a
finite amount of money; once these funds are spent
no more incentives can be paid. Tax deductions
and credits usually have no limit on the amount
of incentives they can pay out. It can be difficult
to determine exactly how many incentives were
claimed because they manifest in the form of
reduced tax revenue. Tax incentives generally also
do not provide other services that may be necessary
to overcome barriers to investment in clean energy.
Unlike a CEF, tax incentives cannot be used to
provide marketing, program administration, and
other supporting activities that may be necessary
to overcome non-economic barriers to clean energy
investment.
Several states provide tax credits for investment in
energy efficiency. For example, Montana provides
a personal tax credit of up to $500 for investment
in several categories of conservation measures in
the residential sector, including shell upgrades and
HVAC equipment. Oregon also provides personal
tax credits for similar residential measures, while
Maryland's tax credits apply only to commercial
buildings or multi-family residences. Oklahoma
provides the builders of high-efficiency residences
with tax credits for new homes that meet "green
building" guidelines.
Portfolio Standards
A portfolio standard is a policy approach that
differs from both CEFs and tax credits in that it
specifies a target for energy savings or clean energy
generation, rather than stipulating a mandatory
spending level. Essentially, portfolio standards direct
utilities or load-serving entities to acquire a certain
portion of their energy supply from a defined set
of renewable and/or efficiency resources. To date,
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27 states plus the District of Columbia have a
mandatory renewable portfolio standard (RPS)
and 16 states have an energy efficiency portfolio
standard (EEPS) (EPA 2006b). States have been
adopting both policies with increasing frequency
in recent years, in recognition of the advantages
of specifying a performance target rather than a
spending level. CEFs, regardless of administrative or
funding approach, may be used to help achieve the
savings goals specified under a portfolio standard.
Market Approaches
Market-based policies or mechanisms may be
instituted or encouraged by government or quasi-
governmental bodies. Examples include energy,
emissions, and efficiency trading markets. While
still relatively uncommon, they are likely to become
more prevalent. Current examples include: ISO New
England's Forward Capacity Market (see text box
on page 24), the Northeast Regional Greenhouse
Gas Initiative, the federal sulfur dioxide emissions
trading program, the regional NOx Budget Trading
Program, and Pennsylvania's Alternative Energy
Portfolio Standard.12 These mechanisms may create
additional revenue streams for CEFs, as described
in Section 3.4. Program designers in regions where
these opportunities exist should work to coordinate
with and leverage these funding streams to the
extent feasible.
Building Codes and Equipment
Standards
Building codes and energy efficiency standards
can also affect the operation and success of CEFs.
Building codes are generally established at the
state level (although sometimes by municipalities)
and set minimum efficiency requirements for new
construction and major renovation projects. In
some cases, CEF programs are specifically designed
to effect long term market transformation by
supporting code upgrades over time. CEF programs
can also fund code training for architects,
engineers, code professionals, and contractors
to encourage higher levels of compliance and
enforcement. In other instances, CEF funds are
used to support programs that go beyond baseline
efficiency levels specified in the energy code.
Standards refer to the manufacture or sale
of equipment rather than overall building
performance. Currently, most standards are set at
the federal level, forbidding the manufacture of
equipment below certain performance levels (e.g.,
minimum efficiencies for residential refrigerators).
Some states, most notably on the West Coast
and in the Northeast, have enacted standards
for appliances not regulated at the federal level
that apply to the sale of equipment within their
borders. As with codes, CEFs may use strategies
to encourage standards upgrades over time and
must make sure programs are designed to promote
efficiency beyond the standards.
5.2 Interactions between Clean
Energy Funds and Related Policies
There are many states or regions in which both a
CEF and one or more other clean energy policies are
in place. For example, at least 15 states have both a
specific CEF and a portfolio standard for renewable
energy (EPA 2006b).
In such cases, it is important that implementers are
aware of each other's efforts and that each program
supports the other without duplication of effort.
In addition, the potential savings from all policies
12 As with some other standards, PA's policy has facilitated a secondary market whereby utilities can provide funds to purchase credits necessary
to meet their targets.
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should be considered when setting rebate levels
for qualifying measures. For example, if there is a
federal tax credit for a clean energy measure, the
program administrator for the CEF may want to
leverage these funds by ensuring common efficiency
criteria and promoting the credits to customers
while providing a lower incentive payment than
might otherwise be necessary. They may even offer
services to help customers obtain the tax credits
by providing information or consultation services.
For example, the Oregon Energy Trust coordinates
closely with the implementation of state efficiency
tax incentives and even helps non-profit customers
enter into agreements that take advantage of
federal and state tax incentives for renewable
energy projects.13
While CEFs and other policy mechanisms can
enhance each other's effectiveness, care must be
taken to avoid negative interactions. Consider a
state where a portfolio standard exists to ensure a
certain level of clean energy activity. If a CEF also
exists and provides financial incentives for the same
investments, the result is a form of freeridership,
where incentives are paid for investments that
would have occurred anyway. This results in greater
ratepayer expenditures than necessary.
13 Tax incentives cannot lower the cost of clean energy investments for non-profit organizations or governmental entities that pay no federal or
state taxes. By providing guidance or information on how to structure ownership arrangements with for-profit entities, states can remove both the
high first-cost barrier and informational and transactional barriers for non-profit firms that want to invest in clean energy.
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Chapter 6.
Other Considerations for Clean Energy Funds
6.1 Program Design Concepts
There is a wide body of literature available on
best practices for designing programs funded by
CEFs, and this manual is not intended to replicate
or synthesize that literature. The purpose of
this Section is to summarize best practices in
program development, with particular attention
to coordination among the various aspects of
resource planning. Appendix A provides additional
references for more detailed information. For an in-
depth review of program design concepts, see the
National Action Plan for Energy Efficiency Report
(NAPEE 2006) and the Guide to Resource Planning
with Energy Efficiency(NAPEE 2007b).
Major Markets Addressed by CEF
Programs
CEF programs, as defined here, can focus on energy
efficiency, renewable energy, or other customer-
sited distributed generation such as combined heat
and power (CHP). Energy efficiency programming is
often segmented into several "markets." This may
be done to focus efforts on the particular barriers
to efficiency faced by different customer classes
or in relation to particular market channels for
energy-consuming equipment. At the broadest level,
portfolios of efficiency programs may be segmented
along one or more of the following schemes:
Residential versus commercial and industrial
customers (although commercial and industrial
may be further segregated);
Low income versus non-low income residential
customers;
Multifamily versus single-family residential
structures;
New construction versus planned equipment
replacement versus discretionary "early
retirement" measures14; and
Retail or "plug load" products versus contractor
installed products.
Within these categories, there can be numerous
other distinctions. Some programs target very
specific customer groups such as public sector
institutions or particular industrial sectors. Other
programs may target specific technologies. Many
program administrators have implemented separate
programs promoting efficient lighting, motors, and
air conditioners.
Differentiating Between New
Construction, Planned Replacement,
and Early Retirement
When allocating CEF resources there are a number
of reasons to differentiate programs or strategies
for new construction, planned replacement, and
14 Early retirement also termed "retrofit" refers to replacing functioning but inefficient equipment or systems with new, high efficiency
equipment or systems.
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early retirement. One is that the costs and savings
associated with them are quite different. For
example, for planned investments (new construction
and planned replacement), consumers are already
in the market to make an investment and the cost
of the efficiency gain is limited to the incremental
cost of the more efficient product. Similarly, the
savings are calculated as the difference between
typical standard efficiency equipment for new
installations and the high efficiency alternative.
For early retirement (i.e., retrofit) opportunities,
consumers bear the full cost of labor and equipment
to make improvements. The savings may also be
larger (at least in the short term) because older
existing equipment typically is less efficient than
new standard efficiency models. These economic
differences often require very different strategies to
overcome financial, informational, and transactional
barriers.
For the replacement market, intervention is highly
time-dependent, which presents an important
barrier. It requires strategies to ensure that a
program can effectively identify, get the attention
of, and influence decision makers at the time a
decision is being made. These programs often
work closely with other market actors such as
architects, engineers, lighting designers, contractors
and distributors to ensure that opportunities are
captured when they occur. In contrast, retrofit
efficiency improvements are generally discretionary
decisions that can happen at any time. As a
result, the focus may be more closely tied to
specific consumers and strategies to encourage
a discretionary decision to change out still
functioning equipment.
Many programs targeted at time-dependent
opportunities address all new construction,
renovation, remodeling and planned equipment
replacement within the same framework.
An Upstream Approach to Expanding the
Market for Efficient Lighting
Several jurisdictions are exploring the use of
"upstream" incentives for energy efficient
products. In this approach, utilities encourage
manufacturers, distributors, and wholesalers to
preferentially stock, promote, and sell efficient
products. The province of New Brunswick, Canada,
is implementing such a program focused on high-
performance T8 linear fluorescent lighting fixtures
and components. Distributors and wholesalers are
paid a per-unit incentive sufficient to eliminate their
cost-differential between traditional T8 and high-
performance T8 lighting components; the customer
pays the same price for either. While this simplifies
the administration of the program by dramatically
reducing the number of rebate transactions and
participation parties, it also provides the supply chain
with experience dealing in higher-efficiency products,
increases the demand for the product, and begins to
transform the market for commercial lighting. When
the program started most NB distributors were not
even aware of HPT8s and none were stocking them.
After only 6 months, HPT8s have reached a significant
market penetration and some distributors have even
stopped stocking standard T8 equipment.
Others will separate out new construction and
major renovation from remodeling and planned
equipment replacement for existing facilities.
While the economics and savings are typically
similar, separation allows programs to focus on
the unique barriers and opportunities associated
with the different markets. For example, for new
construction and renovation, it is critical to get
involved as early as possible, ideally at the very
start of conceptual design, to effectively influence
decisions. The opportunities in these markets also
afford the best opportunities for comprehensive
strategies that address all energy use in a building,
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an approach that is less appropriate to limited
equipment replacement events. Programs for the
latter tend to focus more on the contractor and
vendor market channel, rather than architects and
engineers.
Differentiating Between Market
Transformation and Resource
Acquisition Programs
Clean energy programs funded by CEFs can span a
continuum of objectives. However, the terms market
transformation and resource acquisition are often
used to delineate where in the continuum from one
to the other they fall in terms of primary objectives.
Resource acquisition (RA) refers to a primary focus
on direct capture of energy and/or demand savings,
usually in the near term, without much attention
on efforts specifically intended to modify long term
market practices and behavior. An example of this
might be a low-income retrofit program where an
administrator offers a turnkey service to replace
existing home equipment and systems with high-
efficiency models.
Market transformation (MT) refers to programs
that are designed with the primarily objective of
modifying the long-term behavior and practices
of a market such that efficiency gains will
continue without the need for permanent direct
program intervention. These programs typically
focus resources on building awareness, education
and training, and working "upstream" with
manufacturers, distributors and contractors to ensure
efficient equipment is made, stocked and promoted.
Programs are rarely pure RA or MT. The goals of
market transformation - to expand the penetration
of efficient products being sold in the market
to the point where awareness and availability is
widespread, cost differentials drop, and practices
are transformed over time - are often pursued by
programs that take a mixed approach. For example,
a program might offer consumer rebates for the
purchase of efficient products while working with
retailers to train salespeople on the energy saving
features of that product. Refer to the adjacent text
box for an additional example of a mixed approach
to expanding the market for energy efficient
products.
6.2 Best Practices in Program
Design
Key Components of Best Practices
Programs
It is important to remember that there is no single
solution that works well for all markets or even for
a single market under all conditions. Successful
programs generally employ a suite of services and
strategies that together can overcome barriers and
influence decisions. Programs should be flexible and
responsive to unique customer or market barriers. In
general, most successful programs employ some or
all of the following strategies:
Effective marketing and outreach strategies to all
relevant market actors;
Training and education of contractors and other
market professionals;
Financial strategies to overcome economic
barriers, ranging from cash rebates, to financing
and shared savings arrangements;
Technical and design assistance services that
provide engineering assistance to identify and
analyze clean energy opportunities;
Construction management or facilitation services
that overcome transaction barriers to procuring
and completing construction;
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Coordination, cooperative promotions, training
and outreach with upstream market actors
(retailers, distributors, contractors, etc.) to ensure
products and services are available and well
promoted; and
Turn-key direct installation services to address
segments with many significant barriers (e.g.,
low income households and small commercial
establishments), which provide all analysis and
installation services directly, often at no cost to
the customer.
For a more detailed discussion of best practices in
program design, please refer to Chapters of the
National Action Plan Report (NAPEE 2006).
Recent Innovations in Best Practices
Programs
Program designers and administrators promote
numerous strategies and service combinations
using CEF resources, with some more successful
than others. The following strategies are showing
promise.
Comprehensive, customer-oriented organization.
In the past, many program portfolios offered
separate programs for each technology or category
of technologies. In some cases, services for specific
customers were segmented as well. For example,
NYSERDA, the program administrator for New York
State, offers technical assistance to commercial
and industrial customers through one program
and financial incentives for implementing the
recommendations through a separate program
and subcontractor. Similarly, some administrators
have separate programs for lighting, motors, and
air conditioners, even when they are all targeted
to the same customer base. More recently, a trend
has been to break down internal barriers within
administrating organizations to focus a single
project team or individual on all opportunities
within a given customer. This one-stop shopping
approach provides more comprehensive service
to the customer and eliminates transactional
barriers in having to work with multiple entities
within an organization. In addition, it allows for
more comprehensively addressing all opportunities
in a facility and helps establish the program
administrator as a resource for all clean energy
needs. The text box on this page provides an
example of this practice in the form of Efficiency
Vermont's Account Management protocol.
Financing. Program administrators have long
experimented with financing strategies in an effort
to minimize non-participant ratepayer costs for
efficiency programs and collect funds primarily
from those making improvements. As noted in the
Action Plan, financing also removes the barrier
A Market-Based Approach to Capturing
Energy Efficiency Opportunities in the C&l
Sectors
Efficiency Vermont (EVT) is a state-wide efficiency
utility with the responsibility of delivering energy
efficiency programs to all Vermont residents
and businesses. As part of continuing efforts to
increase the depth of efficiency savings, EVT
recently implemented an Account Management
protocol for large commercial and industrial (C&l)
customers. EVT assigns each large C&l customer
an account manager (AM), much the same as many
businesses do. The AM is responsible for developing
and maintaining relationships with key personnel
within the company to ensure that energy efficiency
is considered as part of all facility renovations
and expansions, remodeling efforts, process
modifications, and capital replacement cycles. The
AM attempts to encourage the selection of high-
efficiency equipment and operating procedures
by providing technical assistance, cash flow
comparisons, and financial incentives, if necessary.
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faced by participants in the form of high first-
time costs of many efficiency measures (NAPEE
2006). The theory is that because efficiency is
generally very cost-effective, providing financing
allows customers to make economically attractive
investments while lowering or eliminating the need
for a cash incentive to do so. The following features
are critical to successful financing efforts:
Make sure participation is as easy as possible:
avoid onerous credit checks and requirements for
detailed financial information.15
Ensure immediate and significant positive cash
flow: make sure monthly energy bill savings
exceed the monthly loan payment.
Structure loans so they may be treated as
operating expenses rather than long term capital
debt. This is particularly important for government
and institutional entities and for some industries.
Allow repayment of loans on the energy bill (i.e.,
"on-bill financing").
On-bill financing has emerged as an important
strategy for advancing clean energy. First, it can
facilitate accomplishing other objectives, such as
having the loan payment treated as an operating
expense, rather than as capital debt. This can
avoid lengthy and uncertain approvals from school
boards, voters, or executive committees. Second,
on-bill financing makes it very clear that positive
cash flow is achieved. The customer still gets
only one bill for energy, and the bills go down
immediately. It also simplifies paperwork for
customers, while utilities find that it lowers default
rates for these loans.
Things to Avoid in CEF Program Design
A few things that are important to consider when
developing programs include:
Do not create silos, hs mentioned above, single-
point-of-contact, full-service approaches are
more effective than many individual programs
that do not comprehensively address customer
needs and that create numerous barriers that
detract from good customer service.
Do not rely on only one strategy. There are
numerous barriers to clean energy adoption. They
may be financial, informational, or transactional.
Successful programs address all important
barriers through a range of approaches to
customer intervention. Following a multifaceted
strategy also serves to attract new customers
and minimize freeridership (the situation where
those already predisposed to adopt clean energy
strategies participate).
Do not offer insufficient services. In efforts to
minimize costs, some program administrators may
adopt a reasonable suite of services but at levels
that are not sufficient to adequately influence
the market (e.g., paying very low financial
incentives for efficiency measures). In these cases,
freeridership may again be high because the
strategies are not aggressive enough to influence
customers beyond those already planning to
implement efficiency measures. The results are
wasted resources and lost opportunities.
Do not ignore important market actors. Some
programs have focused on only one or a very
limited group or market actors rather than
recognizing the dynamic and complicated nature
of the markets they are trying to transform. It is
important to fully understand the market, where
the points of influence are, and how to influence
each entity's role and opportunities in this
process.
Do not be inflexible and ignore new information.
Programs should remain flexible, be able to adjust
to changing markets, and make mid-course
15 While some program administrators are concerned a bout loaning funds without traditional credit requirements, the alternative is often to simply
provide cash rebates. In general however, even with no credit requirements, the cost from loan defaults is far less than the cost of rebates without
financing.
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corrections. Evaluation (described below) efforts
should be undertaken to provide regular and
timely feedback to program administrators to
support these improvements over time.
6.3 Evaluation, Measurement, and
Verification
The terms evaluation, measurement, and verification
(EM&V) refer to processes and techniques used
to measure and document the effects of clean
energy projects and programs supported by CEFs.
The following discussion highlights approaches to
EM&V for energy efficiency, although the concepts
and methods can be extended to clean energy
programs more broadly. Readers seeking an in-
depth treatment of evaluation issues should refer to
the National Action Plan's Model Energy Efficiency
Program Impact Evaluation Guide, which outlines
best practices for calculating energy, demand, and
emissions savings from efficiency programs (NAPEE
2007c). Evaluation approaches for renewable energy
are discussed in Volume Three of EPA's guidance on
establishing clean energy "set-asides" in the NOX
Budget Trading Program (EPA 2007).
Evaluation
Evaluation involves retrospectively assessing the
performance and implementation of a clean energy
program. Program evaluations may include one or
more of the following evaluation types:
Impact Evaluations determine the impacts
(usually energy and demand savings) and co-
benefits (such as avoided emissions health
benefits, job creation, and water savings) that
directly result from a program. All categories of
energy efficiency programs can be assessed using
impact evaluations, but they are most closely
associated with resource acquisition programs.
In determining energy savings from a program,
impact evaluations may consider both savings
from particular efficiency measures or projects
(e.g., high-efficiency HVAC equipment), as well
as factors like freeridership and spillover that
influence savings across a program or portfolio.
Process Evaluations assess how efficiently a
program was or is being implemented with
respect its stated objectives, with implications for
improving future programs. All energy efficiency
program categories can be assessed using process
evaluations.
Market Evaluations estimate changes in the
marketplace and thus a program's influence on
encouraging future energy efficiency activities.
While all program categories can be assessed
using market effects evaluations, they are
primarily associated with market transformation
programs that indirectly achieve impacts and
resource acquisition programs intended to have
long-term effects on the marketplace.
For more information on these evaluation types,
please refer to the National Action Plan's Model
Energy Efficiency Program Impact Evaluation Guide
(NAPEE 2007c).
EM&V for CEF Programs
EM&V establishes the credibility and transparency
of CEF programs by demonstrating that investments
in renewable energy generation and energy
efficiency do indeed provide energy and economic
benefits. This is particularly critical because,
regardless of a CEF's funding strategy, program
funding ultimately comes from the public. EM&V
provides citizens and decision-makers with
assurance that funds are being spent appropriately
and prudently. From a purely practical perspective,
EM&V can help administrators understand the
effectiveness of program strategies and provide a
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perspective on what works and what does not. This
allows for on-going improvements in programs with
the goal of maximizing net benefits. Data derived
from EM&V are also important for demonstrating
program cost-effectiveness.
While a detailed discussion of EM&V methods is
beyond the scope of this manual, the objective
here is to provide key definitions and reference
information. For greater detail on planning and
conducting impact evaluations, please refer to the
Model Energy Efficiency Program Impact Evaluation
Guide (NAPEE 2007c). The Guide to Resource
Planning with Energy Efficiency (NAPEE 2007b) also
contains information and additional references to
assist policy-makers and program administrators
with EM&V.
Clarification of Terms
The objective of this section is to offer clarification
on EM&V-related definitions to policy-makers and
program administrators. For example, measurement
and verification (M&V, and sometimes "monitoring
and verification") refers to data collection,
measurement, and analysis associated with the
calculation of gross energy and demand savings
from individual sites or projects. M&V can be
considered a subset of program impact evaluation.
Generally speaking, the differentiation between
evaluation and M&V is that evaluation is associated
with programs and M&V with projects. The term
"evaluation, measurement, and verification"
(EM&V) is used broadly to refer to the estimation of
program and project impacts due to CEF activities.
The term "measurement" typically refers to on-
going quality assurance activities that specify what
is being counted, with the aim of ensuring that it
really happens and is accurately documented. For
example, an efficiency program might randomly
inspect a sample of projects to ensure that the
efficiency measures receiving a financial incentive
were actually installed and that the proper models
and efficiency levels were recorded. Similarly,
ensuring accurate data tracking, achieving
consistency with declared calculation methods, and
conducting on-going reviews of tracked savings are
often included as measurement functions. In some
cases the terms measurement and verification are
used interchangeably to refer to these activities.
The following methods are typically used to conduct
measurement:
On-site project inspections verify that equipment
installations occur as projected. Inspections may
be performed on a random sample of projects, all
projects of greater than a certain cost or size, or
some combination of these.
Review of program recordsto ensure accuracy
with tracking systems and ensure proper levels of
compliance and quality assurance. For example,
invoices, sales data, etc. may be reviewed.
Formal assessments to track the accuracy of all
program data, through review of databases and
comparison with hard copy documents.
Short term metering is sometimes used on specific
projects to measure savings and adjust a priori
estimates.
"Verification" typically refers to engineering-based
assessments conducted to ensure that efficiency
savings or clean energy generation is being
calculated correctly. It is similar to an accounting
audit and is typically performed by an unbiased
and certified party. For example, a third party might
verify, operating hours, etc. and make adjustments
for any errors or perceived inadequacies.
Verification can also refer to direct metering of
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specific projects to verify and adjust initial savings
estimates (the Model Energy Efficiency Program
Impact Evaluation Guide prefers the term "Project
Evaluation" for this purpose).
Administering and Funding EM&V
Planning for EM&V activities should occur
concurrently with overall program planning.
According to the National Action Plan for Energy
Efficiency, "engaging in evaluation during the early
stages of program development can save time and
money by identifying program inefficiencies, and
suggesting how program funding can be optimized.
It also helps ensure that critical data are not lost"
(EPA 2006b). Developing detailed EM&V plans
simultaneously with program design ensures that
appropriate data will be collected and that program
activities are conducted in a way that facilitates
effective evaluation.
In addition to starting early in the process,
managers should strive to conduct EM&V activities
throughout program implementation to inform
and support needed mid-course corrections. Some
formal evaluations may be delayed until sufficient
data are available, but EM&V should generally be an
on-going process.
While policy makers and others involved in CEFs
may wish to participate in EM&V activities, it
is recommended that professionals trained and
practiced in the type of evaluation for which
they are responsible should lead and conduct
these efforts (CPUC 2004). There is also general
agreement that program evaluations be conducted
by firms or organizations that are independent of
the administrator or implementation contractor
and that the evaluation teams maintain an arm's-
length relationship in order to help assure objective
and reliable evaluation efforts (CPUC 2004). One
exception is on-going measurement, which is
generally performed by program administrators.
Program administrators and policy-makers are often
concerned with identifying the "right" program
budget for EM&V activities. While there is no such
formula, it is recommended that decision-makers
set evaluation budgets at levels appropriate to the
use of the information. For some programs, EM&V
expenses may be relatively large to support better
understanding the markets and opportunities, fine
tuning, and new and innovative strategies such
as pilot programs and those still in their early. For
larger scale programs and mature efforts with fairly
traditional methods, EM&V may be a much lower
percentage of overall budgets. This is because the
uncertainty surrounding the program design and
effectiveness is comparatively small, and because
economies of scale are available.
As a rule of thumb, spending on EM&V generally
accounts for between one and ten percent of total
program budgets. In general, on a unit-of-saved-
energy basis, costs are inversely proportional to
the magnitude of the savings (i.e., larger projects
have lower per-unit evaluation costs) and directly
proportional to uncertainty of predicted savings
(i.e., projects with greater uncertainty in the
predicted savings warrant higher EM&V costs). In
Vermont, spending is currently about 3.5 percent
on EM&V (Wasserman 2008), while Massachusetts
has spent between 3 and 3.5 percent in recent years
(Schlegel 2008). In contrast, the California Energy
Commission requested EM&V funding of 8 percent
for the years 2006-2008 (CPUC 2008).
> Chapter 6. Other Considerations for Clean Energy Funds
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Chapter 7.
Summary of Findings
Clean Energy Funds can be administered by utilities,
states, third-party entities, or a combination of
these. Each comes with strengths and weaknesses,
but in any given situation one or two may be better
choices. The adjacent table summarizes some of
the important characteristics of the administrative
models and their relative strengths in each area.
Clean Energy Funds can be funded by ratepayers
through system benefits charges (SBCs) or as part
of electric rates, by the public through taxes, or
through other sources such as monies leveraged
from energy and emissions markets. As with
administrative models, these approaches also have
strengths and weaknesses and are appropriate in
different circumstances (see table).
Summary Evaluation of Administrative
Model Characteristics
State Utility
Model Model
Model
Resistance to fund
raids
Administrative
efficiency
Reduces Transition
Costs
Avoids conflicts of
interest
Facilitates Market
Transformation
Flexibility of Programs
L
M
M
M
H
L
H
L
H
L
L
H
M
H
L
H
M
H
H=high, M=medium, L=low
Summary Evaluation of Funding Model Characteristics
^^^^^^^H Recover FuUnbdsCBe"efitS Taxes Levera'in'
Legislative or Regulatory Approval?
Sustainability and Flexibility
Supports Integrated Resource Planning
Limits Short- Term Rate Impacts
Regulatory
M
H
M
Legislative
M
M
M
Legislative
L
L
H
Regulatory
L
H
H
H=high, M=medium, L=low
^ Chapter 7. Summary of Findings
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Consideration of the above factors leads to the
conclusion that successful CEFs are those that allow
for a long-term commitment to implementing cost-
effective clean energy resources, as outlined as a
key recommendation of the National Action Plan.
This requires a structure that can be responsive to
changing economic, technological, and political
conditions while maintaining a long-term focus and
supporting consistent and sustained clean energy
investments. Administrative mechanisms must
also be supported by timely, consistent, and stable
program funding that is sufficient to achieve all
cost-effective clean energy resources.
State Approaches to CEF Administration and Funding
^^^^^^| Utility State Third Party
Utility Cost
Recovery
SBC
Taxes
Leveraging
Kansas, Texas, California, New York,
Illinois, Iowa, Minnesota (efficiency)
Massachusetts (efficiency),
Connecticut, California
N/A
Connecticut
Illinois
Massachusetts (renewables),
New York, New Jersey,
Maine
Minnesota (renewables)
N/A
Vermont, Oregon
N/A
Vermont
> Chapter 7. Summary of Findings
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Appendix A.
References
This reference list includes both documents referenced in the text of this report and other documents that
may provide additional information on CEFs.
References
Title/Description URL Address
Biewald, B., T. Woolf, and A. Roschelle. 2003. Portfolio
Management: How to Procure Electricity Resources to Provide
Reliable, Low-Cost, and Efficient Electricity Services to all Retail
Customers. Prepared for The Regulatory Assistance Project and
The Energy Foundation. October.
Blumstein, C., C. Goldman, and G. Barbose. 2003. Who Should
Administer Energy-Efficiency Programs? Center for the Study of
Energy Markets (CSEM) Working Paper 115. August.
[CEC] California Energy Commission. 2005. Implementing
California's Loading Order for Electricity Resources. Staff report.
July
[CPUC] California Public Utilities Commission. 2008. Joint Staff
Request to CPUC for EM&V Budget Authorization and EM&VFund
Shifting Authority
[CPUC] California Public Utilities Commission. 2004. The California
Evaluation Framework. Prepared for Southern California Edison
Company by Tec Market Works. Project Number K2033910. June.
Cowart, R. 2001 Efficient Reliability: The Critical Role of Demand-
Side Resources in Power Systems and Markets. Regulatory
Assistance Project (RAP) prepared for the National Association
of Regulatory Utility Commissioners. June.
[DOE] Department of Energy. 2007. State and Regional Policies
that Promote Energy Efficiency Programs Carried Out by Electric
and Gas Utilities: A Report to the United States Congress
Pursuant to Section 139 of the Energy Policy Act of 2005. U.S.
Department of Energy. March.
[DSIRE] Database of State Incentives for Renewables and
Efficiency. 2007.
http://www.raponline.org/pubs/
portfoliomanagement/syna psepmpaper.pdf
http://repositories.cdlib.org/ucei/csem/
CSEMWP-115/
http://www.energy.ca. gov/2005_energypolicy/
documents/2005-07-25_workshop/2005-07-
25_BENDER_EFFICIENCY.PDF
ftp://ftp.cpuc.ca.gov/puc/energy/electric/
energy%2Befficiency/ee%2Bpolicy/
JSRequest_EMVBudgetAuthorization_
toServiceLists_forPosting_09-07-05.doc,
accessed 3 January 2008.
ftp://ftp.cpuc.ca.gov/Egy_Efficiency/California
EvaluationFrameworkSept2004.doc
http://www.raponline.org/pubs/general/
effreli.pdf
http://www.oe.energy.gov/
DocumentsandMedia/DOE EPAct Sec. 139
Rpt to CongressFINAL PUBLIC RELEASE
VERSION.pdf
www.dsireusa.org. Accessed July 2007 and
January 2008.
^ Appendix A
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Eldridge, M., B. Prindle, D. York, and S. Nadel. 2007. The State
Energy Efficiency Scorecard for 2006. hCEEE-EQ15. American
Council for an Energy Efficient Economy.
[EPA] U.S. Environmental Protection Agency. 2007. Creating an
Energy Efficiency and Renewable Energy Set-Aside in the NOx
Budget Trading Program. Prepared for the Climate Protection
Division by Schiller Consulting, Inc. EPA-430-B-07-001.
[EPA] U.S. Environmental Protection Agency. 2006a. Clean
Energy-Environment Guide to Action: Policies, Best Practices,
and Action Steps for States. February.
[EPA] U.S. Environmental Protection Agency. 2006b. Summary of
State Clean Energy-Environment Actions. Prepared by the Clean
Energy-Environment State Partnership.
Esteves, Richard M. 2003. The Myth of IOU Cost-Effectiveness.
SESCO, INC. August.
Gillingham, K., R. Newell and K. Palmer. 2004. Retroactive
Examination of Demand-Side Energy Efficiency Policies. RFF DP
04-19 REV. Resources for the Future (RFF). June and Revised in
September.
Goldman, J., and S. Nadel. 1998. Ratepayer-Funded Energy-
Efficiency Programs in a Restructured Electricity Industry. (May)
Harrington, C. 2003. Who Should Deliver Ratepayer Funded
Energy Efficiency?. Regulatory Assistance Project, May.
Kushler, M., D. York, and P. White. 2004. Five Years In: An
Examination of the First Half-Decade of Public Benefits Energy
£ff/c/enc/Po//c/es. ACEEE-U041. American Council for an Energy
Efficient Economy.
Lawrence Berkeley Lab. 1992. Sharing the Savings to Promote
Energy Efficiency. April.
Lin, Jiang. 2005. Trends in Energy Efficiency Investments in
China and the US. Ernest Orlando Lawrence Berkeley National
Laboratory: Environmental Energy Technologies Division. June.
Nadel, S., F. Gorden and C. Neme. 2000. Using Targeted Energy
Efficiency Programs to Reduce Peak Electrical Demand and
Address Electric System Reliability Problems. American Council
for an Energy Efficient Economy (ACEEE). November.
[NAPEE] National Action Plan for Energy Efficiency. 2007 a.
National Action Plan for Energy Efficiency Vision for 2025:
Developing a Framework for Change. Prepared by the Leadership
Group and the National Action Plan for Energy Efficiency.
December.
http://www.aceee.org/pubs/e075.htm
http://epa.gov/cleanenergy/documents/
ee-re_set-asides_vol3.pdf
http://www.epa.gov/cleanenergy/
energy-programs/na pee/resources/
guides.html
http://www.epa.gov/cleanenergy/documents/
summary-matrix.pdf. File dated March 6, 2006.
http://www.rff.org/Documents/
RFF-DP-04-19REV.pdf
http://www.raponline.org/Pubs/
RatePayerFundedEE/
RatePayerFundedEEFull%2Epdf
http://www.aceee.org/pubs/u041.htm
http://china.lbl.gov/publications/
china-ee-57691.pdf
http://www.aceee.org/pubs/u008.htm
www.epa.gov/eeactionplan
^ Appendix A
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[NAPEE] National Action Plan for Energy Efficiency. 2007b. Guide
to Resource Planning with Energy Efficiency. Prepared by Snuller
Price et al., Energy and Environmental Economics, Inc.
[NAPEE] National Action Plan for Energy Efficiency. 2007c. Model
Energy Efficiency Program Impact Evaluation Guide. Prepared by
Steven R. Schiller, Schiller Consulting, Inc.
[NAPEE] National Action Plan for Energy Efficiency. 2007d.
Aligning Utility Incentives with Investment in Energy Efficiency.
Prepared by Val R. Jensen, ICF International.
[NAPEE] National Action Plan for Energy Efficiency. 2006.
National Action Plan for Energy Efficiency Report. Prepared by
the Leadership Group and the National Action Plan for Energy
Efficiency.
Neme, C., and G. Reed. 2006. An Effective Policy Framework for
Gas DSM in Ontario. Exhibit L, Tab 5. Vermont Energy Investment
Corporation (VEIC). June.
Peters, J., L. Hoefgen, S. Feldman and E. Vine. 2007. Assessment
of Energy Trust of Oregon's Contracting and Delivery Models.
Energy Trust of Oregon. May.
Prahl, R. 2008. Personal Communication. Prahl & Associates. 3
January.
Prindle, B. 1995. Financing is the Answer: but What was the
Question? Published by Barakat and Chamberlin, Inc.. June.
Schlegel, J. 2008. Personal Communication. Schlegel &
Associates. 3 January.
Vine, E. and J. Sathaye. 1999. Guidelines for the Monitoring,
Evaluation, Reporting, Verification, and Certification of Energy-
Efficiency Projects for Climate Change Mitigation. Ernest Orlando
Lawrence Berkeley National Laboratory. LBNL-41543. March.
Wasserman, N. 2008. Efficiency Vermont. Personal
Communication. 7 January.
York, D. and M. Kushler. 2005. ACEEE's 3rd National Scorecard on
Utility and Public Benefits Energy Efficiency Programs: A National
Review and Update of State-Level Activity. ACEEE Report No.
U054. October, 2005.
www.epa.gov/eeactionplan
www.epa.gov/eeactionplan
www.epa.gov/eeactionplan
www.epa.gov/eeactionplan
http://www.energytrust.org/library/reports/
070619_AssesmentofDeliveryModels.pdf
www.acee.org/pubs/U054.pdf
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Appendix B:
Decision-Making
This manual is intended to help policy and program
decision-makers identify the clean energy funding
and administration approaches that make sense
for their jurisdiction. For each approach, it provides
an overview of advantages and disadvantages,
implementation options, and state examples. As an
additional resource, this Appendix provides three
detailed examples of the how different states have
arrived at decisions on these topics.
Example: Vermont Energy Efficiency
Utility
As mentioned above, Vermont has pursued a
model that relies on a single independent third
party to administer and deliver efficiency services
throughout the state.16 Starting in the early 1990's
the Vermont PSB established an integrated resource
planning approach that called on the electric
utilities to pursue all cost-effective efficiency.17 In
response to this order, the three investor-owned
utilities (also the three largest utilities in the state)
and three municipal and cooperative utilities began
offering efficiency programs. This model resulted in
some significant successes but a number of issues
continued to limit its effectiveness.
First, Vermont has the second smallest population
of any U.S. state, yet has 22 electric utilities. As a
result, while the six utilities with programs covered
the majority of the population, most utilities did
not offer any efficiency services. Many of these
utilities are so small that effectively delivering
efficiency programs created a major challenge.
Further, each of the utilities offering services did
so independently. As a result, customers, vendors,
contractors, distributors, architects and engineers
had to deal with a wide array of different and
sometimes inconsistent program services and
procedures. This created significant barriers to
effective DSM implementation.
In addition to the above challenges, Vermont found
itself expending inordinate resources and time
regulating, monitoring, and planning for efficiency.
Each utility DSM plan was extensively litigated
through a regulatory process, both during the
planning stages and later to address cost recovery
and lost revenue issues. Given the requirement
to acquire all cost-effective efficiency, numerous
investigations into what was cost-effective and
whether utilities where in fact developing and
implementing plans to successfully capture all
cost-effective efficiency were extensive and often
contentious. With separate avoided costs estimated
for each utility, this also meant the standards to
which this criterion was applied were different for
every utility territory.
16 Efficiency Vermont serves as the "energy efficiency utility" for about 93% of the state load, while the states largest municipal utility (Burlington
Electric Department) retained responsibility for these services within the City of Burlington. BED strives to deliver consistent services with the
same "look and feel" as those in the rest of the state provided by Efficiency Vermont.
17 VT PSB, Order in Docket 5270, April 16,1990.
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Finally, during the mid-1990s, stakeholders and
regulators expected that Vermont would follow
neighboring states such as Massachusetts and New
York in restructuring the utility industry. This posed
the likelihood of divestiture of vertically integrated
utilities and possibly dramatic reductions in the
existing efficiency services.
For all of the above reasons, the Vermont
Department of Public Service (DPS) determined that
an independent third-party administrator might be
preferable to utility administration. As envisioned,
this would ensure:
All Vermont electric ratepayers would have equal
and consistent access to the same services;
Consistent, statewide services, including the
obvious advantages in terms of marketing
services, simplifying processes, and encouraging
market transformation;
Elimination of the inherent disincentives utilities
faced with promoting efficiency and the perceived
need to compensate utilities for lost revenues;
A stable and consistent funding stream and
mechanism for efficiency under an anticipated
restructured utility sector; and
Economies of scale by simplifying administrative
and regulatory oversight of efficiency efforts.
Pursuing an independent third-party strategy
required a legislative change to enable the Public
Service Board (PSB) to establish an efficiency
utility. Under its existing mandate, the PSB had
no authority to create or fund such a structure.
The DPS therefore worked with the legislature to
enact new legislation. Act 60 was passed in June
of 1999, authorizing the PSB to develop a funding
mechanism based on a non-bypassable wires charge
and to create an entity to deliver efficiency services
statewide, as the PSB deemed appropriate and in
the public interest. The Act established an initial
spending cap of $17.5 million per year, but otherwise
left much discretion to the PSB to determine the
appropriate structure, methods and guiding principles
for an energy efficiency utility (EEU).
Simultaneous with the legislative process, the
DPS developed a detailed plan for the efficiency
utility under a separate docket.18 This plan laid
out a proposed administrative structure, including
contractual arrangements and functions. It also
analyzed the potential for efficiency savings and
provided program designs, budgets and savings
goals for a set of core programs that would serve as
the initial three year plan to be implemented by the
EEU. The DPS submitted this proposal to the PSB for
approval of creation of the EEU.
The other parties to the agreement included all
the VT electric utilities, environmental and public
interest groups, and business interests. Through
a contested case, the proposal was thoroughly
litigated. In general, the main issues by party or
group were:
Utilities: Virtually all the utilities were opposed
to the creation of an EEU. The most vocally
opposed were the investor-owned utilities that
were currently offering their own DSM programs,
although a consortium of municipal utilities was
also strongly opposed. Utility opposition was
primarily based on the following issues:
- A belief they were doing a good job delivering
programs and that they were the most
appropriate entity to continue because of
their existing customer relationships;
- A strong desire to maintain their customer
relationships, rather than ceding a portion to
another independent entity;
- Concern over having to lay off staff;
18 VT DPS., The Power to Save: A Plan to Transform Vermonts Energy Efficiency Markets, Docket No. 5854: Investigation into the Restructuring of
the Electric Utility Industry in Vermont, May 23,1997.
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- Concern over rate impacts, because the
programs envisioned would represent a
substantial increase in efficiency efforts;
- Concern over lost revenue, based on the
assumption that lost revenue collection
would not continue under an EEU; and
- In the case of one utility, concern the
statewide efforts would not be as aggressive
as the theirs and that their customers would
not receive as much benefit from the new
programs. This utility was also concerned
that their customers would effectively be
subsidizing others because they had already
paid for and captured a high portion of the
achievable retrofit potential in their territory.
Environmental/Public Interest: The environmental
and public interest groups were strongly
supportive of the concept of an EEU, and in fact
pushed for more aggressive funding and goals
than those proposed in the DPS plan.
Business Interests: The business sector intervenors
were opposed to the EEU. While the Chamber of
Commerce was an active intervenor, the most
vocal business interest was Vermont's single
largest electric customer, who accounts for
over five percent of the statewide load and has
historically opposed all DSM spending in Vermont
and other states where it operates. Their primary
position is based on the belief that the market
should be allowed to allocate efficiency and
supply resources and a concern over rate impacts
and the possibility of cross-subsidizing their
competitor's efficiency efforts.
Ultimately, a settlement was reached with all
parties to establish the EEU and adopt the plans laid
out in the Power to Save. Various compromises were
reached to satisfy the parties that were opposed.
For example, it was agreed that utilities would
receive lost revenue for 2 years to compensate them
for lost sales from EEU savings. The most vocal
business interest was able to negotiate a separate
"program" that allowed it to use 70% of the funds
it contributed for its own self-directed efficiency
projects. The City of Burlington was granted the
right to continue to offer its own programs separate
from, but consistent with, the EEU. In addition, and
critical to the overall settlement, were negotiated
ratepayer funding levels by utility territory. Rather
than a single SBC for all Vermonters, levels were
adjusted somewhat to reflect past investments
in efficiency and recognizing the remaining
opportunities and likely benefit from the EEU
programs. This minimized rate impacts for some
sectors, and resulted in what was perceived to be a
more equitable overall solution.
Example: New York State "15x15"
Initiative
In April 2007, the Governor of New York announced
a goal to decrease electricity use 15 percent by
2015 through increased energy efficiency as part
of a comprehensive plan for reducing energy costs
and curbing pollution in New York State. This goal
has come to be known as "15 x 15." In response
to the 15 x 15 Goal, the New York Public Service
Commission (PSC) has initiated a proceeding
with the objectives to: "balance cost impacts,
resource diversity, and environmental effects by
decreasing the State's energy use through increased
conservation and efficiency."19 The purpose of
the proceeding is to design an Energy Efficiency
Portfolio Standard (EEPS) to meet the targets for
energy efficiency.
New York created the New York State Energy
Research and Development Authority (NYSERDA)
in the 1970s in response to that decade's oil crises,
with a goal of research and development focused
on reducing the State's petroleum consumption. As
19 See Order Instituting Proceeding issued May 16,2007 in Case 07-M-0548Proceeding on Motion of the Commission regarding an Energy
Efficiency Portfolio Standard, p.6.
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STATE PARTNERSHIP
electric energy efficiency became more important
and energy prices rose, regulators put pressure on
utilities to deliver efficiency services. NYSERDA was
formed in response to a real or perceived lack of
progress on the part of the utilities in addressing
the need for efficiency.
In 1998, in conjunction with electric industry utility
restructuring, the state established the System
Benefit Fund (SBF), financed through assessment of
a charge on customer bills. The SBF funds energy
efficiency programs administered by the New York
State Energy Research and Development Authority
(NYSERDA). The PSC is revisiting the issue of how
best to administer and fund efficiency in light of
the new 15x15 goal.
While the current model in New York includes
a mixture of program administrators, future
structures may include even more hybrid elements.
One of the current proposals for New York would
have NYSERDA implement programs for residential
and commercial new construction and for efficient
products. They would also be responsible for general
marketing of the Energy Star brand. Utilities
would work directly with their customers to effect
efficiency improvements in existing C&l facilities
and to provide efficiency services for existing
homes. This distribution of responsibility is driven
by the following factors:
Asa regional program administrator, NYSERDA
can better manage market transformation
activities that require the participation of multi-
facility retailers and distributors. They can provide
large home improvement stores and electrical
distributors with a common brand and outreach
effort to implement state-wide with a consistent
message and incentive. Without this level of
coordination, individual utilities offer different
programs and customers are confused, resulting in
lower participation.
The utilities prefer not to have another entity
provide services directly to their customers.
Customers trust their utility and expect them
to be able to help them with all of their energy
needs. Energy efficiency is becoming an important
component of this service as a way of managing
individual customer's energy costs and the overall
cost for the utility to meet its load obligations.
Having another entity involved in providing
services to existing customers may result in
confusion.
Under the existing structure, utilities have been
concerned that their priorities are different from
NYSERDA's. For example, a customer that is
high priority for the utility may not be as high a
priority for NYSERDA. NYSERDA may not have a
current program that fits the customer's needs
or be able to provide custom support when
needed. The utility also desires more certainty
in load forecasting. Having a separate entity be
responsible for load reductions adds uncertainty
to the process of resource planning.
Achieving the 15 x 15 goal will require dramatic
expansion in efficiency services over the next
several years. Although NYSERDA is already
delivering limited efficiency programs and
is therefore in a position to quickly deliver
additional savings, utilities will also need to
play an important role in reaching their small to
medium-sized customers. Over time, the utilities
may become responsible for a greater share of
the programming and savings, depending on their
early success. Regardless, the assumption is that
the efforts of both NYSERDA and the utilities are
required to meet the aggressive savings target.
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The funding mechanism for these programs is
also on the table for discussion. It is likely that
the current SBC will be increased to support to
additional efficiency programs. Along with the
inclusion of the utilities in program administration
has developed discussions about handling lost
revenues and the potential for decoupling. The
parties are also trying to determine how to leverage
funds from the Regional Greenhouse Gas Initiative
(RGGI) and potential funding streams from carbon
or forward capacity markets. At this point in the
discussion, very little has been decided and there is
no clear picture how the funding will eventually be
structured.
Example: Illinois Program
Administration
The Commonwealth of Illinois provides an example
of a hybrid CEF model that relies primarily on utility
program implementation but with some state
government components. In August 2007 Illinois
passed the Public Utilities Act ("Act"), 220 ILCS
5/12-103, which set energy efficiency resource
targets to be captured by a combination of utility
and state efforts. The Act calls for programs to
acquire annual efficiency savings equal to 0.2
percent of total electric load in 2008, increasing
by 0.2 percent each year to an ultimate level of 2.0
percent annual savings by 2017.
Illinois traditionally has not been a leader in DSM
efforts. Although IRPs were required in the 1980s,
this did little to generate interest in efficiency,
partly as a result of large excess supply-side
capacity at the time. In the early 1990s the IRP
rules were eliminated, followed by restructuring of
the industry, which resulted in elimination of the
minimal programs existing at the time.
The primary responsibility for program
implementation and performance goals under the
new authorization resides with the two investor-
owned utilities (lOUs) - Commonwealth Edison and
Ameren. However, 25 percent of the funding was set
aside for program delivery by the State Department
of Commerce and Economic Opportunity (DCEO).
DCEO is responsible for delivering program services
to low-income consumers and to municipalities and
schools. In addition, DCEO will provide technical
services, coordinated with the utility programs, to
large commercial and industrial customers.
Funding for energy efficiency programs occurs
through a surcharge on all electricity sold by
the lOUs. Surcharges are designed to recover all
program costs in the year they are expended,
with true-ups as necessary to adjust for under or
over spending, or variations in expected electric
usage. DCEO funds are collected by the lOUs and
transferred to DCEO. The funding mechanism,
rather than being specified in the legislation,
was left open for the utilities and the regulatory
commission to work out. However, the mechanism
that was proposed by the utilities and approved by
the Illinois State Corporation Commission (SCC)
is substantially similar to that suggested as a
possible example in the legislation. The Act also
imposes strict rate impact caps on spending. First
year spending is limited to 0.5 percent of electric
revenue, increasing each year until a maximum of
2.0 percent. In the event that savings goals can
not be met within the funding caps, goals can be
lowered based on a showing by the utilities that
they are not feasible.
While the utilities do not earn any shareholder
performance incentives, they are exposed to
^ Appendix B
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STATE PARTNERSHIP
penalties. If the utilities fail to meet their goals in
the second year (goal of 0.4 percent of system load
saved) they are subject to financial penalties in the
form of a shareholder contribution to the Illinois
Low Income Home Energy Assistance Program
(LIHEAP). If a utility fails to meet the goal in year
three, the penalty can be to transfer responsibility
for program implementation away from the utilities
to a newly created state entity, the Illinois Power
Agency. This has the effect of highly motivating the
utilities to meet performance targets, as they have
a strong vested interest in continuing to provide
these services to their customers.
^ Appendix B
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