United States
      Environmental Protection
      Agency
Advancing State Clean Energy Funds

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    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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                                                                   EPA Clean Energy Fund Manual
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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
> Contents

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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.
*• Executive Summary

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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.
                                                                                         *• Executive Summary

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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
*• Executive Summary

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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.
                                                                                       *• Executive Summary

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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.
^ Chapter 1. Background and Purpose

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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.
                                                                           ^ Chapter 1. Background and Purpose

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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."
^ Chapter 1. Background and Purpose

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                                                                                ^ Chapter 1. Background and Purpose

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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).
^ Chapter 2. Introduction to Clean Energy Funds

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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.
                                                                  ^ Chapter 2. Introduction to Clean Energy Funds

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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
»• Chapter 2. Introduction to Clean Energy Funds

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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.
                                                                 ^ Chapter 2. Introduction to Clean Energy Funds

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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 authorities—Long 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 that—all else equal—utilities
         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).
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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
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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.
                                                                                                  ^ Appendix B

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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-0548—Proceeding on Motion of the Commission regarding an Energy
       Efficiency Portfolio Standard, p.6.
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        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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        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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