Energy Efficiency as a Low-Cost
Resource for Achieving Carbon
Emissions Reductions
A RESOURCE OF THE NATIONAL ACTION PLAN
FOR ENERGY EFFICIENCY
SEPTEMBER 2009
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About This Document
This paper, Energy Efficiency as a Low-Cost Resource for Achieving
Carbon Emissions Reductions, is provided to assist utility regulators, gas
and electric utilities, and others in meeting the National Action Plan for
Energy Efficiency's goal of achieving all cost-effective energy efficiency
by 2025.
This paper summarizes the scale and economic value of energy effi-
ciency for reducing carbon emissions and discusses the barriers to
achieving the potential for cost-effective energy efficiency. It also
reviews current regional, state, and local approaches for including
energy efficiency in climate policy, using these approaches to inform
a set of recommendations for leveraging energy efficiency within
state climate policy. The paper does not capture federal climate policy
options or recommendations, discussion of tradable energy efficiency
credits, or emissions impacts of specific energy efficiency measures or
programs.
The intended audience for the paper is any stakeholder interested in
learning more about how to advance energy efficiency as a low-cost
resource to reduce carbon emissions. All stakeholders, including state
policy-makers, public utility commissions, city councils, and utilities, can
use this paper to understand the key issues and terminology, as well
as the approaches that are being used to reduce carbon emissions by
advancing energy efficiency policies and programs.
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Energy Efficiency as a Low-Cost
Resource for Achieving Carbon
Emissions Reductions
A RESOURCE OF THE NATIONAL ACTION PLAN FOR
ENERGY EFFICIENCY
SEPTEMBER 2009
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The Leadership Group of the National Action Plan for Energy Efficiency is committed to taking
action to increase investment in cost-effective energy efficiency. Energy Efficiency as a Low-
Cost Resource for Achieving Carbon Emissions Reductions was developed under the guidance
of and with input from the Leadership Group. The document does not necessarily represent a
consensus view and does not represent an endorsement by the organizations of Leadership
Group members.
Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions is a
product of the National Action Plan for Energy Efficiency and does not reflect the views, policies,
or otherwise of the federal government. The role of the U.S. Department of Energy and U.S.
Environmental Protection Agency is limited to facilitation of the Action Plan.
If this document is referenced, it should be cited as:
National Action Plan for Energy Efficiency (2009). Energy Efficiency as a Low-Cost Resource
for Achieving Carbon Emissions Reductions. Prepared by William Prindle, ICF International, Inc.
For More Information
Regarding Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions, please contact:
Joe Bryson
U.S. Environmental Protection Agency
Office of Air and Radiation
Climate Protection Partnerships Division
Tel: (202) 343-9631
E-mail: brvson.ioe@epa.gov
Regarding the National Action Plan for Energy Efficiency, please contact:
Stacy Angel Larry Mansueti
U.S. Environmental Protection Agency U.S. Department of Energy
Office of Air and Radiation Office of Electricity Delivery and Energy Reliability
Climate Protection Partnerships Division Tel: (202) 586-2588
Tel: (202) 343-9606 E-mail: lawrence.mansueti@.hq.doe.qov
E-mail: angel.stacv@epa.gov
or visit www.epa.gov/eeactionplan
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Table of Contents
List of Figures iii
List of Tables iii
List of Abbreviations and Acronyms iv
Acknowledgements v
Executive Summary ES-1
Findings and Recommendations ES-4
Achieving All Cost-effective Energy Efficiency—Vision for 2025 ES-5
1: Introduction 1-1
1.1 Objectives of the Paper 1-1
1.2 Structure of the Paper 1-4
1.3 Development of the Paper 1-4
1.4 Notes 1-4
2: The Size, Economic Value, and Emissions Impacts of Energy Efficiency
Resources 2-1
2.1 Potential Studies for Energy Efficiency 2-1
2.2 Efficiency Potential in Utility Resource Planning Studies 2-5
2.3 Energy Efficiency Resources in Current Program Portfolios 2-8
2.4 Energy Efficiency's Potential Impact on C02 Emissions 2-11
2.5 Summary of Findings 2-15
2.6 Notes 2-16
3: Costs and Benefits of Current Energy Efficiency Investments 3-1
3.1 Cost of Saved Energy 3-1
3.2 Total Costs and Savings of Investment in Energy Efficiency Technologies and
Programs 3-2
3.3 Macro-Economic Benefits of Efficiency Resource Investments 3-3
3.4 Investment Necessary to Achieve Economic Potential 3-3
3.5 Summary of Findings 3-4
3.6 Notes 3-4
4: Limitations to Advancing Energy Efficiency Through Energy Pricing
Policies 4-1
4.1 Market Barriers to Energy Efficiency 4-1
4.2 Regulatory Barriers 4-3
National Action Plan for Energy Efficiency i
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4.3 Price Elasticity 4-3
4.4 Summary of Findings 4-5
4.5 Notes 4-5
5: Summary of Energy Efficiency Policies and Programs 5-1
5.1 Addressing Market Barriers 5-1
5.2 Addressing Regulatory Barriers 5-7
5.3 Action Plan Vision for 2025 and Related Resources 5-7
5.4 Summary of Findings 5-12
5.5 Notes 5-12
6: How Climate Policies and Programs Leverage Energy Efficiency 6-1
6.1 Energy Efficiency Within Climate Policy Mechanisms 6-1
6.2 Energy Efficiency as a Complementary Policy 6-7
6.3 Summary of Findings 6-7
7: Findings and Recommendations 7-1
Appendix A: National Action Plan for Energy Efficiency Leadership Group A-1
Appendix B: Glossary B-1
Appendix C: References C-1
Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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List of Figures
Figure 2-1. Summary of Utility Energy Load Growth Forecasts Through 2013 With and
Without Energy Efficiency Programs 2-8
Figure 2-2. California Utilities' Energy Efficiency Program Impacts, 2006-2008 2-10
Figure 2-3. Northwest Power and Conservation Council Efficiency Estimates 2-10
Figure 2-4. Efficiency Vermont 2007 Impacts 2-11
Figure 2-5. McKinsey Carbon Abatement Cost Curve 2-13
Figure 2-6. IPCC C02 Emissions Abatement Estimates 2-14
Figure 2-7. C02 Reductions From Energy Efficiency and Renewable Energy 2-14
Figure 6-1. Leveraging Energy Efficiency in State Climate Policies 6-2
List of Tables
Table ES-1. Overview of Existing Work on the Energy Efficiency Resource ES-2
Table ES-2. Overview of Costs and Benefits of Energy Efficiency Programs ES-3
Table ES-3. Policy/Program Options Matched to Markets ES-3
Table ES-4. Leveraging Energy Efficiency in State Climate Policies ES-4
Table 1-1. National Action Plan for Energy Efficiency Tools by Implementation Goals 1-2
Table 2-1. Selected U.S. Energy Efficiency Potential Studies 2-2
Table 2-2. Summary of Utilities' Progress Toward the WGA Clean and Diversified
Energy Committee Goal of 20 Percent Reduction in Energy Consumption
by 2020 2-7
Table 5-1. Policy/Program Options Matched to Markets 5-2
Table 5-2. State Progress in Meeting the National Action Plan for Energy Efficiency
Vision 5-8
Table 5-3. National Action Plan for Energy Efficiency Tools by Implementation Goals 5-11
Table 6-1. California Air Resources Board AB 32 Compliance Plan Summary 6-4
Table 6-2. States Wth Common Energy Efficiency Policies in Place as of October 2008 6-7
National Action Plan for Energy Efficiency iii
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List of Abbreviations and Acronyms
AB 32 Assembly Bill 32
ACEEE American Council for an Energy-Efficient Economy
ARRA American Recovery and Reinvestment Act
ASES American Solar Energy Society
Btu British thermal unit
CARB California Air Resources Board
CEE Consortium for Energy Efficiency
CEF (Scenarios for a) Clean Energy Future
CIP Conservation Improvement Program
C02 carbon dioxide
CPUC California Public Utilities Commission
DOE U.S. Department of Energy
EERS energy efficiency resource standard
EIA U.S. Energy Information Administration
EPA U.S. Environmental Protection Agency
EPRI Electric Power Research Institute
GHG greenhouse gas
GWh gigawatt-hour
IEA International Energy Agency
IPCC Intergovernmental Panel on Climate Change
kW kilowatt
kWh kilowatt-hour
MGA Midwestern Governors Association
MPO Metropolitan Planning Organization
NWPCC Northwest Power and Conservation Council
NYSERDA New York State Energy Research and Development Authority
OECD Organisation for Economic Co-operation and Development
PGE Portland General Electric
PG&E Pacific Gas and Electric Company
PSCo Public Service of Colorado
PSE Puget Sound Energy
RGGI Regional Greenhouse Gas Initiative
SCE Southern California Edison
SDG&E San Diego Gas and Electric Company
WCI Western Climate Initiative
WGA Western Governors' Association
iv
Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Acknowledgements
This paper, Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions
Reductions, is a key product of the National Action Plan for Energy Efficiency. In addition to
review and comment by the Action Plan Leadership Group (see Appendix A), this paper was
prepared with the valuable input of an advisory group. Advisory group members include:
Lynn Anderson, Idaho Public Utilities Commission
Jasmin Ansar, Pacific Gas & Electric
Sheryl Carter, Natural Resources Defense Council
Daniel Francis, American Electric Power
Clay Nesler, Johnson Controls
Jolyn Newton, Tennessee Valley Authority
Paul Sotkiewicz, PJM Interconnection
Dick Stevie, Duke Energy
Rick Tempchin, Edison Electric Institute
Bill Prindle of ICF International served as the primary author of the paper, under contract to the
U.S. Environmental Protection Agency (EPA). Rich Sedano of the Regulatory Assistance
Project provided his expertise during review and editing of this paper.
The U.S. Department of Energy (DOE) and EPA facilitate the National Action Plan for Energy
Efficiency. Key staff include Larry Mansuetti (DOE Office of Electricity Delivery and Energy
Reliability); Dan Beckley (DOE Office of Energy Efficiency and Renewable Energy); and
Kathleen Hogan, Joe Bryson, Katrina Pielli, and Stacy Angel (EPA Climate Protection
Partnerships Division).
Eastern Research Group, Inc. provided copyediting, graphics, and production services.
National Action Plan for Energy Efficiency
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Executive Summary
This paper examines the role of energy efficiency in addressing global climate change. It
summarizes research on the size, economic value, and carbon dioxide fC02) emissions
reduction impacts of efficiency resources, reviews available information on the benefits
and costs of energy efficiency, discusses the factors that limit efficiency investment in
today's markets, and outlines energy efficiency policy and programs in use today that
can be further expanded, including climate policy applications. The paper concludes that
efficiency's potential contribution to reducing C02 emissions and reducing the cost of
climate policies is large, requires action, and should be part of climate policy designs at
all levels of government. This paper is provided to assist organizations in meeting the
National Action Plan for Energy Efficiency's goal to achieve all cost-effective energy
efficiency by 2025.
Investment in energy efficiency combats global climate change in two primary ways. First:
simply put, "the less energy used, the fewer emissions produced." Second, cost-effective energy
efficiency achieves these environmental benefits at low cost, and thus can reduce the economic
costs of achieving climate policy goals.
To improve the understanding of the role of energy efficiency in addressing global climate
change and many of the policy steps necessary to employ energy efficiency toward this end,
this paper summarizes:
Existing work on the magnitude, benefits, and costs of the energy efficiency
resource in the United States. This paper examines more than a dozen potential
studies, resource planning documents, and energy efficiency program evaluations (see
Table ES-1). A particular emphasis is placed on studies that evaluate the potential for
energy efficiency to cost-effectively reduce C02 emissions. From these and additional
studies, the costs and benefits of energy efficiency programs currently underway are
also summarized (see Table ES-2).
Key barriers that limit investment in energy efficiency to a fraction of its cost-
effective potential. This paper explores the rationale for energy efficiency policy and
program interventions by discussing the nature and extent of market and regulatory
barriers that keep energy end-use markets from adopting cost-effective energy
efficiency. These include the principal-agent barrier that shows up in new buildings and
rental property markets and the transaction-cost barrier that affects many smaller
customers and transactions. Regulatory barriers include the fragmented nature of
planning and resource decision-making in energy markets, as well as ratemaking
practices that create disincentives for utilities to invest in customer energy efficiency.
The paper also discusses the limitations of energy prices as a driver for energy
efficiency investment due to price inelasticity, which largely results from these market
and regulatory barriers.
Energy efficiency policies and programs. This paper summarizes the policies and
programs that federal, state, and local governments are using to require or encourage
efficiency investment. (Table ES-3 provides a snapshot of these options.) It also lists
Action Plan tools and resources that can support agencies and program administrators
in developing and implementing these policy and program options.
National Action Plan for Energy Efficiency
ES-1
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Climate policy approaches that leverage energy efficiency. This paper summarizes
state and regional climate policies in operation or development which help drive
investment in energy efficiency. These policies target energy efficiency through a variety
of means, including allowance auction and allocation and complementary energy
policies such as resource standards, administered energy efficiency programs, building
codes, and appliance standards (see Table ES-4).
Table ES-1. Overview of Existing Work on the Energy Efficiency Resource
Type of Study
Number of
Studies
Examined
General Summary
Potential studies:
Estimates of the overall cost-
effective resource capabilities
Nine studies,
including
national, regional,
and state-level
assessments
Energy savings potentials range
from 8.5% to 26.3% of forecast
consumption across a variety of
study horizons and other factors
Energy resource plans:
Assessments of the resource
contribution from energy
efficiency for a specific
geographic area or energy
system
Three studies at
utility or regional
level
Findings are consistent with the
range of savings potentials
contained in the nine potential
studies
Program portfolio evaluations
and program filings:
Detailed plans on the energy that
can be saved through energy
efficiency and the cost of the
saved energy
Four portfolios:
three state and
one regional
Several states are realizing energy
savings on an annualized basis
within the range of estimates
projected in potential assessments
and resource plans
C02 reduction potential
studies:
Assessments of the impacts that
energy efficiency could have on
reducing U.S. C02 emissions
Six major studies
at national level
The studies' estimates range from
less than 300 million metric tons to
over 1 billion metric tons in 2030,
placing the Action Plan goal toward
the center of the range of estimates
ES-2
Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Table ES-2. Overview of Costs and Benefits of Energy Efficiency Programs
Cost/Benefit Measure
Number of
Studies
Examined
General Summary
Cost of saved energy
(annualized)
Six
1.2-5.2 cents per saved kWh
Total program costs and
savings3
Two
About $2 billion annually, equivalent to
about 0.5% of utility revenues as of 2006;
savings of about 63 billion kWh (about 2%
of retail sales) and 135 million therms
(about 0.1% of retail sales) as of 2006
Macroeconomic benefits
(increases in gross economic
output, jobs, and additional
personal income)
Three
Economic benefits in the range of $250
billion through 2030
Source: Values derived from ACEEE (Eldridge et al., 2008) and CEE (Nevius et al., 2008), as estimated
for the Action Plan's Vision for 2025 (National Action Plan for Energy Efficiency, 2008).
a Note that these savings and costs apply only to administered programs. They do not include savings
and costs related to other efficiency policies such as building codes and appliance standards, and also
do not capture private efficiency investment from non-participants in administered programs. The
energy savings are cumulative, representing savings from multiple years, while the costs are annual.
Table ES-3. Policy/Program Options Matched to Markets
Policy/Program Option
Market Focus
Individual
Products
New
Construction
Existing
Buildings/
Facilities
Mandatory appliance standards
X
Product labeling
X
Voluntary appliance standards
X
Minimum building codes
X
Voluntary building standards
X
Building labeling/benchmarking
X
X
Retrofit programs
X
Education and outreach
X
X
X
Government lead-by-example
X
X
X
Administered energy efficiency
programs
X
X
X
National Action Plan for Energy Efficiency
ES-3
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Table ES-4. Leveraging Energy Efficiency in State Climate Policies
State Climate Policy Leveraging Energy Efficiency
Number of States
with Policy in
Place
GHG allowance revenue from GHG cap and trade used to
expand funding of energy efficiency programs
10
State climate change action plans that highlight the potential role
for energy efficiency policy and programs
32
Sources: and
.
Note: These totals were current as of August 2008.
Findings and Recommendations
This paper presents the following key findings:
Energy efficiency is a large and low-cost energy resource that can save on the order of
20 percent of end-use energy consumption and costs substantially less than new supply
resources.
Efficiency is also a large and low-cost carbon abatement resource. If tapped in
substantial quantities, efficiency can help achieve C02 emissions reduction goals and
lower the costs of doing so—whether or not specific climate policies are in effect.
Due to market and regulatory barriers and the limits of price elasticity, energy prices
alone are not likely to accelerate efficiency investment at the rate needed to realize
efficiency's economic potential.
Targeted energy efficiency policies and programs are needed to reduce market and
regulatory barriers and thereby increase energy efficiency investment. Proven policy and
program options are available to address a range of barriers.
On a national basis, harvesting cost-effective efficiency resources could justify several-
fold increases in current efficiency program budgets. Investment in efficiency is at a
fraction of the level necessary to realize a high percentage of efficiency potential.
Many states and local governments have made energy efficiency central to their
greenhouse gas reduction strategies through targeted policies and programs. The Action
Plan's Vision for 2025 and supporting tools and resources offer important policy
frameworks and assistance for capturing the low-cost energy efficiency resources.
Based on these findings, key recommendations are as follows:
Energy efficiency should be a cornerstone of energy and/or climate policies at all levels
of government, based on its proven status as a cost-effective option for reducing C02
emissions and reducing the cost of climate policies.
ES-4
Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Energy efficiency policies and programs should be pursued expeditiously, with an
emphasis on establishing the necessary policy foundation for capturing all cost-effective
energy efficiency as outlined in the Vision for 2025.
Achieving All Cost-effective Energy Efficiency—Vision for 2025
This paper has been developed to help parties pursue the key policy recommendations of the
National Action Plan for Energy Efficiency and its Vision for 2025 implementation goals. As part
of its Vision, the Action Plan Leadership Group identified integrating energy efficiency
considerations into policies to limit emissions of greenhouse gases as one of the six key related
state, regional, and national policies that can help achieve all cost-effective energy efficiency by
2025 (National Action Plan for Energy Efficiency, 2008a, Chapter 4). For information on the full
suite of policy and programmatic options to remove barriers to energy efficiency, see the Vision
for 2025 and the various other Action Plan papers and guides available at
www.epa.gov/eeactionplan.
National Action Plan for Energy Efficiency
ES-5
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1: Introduction
Global climate change challenges us to transform the ways in which we generate and use
energy. Based on the findings of the world's climate scientists and mitigation experts,
substantial emissions reductions are necessary to avoid significant changes in the earth's
atmosphere with severe consequences for human health and the global environment. The most
recent consensus findings of the Intergovernmental Panel on Climate Change (IPCC) state that
greenhouse gas (GHG) emissions need to be reduced by 50 to 85 percent by 2050 to avoid
global temperature rise of 2.5 degrees Celsius or more, and global GHG emissions must stop
rising no later than 2015 (IPCC, 2007). With the majority of government leaders taking steps to
act on these findings, there are intensified efforts in many nations to develop low-cost emissions
reduction options in the near term. This puts energy efficiency in the climate policy spotlight as a
near-term, low-cost resource for reducing the growth in carbon emissions and lowering the
ultimate cost of reducing GHG emissions.
Energy efficiency provides multiple public benefits regardless of its carbon emissions impacts. It
reduces home and business energy costs, improves productivity, stimulates economic growth,
reduces energy market prices, improves energy system reliability, reduces criteria air pollutant
emissions, and enhances national energy security. Savings from reduced energy consumption
typically outweigh the cost of the energy efficiency investment. Thus, efficiency reduces the
overall cost of energy services. Energy consumption per dollar of U.S. economic output has
fallen by half since the 1970s, fueling sustained economic growth and softening the economic
damage from recent energy price surges. Efficiency has become a quiet engine of prosperity for
the United States and other economies, and is at the forefront of a new wave of clean energy
investment that can support continued prosperity along with energy security and environmental
protection (Ehrhardt-Martinez and Laitner, 2008; EPA, 2006; and National Action Plan for
Energy Efficiency, 2008a).
Increased energy efficiency investment combats global climate change in two primary ways.
First, simply put, "the less energy used, the fewer emissions produced." While this general
statement overlooks the more complex relationships between energy efficiency and carbon
dioxide (C02) emissions, it places energy efficiency in a core role for future energy and climate
policies and programs. Second, cost-effective energy efficiency achieves these environmental
benefits at low cost, and thus can reduce the economic costs of achieving climate policy goals.
1.1 Objectives of the Paper
This paper has been developed to help parties pursue the key policy recommendations of the
Action Plan and its Vision for 2025 implementation goals. As part of its Vision, the Action Plan's
Leadership Group identified integrating energy efficiency considerations into policies to limit
emissions of GHGs as one of the six key related state, regional, and national policies to
achieving all cost-effective energy efficiency by 2025. While energy efficiency's potential to
achieve low-cost reductions in C02 emissions has been mentioned in earlier Action Plan
materials, C02 impacts have been addressed only in a general way as one of many societal
benefits. Accordingly, the Leadership Group made it a priority to develop this issue paper,
presenting more explicit information that will help states, utilities, and other stakeholders
address climate change through a variety of policy and program mechanisms. This paper is part
of the comprehensive suite of papers, resources, and tools available to all parties taking action
to advance all cost-effective energy efficiency by 2025 (see Table 1-1).
National Action Plan for Energy Efficiency
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Table 1-1. National Action Plan for Energy Efficiency Tools by Implementation
Goals
Goal
Detailed Action Plan Tools and Resources
Goal One: Establishing Cost-Effective
Energy Efficiency as a High-Priority
Resource
¦ Guide to Resource Planning With Efficiency
¦ Guide for Conducting Potential Studies
¦ Communications Kit
Goal Two: Developing Processes to Align
Utility and Other Program Administrator
Incentives Such That Efficiency and Supply
Resources Are on a Level Playing Field
¦ Aligning Utility Incentives With Investment in
Energy Efficiency Paper
Goal Three: Establishing Cost-
Effectiveness Tests
¦ Understanding Cost-Effectiveness of Energy
Efficiency Programs Paper
¦ Guide to Resource Planning Wth Efficiency
¦ Guide for Conducting Potential Studies
Goal Four: Establishing Evaluation,
Measurement, and Verification Mechanisms
¦ Model Energy Efficiency Program Impact
Evaluation Guide
Goal Five: Establishing Effective Energy
Efficiency Delivery Mechanisms
¦ Rapid Deployment Energy Efficiency Toolkit
¦ Consumer Perspectives on Delivery of Energy
Efficiency Brief
¦ Customer Incentives Through Programs Brief
(Under Development)
Goal Six: Developing State Policies to
Ensure Robust Energy Efficiency Practices
¦ Building Codes for Energy Efficiency Fact
Sheet
¦ Efficiency Program Interactions Wth Codes
Paper
¦ State and Local Lead-by-Example Guide
Goal Seven: Aligning Customer Pricing and
Incentives to Encourage Investment in
Energy Efficiency
¦ Customer Incentives Through Rate Design
Brief
Goal Eight: Establishing State of the Art
Billing Systems
¦ Utility Best Practices Guidance for Providing
Business Customers Wth Energy Data
Goal Nine: Implementing State of the Art
Efficiency Information Sharing and Delivery
Systems
¦ Paper on Coordination of Demand Response
and Energy Efficiency (Under Development)
Goal Ten: Implementing Advanced
Technologies
¦ Most Energy-Efficient Economy Project (in
Process)
Related State, Regional, and National
Policies
¦ Energy Efficiency as a Low-Cost Resource for
Achieving Carbon Emissions Reductions
Paper
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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This paper supplements existing Action Plan materials that address C02 emissions in the
context of methods for resource planning1 and establishing the business case for energy
efficiency.2 It focuses more fully on energy efficiency in a climate policy context, exploring the
role of state-level policies in increasing investment in energy efficiency across the nation's
buildings and industrial facilities. Policy options include building codes, state-level appliance
standards, voluntary standards, labeling and rating, administered energy efficiency programs,
and utility regulatory policies that support investment in energy efficiency where cost-effective.
The paper's key objectives are to:
Summarize research and analysis on the magnitude and cost of the energy efficiency
resource in the United States, especially with respect to its potential to cost-effectively
reduce C02 emissions.
Inventory and summarize the current range of policy and program approaches that seek
to leverage energy efficiency as part of GHG reduction strategies across the United
States, focusing on state and regional efforts.
Describe the nature and magnitude of the major market and regulatory barriers that
currently prevent energy efficiency from realizing its full economic potential.
Briefly summarize the suite of energy efficiency policies and programs that can reduce
these key market and regulatory barriers and help capture a larger portion of the
available cost-effective potential, referencing the tools and resources offered by the
Action Plan as appropriate.
Further, through review and synthesis of numerous studies and other information sources, this
paper provides support for the following conclusions:
Energy efficiency is a relatively large and low-cost carbon abatement resource in the
United States.
Current U.S. investment levels in energy efficiency tap only a small amount of the
available low-cost energy efficiency.
If developed substantially beyond current investment levels, energy efficiency can lower
the costs of achieving GHG reductions.
Increased energy prices alone (stemming from policies requiring GHG emissions
reductions) will not accelerate efficiency investment sufficiently to tap the majority of
efficiency's economic potential. This is due not only to market and regulatory barriers,
but also to the limits of price inelasticity of energy consumption in many end-use
markets.
Market and regulatory barriers can be reduced through targeted energy efficiency
policies and programs, with the effect of increasing energy efficiency investment,
reducing GHG emissions, and reducing the overall economic cost of climate policies.
Many state and local governments, recognizing the important role of energy efficiency in
their GHG reduction strategies, have pursued targeted policies and other initiatives to
National Action Plan for Energy Efficiency
1-3
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advance energy efficiency. A review of these initiatives provides useful information for
policy-makers at all levels of government.
1.2 Structure of the Paper
The paper discusses these topics as outlined below:
Chapter 1. The size and economic value of the energy efficiency resource and its
potential to cost-effectively reduce C02 emissions.
Chapter 2. Current costs and benefits of investments in energy efficiency.
Chapter 3. The limitations to advancing energy efficiency through price mechanisms
alone.
Chapter 4. Summary of energy efficiency policies and programs that advance low-cost
energy efficiency.
Chapter 5. Review of current climate policies across the United States that explicitly
employ energy efficiency.
Chapter 6. Summary of findings and recommendations.
1.3 Development of the Paper
Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions is a
product of the National Action Plan for Energy Efficiency. A conceptual outline and drafts of this
paper were prepared with direction and comment by the Action's Plan Leadership Group (see
Appendix A for a list of group members), as well as the valuable input of an Advisory Group
(see the "Acknowledgements" section for a list of members). Bill Prindle of ICF International
served as project manager and primary author of the paper under contract to the U.S.
Environmental Protection Agency (EPA).
1.4 Notes
1 See Chapter 1 and Chapter 3 of National Action Plan for Energy Efficiency (2006), as well as National
Action Plan for Energy Efficiency (2007c).
2 See Chapter 4 of National Action Plan for Energy Efficiency (2006).
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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2: The Size, Economic Value, and Emissions
Impacts of Energy Efficiency Resources
This chapter reviews recent leading studies and materials that assess the potential for
energy efficiency to provide low-cost reductions in C02 emissions. It summarizes these
studies, highlights key considerations, and presents key findings.
The scale of the energy efficiency resource as a low-cost abatement option for C02 emissions
can be assessed by examining studies and planning documents that fall into the following
categories:
Energy efficiency potential studies that estimate the overall cost-effective resource
capability for energy efficiency to provide energy, economic, and environmental benefits
for various energy types, timeframes, and geographic areas.
Energy resource plans that assess the specific role energy efficiency can play in
meeting energy needs for a specific geographic area or energy system. These plans
often draw on potential studies, but apply them in a more focused and constrained
framework.
Energy efficiency program portfolio evaluations and program filings that offer
detailed plans on the energy that can be saved through energy efficiency and the cost of
the saved energy.
Studies designed specifically to assess the C02 reduction potential of energy
efficiency, building upon the overall energy efficiency potential studies.
2.1 Potential Studies for Energy Efficiency
Numerous potential studies have been undertaken over the last decade to assess the
availability and cost of energy efficiency. These studies have been performed at the national,
regional, and state levels and employ various screens (e.g., technically feasible, economically
feasible, programmatically achievable) to assess the energy efficiency resource. Selected
leading analyses are highlighted in Table 2-1.
The examples summarized in Table 2-1 vary considerably in absolute savings. Several key
factors account for this variation. They include the following:
Sectors, geographic scope, and fuels covered. These studies vary from national to
state-level in scope. In terms of sectors studied, they range from economy-wide—
including all four key economic sectors (i.e., residential, commercial, industrial, and
transportation)—to a focus on those sectors using electricity. They also differ based on
the fuels covered. For example, the McKinsey analysis is U.S. economy-wide and
covers all fuels. Other studies are state-wide or regional in scope, and many focus
primarily on electricity.
National Action Plan for Energy Efficiency
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Table 2-1. Selected U.S. Energy Efficiency Potential Studies
Study Author, Date,
and Title
Savings
Potential
(achievable
unless
noted)3
Timeframe13
Annualized
Savings0
Scope
McKinsey & Company
(2009). Unlocking
Energy Efficiency in
the U.S. Economy.
23%
(economic)
2020
~2%/year
¦ National
¦ All fuels
¦ Economic potential
only
Itron (2006). California
Energy Efficiency
Study. CALMAC Study
ID: PGE0211.01
7.5%
(electricity)
4.4% (gas)
2016
<1%/year
(electricity)
~0.5%/year
(gas)
¦ California
¦ Electricity and gas
¦ Technical, economic,
and achievable
potential
¦ Limited to programs
of investor-owned
utilities
EPRI (2009).
Assessment of
Achievable Potential
from Energy Efficiency
and Demand
Response Programs in
the U.S. (2010-2030).
5%-8%
(realistic to
maximum
achievable)
2030
<0.5%/year
¦ National
¦ Electricity only
¦ Technical, economic,
and achievable
potential
¦ Limited to programs;
excludes building
codes or product
standards
WGA (2006). Energy
Efficiency Task Force
Report. A report of the
WGA Clean and
Diversified Energy
Initiative.
20%
2020
>1%/year
¦ 18 western states
¦ Electricity only
¦ Achievable potential
only
ACEEE (2008).
Energizing Virginia:
Efficiency First.
19%
2025
>1%/year
¦ Virginia
¦ Electricity only
¦ Achievable potential
only
Georgia Environmental
Facilities Authority.
2005. Assessment of
Energy Efficiency
Potential in Georgia.
2.3%-8.7%
(electricity)
1,8%-5.5%
(gas)
2010
~1%/year
(electricity)
~0.7%/year
(gas)
¦ Georgia
¦ Electricity and gas
¦ Technical, economic,
and achievable
potential
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Study Author, Date,
and Title
Savings
Potential
(achievable
unless
noted)3
Timeframe"
Annualized
Savings0
Scope
NYSERDA (2003).
Energy Efficiency and
Renewable Energy
Resource
Development Potential
in New York State.
16%
2022
<1%/year
¦ New York
¦ Electricity only
¦ Achievable potential
only
¦ Also addresses
renewable electricity
ACEEE (2004). The
Technical, Economic,
and Achievable
Potential for Energy
Efficiency in the United
States: A Meta-
Analysis of Recent
Studies.
24%
(electricity)
9% (gas)
Various
1.2%/year
(electricity)
0.5%/year
(gas)
¦ Meta-analysis of 11
reports
¦ Includes national,
regional, and state
studies
¦ Electricity and gas
¦ Technical, economic,
and achievable
potential
a This table expresses savings potential as a percentage of a future year forecast of energy consumption.
Percentages tend to vary based on the length of the time horizon; e.g., shorter timeframes tend to show
smaller savings percentages. It is thus important to take the timeframe into account when comparing
percentage estimates.
b To provide a more consistent basis for comparison of savings potential, this column presents a rough
estimate to show energy savings on an annualized basis. This tends to even out the differences in
timeframe among the various studies. However, these estimates are only approximate and are meant
as indicative only.
c To provide a more consistent basis for comparison of savings potential, an estimate is made in this
column to show energy savings on an annualized basis. This tends to normalize the differences in
timeframe among the various studies. However, these estimates are only approximate and are meant
as indicative only.
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Potential framework. Potential studies generally use at least one tier in a three-tier
framework: technical potential, economic potential, and achievable (or market) potential
(National Action Plan for Energy Efficiency, 2007b).
- Technical potential is based on the assumption that all major end-use devices and
building components are replaced instantly with the best available technology,
regardless of cost. This type of potential reflects the savings possible with today's
known technologies.
- Economic potential applies one or more economic tests or criteria, screening out
measures that are not economically attractive. These criteria can vary from simple
payback calculations to complex life-cycle benefit/cost tests.
- Achievable (or market) potential applies various constraints to economic potential,
such as availability of funding, program delivery capacity, program design limits,
market acceptance rates, and other factors. Many of the studies in Table 2-1 use
various sub-definitions of what is achievable.
Timeframe. Some potential studies show lower potential savings in terms of absolute
percentage numbers because their timeframes are shorter than other studies.' For
example, the Georgia study covers only five years, while the ACEEE Virginia study
covers 17. To address differences in timeframes, Table 2-1 provides estimates of the
annualized savings where possible.
Technology assumptions. Part of the variability of these studies' results stems from
differences in the energy efficiency measures selected for analysis and different
assumptions about their cost and performance. Some use very detailed "bottom-up"
methods of aggregating thousands of different efficiency measures; others use more
aggregated or stylized characterizations of technology choices in various end-uses and
markets.
Economic assumptions. Key parameters that drive variations in the findings for
economic potential studies include the assumed discount rates used for present value
analyses and the costs of avoided energy. Appropriate values for these factors can vary
by geographic region and sector, among other considerations.
Technologies versus practices. Many potential studies are "widget-based," which
means they look at individual equipment measures that can improve the efficiency of
specific products or systems. However, significant efficiencies can be found in systems
and whole buildings through design and operating practices. Such improvements are
harder to standardize, and they are left out of many studies. Including such approaches
can improve efficiency potential study estimates on a technical or economic basis,
though implementing them consistently in energy markets can be challenging—which
can limit the achievable estimates for such approaches.
Policy and other "baseline" considerations. Studies vary considerably in their
assumptions regarding the fraction of economic potential that can be achieved through
existing market forces and policies. Market-based, autonomous trends driven by market
forces such as energy prices and technology advancement can be projected to capture
some fraction of economic potential. Policies and programs already in place can be
projected to capture another fraction, leaving a remainder to be captured by additional or
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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incremental policies and programs. Some studies focus on what energy efficiency
programs can achieve, such as the EPRI and Itron studies. Others, including the ACEEE
and Georgia studies, consider a broader suite of policies such as mandatory building
codes and product standards.
Technological change. Potential studies vary in their assumptions about changes in
the costs and energy performance of end-use technologies over time. Some studies
assume no change from current levels. Other studies assume varying degrees of
change over time. The longer the timeframe accounted for in the study, the greater the
impacts these assumptions will have.
While less extensive, the analytical literature on natural gas end-use energy savings is also part
of the research record. Natural gas potential studies tend to show somewhat lower potential as
a total fraction of gas consumption, in part because the number of end-uses for gas tends to be
fewer in typical buildings, which limits the number of efficiency measures available for study. In
addition, basic differences between natural gas and electricity end-use applications can limit
efficiency potential based on current technologies.1
2.2 Efficiency Potential in Utility Resource Planning Studies
A number of utility or regional energy resource plans forecast energy savings from energy
efficiency programs and policies, building upon the information contained in energy efficiency
potential studies in many cases (National Action Plan for Energy Efficiency, 2007b, 2007c).
Often referred to as integrated resource planning, these plans and their development processes
have a periodic cycle and identify supply and demand resource options needed to meet utility
customers' future energy needs. Resource planning studies typically use many of the same data
sources and analytical techniques applied in potential studies. The principal difference is that
resource planning analysis uses timeframes, economic assumptions, and other factors specific
to the utility service area.
Energy efficiency savings, when used in a resource plan, tend to be at the lower end of the
energy efficiency potential spectrum. This is true for several reasons, including that the potential
is typically limited to what can be achieved with the energy types of the utility and can be limited
to the types of energy efficiency programs that utilities typically administer. These studies
typically use conservative estimates of energy savings to be deemed realistic and reliable for
the purposes of planning energy supply. Resource plans can also be built up from individual
program designs; these programs may draw on some of the data in potential studies, but tend to
use market-based estimates of what has been achieved through energy efficiency programs
and funding projections to estimate expected impacts.
Below are brief summaries of selected recent studies showing the expected energy savings
from energy efficiency as part of integrated resource planning.
Duke Energy. In 2007, Duke Energy Carolinas issued an energy efficiency potential
study for North Carolina. It found a technical potential over a 20-year study period of 32
percent of forecast load. Economic potential over 20 years was projected at 18 percent
of forecast load (Forefront Economics, Inc., H. Gil Peach and Associates, and PA
Consulting Group, 2007). These numbers are comparable with a North Carolina Utilities
Commission potential analysis conducted prior to the Duke study, which estimated
technical potential of 33 percent and economic potential of 14 percent (GDS Associates,
2006), although the timeframe was shorter, 11 years vs. 20 years. These numbers are
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also comparable to those in the ACEEE meta-review of 11 studies that found median
technical potential of 33 percent and median economic potential of 20 percent.
Western Governors' Association (WGA). In 2005, WGA set a goal of reducing
electricity usage by 20 percent in 2020 compared with baseline forecasts. In 2006, a
report was issued comparing the resource plans of more than a dozen utilities in the
western states with the WGA's 20 percent goal. The report is one of very few attempts to
compare efficiency components of utility resource plans across a large number of states
and utilities. It found that some utility plans contained energy efficiency savings
projections that would achieve a substantial fraction of the 20 percent goal, and others
held much lower efficiency gains (Hopper et al., 2006). More specifically, the report
shows that the California utilities, which have the most aggressive energy savings
targets in the region, have efficiency resource plans expected to offset over 70 percent
of forecast load growth, about 60 percent of capacity growth, and 10 percent of total
energy consumption by 2013, the last year of the study timeframe (see Table 2-2)
(Hopper et al., 2006). Further, they would reduce annual energy load growth by about 1
percent (see Figure 2-1) (Hopper et al., 2006).
Northwest Power and Conservation Council (NWPCC). The NWPCC is a unique
organization, created by Congress in the 1980 Pacific Northwest Electric Power
Planning and Conservation Act as a resource planning structure for the region served by
the federal Bonneville Power Administration. While its authority does not extend to all
retail utilities in the region, the Council's planning process exerts substantial influence,
and its resource plans are viewed as credible and authoritative. The Council's Fifth
Power Plan, issued in 2005, projects that cost-effective and achievable energy efficiency
could reduce forecast load growth by just over 50 percent by 2025. This planning
process includes a broad set of energy efficiency policies including codes and standards
as well as utility-administered programs. The expected savings from energy efficiency in
the future are in addition to substantial savings achieved through programs that have
been in place for more than 20 years (see Figure 2-3).
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Table 2-2. Summary of Utilities' Progress Toward the WGA Clean and Diversified
Energy Committee Goal of 20 Percent Reduction in Energy Consumption by 2020
Utility
Plan Program Effects as Percent of Total Energy Requirements (%)a
2008
2013
Avista
2.5
4.8
BC Hydro"
3.8
6.0
Idaho Power
0.4
0.9
Nevada Power0
0.7
—
Northwestern
2.9
5.9
PacifiCorp
1.9
3.4
PGEd
2.8
5.1
PSCo
1.4
2.8
PSEe
5.7
10.4
PG&Ef
5.0
10.1
SCEf
5.3
10.4
SDG&Ef
6.7
11.3
Sierra Pacific9
1.4
—
Source: Hopper et al., 2006.
Note: The authors made assumptions in calculating italicized values. Values in regular font are compiled
directly from resource plan data.
a Total energy requirements do not include load reductions from plan program effects or reserve margins.
b BC Hydro's plan only commits to implementing its PowerSmart-2 program through 2012; possible
continued savings from PowerSmart-3 are included for 2013.
c Nevada Power only reported annual savings for 2004; this level of savings was assumed for each year
from 2004 through 2008.
d PGE identifies plan program effects for 2005-2011; the 2013 value was extrapolated.
8 PSE values include residential fuel conversion programs; stand-alone energy-efficiency program
savings were not available.
f The energy savings goals for the California utilities include all programs administered by the utilities,
including those offered to direct access customers. Some portion of savings from energy-efficiency
standards is included in these goals, as the utilities administer programs to support their
implementation.
9 Sierra Pacific only reported annual savings for 2005; this level of savings was assumed for each year
from 2004 through 2008.
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Figure 2-1. Summary of Utility Energy Load Growth Forecasts Through 2013 With
and Without Energy Efficiency Programs
4.0%
3.5%-
3.0%
w 2.5%-
2.0%-
1.5%-
1.0%
0.5%-
0.0%
~ Load Growth Without Efficiency ¦ Load Growth Net of Efficiency
Source: Hopper et al., 2008.
In reviewing resource plans, it is important to be aware that these plans are developed using
locally and or regionally specific information and guidelines. In the NWPCC planning process,
efficiency is treated prominently, consistently, and transparently, and is included in the plan as
achievable potential, not as the impacts of specific program portfolios. In most utility resource
plans, efficiency impacts are based on estimates from programs likely to be implemented.
2.3 Energy Efficiency Resources in Current Program Portfolios
A number of states and utilities now have substantial experience deploying energy efficiency
resources in comprehensive program portfolios, and the results of these efforts provide support
for estimates of the savings that can be achieved through planned energy efficiency initiatives.
The reported impacts from a sampling of these programs include:
California. The state's three largest investor-owned electric utilities have just completed
a three-year program cycle (2006-2008), driven by plans developed under the California
Public Utilities Commission (CPUC). A snapshot of the companies' cumulative savings
impacts to date is shown in Figure 2-2.
Figure 2-2 shows the total gigawatt-hours (GWh) of energy savings estimated for each
month from measures installed in that or prior months. "Committed" refers to savings
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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from projects that participated in programs in that month, but whose installation was not
completed in that month. The installed savings in Figure 2-2 were reported in the CPUC
Web-based reporting system, and represent about 3 percent of estimated 2008 investor-
owned utility electricity sales. This means that, over the 2006—2008 program period,
savings are averaging about 1 percent of total sales for each year's program efforts. This
is consistent with the efficiency savings potential estimates in the studies summarized in
Table 2-1.
Minnesota. The state's Conservation Improvement Program (CIP) has continued fairly
steadily for more than a decade. A 2005 report by the state's Office of the Legislative
Auditor found that the investor-owned utilities' CIP savings totaled 328 million kilowatt-
hours (kWh) in 2003 (Minnesota Office of the Legislative Auditor, 2005). This is about
0.8 percent of 2003 investor-owned utility electricity sales, which is also within the range
of estimates found in the potential studies in Table 2-1.
Pacific Northwest. In the NWPCC Fifth Power Plan cited earlier, the Council estimates
the impacts of regional energy efficiency programs operated since 1980. Figure 2-3
summarizes those estimates. While this figure includes the impacts of state building
energy codes and federal appliance standards, the great majority of energy savings
come from utility and Northwest Energy Efficiency Alliance programs. The 2000 average
megawatts of energy savings, not including the savings from federal codes, are equal to
about 7 percent of 2002 electricity sales. The annual savings over the last 10 years
covered by the figure are close to 1 percent of sales.
Vermont. The Efficiency Vermont program, in which a single entity is contracted to
deliver energy efficiency programs for the whole state, reports significant impacts from
its programs. Efficiency Vermont estimates that its program portfolio saved about
103,000 megawatt-hours, or about 1.7 percent of total electricity sales in 2007, which is
at the high end of efficiency potential estimates (Efficiency Vermont, 2008). This savings
level is the highest to date and is the result of significantly higher levels of investment in
energy efficiency programs. This level of savings is estimated to fully offset growth in
electricity sales. Figure 2-4 illustrates the annual impacts of the Efficiency Vermont
program since 2000. Figure 2-4 also offers a result that might be unexpected: at higher
levels of energy efficiency savings, the amount saved per dollar spent goes up. While it
is intuitive to expect that the "law of diminishing returns" would eventually reduce the
savings yield per dollar, energy efficiency programs demonstrate that economies of
scale may also influence the savings yield per dollar.
These estimates of savings from energy efficiency typically represent the savings achievable
through utility- or state-administered programs. The Pacific Northwest stands out as an effort
that represents the savings from a more comprehensive set of energy efficiency policies.
National Action Plan for Energy Efficiency
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Figure 2-2. California Utilities' Energy Efficiency Program Impacts, 2006-2008
o
a>
c
>
Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Month
Source: CPUC Energy Efficiency Groupware Application reporting system:
.
Figure 2-3. Northwest Power and Conservation Council Efficiency Estimates
35,000
30,000
§ 25,000
S
if 20,000
>
> 15,000
10,000 -
5,000
0
¦ BPA and Utility Programs
¦ State Codes
~ Alliance Programs
~ Federal Standards
-Mimillll
1980 1985 1990 1995
Year
2000
2005
Source: NWPCC, 2009.
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Figure 2-4. Efficiency Vermont 2007 Impacts
en
C
C
C
<
c
a>
E
120,000
100,000 -
80,000 -
60,000 -
40,000 -
20,000 ¦
o
o
o
o*
a.
C71
C
a>
>
2000
2001
2002
2003
2004
2005 2006 2007
Year
Source: Efficiency Vermont, 2008.
2.4 Energy Efficiency's Potential Impact on C02 Emissions
Efficiency has long been discussed as a "no regrets" element of climate policy because it offers
a cost-effective energy resource even in the absence of greenhouse gas reduction goals or
associated policies. Thus, reducing C02 emissions associated with energy usage is just another
benefit to an already cost-effective strategy. Efficiency has been viewed as providing at least
two broad benefits in the climate arena: (1) slowing the growth of energy use, to buy time for
non-emitting supply technologies to reduce average emissions rates, and (2) reducing the cost
of meeting C02 emissions reduction goals.
Efforts to quantify the link between energy efficiency and C02 emissions have been fewer than
analyses of energy efficiency potential, and have generally been conducted in long-term,
aggregate frameworks at the national level. In electricity systems, because electricity usage is
distant from the generation facilities that emit C02, efficiency's impact on C02 emissions is
indirect, and it depends on specific factors like the hourly load shape impact of efficiency
measures and the marginal carbon emissions rate at a given hour for the affected power
system. Studies often use national or regionally averaged emission factors to address this
issue.
Recent studies of the impact of energy efficiency on C02 emissions include:
EPRI's PRISM analysis. This 2007 report included end-use efficiency in addition to a
range of low-carbon supply technologies in a high-level estimate of their potential for
reducing U.S. electricity-sector C02 emissions in 2030. The study assumed that
efficiency could reduce average annual growth rates by 30 percent, based on an
assumed average end-use energy intensity improvement of 20 percent. Combined with
National Action Plan for Energy Efficiency
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low-carbon supply technologies, efficiency would contribute substantially to a 45 percent
reduction in power-sector C02 emissions from the 2007 U.S. Energy Information
Administration (EIA) Annual Energy Outlook reference case. While the report does not
specify exact emissions impacts by technology type, interpretation of report graphics
indicates that efficiency would reduce 2030 C02 emissions by 200 to 300 million metric
tons, or about 12 to 18 percent of a combined 1,600 million metric ton reduction in 2030
(EPRI, 2007).
McKinsey & Company. McKinsey has developed several carbon abatement cost
curves that highlight the leading role of energy efficiency in low-cost abatement
strategies (McKinsey & Company, 2007). The mid-range cost curve shows that roughly 1
billion tons of C02 emissions reductions are available annually in the 2030 timeframe
through energy efficiency technologies (see Figure 2-5). Energy efficiency technologies
account for most of the lowest-cost resource options, shown on the left side of the
graphic. While the level of detail available in the report does not precisely segment
efficiency versus other technology impacts, McKinsey's analysis also estimates costs
per ton of C02 emissions reduced. Most energy efficiency technologies are shown as
negative-cost measures. This negative-cost calculation is based on net life-cycle costs,
measured against reference case estimates of energy supply costs. McKinsey does not
include non-capital costs, such as the administrative and other program costs needed to
overcome market barriers, and so may somewhat underestimate the total cost of
delivering efficiency resources. McKinsey's use of the life-cycle-cost framework, in which
efficiency investments show lower lifecyle costs than reference supply investments and
therefore have negative relative costs, does not suggest that efficiency bears no initial
capital cost.2 Ultimately, from the policy-maker's perspective, the issue of "negative cost"
is a question of relative costs—the relative cost of resource choices. If energy efficiency
resources cost less on a life-cycle basis than other resource choices, they would be
preferred in a least-cost policy.
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Figure 2-5. McKinsey Carbon Abatement Cost Curve
j»
a
~
^ 0
Residential
electronics
Residential
buildings-
Lighting
I Abatement Cost
-------
Figure 2-6. IPCC C02 Emissions Abatement Estimates
7-
6-
S 5-
<20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100 <20 <50 <100
Energy Supply Transport Buildings Industry Agriculture Forestry Waste
U.S. Dollars per Metric Ton of Carbon Dioxide Equivalents
~ Non-OECD/EIT
¦ EIT ¦ OECD ~ World Total
Source: IPCC, 2007.
OECD = Organisation for Economic Co-operation and Development; EIT = economies in transition.
Figure 2-7. CO2 Reductions From Energy Efficiency and Renewable Energy
2,500
O
c
o
_Q
S
2,000 -
1,500 -
1,000 -
500 -
| Energy Efficiency
~ Wind
| Biofuels
I I Biomass
| Photovoltaics
| Concentrating Solar Power
| Geothermal
- - Path for 60% Reduction
— Path for 80% Reduction
0 +
2005
2010
2015
2020
2025
2030
Year
Source: Kutscher, 2007.
2-14
Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Scenarios for a Clean Energy Future (CEF). The CEF study projected carbon
emissions and reductions out to 2020. In its advanced scenario, with maximum
reductions of 565 million tons of C02 in 2020 across a range of policies, energy
efficiency accounted for 65 percent of total emissions reductions. The CEF study
projected investment costs of $82 billion in 2020, offset by energy bill reductions of $189
billion, for a net economic benefit of $107 billion.
Action Plan Vision for 2025. The Action Plan has a goal of achieving all cost-effective
energy efficiency by 2025. The national cost-effective energy savings estimate was
developed by extrapolating the costs and benefits from existing energy efficiency efforts;
this estimate has been translated into the C02 reductions that would result from
achieving this goal. The goal is equivalent to a reduction in greenhouse gas emissions
on the order of 500 million metric tons of C02 annually (National Action Plan for Energy
Efficiency, 2008a). The Vision does not assume a price for C02.
2.5 Summary of Findings
A review of the studies presented in this chapter leads to the following observations:
The scope of cost-effective energy efficiency is large, and a substantial percentage of
future energy needs can be met through efficiency resources. Several studies in the
electricity sector indicate that savings in the range of 1 percent of total sales annually are
achievable. Continued over several years, these modest annual savings can add up to a
large portion of a long-term forecast. These estimates suggest that efficiency policies
and programs can offset a significant portion of electric load growth, on the order of 50
percent or more (National Action Plan for Energy Efficiency, 2008a). The percentage of
load growth that can be offset depends in part on underlying forecast growth rates. In
high-load-growth areas, efficiency may have a lower percentage impact on load growth,
while in slower-growth areas, efficiency can offset a higher fraction.
Substantial energy savings and greenhouse gas reductions are possible through energy
efficiency programs administered by states, utilities, or third parties. The promise found
in potential studies is being borne out by measured impacts from programs operated in
some states over extended timeframes.
Extrapolating the costs and benefits of existing programs managed by states and/or
utilities reveals a national potential to meet 50 percent or more of load growth, or 20
percent of electricity demand and 10 percent of natural gas demand in 2030. In other
words, in 2030, peak electric demand would be 20 percent lower than it otherwise would
be, and natural gas demand would be 10 percent lower than it otherwise would be due
to the effect of cost-effective energy efficiency programs.
Studies that cover a full range of markets, end-uses, and technologies show substantial
energy efficiency savings opportunities across residential, commercial, and industrial
end-use sectors. While the efficiency potential found in a given region, state,
metropolitan area, or utility service territory depends on its unique mix of building stock,
industry sectors, and other factors, potential studies are relatively consistent in finding
savings opportunities in comparable ranges throughout the country.
The studies that calculate the C02 emissions impacts of energy savings show that
energy efficiency offers substantial low-cost opportunities to reduce C02 emissions.
National Action Plan for Energy Efficiency
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They estimate that efficiency could achieve on the order of one-eighth to one-half of the
reductions necessary in the 2025-2030 timeframe to attain a longer-term goal of
reducing C02 emissions by 60 to 80 percent by 2050.3
2.6 Notes
1 For more information, see Nadel et al. (2006).
2 The conclusion of the study is accompanied by the following important caution: "Achieving these
reductions at the lowest cost to the economy, however, will require strong, coordinated, economy-wide
action that begins in the near future." Further, the study makes it clear that achievement of the
identified potential will require strong policy support "needed to address fundamental market barriers."
The analysis does not account for the costs associated with such policies.
3 There is some confusion in the literature about some studies' association of the term "negative cost"
with energy efficiency investments. These studies use negative cost in a life-cycle-cost framework,
against a benchmark of reference case energy supply costs. In this framework, efficiency can be said
to bear negative costs on a life-cycle, comparative basis. Such findings should not be confused with a
present-day, investment-oriented framework, in which all resource choices bear initial capital and other
costs. From a policy-maker's point of view, the comparative life-cycle cost perspective can be
appropriate, and it is also true that the up-front costs of all resource choices must be considered.
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3: Costs and Benefits of Current Energy Efficiency
Investments
This chapter provides an overview of the costs and benefits of energy efficiency
programs and policies and presents key findings.
To better understand the role that energy efficiency can play in reducing C02 emissions, and at
what cost, it is important to review available information on the cost of saved energy, the level of
current investment in energy efficiency across the country, the resulting aggregate savings, and
the extent to which these efforts are capturing the available low-cost energy efficiency. This
chapter presents information and key findings on:
The cost of saved energy.
Current investments and savings from energy efficiency programs and policies.
The portion of low-cost, achievable energy efficiency being captured from current
investments.
3.1 Cost of Saved Energy
Various potential studies, resource plans, and program reports and evaluations have estimated
the cost-effectiveness of energy efficiency, both as an aggregate resource and as individual
measures and programs. Overall, these analyses find that energy efficiency is relatively
inexpensive, especially when compared with conventional energy supply resource options. A
sample of these estimates includes:
A 2004 ACEEE review of efficiency programs around the United States found that the
levelized life-cycle cost of saved energy for the programs reviewed ranged from 2.3 to
4.4 cents per kWh (Kushler et al., 2004). This compares favorably with avoided costs for
conventional power plants. It is important to note that the definition and the calculation
methods of "avoided costs" vary from state to state, so there is no single national
benchmark for the cost of electricity supply resources that would be avoided by
efficiency programs. In California, 2008-2009 estimates of avoided costs are in the
range of 9 cents per kWh. This is within a typical range of avoided costs filed in various
resource plans around the United States.
Consistently, a nominal calculation from ACEEE's State Energy Scorecard data
(Eldridge et al., 2008) shows an average cost of about 20 cents per first-year saved
kWh. On a levelized life-cycle basis, this translates to a cost of saved energy of
approximately 2 cents per kWh. This estimate would be termed the "program
administrator cost" for the saved energy; because customers typically pay a substantial
portion of total efficiency investment costs, the "total resource cost" of these savings
would be higher than 2 cents.1
The NWPCC's Fifth Power Plan (NWPCC, 2005) estimates levelized costs and benefit-
cost ratios for individual efficiency measures and end-uses. The levelized cost of saved
energy averages 2.4 cents per kWh, ranging from 1.2 to 5.2 cents. The Council's
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avoided cost estimates are unique and variable because it uses a mix of low-cost
hydropower and higher-cost fossil-fuel generation resources in a sophisticated hourly
modeling approach. An annual average cost of saved energy would fall within this range.
Efficiency Vermont's 2007 Annual Report (Efficiency Vermont, 2008) estimates the cost
of saved energy at 2.7 cents per kWh. Vermont's avoided costs for electricity supply are
estimated to average 10.7 cents per kWh.
The Minnesota CIP evaluation (Minnesota Office of the Legislative Auditor, 2005) shows
2003 costs of $52 million for annual savings of 328 million kWh. That averages to a cost
per first-year saved kWh of 16 cents per kWh. While the report does not calculate
levelized life-cycle costs of saved energy, based on typical measure lives this translates
to a levelized cost of 2 cents per kWh or less.
The July 2006 Action Plan report (National Action Plan for Energy Efficiency, 2006)
references 12 best practice program portfolios with lifetime levelized costs of $0.02 to
$0.05 per kWh for electricity measures and $0.06 to $2.32 per million Btu for natural gas
efficiency measures.
3.2 Total Costs and Savings of Investment in Energy Efficiency
Technologies and Programs
Energy efficiency has yielded important benefits across the U.S. economy over the last 35
years. However, while various analyses have sought to estimate total investment and benefits
from energy efficiency across the U.S. economy (e.g., Ehrhardt-Martinez and Laitner, 2008),
such efforts are limited by data and methodology constraints. Reports like the Rand study of
California's efficiency policies provide useful examples of the significant streams of economic
and other benefits these policies and programs deliver (Bernstein et al., 2000). Based on data
available, energy efficiency delivered through state- and utility-administered programs is funded
at the following levels and has provided the following benefits:
Approximately $2 billion (approximately 0.5 percent of utility revenues) is being invested
annually in state- and utility-administered energy efficiency programs.2
Cumulative annual electricity savings total 63 billion kWh (about 2 percent of retail sales)
and cumulative annual natural gas savings total 135 million therms (0.1 percent of retail
sales) as of 2006.3 The cumulative electricity savings have avoided the need for 16
gigawatts of new capacity.4
These estimates have been developed from a variety of available information sources,5 which
introduces inconsistencies in timeframes, reporting categories, universe of respondents, and
quality control of data. Due to data limitations, these initial values are likely to underestimate the
full contribution that energy efficiency investments are making to reduce energy demand as well
as the full level of energy efficiency investment. Some of the key limitations include:
The energy savings values only capture savings from administered energy efficiency
programs and do not reflect energy savings from other state and local efforts such as
building energy codes, state-level appliance standards, and local and state lead-by-
example initiatives.
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The energy savings values do not include the benefits from national efforts to promote
energy efficiency, federal appliance standards, or the autonomous rate of improvement
in efficiency across the economy.
The program funding values represent program costs alone and not the costs that
program participants may bear.
Additional attention is necessary to expand the breadth and accuracy of energy efficiency
resource information in order to improve the ability to measure progress toward all cost-effective
energy efficiency using these national performance metrics.
3.3 Macro-Economic Benefits of Efficiency Resource Investments
Some of the potential studies reviewed in this chapter assess the wider economic benefits of
energy efficiency investments. Examples include:
ACEEE state analyses. The Virginia study cited earlier, and other recent ACEEE state
efficiency potential studies, include state-level macroeconomic assessments of the
policies recommended in the study. In Virginia, the study estimates that in 2025,
electricity customers would save a net $2.2 billion on their bills, nearly 10,000 net new
jobs would be created, and the state economy would expand by almost $900 million.
The comparable ACEEE study in Ohio estimates net electricity bill savings of $3.3 billion
in 2025, 32,000 net new jobs, and $2.5 billion in increased gross state product.
EPRI PRISM study. EPRI used its general-equilibrium MERGE macroeconomic model
to estimate economic impacts from carbon emissions reduction policies, with and without
advanced technology deployment. The MERGE analysis estimated that a carbon
emissions policy scenario without advanced technology deployment could reduce gross
domestic product through 2030 by as much as $1.5 trillion. Full deployment of advanced
technologies as outlined in the PRISM analysis could reduce that impact by as much as
$1 trillion. Efficiency was estimated to provide about $250 billion, or about 25 percent, of
that $1 trillion impact reduction.
Scenarios for a Clean Energy Future. The CEF study did not include direct
macroeconomic modeling for its technology scenarios, because the incremental impacts
on gross domestic product were estimated to be too small to be meaningfully calculated.
However, a discussion paper included as an appendix estimated a range of possible
secondary economic impacts. This discussion, while not specific in its conclusions,
estimated that negative macroeconomic impacts from the clean energy scenarios would
in most cases be lower than the net economic benefits of the technology investments.
3.4 Investment Necessary to Achieve Economic Potential
Current levels of energy efficiency investment are substantially less than necessary to capture
all cost-effective energy efficiency. For example, leading energy efficiency programs being
deployed in some states, as described above, are being funded at 2 to 3 percent of energy
revenues and delivering energy savings on the order of 1 percent of total sales per year. If these
programs were deployed throughout the country, annual energy efficiency program funding and
investment would be on the order of four to five times larger. In this context, total efficiency
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program spending in the utility sector might rise as high as $10 billion annually if all states
pursued savings goals and program portfolios comparable to those in leading states.
These estimates do not reflect the investment requirements of implementing energy efficiency
policies such as building codes and minimum appliance standards. Further, focusing just on the
state efforts that have been designed to capture achievable cost-effective energy efficiency
would suggest that these investment levels should be higher.
3.5 Summary of Findings
The key findings in this area are summarized below:
Energy efficiency is a low-cost resource. The studies cited in this chapter show a
levelized cost of 2 to 5 cents per saved kWh of electricity. While some of these estimates
come from potential studies, many come from program impact reports, and are thus
borne out by program field experience.
Public investment in efficiency is a fraction of the levels justified by potential
assessments. If all states spent the fraction of revenues expended by leading states,
total utility-sector efficiency spending would be as high as five times the current national
total.
Efficiency can produce net economic benefits. There are macroeconomic benefits
from the pursuit of energy efficiency, including reduced energy expenditures for end-use
consumers, increased spending of saved energy dollars in other sectors, increased
employment and personal income, and increased total economic output.
3.6 Notes
1 For a more complete discussion of cost-effectiveness issues, see the Action Plan report
Understanding Cost-Effectiveness of Energy Efficiency Programs: Best Practices, Technical Methods,
and Emerging Issues for Policy-Makers (National Action Plan for Energy Efficiency, 2008c).
2 The annual spending value considers both ACEEE's 2006 actual electricity efficiency program
spending (Eldridge et al., 2008) and CEE's 2007 budget estimates for residential, commercial, and
industrial electricity and gas efficiency programs (Nevius et al., 2008). CEE budget estimates capture
responses from both CEE members and nonmember administrators of energy efficiency programs.
Program funding for low-income, load management, and other programs is not included in these
estimates. Actual 2006 spending for electricity efficiency programs comes from ACEEE, leveraging
EIA and ACEEE's independent information collection efforts.
3 Natural gas savings are from CEE for their members only (Nevius et al., 2008) and include estimated
savings from measures installed in 2006, as well as those installed as early as 1992 that were still
generating savings as of 2006.
4 Annual incremental electricity savings are from ACEEE (Eldridge et al., 2008) and cumulative
electricity savings are from EIA Form-861 data (EIA, 2008), both for year 2006. Values reflect reported
data for administered energy efficiency programs only and do not include low-income programs or
other load management efforts such as demand response. Cumulative savings do not capture those
programs administered by state entities. Peak electricity savings are from EIA Form-861 data for year
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2006 and reflect reported data for utility-administered energy efficiency programs only and do not
include load management programs.
5 For additional information on data sources and calculation methodologies see Appendix E of National
Action Plan for Energy Efficiency (2008a).
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4: Limitations to Advancing Energy Efficiency
Through Energy Pricing Policies
This chapter summarizes key barriers to energy efficiency and the extent to which price
signals can influence energy consumption. Reducing carbon emissions through energy
efficiency policies and programs requires that a broad suite of market and regulatory
barriers be addressed.
In traditional energy and environmental policy analysis, getting energy prices "right," such that
they fully reflect direct economic costs as well as indirect environmental social costs, is a central
concern.1 In this approach to policy-making, setting the right energy price signals would result in
the best allocation of resources among various options. It would suggest that proper price
signals would also capture the cost-effective energy efficiency resource potential embedded in
the various sectors of the U.S. economy.2 This chapter explores two factors that limit the effects
that price signals have in driving investments in energy efficiency:
The substantial and persistent market barriers that affect large portions of energy
end-use markets. Decades of experience in real energy markets, backed up by recent
analyses that seek to quantify the effects of market barriers, show that barriers are real,
large, and lasting, and require targeted policy and program initiatives to overcome.
There are both significant market barriers and regulatory barriers that limit investment in
cost-effective energy efficiency and which need to be addressed.
The limits of price elasticity in effecting net changes in energy use throughout the
economy. While price elasticity effects are real, they are also counteracted by other
forces such as income elasticity (the tendency for consumption to rise and fall with
income) and cross-elasticity (reduced consumption of one good in response to the
change in price of another good), such that the net effect of price signals on energy
consumption can be blunted. Price elasticities are further muted by the lack of
transparency in electricity and natural gas pricing and billing.
Following is a discussion of these factors and key findings.
4.1 Market Barriers to Energy Efficiency
One of the roles of efficiency potential studies is to identify the cost-effective technologies,
practices, and programs that reduce life-cycle or societal costs, because such measures justify
policy or program intervention to remediate market failures. Substantial work in this area has
been undertaken, as seen in Chapter 2. Further, a principal purpose of many of the energy
efficiency programs and policies already in place at the national, state, and local levels is to
reduce market or policy barriers that can be shown to significantly limit energy efficiency
investment, relative to the level of investment that would occur if markets operated "efficiently."
There is substantial economic research on the existence and magnitude of market barriers to
energy efficiency and on the ability of policies and programs to overcome them.3 Barriers to
energy efficiency are reviewed in several Action Plan documents (National Action Plan for
Energy Efficiency, 2006, 2008a, 2008b). Other market barrier research includes the
International Energy Agency's recent Mind the Gap report (IEA, 2007). This report segments
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barriers into phenomena that classical economists recognize, conditions that behavioral
economists and psychology and sociology practitioners might study, and conditions that energy
efficiency practitioners experience.
Several commonly acknowledged market barriers are described below:
The principal-agent barrier. This involves a condition in which one entity (the agent)
makes energy efficiency investment decisions and another entity (the principal) pays the
energy operating costs that flow from those decisions. The most common principal-agent
barrier observed in the United States is the builder-buyer barrier, in which building
designers or construction contractors determine the efficiency levels for major building
systems and equipment. This can include building thermal performance, heating and
cooling systems, hot water systems, lighting systems, and major appliances. The
builder's equipment and design choices will ultimately determine much of the building's
energy consumption requirements. Builders will rarely optimize energy performance on a
life-cycle basis, unless they are under contract directly to informed buyers who specify
such performance and are willing to pay for it. This "custom-building" or owner-designed
construction accounts for a small minority of U.S. building starts. In residential or
commercial rental property, tenants normally lack the ability to specify energy
performance for major building systems or appliances, and landlords typically pass
through energy costs to tenants, so they lack the incentive to reduce energy usage in
their buildings. Principal-agent problems can exist even within organizations: for
example, if a procurement department buys energy-using equipment for the organization
on a low-bid first cost basis, and facility operators seek to reduce operating costs
through efficient technologies that have a cost premium, the organization may
chronically under-invest in efficiency.
The transaction-cost barrier. Economists sometimes use terms like "information-cost"
or "search cost" for this type of barrier. It refers to the condition in which energy users,
even if they have the ability to consider the energy efficiency performance of a product
or system, are unwilling to invest the time, effort, and analysis to make the best
economic decision. Residential and small commercial consumers frequently experience
this situation: they need to replace a product, such as a water heater, but lack the
knowledge, expertise, and time to figure out the most economical decision. These
factors—information, time, and analytical skill—add up to a transaction barrier that
average consumers are unwilling or unable to overcome. By contrast, some larger
customers and some energy professionals have the information, expertise, and time to
make better decisions, so some customer markets are less affected by this barrier.
Many other conditions are often referred to as barriers. Consumers' aversion to risk, competing
attributes of products that drive decisions based on non-energy factors, and other conditions
can be observed in markets and consumer behaviors. Understanding these phenomena can be
helpful for some purposes, such as designing the marketing, outreach, and delivery systems for
efficiency programs, or public education and media efforts. However, the scope of this paper
limits the extent of such a review, so this assessment is limited to the more classic barrier types.
These barriers have a significant limiting effect on total investment by energy end-users and
others in cost-effective energy efficiency.
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4.2 Regulatory Barriers
Policies can create additional barriers in some cases by adding constraints or prescriptions to
market structures or practices. In the power sector, regulatory barriers to efficiency revolve
around utility resource planning and ratemaking policies.
Examples of regulatory barriers to efficiency in the power sector include:
Resource planning practices. While efficiency programs can be deployed rapidly, their
full potential typically takes decades to realize. The markets for new buildings, energy
systems, and other end-use products take many years to turn over; efficiency programs
must be in place for the duration of such cycles to fully realize efficiency's market
potential. However, not all jurisdictions undertake resource planning on the 10- to 20-
year timeframes needed to adequately plan for efficiency. In addition to the time horizon
issues, resource planning must include robust and consistent resource assessment
methods that treat demand and supply resources with comparable levels of analytic rigor
(National Action Plan for Energy Efficiency, 2007c).
Ratemaking practices. The mechanisms by which utilities recover costs and earn
returns can have a strong effect on investor-owned companies' willingness to invest in
demand-side resources. The predominant approach to utility cost recovery in most U.S.
states links sales to the recovery of variable and some portion of fixed costs, including
allowed margins. If kWh sales fall short of estimates, utilities' fixed cost recovery and
shareholder returns can be reduced substantially. This limits many companies'
willingness to invest substantial amounts in energy efficiency (National Action Plan for
Energy Efficiency, 2007a).
Unbundling of distribution, transmission, and generation functions. Restructuring
of these three utility system functions can be argued to increase economic efficiency by
opening markets to competitive forces. From a resource planning point of view, however,
unbundling of these functions can also fracture the jurisdictional ability to plan for and
estimate the resource value of energy efficiency. This is particularly true for distribution-
only utilities regulated by state or local government. Because transmission and
generation are outside these agencies' jurisdiction, it can be difficult for them to assign a
fully bundled set of values to energy efficiency resources. Transmission system
operators, in a related way, are able to value only the transmission-related resource
benefits of efficiency, and in some cases (e.g., ISO New England and PJM
Interconnection) can value the generation capacity value if a capacity market has been
established.
These barriers are a result of state-level policies, and they have a significant impact in limiting
investment in cost-effective energy efficiency. The Vision for 2025 and other Action Plan
materials extensively discuss these barriers and policy and program options for addressing
them.
4.3 Price Elasticity
"Price elasticity of demand" is an economist's term for the effects of changes in energy prices on
energy consumption. Price elasticity assumptions underlie many energy policies, relying on
energy prices to change energy use patterns. While price elasticity is an important market
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factor, experience in end-use markets indicates the significant limits of this effect. Thus, it is
important to discuss whether pricing policies alone are sufficient to realize the full potential for
energy efficiency. This section discusses the limits of price elasticity and the implications of
such limits for policies to encourage efficiency investment in the power sector.
The limits of price elasticity can be summarized in the following points:
Market barriers. As discussed above, barriers such as the principal-agent problem and
the transaction-cost problem have the effect of isolating some energy end-use markets
from price elasticity effects. This barrier affects a large fraction of residential and
commercial end-use markets (IEA, 2007).
Price transparency. End-users can only respond to price signals when prices are
transparent: that is, when prices are perceived at or before the time of energy
consumption. For example, in motor fuel markets, drivers see posted fuel prices at retail
stations before making their purchases, and thus have a very transparent signal that
may affect both short-term driving behavior and longer-term vehicle purchase behavior.
By contrast, in utility markets, customers receive bills after they have consumed
electricity. Bills are often complex, such that customers may have to do arithmetic to
discover the net price per kWh, then compare that price with what they paid in previous
periods. This can mask price effects. Moreover, vehicle drivers have more transparent
choices regarding future energy use: some can drive less in the near term, and/or buy
more fuel-efficient vehicles in the longer term. Electricity consumers, however, typically
have dozens of power-using devices in their homes or businesses, and they do not
typically know which devices will yield the greatest savings if used differently or
replaced. This compounds the lack of price transparency with a lack of transparency for
choices in demand reduction. Further, the traditional ratemaking practice of average-
cost, non-time-differentiated pricing tends to mask the marginal cost of producing
electricity. While many states are developing rate and pricing approaches that better
match the marginal cost of power to retail rates, the prevailing price structures in most
states continue to rely on average-cost-based rates.
Countervailing price effects. Price elasticity is but one element of economic price
theory. Income elasticity and cross-elasticity effects also operate in energy markets, and
they can serve to counteract price elasticity effects. Income elasticity refers to the effect
of income on energy demand. In prospering economies, rising incomes tend to drive up
the demand for energy services. For example, consumers want larger homes and more
appliances as their incomes increase in good economic times. Cross-elasticity refers to
effects in which changes in energy prices cause energy users to reduce consumption of
other goods, rather than directly reducing energy consumption. For example, consumers
may continue to drive to a shopping center, using the same amount of fuel, but may
make fewer discretionary purchases on a given shopping trip. Electricity users may see
electricity as an essential service and may choose to cut back on entertainment or other
expenses if utility bills rise. While it is difficult to quantify the net effects of price, income,
and cross-elasticity, for the purposes of this paper it is sufficient to point out that price
elasticity effects may be limited in some markets.
Lack of substitutes. The lack of practical substitutes for electricity, natural gas, or
heating oil in many end-uses also impacts price elasticity. Energy is needed to provide
services such as heating or hot water, cooling, and ventilation, in addition to food
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preparation, cleaning, and entertainment. Fuel switching is frequently not technically
feasible or economically attractive.
This chapter's discussion of the limits of price elasticity is not meant to suggest that energy
pricing policies have no impact on promoting energy efficiency. Rather, the intent is to point out
that to realize the potential for efficiency in all end-use markets, pricing policies will need to be
complemented with other approaches.
4.4 Summary of Findings
Assuming that a principal impact of climate policies will be to raise energy prices, energy prices
alone will not increase efficiency investment to the level needed to tap the majority of
efficiency's economic potential. Price signals alone are insufficient because:
Market and regulatory barriers are large and persistent, especially the principal-agent
barrier, information-cost or transaction-cost barriers, and regulatory policies in the area
of utility ratemaking.
The price elasticity of energy consumption in many residential and commercial markets
is relatively weak, due to countervailing elasticity effects. Relying solely on price
elasticity to drive efficiency investment is unlikely to lead to the realization of a large
fraction of efficiency potential.
More analysis is needed to quantify the impacts of specific barriers and evaluate the
solutions designed to address them.
4.5 Notes
1 In practice, environmental costs are incorporated to some degree through a number of different
mechanisms. For example, some state utility commissions require utilities to apply factors
representing the societal costs of environmental externalities (e.g., cost per ton of C02 emitted) when
conducting resource planning. Some federal and state emissions regulations require emission controls
that increase costs of power plants. These costs are ultimately reflected in electric rates.
2 Selected recent references on price elasticity include Barbose et al. (2004), Faruqui and Wood (2008),
Neenan (2008), McDonough and Kraus (2007), and Siddiqui (2003).
3 One of the fundamental distinctions made in the market barrier literature is between market barriers
and market failures. Some economists distinguish barriers and failures by defining a market failure as
a condition that reduces energy efficiency and economic efficiency, whereas a market barrier is a
condition that reduces energy efficiency without necessarily reducing economic efficiency. For
example, one could point out a market barrier that keeps home builders from constructing homes that
use 75 percent less energy than current building codes require. However, this condition would only be
classified as a market failure if the life-cycle cost of the home were lower at the 75 percent energy
savings level than at the current code level. If it can be shown that energy performance at that level
does not reduce overall life-cycle costs, builders' unwillingness to build to that level of performance
would not be a market failure. If, by contrast, a performance level 30 percent better than current codes
can be shown to reduce life-cycle costs, and builders still fail to build to this level of performance, that
would be deemed a market failure.
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5: Summary of Energy Efficiency Policies and
Programs
This chapter reviews the policies and programs that can address the key market and
regulatory barriers to energy efficiency. It also outlines tools and resources available
through the Action Plan to address these barriers and presents key findings.
A common rationale for public policy and programs aimed at energy efficiency is removing the
known barriers to energy efficiency in key end-use markets. Another important focus is in the
policy arena itself, such as reforming regulatory policies to remove utility disincentives to
efficiency investment. Market barriers can be addressed through direct policy interventions (e.g.,
building codes, appliance standards, setting energy efficiency resource requirements) and
through voluntary, information- or incentive-based programs administered by utilities,
government entities, and third parties. Addressing regulatory barriers involves a review of
regulatory policy specifics and modifications that align with the delivery of energy efficiency
where it is cost-effective.
Policies and programs are currently used to:
Address market barriers. A suite of programs are employed by many state and local
governments, utilities, and others to address the market barriers limiting investment in
energy efficiency. These programs generally target the following market opportunities:
- Purchase of individual products
- Construction of new buildings
- Improvement of existing facilities
Address regulatory barriers. The regulatory barriers can be addressed by state policy-
makers, utilities, and others through policies in the following areas:
- Utility regulatory issues
- Pricing policies
- Ratemaking policies
5.1 Addressing Market Barriers
This section summarizes the policy and program options most commonly used today to address
market barriers and increase energy efficiency in end-use markets. It matches policy/program
options to the main markets affected by barriers. Table 5-1 summarizes this approach.
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Table 5-1. Policy/Program Options Matched to Markets
Policy/Program Option
Market Focus
Individual
Products
New
Construction
Existing
Buildings/
Facilities
Mandatory appliance standards
X
Product labeling
X
Voluntary appliance standards
X
Minimum building codes
X
Voluntary building standards
X
Building labeling/benchmarking
X
X
Retrofit programs
X
Education and outreach
X
X
X
Government lead-by-example
X
X
X
Administered energy efficiency
programs
X
X
X
5.1.1 Purchase of Individual Products
Product purchases exemplify a "lost-opportunity" market, in that consumers or businesses
routinely purchase energy-using products or equipment, and each purchase represents an
opportunity that will be lost if the efficiency program does not influence the purchaser to make a
more efficient choice. Principal-agent and transaction-cost barriers can turn millions of these
routine transactions into lost opportunities. Fortunately, there are several policy tools for
reducing these lost opportunities. These include minimum appliance standards and approaches
that go beyond standards, as discussed below.
Mandatory minimum appliance standards. Minimum appliance standards help
address the principal-agent problem in new construction and in leased space, as well as
the transaction-cost barrier that arises in the typical purchase of an energy-using
product. The latter is best highlighted by explaining how purchases are frequently made.
If, for example, a hot water heater, air conditioner, or refrigerator fails, the owner's first
concern is to replace the unit as soon as possible. This "panic purchase" situation tends
to severely truncate any broader consideration of efficiency options, and tends to drive
consumers toward models that are available and affordable on short notice. For many of
the larger energy-using products, the new construction market and the retrofit markets
have relatively equal sales, emphasizing the role of appliance standards in addressing
these various barriers.
Appliance standards play a complementary role to building codes by addressing the
devices that consume energy within the building. This is particularly true for residential
buildings, where federal standards cover most major energy-using devices. It is less so
for commercial buildings, where some types of heating and cooling equipment—and
most lighting systems—are not covered by federal standards.
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The U.S. Department of Energy (DOE) manages the federal minimum appliance
standard program, which was first authorized in 1987 and currently covers approximately
50 products across the residential, commercial, and industrial sectors. States are able to
set standards for product or equipment types that are not covered by federal law.1
ACEEE's analysis indicates that several technologies represent opportunities for states
to enact standards (Nadel et al., 2006). Historical precedent indicates that standards,
once enacted at the state level, tend to become federal standards over time.
Manufacturers may oppose state standards, but once those standards are enacted, they
often negotiate federal standards to avoid having to contend with multiple standards in
customer markets. As of October 2008, 16 states have set their own appliance
standards.2
Voluntary product standards and promotion. This approach addresses the principal-
agent and transaction-cost problems through voluntary approaches. The leading
example is the ENERGY STAR® program, introduced by EPA in 1992. The program's
strategy was to specify and promote products that are significantly more efficient than
minimum standards and to provide efficient choices for product categories not covered
by standards. Specifications are set to identify efficient products that are cost-effective to
the consumer, offering short simple paybacks, while providing for the features and
performance consumers expect. The ENERGY STAR label is now used on more than 50
product categories across the residential, commercial, and industrial sectors. Many
types of organizations are using ENERGY STAR requirements as part of their energy
efficiency efforts. These include:
- Retailers in their retail stores.
- Federal, state, and local governments establishing procurement policies requiring the
purchase of ENERGY STAR qualifying products.
- Energy efficiency program administrators using ENERGY STAR branding, products,
programs, and tools as part of their energy efficiency programs.
Product energy labeling. Congress established the Federal Energy Guide labeling
program in the 1970s to provide basic energy use information for major energy-using
products. The yellow Energy Guide labels seen on home appliances and other products
make it easier for consumers to select efficient models by reducing the transaction costs
of comparing the energy efficiency of different models. This provides additional energy
use information beyond the binary (yes/no) designation of ENERGY STAR.
5.1.2 New Building Construction
The new building construction market is another "lost-opportunity" market. The design decisions
made before construction are difficult and expensive to correct later, making new construction
the most cost-effective time to achieve major energy savings in the building stock. The new
construction market is also home to one of the largest and most persistent market barriers that
limit energy efficiency investment. In U.S. housing and commercial construction markets, the
builders who make efficiency decisions in design and construction are typically far removed
from the occupants responsible for paying the building's energy bills. The "agent"—the builder—
is motivated primarily to limit upfront construction costs, whereas the "principal"—the ultimate
owner/tenant who pays the energy bills—is motivated to find the lowest total cost of owning and
operating the building. In U.S. construction markets, many buildings are built speculatively,
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meaning that the builder does not know the ultimate owner/occupant before key design and
construction decisions are made. Under such conditions, builders chronically under-invest in
efficiency. This persistent principal-agent barrier has been addressed through policy action in
building codes and beyond code programs.
Mandatory building energy codes. State and local governments commonly use
building energy codes to address the principal-agent problem. Building energy codes
primarily address the thermal performance of the building envelope—insulation and
window efficiency; air leakage through walls, ceilings, and window and door assemblies;
and in some cases leakage from heating and cooling ducts. Codes are limited in most
cases to the "envelope" for two reasons:
- The envelope involves the most permanent design and construction decisions,
because these components can last indefinitely and can be difficult or expensive to
rebuild after construction.
- Federal law pre-empts states from regulating most heating, cooling, hot water, and
other appliances. These devices can be replaced somewhat more quickly (on a 10-
to 30-year cycle), typically do not require expensive construction modifications to
replace, and are addressed through the appliance standards discussed above.
The majority of states have relatively recent building codes in force for both residential
and commercial buildings.3 Beyond the basic question of whether an energy code exists,
the relative stringency of the code can also reflect the principal-agent problem. Because
builders participate in the code development and adoption process, and are influential
economic interests in most states and localities, they can influence the stringency of
building energy codes. Stringency is an important issue in developing, adopting, and
implementing energy codes. Other important issues include builder training,
enforcement, and verification.
Voluntary, beyond-code programs. Regardless of the presence of building codes,
programs such as ENERGY STAR that establish performance levels more stringent than
codes also work to address the principal-agent barrier while providing greater energy
savings. ENERGY STAR encourages buyers to evaluate the energy performance of a
building before buying and influences builders to upgrade the energy performance of
their buildings. Programs such as ENERGY STAR are being used to establish a market
for efficient, beyond-code buildings and are used in energy efficiency programs to offer
more efficient buildings and procure energy savings by the utility. These programs
include verification protocols and require the development of a building rating
infrastructure to ensure that the buildings are constructed to more efficient levels.
Significant market penetration of buildings built to these voluntary standards is being
achieved; for example, ENERGY STAR new homes represent more than 20 percent of
new home starts in many metropolitan areas (EPA, 2008).
5.1.3 Existing Facility Improvements
Beyond the lost-opportunity markets driven by equipment replacement and new construction
cycles, a vast set of energy efficiency measures can be installed as elective retrofits and
improvements. Many lighting measures, insulation, air leakage reduction, controls, and other
technologies can be cost-effective to install without waiting for a time-of-replacement point.
These retrofit measures hold significant energy savings potential, but they also present
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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challenges in reaching customers and engaging trade allies because there are typically few
existing market channels through which to promote these options. Getting retrofits to occur
takes much more active marketing—and sometimes additional administrative effort to
coordinate marketing and delivery—than do measures that can be driven through existing
market channels.
Home weatherization measures provide an example of the challenges faced by programs aimed
at retrofit measures. With much of the U.S. housing stock built before the current era of high
energy prices, environmental concerns, and advances in building design, there are enormous
opportunities for improving home insulation, windows, air leakage, duct leakage, lighting, and
other features. However, reaching homeowners one by one and customizing measures and
installation techniques to each home can be challenging. These challenges stem in part from
the diverse and complex nature of home improvement markets, the overriding effect of which is
to increase transaction-cost barriers.
Key programs operating in U.S. markets today that seek to overcome these barriers include:
Low-income weatherization. The federal Weatherization Assistance Program, which is
administered through state and local organizations, currently serves about 100,000
homes annually with a range of retrofit measures, from air and duct leakage reduction to
insulation and equipment replacement.
Comprehensive home retrofits. Some states and utilities offer packages of retrofit
services to residential customers. One of the leading national umbrella efforts for these
programs is Home Performance with ENERGY STAR. This program takes a
comprehensive approach to home retrofits, using advanced diagnostics and treatment
methods, qualified home professionals, and quality assurance protocols to deliver
energy efficiency solutions that reduce energy bills while improving comfort. This
package has been designed to tackle the specific barriers found to be present in the
residential home improvement marketplace.
Commercial building retrofits. Several states and utilities offer direct installation, re-
commissioning, and customized retrofit programs for non-residential customers.
ENERGY STAR Buildings is a commonly used umbrella approach for many of these
efforts; it uses a benchmarking approach to determine relative energy performance.
Many building owners then pursue a range of retrofits and operating practices to improve
the building's performance to a level that can be recognized by the ENERGY STAR
program.
Industrial assistance. Federal and state programs support a variety of industrial
technical assistance. EPA's Industrial ENERGY STAR programs, DOE's Office of
Industrial Technologies programs, and numerous state industrial programs offer
analytical tools, recognition, technical assistance, and in some cases financial
incentives.
In the 2009-2011 timeframe, these and other efficiency programs for homes and businesses
are receiving substantial federal grant support through the American Recovery and
Reinvestment Act (ARRA). Additional information on ARRA funding and technical assistance is
available on the Action Plan Web site.4
National Action Plan for Energy Efficiency
5-5
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5.1.4 Standardized Benchmarking of Building Energy Use
Assessing the energy performance of new and existing buildings through standardized protocols
and benchmarks is a growing practice in the United States and countries around the world. This
practice addresses the transaction-cost barrier in the purchase, resale, and leasing of building
space. It also works as an information management system to help building owners/managers
understand and ultimately reduce their energy use and costs. This benchmarking and
monitoring practice requires collection of data both from the energy provider and the building
owner to generate ratings that reflect key building characteristics as well as actual energy use.
An important issue affecting the cost and wider use of benchmarking is the standardization of
energy billing data, so customers can access utility bills and other data, download the data into
software tools, and assess energy performance on a common basis in various states and utility
service areas around the country. The Action Plan has developed guidance on standardizing
access to energy data; the Utility Best Practices Guidance for Providing Business Customers
With Energy Use and Cost Data report (National Action Plan for Energy Efficiency, 2008d).
5.1.5 Education and Outreach
A number of organizations provide education and outreach at the national, state, and local
levels to address informational barriers and help consumers adopt energy-saving practices that
complement energy-efficient products and buildings.
5.1.6 Government Lead-by-Example
Federal, state, and local governments command significant building square footage and product
procurement efforts across the country, and they can help drive the marketplace toward efficient
products and practices. State and local governments in particular spend about $12 billion
annually on energy bills across more than 16 billion square feet of building space (EPA, 2006).
A number of leading states and local governments are pursuing energy efficiency practices
throughout their facilities through executive and/or legislative requirements.
5.1.7 Administered Electricity and Natural Gas Efficiency Programs
Utility sector efficiency programs seek to address barriers in markets for new construction and
existing building improvements, as well as equipment replacement programs. They dovetail with
many of the policies outlined above, though they generally are not connected to mandatory
regulatory policies like building codes and appliance standards. By providing a range of market
transformation efforts, technical assistance services, and financial incentives, utility- and state-
administered energy efficiency programs can achieve significant impacts across all major end-
use markets.
These voluntary programs are needed to realize the maximum achievable potential for energy
efficiency resources. Building energy codes tend to be limited in stringency compared with an
economically optimal level of performance, and they also tend to contain simplified, prescriptive
measures addressing each component separately. Voluntary programs can be based on
measures designed to realize a greater fraction of the economic potential in new construction.
They can play a similar role in equipment-replacement markets, where minimum standards
typically capture only part of the cost-effective efficiency potential. Voluntary programs can also
cover a wider range of products, services, and design and operating practices, beyond those
typically affected by building codes and appliance standards, adding to their ability to realize a
greater portion of efficiency potential.
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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5.2 Addressing Regulatory Barriers
Effectively addressing regulatory barriers is fundamental to achieving all cost-effective energy
efficiency investment. In the electricity and natural gas sectors, these barriers involve
ratemaking and resource planning issues. While not the primary focus of this paper, policies
affecting clean distributed generation technologies such as combined heat and power can also
inhibit efficiency investment. These include utility interconnection policies and tariff policies
regarding standby and supplemental power.
As with efficiency programs, the Action Plan has dedicated substantial effort to exploring the
policy issues involved in redirecting utility regulatory policies to encourage utility and customer
investment in energy efficiency. These issues include:
Integrating energy efficiency into resource planning
Providing sufficient, timely, and stable recovery of program costs
Addressing utility revenue stability given the reduction in throughput from efficiency
Providing incentives to shareholders for measured and verified savings
Designing rates to maximize customer incentives for energy efficiency
These issues are discussed in the Action Plan report (National Action Plan for Energy
Efficiency, 2006), with substantial detail provided in additional Action Plan guides and papers.
These documents can be found at www.epa.gov/eeactionplan.
5.3 Action Plan Vision for 2025 and Related Resources
The Vision for 2025 provides a comprehensive framework for overcoming a state's market and
regulatory barriers to investment in cost-effective energy efficiency. It establishes a long-term
goal of achieving all cost-effective energy efficiency by 2025, defines 10 specific implementation
goals, and outlines additional policy and program steps for each goal. The Vision framework is
based on over two decades of program and policy experience. Implementation of these goals by
2015 to 2020 would put the country on the path to achieving all cost-effective energy efficiency.
Substantial progress has been made, as can be seen by reviewing the policies in place across
the 50 states (see Table 5-2). Much more progress is needed to establish the necessary policy
foundation for energy efficiency, though, as Table 5-2 shows.
National Action Plan for Energy Efficiency
5-7
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Table 5-2. State Progress in Meeting the National Action Plan for Energy
Efficiency Vision
Implementation Goal and Key Steps
States Having Adopted Policy Step as of
December 31, 2007
Electricity Services
Natural Gas Services
Completely
Partially
Completely
Partially
Goal One: Establishing Cost-Effective Energy Efficiency as a High-Priority Resource
1
Process in place, such as a state
and/or regional collaborative, to
pursue energy efficiency as a high-
priority resource.
14
0
14
0
2
Policy established to recognize
energy efficiency as high-priority
resource.
21
22
8
8
3
Potential identified for cost-effective,
achievable energy efficiency over
the long term.
25
1
13
0
4
Energy efficiency savings goals or
expected energy savings targets
established consistent with cost-
effective potential.
15
3
5
2
5
Energy efficiency savings goals and
targets integrated into state energy
resource plan, with provisions for
regular updates.
0
16
0
1
6
Energy efficiency savings goals and
targets integrated into a regional
energy resource plan.3
TBD
TBD
TBD
TBD
Goal Two: Developing Processes to Ali<
Incentives Such That Efficiency and Su
jn Utility and Other Program Administrator
aply Resources Are on a Level Playing Field
7
Utility and other program
administrator disincentives are
removed.
17
8
18
5
8
Utility and other program
administrator incentives for energy
efficiency savings reviewed and
established as necessary.
10
5
5
2
9
Timely cost recovery in place.3
TBD
TBD
TBD
TBD
Goal Three: Establishing Cost-Effectiveness Tests
10
Cost-effectiveness tests adopted
which reflect the long-term resource
value of energy efficiency.
29
2
9
0
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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Implementation Goal and Key Steps
States Having Adopted Policy Step as of
December 31, 2007
Electricity Services
Natural Gas Services
Completely
Partially
Completely
Partially
Goal Four: Establishing Evaluation, Measurement, and Verification Mechanisms
11
Robust, transparent EM&V
procedures established.
14
6
5
2
Goal Five: Establishing Effective Energy Efficiency Delivery Mechanisms
12
Administrator(s) for energy
efficiency programs clearly
established.
24
2
13
1
13
Stable (multi-year) and sufficient
funding in place consistent with
energy efficiency goals.
4
9
2
4
14
Programs established to deliver
energy efficiency to key customer
classes and meet energy efficiency
goals and targets.
24
2
7
0
15
Strong public education programs
on energy efficiency in place.
18
5
13
6
16
Energy Efficiency program
administrator engaged in developing
and sharing program best practices
at the regional and/or national level.
30
0
18
0
Goal Six: Developing State Policies to Ensure Robust Energy Efficiency Practices
17
State policies require routine review
and updating of building codes.
28
13
28
13
18
Building codes effectively enforced.3
TBD
TBD
TBD
TBD
19
State appliance standards in place.
11
0
11
0
20
Strong state and local government
lead-by example programs in place.
13
24
13
24
Goal Seven: Aligning Customer Pricing and Incentives to Encourage Investment in
Energy Efficiency
21
Rates examined and modified
considering impact on customer
incentives to pursue energy
efficiency.
7
5
2
0
22
Mechanisms in place to reduce
consumer disincentives for energy
efficiency (e.g., including financing
mechanisms).
4
1
0
0
National Action Plan for Energy Efficiency
5-9
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Implementation Goal and Key Steps
States Having Adopted Policy Step as of
December 31, 2007
Electricity Services
Natural Gas Services
Completely
Partially
Completely
Partially
Goal Eight: Establishing State of the Art Billing Systems
23
Consistent information to customers
on energy use, costs of energy use,
and options for reducing costs.3
TBD
TBD
TBD
TBD
Goal Nine: Implementing State of the Art Efficiency Information Sharing and Delivery
Systems
24
Investments in advanced metering,
smart grid infrastructure, data
analysis, and two-way
communication to enhance energy
efficiency.
5
29
b
b
25
Coordinated energy efficiency and
demand response programs
established by customer class to
target energy efficiency for
enhanced value to customers.3
TBD
TBD
b
b
26
Residential programs established to
use trained and certified
professionals as part of energy
efficiency program delivery.
9
0
9
0
Goal Ten: Implementing Advanced Technologies
27
Policies in place to remove barriers
to combined heat and power.
11
24
b
b
28
Timelines developed for the
integration of advanced
technologies.3
TBD
TBD
TBD
TBD
See Appendix D of the Vision for 2025 report (National Action Plan for Energy Efficiency, 2008a) for
additional information on how these numbers have been determined.
a See Appendix D of the Vision for 2025 report (National Action Plan for Energy Efficiency, 2008a) for
discussion of why progress on this policy step is not currently measured.
b Steps 24, 25, and 27 do not apply to natural gas.
TBD = to be determined.
In addition, the Action Plan provides a comprehensive suite of resources and technical
assistance to help states, utilities, and other stakeholders realize the Vision. Table 5-3 lists
guides and papers that are available to assist in implementing each of the Vision goals.
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Table 5-3. National Action Plan for Energy Efficiency Tools by Implementation
Goals
Goal
Detailed Action Plan Tools and Resources
Goal One: Establishing Cost-Effective
Energy Efficiency as a High-Priority
Resource
¦ Guide to Resource Planning With Efficiency
¦ Guide for Conducting Potential Studies
¦ Communications Kit
Goal Two: Developing Processes to Align
Utility and Other Program Administrator
Incentives Such That Efficiency and Supply
Resources Are on a Level Playing Field
¦ Aligning Utility Incentives With Investment in
Energy Efficiency Paper
Goal Three: Establishing Cost-
Effectiveness Tests
¦ Understanding Cost-Effectiveness of Energy
Efficiency Programs Paper
¦ Guide to Resource Planning Wth Efficiency
¦ Guide for Conducting Potential Studies
Goal Four: Establishing Evaluation,
Measurement, and Verification Mechanisms
¦ Model Energy Efficiency Program Impact
Evaluation Guide
Goal Five: Establishing Effective Energy
Efficiency Delivery Mechanisms
¦ Rapid Deployment Energy Efficiency Toolkit
¦ Consumer Perspectives on Delivery of Energy
Efficiency Brief
¦ Customer Incentives Through Programs Brief
(Under Development)
Goal Six: Developing State Policies to
Ensure Robust Energy Efficiency Practices
¦ Building Codes for Energy Efficiency Fact
Sheet
¦ Efficiency Program Interactions Wth Codes
Paper
¦ State and Local Lead-by-Example Guide
Goal Seven: Aligning Customer Pricing and
Incentives to Encourage Investment in
Energy Efficiency
¦ Customer Incentives Through Rate Design
Brief
Goal Eight: Establishing State of the Art
Billing Systems
¦ Utility Best Practices Guidance for Providing
Business Customers Wth Energy Data
Goal Nine: Implementing State of the Art
Efficiency Information Sharing and Delivery
Systems
¦ Paper on Coordination of Demand Response
and Energy Efficiency (Under Development)
Goal Ten: Implementing Advanced
Technologies
¦ Most Energy-Efficient Economy Project (in
Process)
Related State, Regional, and National
Policies
¦ Energy Efficiency as a Low-Cost Resource for
Achieving Carbon Emissions Reductions
Paper
National Action Plan for Energy Efficiency
5-11
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5.4 Summary of Findings
The information presented above can be summarized as follows:
Market and regulatory barriers can and are being reduced through targeted energy
efficiency policies and programs, with the effect of increasing energy efficiency
investment, reducing greenhouse gas emissions, and ultimately reducing the overall
economic cost of climate policies.
- Policies and programs are available to address a range of identified market barriers
to energy efficiency across the key end-use sectors and to address the prominent
market transactions where these barriers limit investment.
- Policies and approaches are available to address a range of regulatory barriers that
exist primarily at the state level.
Substantial progress has been made at the state level to advance energy efficiency
policies and programs to address barriers, but more work needs to be done.
Additional work is necessary to better understand the extent to which individual policies
and programs can address the existing barriers and help access the available, cost-
effective energy efficiency potential.
The Vision for 2025 and supporting tools and resources offer important policy
frameworks for state and local policy-makers and assistance for capturing low-cost
energy efficiency resources.
5.5 Notes
1 For more information, see the Appliance Standards Awareness Project at
.
2 Based on data reported at .
3 Energy building codes have been adopted by 37 states for commercial buildings and 34 states for
residential buildings. See for more information.
4 See the Action Plan's Rapid Deployment Energy Efficiency Toolkit at
.
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6: How Climate Policies and Programs Leverage
Energy Efficiency
This chapter reviews and summarizes the existing state and regional climate policies that
leverage energy efficiency. It also provides a summary of key findings.
A review of climate-related policies and programs across the United States finds that energy
efficiency is used in two main forms:
Within climate policy mechanisms. These policies are part of core climate policy
mechanisms (e.g., a cap and trade program for greenhouse gases) and are used to
encourage energy efficiency investment. An example of this is an allowance allocation
approach whereby auction proceeds are used to fund energy efficiency programs.
As complementary energy policies/programs. These initiatives are not directly a part
of the regulatory system governing the core climate policy; rather, they operate in
parallel in the energy sector, with the intent of reducing total greenhouse gas emissions
or reducing the cost of meeting greenhouse gas reduction targets. Many of these
policies and programs were discussed in some detail in Chapter 5. Additional policies
include energy efficiency resource standards (EERS).
6.1 Energy Efficiency Within Climate Policy Mechanisms
Figure 6-1 summarizes state policies that are being implemented in support of greenhouse gas
reduction objectives.
National Action Plan for Energy Efficiency
6-1
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Figure 6-1. Leveraging Energy Efficiency in State Climate Policies
OR
MT ND
¦MNifcfl MA
ID SD W! # M . Rl
WY
Ml
CT
!A PA NJ
NE ... OH
NV n IN
UT ¦¦ !L wv
CA H
DE
MD
AZ NM AR
MS
ak TX LA
HI
KS MO KY > DC
NC
TN
OK flD SC
AL GA
FL
States with climate action plans that leverage energy efficiency
States with climate action plans that leverage energy efficiency and that
use allowance revenue from a GHG cap and trade program to support
energy efficiency p.e.. the 10 RGGI states)
Sources: and
.
Examples of each of these policy forms are provided below.
Regional Greenhouse Gas Initiative (RGGI). RGGI is a 10-state policy in the Northeast,
comprising Maryland, Delaware, New Jersey, New York, Connecticut, Rhode Island,
Massachusetts, Vermont, New Hampshire, and Maine. Since its origins in a 2003 governors'
agreement, RGGI has established a model regulation that establishes an electricity-sector C02
cap and trade system. The program begins compliance in 2009, caps emissions in 2014, and
then requires a 10 percent reduction by 2018.
Within RGGI's regulations, the principal means through which efficiency is promoted is the
RGGI allowance auction policy. The model rule requires that at least 25 percent of allowances
be auctioned, and that the proceeds be used to support energy efficiency and other carbon
emissions reduction strategies. States have for the most part structured their RGGI
implementation rules to require higher auction percentages, most at or near 100 percent. As
states have worked out their allowance auction processes and the use of allowance proceeds,
energy efficiency has been designated for specific levels of funding. For example, the 2008
Maryland legislation establishing the state's Strategic Energy Investment Fund designates 46
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Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions
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percent of allowance proceeds for energy efficiency (Maryland General Assembly, 2008). The
first RGGI emissions allowance auction was held on September 25, 2008, producing a clearing
price of $3.07/ton. At that price, Maryland would garner $117 million in total funds and $54
million for energy efficiency programs. Another 2008 Maryland bill (the EmPOWER Maryland
Act), which sets energy savings targets for utilities, requires utilities to coordinate their efficiency
programs with the state-run programs funded with RGGI dollars. Other RGGI states are taking
similar approaches (Environment Northeast, 2009).
Most of the RGGI states are also pursuing complementary energy efficiency policies, including
building codes, appliance standards, and EERS. These policies are referenced in various RGGI
documents, including the following statement on complementary policies in the RGGI
Memorandum of Understanding, which all participating states have signed:
COMPLEMENTARY ENERGY POLICIES
Each state will maintain and, where feasible, expand energy policies to decrease
the use of less efficient or relatively higher polluting generation while maintaining
economic growth. These may include such measures as: end-use efficiency
programs, demand response programs, distributed generation policies, electricity
rate designs, appliance efficiency standards and building codes. Also, each state
will maintain and, where feasible, expand programs that encourage development
of non-carbon emitting electric generation and related technologies.
EERS, which set overall energy savings targets for utility-sector efficiency programs, are in
place in Vermont, New York, Connecticut, Maryland, and also in non-RGGI states such as
Pennsylvania, Ohio, Illinois, Minnesota, Texas, North Carolina, and Colorado.
California Assembly Bill 32 (AB 32) legislation and subsequent actions from the
California Air Resources Board (CARB) and CPUC. AB 32 is the authorizing legislation for
CARB, CPUC, and other entities to act on several fronts to reduce greenhouse gas emissions.
Key documents to date include the Climate Change Draft Scoping Plan: A Framework for
Change (CARB, 2008) and CPUC's Final Opinion on Greenhouse Gas Regulatory Strategies
under Rulemaking 06-04-009 (CPUC, 2008).
The CARB Scoping Plan's proposed portfolio of policies and programs is shown in Table 6-1.
Energy efficiency policies, including transportation measures, account for more than one-third of
total emissions reductions targeted under the plan.
National Action Plan for Energy Efficiency
6-3
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Table 6-1. California Air Resources Board AB 32 Compliance Plan Summary
Recommended Reduction Measures
Reductions
Counted Toward
2020 Target
(MMT C02e)
Estimated Reductions Resulting From the Combination of
Cap-and-Trade Program and Complementary Measures
146.7
California light-duty vehicle greenhouse gas standards
¦ Implement Pavley standards
¦ Develop Pavley II light-duty vehicle standards
31.7
Energy efficiency
¦ Building/appliance efficiency, new programs, etc.
¦ Increase CHP generation by 30,000 GWh
¦ Solar water heating (AB 1470 goal)
26.3
Renewables portfolio standard (33% by 2020)
21.3
Low carbon fuel standard
15
Regional transportation-related GHG targets
5
Vehicle efficiency measures
4.5
Goods movement
¦ Ship electrification at ports
¦ System-wide efficiency improvements
3.7
Million solar roofs
2.1
Medium-/heavy-duty vehicles
¦ Heavy-duty vehicle greenhouse gas emission reduction
(aerodynamic efficiency)
¦ Medium- and heavy-duty vehicle hybridization
1.4
High-speed rail
1.0
Industrial measures (for sources covered under cap and trade
program)
¦ Refinery measures
¦ Energy efficiency and co-benefits audits
0.3
Additional reductions necessary to achieve the cap
34.4
Estimated Reductions From Uncapped Sources/Sectors
27.3
High global warming potential gas measures
20.2
Sustainable forests
5.0
Industrial measures (for sources not covered under cap and trade
program)
¦ Oil and gas extraction and transmission
1.1
Recycling and waste (landfill methane capture)
1.0
Total Reductions Counted Towards 2020 Target
174
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Other Recommended Measures
Estimated 2020
Reductions
(MMT C02e)
State government operations
1-2
Local government operations
TBD
Green buildings
26
Recycling and waste (other measures)
9
Water sector measures
4.8
Methane capture at large dairies
1.0
Source: CARB, 2008.
MMT C02e = million metric tons of carbon dioxide equivalents.
The CPUC decision (CPUC, 2008) defers a number of specific issues, including the use of
allowance auction proceeds, so it is not known to what extent this revenue stream will be
applied to support energy efficiency-related efforts. However, this statement in CPUC's recent
greenhouse gas decision indicates an intention to devote some portion of allowance allocation
revenues to energy efficiency:
We recommend that ARB require that all allowance auction revenues be used for
purposes related to Assembly Bill (AB) 32, including the support of investments
in renewables, energy efficiency, new energy technology, infrastructure,
customer bill relief, and other similar programs, (p. 289)
Western Climate Initiative (WCI). This multi-state effort began in February 2007 when the
governors of Arizona, California, New Mexico, Oregon, Montana, Utah, and Washington, plus
four Canadian provinces, issued the Design Recommendations for the WCI Regional Cap-and-
Trade Program in September 2008 (WCI, 2008). One statement in the Design
Recommendations identifies energy efficiency as a targeted use for allowance revenues:
The WCI Partner jurisdictions agree that a portion of the value represented by
each WCI Partner jurisdiction's allowance budget (for example, through set-
asides of allowances, a distribution of revenues from the auctioning of
allowances, or other means) will be dedicated to one or more of the following
public purposes which are expected to provide benefits region wide:
- Energy efficiency and renewable energy incentives and achievement;
- Research, development, demonstrations, and deployment (RDD&D) with
particular reference to carbon capture & sequestration (CCS); renewable
energy generation, transmission and storage; and energy efficiency;
- Promoting emissions reductions and sequestration in agriculture, forestry and
other uncapped sources; and
- Human and natural community adaption to climate change impacts.
(P- 7)
National Action Plan for Energy Efficiency
6-5
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The WCI Design Recommendations also support the use of complementary energy policies
such as energy efficiency:
Complementary Policies: The analysis demonstrated that energy efficiency
programs, vehicle emissions standards, and programs to reduce vehicle miles
traveled (VMT) are important for achieving emissions reductions. The manner in
which these policies are represented in ENERGY 2020 results in overall savings
being realized from these policies. Resources from the cap-and-trade program
(e.g., from auctioning of emissions allowances) can fund these complementary
programs, (p. 59)
Midwest Greenhouse Gas Reduction Accord. The Midwestern Governors Association issued
the Energy Security and Climate Stewardship Platform for the Midwest and the Midwestern
Greenhouse Gas Reduction Accord in 2007 (MGA, 2007a, 2007b). The Accord commits the
member states to developing a carbon cap and trade system, in concert with the more specific,
near-term policy initiatives laid out in the more detailed Platform. The Platform document makes
the following five recommendations for energy efficiency policies:
1. Establish quantifiable goals for energy efficiency. Policy-makers need to
determine what level of efficiency improvement is economically achievable for
their jurisdiction to meet the regional goal. If each state identified targets for
megawatt-hours and therms saved, it would be possible to determine what
role each jurisdiction can play in achieving the region's overall 2 percent
energy efficiency objective. Progress should be continually measured and
evaluated, and adjustments should be made as necessary.
2. Undertake state assessments that quantify the amount of energy
efficiency that would cost less on a unit cost basis than new generation.
This analysis should include a cost-benefit analysis of pursuing this amount
of efficiency.
3. Require retail energy providers to make energy efficiency a priority.
Resource plans should begin with all cost-effective energy efficiency goals,
targets and strategies before reliance upon any additional supply.
4. Remove financial disincentives and enable investment recovery for
energy efficiency program costs. Regulatory practices and rate designs
sometimes result in barriers to efficiency investments because efficiency
reduces potential energy sales. Changes should be implemented to remove
financial disincentives and provide appropriate incentives for prudent
expenditures on energy efficiency.
5. Strengthen building codes and appliance standards and requisite
training, quality assurance and enforcement. The experience of other
countries and regions in developing progressive codes and standards should
be a model for this region. For example, leading states have updated state
building codes to keep up with technological advances in energy efficiency.
(P- 7)
A review of these climate policy documents shows that all three have committed to developing a
cap-and-trade system and made specific commitments to developing energy efficiency as a
resource to support their overall goals.
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6.2 Energy Efficiency as a Complementary Policy
Many states are pursuing energy efficiency policies and programs outside of climate policy
mechanisms due to the many benefits that energy efficiency provides, including low-cost C02
emissions reductions. Table 6-2 shows how many states have adopted common energy
efficiency policies.
Table 6-2. States With Common Energy Efficiency Policies in Place as of October
2008
Policy
Number of States
State appliance standards
16
Building codes
43
EERS
21
Public benefit funds for energy efficiency
22
Source: .
6.3 Summary of Findings
Many states and local governments have recognized the important role of energy efficiency in
their greenhouse gas reduction strategies and have developed targeted policies to capture the
available low-cost energy efficiency opportunities. These policies include energy efficiency
strategies that complement carbon policies, as well as the use of revenue from the carbon
policy to fund energy efficiency programs.
National Action Plan for Energy Efficiency
6-7
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7: Findings and Recommendations
This paper's findings regarding energy efficiency as a resource for reducing C02 emissions are
summarized as follows:
Energy efficiency is a relatively large and low-cost resource available to states and other
entities to meet future energy needs. Approximately 20 percent of end-use energy
consumption can be saved at costs less than half that of new generation. This can
reduce energy bills as well as the total cost of energy resources.
Current investment levels in energy efficiency are substantially below those needed to
capture the achievable, low-cost potential of this resource.
Efficiency is a relatively large and low-cost carbon abatement resource. Given its low
cost relative to new supply of energy, if tapped in substantial quantities beyond current
investment levels, efficiency can help achieve carbon emissions reduction goals and
lower the costs of meeting these goals—whether or not specific climate policies are in
effect.
Energy prices alone are not likely to accelerate efficiency investment at the rate needed
to tap the majority of efficiency's economic potential. While more analysis is needed to
quantify the specific impacts of barriers, it is generally clear that:
- Market and regulatory barriers are large and persistent. They include principal-agent
barriers, information-cost or transaction-cost barriers, and regulatory policy barriers
in the areas of resource planning and utility ratemaking.
- The price elasticity of energy consumption in many residential and commercial
markets is relatively weak due to countervailing elasticity effects. Relying solely on
price elasticity to drive efficiency investment is unlikely to capture a significant portion
of cost-effective efficiency potential.
Targeted energy efficiency policies and programs are needed to reduce market and
regulatory barriers. These policies and programs can help increase energy efficiency
investment, reduce greenhouse gas emissions, and reduce the overall economic cost of
climate policies.
- Policies and programs are available to address a range of identified market barriers
to energy efficiency across the key economic sectors and to address the prominent
market transactions where barriers limit investment.
- Policies and approaches are available to address a range of regulatory barriers that
exist primarily at the state level.
Many states and local governments have recognized the important role of energy
efficiency in their greenhouse gas reduction strategies and have developed targeted
policies to capture the available low-cost energy efficiency opportunities. These policies
include energy efficiency strategies that complement carbon policies as well as the use
of revenue from the carbon policy to fund energy efficiency programs.
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The Action Plan's Vision for 2025 and supporting tools and resources offer important
policy frameworks and assistance for capturing low-cost energy efficiency resources.
Based on these findings, key recommendations are:
Energy efficiency should be a cornerstone of energy and/or climate policies at all levels
of government, based on its proven status as a cost-effective option for reducing C02
emissions and reducing the cost of climate policies.
Energy efficiency policies and programs should be pursued expeditiously, with an
emphasis on establishing the necessary policy foundation for capturing all cost-effective
energy efficiency as outlined in the Vision for 2025.
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Appendix A: National Action Plan for Energy
Efficiency Leadership Group
Co-Chairs
Marsha Smith
Commissioner, Idaho Public
Utilities Commission
Past President, National
Association of Regulatory Utility
Commissioners
James E. Rogers
Chairman, President, and
C.E.O.
Duke Energy
Leadership Group
Barry Abramson
Senior Vice President
Servidyne Systems, LLC
Tracy Babbidge
Director, Air Planning
Connecticut Department of
Environmental Protection
Angela Beehler
Senior Director, Energy
Regulation/Legislation
Wal-Mart Stores, Inc.
Bruce Braine
Vice President, Strategic Policy
Analysis
American Electric Power
Jeff Burks
Director of Environmental
Sustainability
PNM Resources
Sandra Hochstetter Byrd
Vice President, Strategic Affairs
Arkansas Electric Cooperative
Corporation
Kateri Callahan
President
Alliance to Save Energy
Jorge Carrasco
Superintendent
Seattle City Light
Lonnie Carter
President and C.E.O.
Santee Cooper
Sheryl Carter
Co-Director, Energy Program
Natural Resources Defense
Council
Gary Connett
Director of Environmental
Stewardship and Member
Services
Great River Energy
Larry Downes
Chairman and C.E.O.
New Jersey Natural Gas (New
Jersey Resources Corporation)
Roger Duncan
General Manager
Austin Energy
Neal Elliott
Associate Director for Research
American Council for an
Energy-Efficient Economy
Angelo Esposito
Senior Vice President, Energy
Services and Technology
New York Power Authority
Jeanne Fox
President
New Jersey Board of Public
Utilities
Philip Giudice
Commissioner
Massachusetts Department of
Energy Resources
Dian Grueneich
Commissioner
California Public Utilities
Commission
Blair Hamilton
Policy Director
Vermont Energy Investment
Corporation
Stephen Harper
Global Director, Environment
and Energy Policy
Intel Corporation
Maureen Harris
Commissioner
New York State Public Service
Commission
Mary Healey
Consumer Counsel for the State
of Connecticut
Connecticut Consumer Counsel
Joe Hoagland
Vice President, Energy
Efficiency and Demand
Response
Tennessee Valley Authority
Val Jensen
Vice President, Marketing and
Environmental Programs
ComEd (Exelon Corporation)
Mary Kenkel
Consultant, Alliance One
Duke Energy
National Action Plan for Energy Efficiency
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Ruth Kiselewich
Director, Demand Side
Management Programs
Baltimore Gas and Electric
Company
Harris McDowell
Senator
Delaware General Assembly
Ed Melendreras
Vice President, Sales and
Marketing
Entergy Corporation
Janine Migden-Ostrander
Consumers' Counsel
Office of the Ohio Consumers'
Counsel
Michael Moehn
Vice President, Corporate
Planning
Ameren
Fred Moore
Director, Manufacturing and
Technology, Energy
The Dow Chemical Company
Richard Morgan
Commissioner
District of Columbia Public
Service Commission
Diane Munns
Vice President, Regulatory
Relations and Energy Efficiency
MidAmerican Energy Company
Clay Nesler
Vice President, Global Energy
and Sustainability
Johnson Controls, Inc.
Brock Nicholson
Deputy Director, Division of Air
Quality
North Carolina Department of
Environment and Natural
Resources
Jed Nosal
Chief, Office of Ratepayer
Advocacy
Massachusetts Office of
Attorney General Martha
Coakley
Pat Oshie
Commissioner
Washington Utilities and
Transportation Commission
John Perkins
Consumer Advocate
Iowa Office of Consumer
Advocate
Doug Petitt
Vice President, Marketing and
Conservation
Vectren Corporation
Phyllis Reha
Commissioner
Minnesota Public Utilities
Commission
Roland Risser
Director, Customer Energy
Efficiency
Pacific Gas and Electric
Gene Rodrigues
Director, Energy Efficiency
Southern California Edison
Wayne Rosa
Energy and Maintenance
Manager
Food Lion, LLC
Art Rosenfeld
Commissioner
California Energy Commission
Jan Schori
General Manager
Sacramento Municipal Utility
District
Ted Schultz
Vice President, Energy
Efficiency
Duke Energy
Larry Shirley
Division Director
North Carolina Energy Office
Paul Sotkiewicz
Senior Economist, Market
Services Division
PJM Interconnection
Jim Spiers
Senior Manager, Planning,
Rates, and Member Services
Tri-State Generation and
Transmission Association, Inc.
Susan Story
President and C.E.O.
Gulf Power Company (Southern
Company)
Tim Stout
Vice President, Energy
Efficiency
National Grid
Debra Sundin
Director, Energy Efficiency
Marketing
Xcel Energy
Paul Suskie
Chairman
Arkansas Public Service
Commission
Dub Taylor
Director
Texas State Energy
Conservation Office
David Van Holde
Energy Manager, Department of
Natural Resources and Parks
King County, Washington
Brenna Walraven
Managing Director, National
Property Management
USAA Realty Company
J. Mack Wathen
Vice President, Regulatory
Affairs
Pepco Holdings, Inc.
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Mike Weedall
Vice President, Energy
Efficiency
Bonneville Power Administration
Michael Wehling
Strategic Planning and
Research
Puget Sound Energy
Henry Yoshimura
Manager, Demand Response
ISO New England, Inc.
Dan Zaweski
Assistant Vice President,
Energy Efficiency and
Distributed Generation
Long Island Power Authority
Observers
Rex Boynton
President
North American Technician
Excellence
James W. (Jay) Brew
Counsel
Steel Manufacturers Association
Susan Coakley
Executive Director
Northeast Energy Efficiency
Partnerships
Roger Cooper
Executive Vice President, Policy
and Planning
American Gas Association
Mark Crisson
President and C.E.O.
American Public Power
Association
Dan Delurey
Executive Director
Demand Response
Coordinating Committee
Reid Detchon
Executive Director
Energy Future Coalition
Ron Edelstein
Director, Regulatory and
Government Relations
Gas Technology Institute
Claire Fulenwider
Executive Director
Northwest Energy Efficiency
Alliance
Sue Gander
Director, Environment, Energy,
and Natural Resources Division
National Governors
Association—Center for Best
Practices
Jeff Genzer
General Counsel
National Association of State
Energy Officials
Donald Gilligan
President
National Association of Energy
Service Companies
Chuck Gray
Executive Director
National Association of
Regulatory Utility
Commissioners
Katherine Hamilton
President
GridWise Alliance
William Hederman
Member, IEEE-USA Energy
Policy Committee
Institute of Electrical and
Electronics Engineers
Marc Hoffman
Executive Director
Consortium for Energy
Efficiency
John Holt
Senior Manager of Generation
and Fuel
National Rural Electric
Cooperative Association
Eric Hsieh
Manager of Government
Relations
National Electrical
Manufacturers Association
Lisa Jacobson
Executive Director
Business Council for
Sustainable Energy
Wendy Jaehn
Executive Director
Midwest Energy Efficiency
Alliance
Meg Matt
President and C.E.O.
Association of Energy Services
Professionals
Joseph Mattingly
Vice President, Secretary and
General Counsel
Gas Appliance Manufacturers
Association
Kate Offringa
President and C.E.O.
North American Insulation
Manufacturers Association
Ellen Petrill
Director, Public/Private
Partnerships
Electric Power Research
Institute
Christie Rewey
Senior Policy Specialist
National Conference of State
Legislatures
Steven Schiller
Board Director
Efficiency Valuation
Organization
Jerry Schwartz
Senior Director
American Forest and Paper
Association
National Action Plan for Energy Efficiency
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Andrew Spahn
Executive Director
National Council on Electricity
Policy
Ben Taube
Executive Director
Southeast Energy Efficiency
Alliance
Rick Tempchin
Interim Executive Director,
Retail Energy Services
Edison Electric Institute
Mark Wolfe
Executive Director
Energy Programs Consortium
Lisa Wood
Executive Director
Institute for Electric Efficiency
Facilitators
U.S. Department of Energy
U.S. Environmental Protection
Agency
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Appendix B: Glossary
Achievable potential: The result of estimating how much market barriers and program uptake
limits will reduce the economic potential.
Allowances: Allowances represent the amount of a pollutant that a source is permitted to emit
during a specified time in the future under a cap and trade program. Allowances are often
confused with credits earned in the context of project-based or offset programs, in which
sources trade with other facilities to attain compliance with a conventional regulatory
requirement. Cap and trade program basics are discussed at the following EPA Web site:
.
Avoided costs: The forecasted economic "benefits" of energy savings. These are the costs that
would have been incurred if the energy efficiency had not been put in place.
Baseline: Conditions, including energy consumption and related emissions, that would have
occurred without implementation of the subject project or program. Baseline conditions are
sometimes referred to as "business-as-usual" conditions. Baselines are defined as either
project-specific baselines or performance standard baselines.
Carbon dioxide reduction potential studies: Assessments of the impacts that energy
efficiency could have on reducing U.S. carbon dioxide emissions.
Cost-effectiveness: A measure of the relevant economic effects resulting from the
implementation of an energy efficiency measure. If the benefits outweigh the cost, the measure
is said to be cost-effective.
Cost recovery: Recovery of the direct costs associated with utility program administration
(including evaluation), implementation, and incentives to program participants.
Demand: The time rate of energy flow. Demand usually refers to electric power measured in
kW (equals kWh/h) but can also refer to natural gas, usually as Btu/hr, kBtu/hr, therms/day, etc.
Discount rate: A measure of the time value of money. The choice of discount rate can have a
large impact on the cost-effectiveness results for energy efficiency. As each cost-effectiveness
test compares the net present value of costs and benefits for a given stakeholder perspective,
its computation requires a discount rate assumption.
Economic potential: The result of reducing the technical potential by applying cost-
effectiveness and program eligibility criteria.
End-use: A category of equipment or service that consumes energy (e.g., lighting, refrigeration,
heating, process heat).
National Action Plan for Energy Efficiency
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Energy efficiency: The use of less energy to provide the same or an improved level of service
to the energy consumer in an economically efficient way. "Energy conservation" is a term that
has also been used, but it has the connotation of doing without in order to save energy rather
than using less energy to perform the same or better function.
Energy efficiency measure: Installation of equipment, subsystems, or systems, or modification
of equipment, subsystems, systems, or operations on the customer side of the meter, for the
purpose of reducing energy and/or demand (and, hence, energy and/or demand costs) at a
comparable level of service.
Energy resource plans: Assessments of the energy resources that are available to meet future
energy needs for a specific geographic area or energy system. These plans can draw from
energy efficiency potential studies, but apply them in a more focused and constrained
framework.
Evaluation: The performance of studies and activities aimed at determining the effects of a
program; any of a wide range of assessment activities associated with understanding or
documenting program performance, assessing program or program-related markets and market
operations; any of a wide range of evaluative efforts including assessing program-induced
changes in energy efficiency markets, levels of demand or energy savings, and program cost-
effectiveness.
Fixed costs: Expenses incurred by the utility that do not change in proportion to the volume of
sales within a relevant time period.
Integrated resource planning: A public planning process and framework within which the
costs and benefits of both demand- and supply-side resources are evaluated to develop the
least-total-cost mix of utility resource options. In many states, integrated resource planning
includes a means for considering environmental damages caused by electricity
supply/transmission and identifying cost-effective energy efficiency and renewable energy
alternatives.
Leakage: In the context of avoided emissions, emissions changes resulting from a project or
program not captured by the primary effect (typically the small, unintended emissions
consequences).
Levelized cost: A constant value or payment that, if applied in each year of the analysis, would
result in a net present value equivalent to the actual values or payments which change (usually
increase) each year. Often used to represent, on a consistent basis, the cost of energy saved by
various efficiency measures with different useful lives.
Load shapes: Representations such as graphs, tables, and databases that describe energy
consumption rates as a function of another variable such as time or outdoor air temperature.
Lost-opportunity: Refers to an efficiency measure or efficiency program that seeks to
encourage the selection of higher-efficiency equipment or building practices than would typically
be chosen at the time of a purchase or design decision.
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Marginal cost: The sum that has to be paid for the next increment of product or service. The
marginal cost of electricity is the price to be paid for kilowatt-hours above and beyond those
supplied by presently available generating capacity.
Market barriers: Market conditions that limit or constrain economic efficiency and, thus, result
in less than economically optimal societal outcomes.
Market transformation: A reduction in market barriers resulting from a market intervention, as
evidenced by a set of market effects, that lasts after the intervention has been withdrawn,
reduced, or changed.
Monitoring: Gathering of relevant measurement data, including but not limited to energy
consumption data, over time to evaluate equipment or system performance.
Non-participant: Any consumer who was eligible but did not participate in the subject efficiency
program, in a given program year. Each evaluation plan should define "non-participant" as it
applies to a specific evaluation.
Participant: A consumer who received a service offered through the subject efficiency program,
in a given program year. In this definition, the "service" can be a wide variety of services,
including financial rebates, technical assistance, product installations, training, energy efficiency
information or other services, items, or conditions. Each evaluation plan should define
"participant" as it applies to the specific evaluation.
Portfolio: Either (1) a collection of similar programs addressing the same market, technology,
or mechanisms or (2) the set of all programs conducted by one organization.
Potential study: A study conducted to assess market baselines and energy efficiency savings
potentials for different technologies and customer markets. Potential is typically defined in terms
of technical, economic, achievable, and program potential.
Price elasticity: Refers to "price elasticity of demand," which is the extent to which a change in
the price of a product or service will affect the quantity demanded. In the context of energy
efficiency, it refers to the effects of changes in energy prices on energy consumption.
Principal-agent barrier: A condition in which one entity (the agent) makes energy efficiency
investment decisions, and another entity (the principal) pays the energy operating costs that
flow from that decision.
Program: A group of projects, with similar characteristics and installed in similar applications.
Program administrators: Typically procure various types of energy efficiency services from
contractors (e.g., consultants, vendors, engineering firms, architects, academic institutions,
community-based organizations), as part of managing, implementing, and evaluating their
portfolio of energy efficiency programs. Program administrators in many states are the utilities;
in some states they are state energy agencies or third parties.
National Action Plan for Energy Efficiency
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Project: An activity or course of action involving one or more energy efficiency measures, at a
single facility or site.
Regulatory barriers: Barriers created by adding constraints or prescriptions to market
structures or practices. In the power sector, regulatory barriers to efficiency revolve around
utility resource planning and ratemaking policies.
Resource planning study: Typically uses many of the same data sources and analytical
techniques applied in potential studies. The principal difference is that a resource planning
analysis uses timeframes, economic assumptions, and other factors specific to the utility service
area.
Retrofit: Refers to an efficiency measure or efficiency program that seeks to encourage the
replacement of functional equipment before the end of its operating life with higher efficiency
units (also called "early-retirement") or the installation of additional controls, equipment, or
materials in existing facilities for purposes of reducing energy consumption (e.g., increased
insulation, lighting occupancy controls, economizer ventilation systems).
Technical potential: An estimate of what energy and capacity savings would be achieved if all
technically feasible efficiency measures were implemented for all customers. The technical
potential is adjusted by applying a series of screens of real-world constraints.
Transaction-cost barrier: Refers to the condition in which energy users, even if they have the
ability to choose an energy-efficient product or system, are unwilling to invest the time, effort,
and analysis to make an economically optimal decision. Economists sometimes use terms like
"information-cost" or "search cost" for this type of barrier.
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Orlando Lawrence Berkeley National Laboratory.
Bernstein, M., R. Lempert, D. Loughran, and D. Ortiz (2000). The Public Benefit of California's
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California Public Utilities Commission [CPUC] (2008). Final Opinion on Greenhouse Gas
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Efficiency Vermont (2008). Year 2007 Annual Report.
Ehrhardt-Martinez, K., and J.A. Laitner (2008). The Size of the U.S. Energy Efficiency Market:
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U.S. Energy Information Administration [EIA] (2008). Form EIA-861 Final Data File for 2006.
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Eldridge, M., M. Neubauer, D. York, S. Vaidyanathan, A. Chittum, and S. Nadel (2008). The
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U.S. Environmental Protection Agency [EPA] (2006). Clean Energy-Environment Guide to
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U.S. Environmental Protection Agency [EPA] (2008). ENERGY STAR and Other Climate
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Electric Power Research Institute [EPRI] (2007). The Power to Reduce C02 Emissions: The Full
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Itron (2006). California Energy Efficiency Study. CALMAC Study ID: PGE0211.01.
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National Action Plan for Energy Efficiency (2007b). Guide for Conducting Energy Efficiency
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21(5):4-5.
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Funding and printing for this report was provided by the U.S. Department of Energy and U.S. Environmental
Protection Agency in their capacity as co-sponsors for the National Action Plan for Energy Efficiency.
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