Energy Efficiency Policy Trends A Look Nationally Katrina Pielli Clean Energy Program Manager...

Energy Efficiency Policy TrendsA Look Nationally

Katrina PielliClean Energy Program ManagerClimate Protection Partnerships DivisionU.S. Environmental Protection AgencyFlorida PSC Energy Efficiency Initiatives WorkshopNovember 29, 2007

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Today’s energy challenges and EE

Issues Garnering Increased Interest“Quick start” EE programs

Aligning utility incentives with EE

Incorporating EE as a resource in utility planning processes

Cost-effectiveness tests

State examples

Resources and Summary

Agenda

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Energy Efficiency is a Key Part of the Solution to Today’s Energy Challenges

Environmental • Lower carbon emissions and

criteria pollutants• Lower water use

Economic• Savings to customers• Lower cost (about half)

compared to new G&T • Downward pressure on natural

gas prices and volatility• Improved local economy, using

local labor

• Benefits low–income, seniors

Utility System Benefits• Near-term tool with persistent, long-

term benefits • Improved security of systems• Lower baseload and peak demand • Reduce need for “hard to site” G&T

assets• Targeted, modular, manageable

Risk Management• Diversifies utility resource portfolios• Zero carbon emissions

Energy efficiency is vastQuick, cheap, and clean resource

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Large Potential for Cost-Effective Energy Efficiency

McKinsey Global Institute’s Curbing Global Energy Demand Growth: The Energy Productivity Opportunity (May 07) - By capturing the potential available from existing technologies with an internal rate of return of 10% or more, we could cut global energy demand by half or more over the next 15 years.

ACEEE’s Energy Efficiency’s Role in a Carbon Cap-and-Trade System (May 06) - Doubling efficiency would cut load growth by about two-thirds in 2024, from about 20% to about 6% above 2006 levels.

Report of the Clean and Diversified Energy Advisory Committee to the Western Governors Association (WGA) (June 06) - By adopting the WGA's best practices scenario in the 18 WGA states, load growth could be reduced by as much as 75% over the next 15 years.

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$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Inve

stm

ent

in b

illio

ns

real

200

5 d

olla

rs

Despite Potential, Utility Sector Energy Efficiency Has Declined

Source: Data from ACEEE 2005 Scorecard adjusted for inflation using U.S. Department of Labor Bureau of Labor Statistics Inflation Calculator

Annual Spending on Utility Sector Energy Efficiency Programs 1992-2003

(2005 real dollars)

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Programs Help Overcome Key Barriers Limiting Efficiency

ENERGY STAR

• Helps homeowners reduce energy use by 10, 20, or 30% while purchasing products, home improvements, or buying a new home

• Helps businesses, public sector, schools reduce energy use by 10% or more

• Overcomes lack of information, competing vendor claims, split incentives

• Broad-based platform with government-backed credibility and network of retailers and manufacturers to leverage

Important utility barriers remain

• Existing electricity and gas regulations / market rules provide additional financial incentives for supply-side resources

• View that EE is not a reliable, measurable, cost effective resource

• Concern that EE will raise rates

• Lack of good documentation and guidance on demand-side programs

Barriers important to address – do not go away with carbon regulation

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State examples


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“Quick start” EE programs

“Quick Start“ programs are a basic set of programs that:• Are quick to get off the ground• Offer measurable benefits in the near-term• Can be expanded to a broader and more

comprehensive set of programs over a few years AR PSC completed a successful collaborative in 2006

which resulted in EE rulemaking in June 07. • Quick Start EE programs filed by 4 electric & 3 gas

utilities;• Approved statewide EE education program and

weatherization program for Severely Energy-Inefficient Houses;

• Allows for cost recovery via rate rider.

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“Quick start” EE programs (2)

Residential Sector• Promoting the purchase of ENERGY STAR qualifying lighting and

appliances through existing supply channels with financial incentives for some products, coupled with education and outreach

• Promoting retirement and recycling of old and inefficient appliances such as refrigerators, freezers, and room air conditioners through turn-in incentive programs.

• Promoting proper functioning of existing residential HVAC equipment, as well as proper sizing and installation of new equipment.

• Developing pilot-scale initiatives to promote comprehensive home energy improvements for existing homes through Home Performance with ENERGY STAR.

• Developing pilot-scale initiatives to promote the construction of ENERGY STAR qualified new homes (both site built and manufactured) through builder networks.

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“Quick start” EE programs (3)

Commercial Sector• Offering prescriptive incentives for lighting and HVAC measures to a broad

range of commercial facilities along with education and/or technical assistance to promote increased efficiency in lighting and HVAC system design.

• Offering prescriptive incentives to promote the purchase of ENERGY STAR qualifying commercial food service equipment for use in restaurants, hotels/hospitality venues, schools, and other applicable commercial or institutional facilities.

• Developing pilot-scale initiatives to facilitate whole-building energy performance using the ENERGY STAR building performance rating system, coupled with incentives for energy efficient lighting and HVAC systems, and general education about building tune-ups and/or retrocommissioning to improve building operation and maintenance.

• Promoting power management of computer monitors through direct outreach to large end users and online tools for smaller end users, along with education about additional opportunities for saving energy through purchase and proper use of ENERGY STAR qualifying office products.

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State examples


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Aligning utility incentives with EE investment Increased interest in broad topic by many stakeholders

(Commissions, utilities, legislators, non-profits, etc) Renewed interest in exploring decoupling

• Idaho Power pilot in ID• Legislation in CT, NY, MN• Filing by Pepco in MD and DC• Docket in IA

LRAM seems to be out of favor Large variety of approaches for performance incentives

• CA – Rewards and penalties based on a) how well the utility met CPUC established energy savings targets; b) the economic benefits generated from the utility’s EE portfolio

• NV – Enhanced ROR• Xcel Energy filings in NM and CO

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The Status of EE Cost Recovery and Incentive Mechanisms for IOUs

Source: Aligning Utility Incentives with Investment in Energy Efficiency - a Product of the National Action Plan for Energy Efficiency. 2007.

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Idaho Power Pilot

Mechanism adopted to address impacts of EE program-induced changes in sales - should not be viewed as decoupling in the broadest sense of that term.

Mechanism focused specifically on recovery of lost fixed cost revenues.

PUC initiated proceeding in August 2004 to investigate financial disincentives to investment in EE by Idaho Power Company. Held a series of workshops and a written report was filed in early 2005.

Parties agreed there were disincentives preventing higher EE investment by Idaho Power, but no agreement was reached on whether or not the return of lost fixed cost revenues would result in removing the disincentives.

Parties agreed to conduct a simulation of the proposed mechanism, the results of which indicated that lost fixed cost revenues in fact produced barriers to EE investments and, therefore, a three-year pilot mechanism to allow recovery of fixed cost revenue losses should be approved.

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Idaho Power Pilot (2)

Idaho Power filed in January of 2006 and requested authority to implement a Fixed Cost Adjustment (FCA) decoupling or true-up mechanism for its residential and small general service customers.

PUC approved the FCA as a three-year pilot program. Program implementation began on January 1 2007 and will last

through December 31, 2009 plus any carryover. The first rate adjustment will occur June 1, 2008 and subsequent

rate adjustments will occur on June 1 of each year during the term of the pilot.

FCA is applicable to residential and small general service customers, as the Company noted that these two classes present the most fixed cost exposure for the Company.

FCA is designed to provide symmetric rate adjustment (up or down) when fixed cost recovery per customer varies above or below a Commission established level.

FCA mechanism incorporates a 3% cap on annual increases with carryover of unrecovered deferred costs to subsequent years.

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CA Risk/Reward Incentive Mechanism

CPUC decision issued September 20, 2007 Reward

• First opportunity if utility exceeds 85% of CPUC goals.– Reward of 9% of the total net benefits generated from its portfolio.

• At 100% or above CPUC goals– Reward of 12% of the total net benefits generated from its portfolio.

• Total rewards across all IOUs for each 3-yr program cycle capped at $450 million

Penalty• Savings below 65% of CPUC goals = penalty.

– Larger of either: 1) summed per unit penalty for every kWh, kW and therm below goals; 2) any positive net costs to the EE portfolios

• Total penalties across all IOUs for each 3-yr program cycle capped at $450 million.

Deadband• No reward or penalty if performance 65%-85% of CPUC goals.

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CA Risk/Reward Incentive Mechanism (2)

85% of goal

65% of goal

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HI DSM Docket HI PUC Docket -- DSM Programs and Recovery of Program Costs and

DSM Utility Incentives. 2 years to reach decision. Decision on February 13, 2007

• Established EE goals for the “HECO Companies” until their next IRP dockets• Selected the appropriate market structures for providing DSM programs • Determined the cost recovery mechanisms for utility recovery of utility-

incurred DSM program costs• Determined the types of costs that are appropriate for utility recovery of utility-

incurred DSM program costs• Established the appropriate DSM incentive mechanism for the HECO

Companies• Determined that HECO’s proposed EE DSM programs are likely to achieve

the EE goals and be cost-effective• Established the appropriate cost level for HECO’s utility-incurred costs in

base rates• Approved HECO’s proposed DSM utility incentive, with modifications• Approved HECO’s Proposed EE DSM Programs and Residential Customer

Energy Awareness Program, with modifications

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HI DSM Docket (2)

EE goals until next IRP: Based on MW and MWh savings that HECO Companies’ proposed EE programs could and would achieve. • C&I: 2007 - 91,549 MWh, 13,041 MW; 2008 – 137,324 MWh, 19,563 MW.

• Residential: 2007 – 50,553, 13,336; 2008 – 66,914, 18, 068 Non-Utility Market Structure for administering EE programs by Jan

2009. Deferred decoupling for possible consideration in future. Shared savings mechanism to serve as an incentive. Cost-effectiveness of EE Portfolio: IRP framework requires use of 5

tests - utility cost, rate impact measure, participant impact, societal cost and total resource cost.• Most weight given to TRC.

• Program Portfolio filed has benefit-to-cost rations above 1 for all tests but RIM.

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State examples


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Incorporate EE as a resource in utility planning processes

Renewed interest in treating EE as a resource in planning• CA loading order• WA ballot initiative 937 – conservation is resource of

first choice• NC IRP – comparison of demand and supply side

options to determine the least-cost, long-term set of resources needed

• ISO New England Forward Capacity Market – EE can bid in as a resource to provide capacity

• TVA Board approved goal of 1200 MW demand reduction through EE and DR in 5 years.

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Incorporate EE as a resource in utility planning processes (2)

WI legislation requires the PSC to conduct EE planning every four years; results incorporated into Strategic Energy Assessment by PSC.

AR PSC decision in June 2007 -- Resource Planning Guidelines, directs utilities to give “comparable consideration” to demand and supply resources and to assess “ all reasonably useful and economic supply and demand resources that may be available to a utility or its customers,” and to identify and investigate resources including “energy efficiency, conservation, demand-side management, interruptible load, and price responsive demand.”

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Incorporate EE as a resource in utility planning processes (3)

Data necessary to integrate EE into resource planning are readily available • Cost and savings data • Potential studies for what is achievable through EE measures

Energy, capacity and non-energy benefits can justify robust EE programs

Clear path to funding is needed to establish a budget for EE resources

Integrate EE early in the resource planning process to capture the full value

Update resource plan as information changes

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State examples


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Importance of cost-effectiveness tests

Several tests for evaluating EE cost-effectiveness, each reflect a different stakeholder perspective on the impact of EE.

Common misperception that there is a single best perspective for evaluation of cost-effectiveness. Each test is useful and accurate, but the results of each test are intended to answer a different set of questions.

Amount of cost-effective EE is different depending on perspective

Criteria for defining cost-effectiveness - the California Standard Practice Manual is authoritative source Many other states now also refer to the California Standard

Practice Manual as the source of their own cost-effectiveness criteria.

The California criteria include five major tests.

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Snapshot of states use of cost tests

No specific test/s required:

• KY, PA, ME, IL, ND, OK, ID, WY, NC, SC

All 5 tests required:

• VA, IN, MN, CA, HI, GA

Doesn’t include info. from: MD, WV, MI, NE, OH, SD, AK, NV, TX, UT, WA, AL, LA, MS, TN

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Cost Test Questions Addressed

Participant Cost Test

-Is it worth it to the customer to install EE?-Is the customer likely to want to participate in a utility program that promotes EE?

Ratepayer Impact Measure

-What is the impact of the EE project on the utility’s operating margin?-Would the project require an increase in rates to reach the same operating margin?

Utility Cost Test -Do total utility costs increase or decrease?-What is the change in total customer bills required to keep the utility whole (the change in revenue requirement)?

Total Resource Cost Test

-What is the regional benefit of the EE project including the net costs and benefits to the utility and its customers?-Are all of the benefits greater than all of the costs (regardless of who pays the costs and who receives the benefits)?-Is more or less money required by the region to pay for energy needs?

Societal Cost Test

-What is the overall benefit to the community of the EE project, including indirect benefits?-Are all of the benefits, including indirect benefits, greater than all of the costs (regardless of who pays the costs and who receives the benefits)?

Source: Guide to Resource Planning with Energy Efficiency - a Product of the National Action Plan for Energy Efficiency. 2007.

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State examples


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Energy Efficiency in Arizona

Policy Overview:• In September 1999, the Arizona Corporation Commission

ordered utilities to include a system benefits charge (SBC) in their restructuring plans to fund demand side management programs, consumer education, etc.

• The bulk of the SBC funding for IOUs finances the Environmental Portfolio Standard, which requires all utility companies that sell retail electricity in Arizona to generate a percentage of their electricity from renewable resources. There is no set percentage for EE programs. However, the public benefits fund for Salt River Project (the second largest utility in Arizona) does support several energy efficiency programs.

2003-2004: 2.5-3% reduction in energy use for state buildings

2004-2005: ~10% reduction in energy use for state buildings

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Arizona Public Service Co. (APS)

In June 2003, APS filed an application for a rate increase and a settlement agreement was signed between APS and the involved parties in August 2004. The settlement agreement issued in April 2005, includes:

• An annual $10 million base rate DSM allowance for the costs of approved “eligible DSM-related items,” defined as the planning, implementation, and evaluation of programs that reduce the use of electricity by means of energy efficiency products, services, or practices. Performance incentives are included as an allowable expense.

• In addition to expending the annual $10 million base rate allowance, APS is obligated to spend, on average, at least another $6 million annually on approved eligible DSM-related items. These additional amounts are to be recovered through a DSM adjustment mechanism.

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Programs implemented by APS:• ENERGY STAR New Homes• ENERGY STAR Lighting (CFLs) rebates• ENERGY STAR HVAC rebates• Home Performance with ENERGY STAR program is

currently being developed

From 2005-2007, APS set the following goals for its DSM Portfolio:

• 3,435,000 MWh in lifetime savings• 51.7 MW in peak demand savings, and• $68 million in net benefits

Arizona Public Service Co. (APS)

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Energy Efficiency in Nevada

Policy Overview:• In 2001, the Nevada legislature enacted resource

portfolio standard legislation. • In 2005 this law was amended to increase the portfolio

requirement, but also to allow the utilities to use EE programs to help meet the requirements.

• Under the new law, renewable energy and EE is required to meet 20% of the state's electricity needs by 2015. The contribution from EE measures to meet the portfolio standard is capped at one-quarter of the total standard in any particular year.

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Nevada is the only state currently that allows recovery of EE program costs using capitalization as well as a bonus return on those costs.

Over the past several years, spending on EE programs has risen substantially, due to:

• Rapid growth in electricity demand• Attempts by Nevada Power and Sierra Pacific Power to

maximize the contribution of EE to resource portfolio requirements as those requirements grow.

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Utility EE investments are mainly a product of IRP process.

The addition of the resource portfolio requirement and the ability to meet up to 25% of that requirement provides further incentive to pursue EE investment.

Most incurred costs associated with EE programs are recoverable pursuant to the Nevada Administrative Code 704.9523.

A utility may seek to recover any costs associated with approved programs for conservation and DSM, including labor, overhead, materials, incentives paid to customer, advertising, and program monitoring and evaluation.


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Programs implemented (Nevada Power/Sierra Pacific Power):

• ENERGY STAR Appliance rebates• ENERGY STAR Lighting (CFLs and fixtures) rebates• ENERGY STAR Plus Homes Program

Nevada Power and Sierra Pacific Power Energy Savings:• 2003: 35 GWh/yr, 16 MW• 2004: 78 GWh/yr, 21 MW• 2005: 93 GWh/yr, 33 MW


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State examples


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Resources

National Action Plan for Energy Efficiency Guides and Papers

www.epa.gov/eeactionplan

• National Action Plan for Energy Efficiency Report

• Aligning Utility Incentives with Energy Efficiency Investment

• Resource Planning with Energy Efficiency

• Conducting Potential Studies for Cost-Effective Energy Efficiency

• Model Energy Efficiency Program Evaluation

• National Action Plan Vision for 2025

EPA Clean Energy-Environment Guide to Action

www.epa.gov/cleanenergy/stateandlocal• Sections on Energy Efficiency Portfolio Standards, Public

Benefits Funds for Energy Efficiency, Portfolio Management Strategies and Utility Incentives for Demand-Side Resources.

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Summary

Growing momentum across the country Interest in learning how to increase use of EE Recognition that EE is a valuable part of

energy mix and is one key as the nation addresses climate change solutions

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Katrina Pielli

U.S. Environmental Protection Agency

Clean Energy Program Manager

(202) 343-9610

[email protected]

www.epa.gov/cleanenergy

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