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Like several states in the U.S., the EU is going to use a two-pronged attack: (1) supply side solutions for energy generation and energy distribution; and (2) demand side solutions for end-users. Most experts would say Europe has been more efficient with its energy than the U.S. In fact, several studies suggest that the U.S. uses 50% more energy per one unit of GDP than the EU. However, there are other studies that suggest the EU can still save an additional 20% of its current energy consumption in a cost-effective way, equivalent to 60 billion euros per year. That is the same as the present day consumption of Germany and Finland combined.
However, the beginning date for the Energy Efficiency Directive is still a year and a half away.
In the meantime, I would like to suggest that the world can benefit by watching the utility sector, the federal government, the state governments and the business community in the U.S. grapple with energy and its policy issues. It seems only fair as the U.S. watches the EU’s experiment with a mandatory “cap and trade” regiment for greenhouse gases with great interest.
It is useful to invoke Murphy’s Laws in order to preserve a sense of humility when discussing the future. The first of Murphy’s Law is that “whatever can go wrong will.” The second Law is that “what actually goes wrong is seldom what we anticipate.” So if the second Law is true, then the corollary is probably true, which goes “what actually goes right is seldom what we anticipate.”
With few exceptions, the innovations and technology of the last twenty years have not been what we expected. The Internet and broadband technology are the best examples of that fact. Therefore, I feel compelled to talk about the importance of energy efficiency in the world’s transition from a carbon-based economy to a hydrogen-based economy. This transition will undoubtedly last for at least twenty years and it will be fraught with energy policy mistakes and technological trial and error. It will also be a time of great opportunity for those who are willing to bring innovation and good economics to our carbon-based world of today.
Energy Efficiency Defined
First, we would like to define energy efficiency as "the quickest, cleanest and cheapest source of new energy," which means it should be accorded at least the same respect and consideration that renewables receive today. The Energy Efficiency Directive says much the same: “Energy efficiency is without doubt the quickest, most effective and most cost effective manner for reducing greenhouse gas emissions.”
Semantics is the first problem with any thoughtful energy discourse. When discussing energy issues, one cannot help notice how many semantic mine fields there are. You have such terms as: "green," "renewable," "sustainable," "conservation," "energy efficiency," "alternative energy," "efficiency utility," "emission reduction," "portfolio standards," "renewable portfolio standard," "new generation resource," "negawatts," "virtual power plant" and many other catchy and oft-times poetic phrases. It is enough to confuse even the most battle hardened energy veteran.
The first objective of this article is to establish a set of terms we can all agree on. Of the terms already mentioned, the first five are the most important for sake of beginning this discussion. Green, renewable and sustainable are sometimes used as if they are interchangeable, while conservation and Energy Efficiency are often used as a distant third cousin kind of add-on with no actual precise meaning or status.
Then, there is the matter of public and political perception. In a previous era, “energy efficiency programs” were just a fancy way of describing a social program or corporate welfare. These prejudices are slowly disappearing, thanks in part to better measurement technology and an understanding of the relationship between the cost of building new power plants and employing energy efficiency programs as a new source of energy.
Lessons for The U.S and the World
Even though the overall responsibility for utilities and transmission lines are shared by state, regional and national governments and groups, it seems like the best ideas and practices are being generated by the states. Yes, the United States Energy Policy Act of 2005 (EPAct) tried to establish a national energy policy, but the final result owed much more to national politics than it did to sound economics. In fact, it could be argued that, after so many years of deadlock and debate, getting an energy bill signed into law is a minor miracle.
However, the EPAct has several flaws that cannot be overlooked. First, many provisions are of short or indeterminate length; then, the political process itself has created a set of provisions that once again have tried to pick winners and losers; and finally, the administrative rules for EPAct are difficult enough to create that they have yet to be issued in a complete document.
The net result has been confusion and uncertainty. According to Charles O’Connor, Supervisor of Energy Efficiency in the Valley, Los Angeles Department of Water and Power, “We need to develop a nationally accepted template so that states can establish effective energy portfolios that are not swayed by the politics of the day at the expense of sound and proven Energy Efficiency technologies that benefit each state and their business owners and residential customers alike.”
That said, the states and their stakeholders seem better positioned to act as petrie dishes for innovative ideas and energy policies that can have some national energy efficiency relevance once proven. There are several different groups in the states who have become leaders either, by necessity or by wise leadership. These groups include the utility industry; state utility regulators, lawmakers, environmental groups, policy advisors and the business community.
In a recent news release from California’s “Flex Your Power,” they stated that properly done energy efficiency is one/fifth of the cost of building new power plants. In a more recent study implemented for the Northeast Energy Efficiency Partnership, Inc. (NEEP), investments in energy efficiency was 67% cheaper than the avoided cost of electric supply. In other words, the cost/benefit analysis of the two approaches to new sources of electricity suggests that energy efficiency programs are 33% the cost of the new power.
Like the all developed nations of the world, the U.S. has vast potential for energy efficiencies. According to a recent study done the American Council for an Energy Efficient Economy (ACEEE), the U.S. can cost-effectively save 24% of all its electricity usage. Given the fact that EU found a 20% energy savings possible, the ACEEE study might be considered very conservative.
Utility Involvement
As is so often the case with any form of legislation, each individual law including the EPAct represents a compromise built around a coalition of diverse forces. In the case of energy and electricity, one needs to look no further than the way most states reward regulated utilities for providing electricity. Like any other business, the utility’s objective is to maximize profits in order to meet its obligation to shareholders. In the case of the utility, that means selling as many kilowatts of electricity to its customer as possible.
But why do we reward consumption and generation in an era when energy sources including renewables are expensive and a new cycle of power plant and transmission line construction looms ahead? Given the fact that the cleanest, least expensive kWh is the one not used and saved for the next customers, why don’t we devise a regimen whereby utilities receive the same return on investment for provable energy efficiencies as they receive for new or existing sources of electricity?
First, we should break apart the old law to identify the reasons for its current form. In many cases, the Public Service Commissions for the states usually accepted the notion that the utilities should not be allowed to administer and implement conservation efforts, usually for the “fox watching the henhouse” reason. Then, there is the whole notion of measuring and verifying results, which has vexed regulators and electrical engineers forever.
The answer to this dilemma is already being practiced in places like California and Oregon. The energy and utility commissions have “decoupled” electricity sales from profits, which removes an important disincentive for utilities. In exchange, the utilities are rewarded for reaching energy efficiency goals.
The net benefits of this energy efficiency involvement by utilities are as follows:
- Reduced energy bills for business and residential customers
- Reduced demand for power plants and transmission lines
- Reduced operating costs stimulate economic development
- Increased competitiveness of commercial enterprises
- Reduced emissions that contribute to national and international environmental problems
- Creates opportunities for long-term jobs in general and energy efficiency industries
- Improves national security by easing energy dependence
- Efficient new technologies that also improve work place environs and thereby productivity
- Creates a marketplace that can be transformed by documenting long-term results
There are many other program and policy alternatives in existence that can be used for implementing energy efficiency measures, such as: utility-operated and government-operated Energy Efficiency Management programs, portfolio standards, and public service commission regulations. The key to any solution or solutions must be measurement and verification, without which any energy efficiency effort will fail.
Ultimately, what makes the idea of utility programs for energy efficiency so compelling is that it establishes practical rules, whereby large energy efficiencies could be achieved. The potential for such an approach is enormous, because: (1) it is not being done to any extent now; (2) utility programs can help increase market penetration, because they know their industrial customers best; (3) with the opportunity for profit, utilities can now provide the necessary personnel and capital to test new and existing technologies, because they would receive a return on investment for them; and finally, (4) they can provide all of their customers including business and industrial customers with objective advice about the array of energy efficiencies, helping them identify the most appropriate for each customer.
The California Plan
The fact that California utilities and state regulators can treat energy efficiency as a supply side option, with an allowable return on investment, means that a balanced portfolio of options can be developed. In the case of the California energy crisis, the state was able to reduce demand by 5% within the first year of the crisis, with as much as a reduction of 10% in overall electrical consumption possible for California over the next decade. New evidence is emerging that California could cost-effectively reduce its electricity needs by at least 5,900 MW --the equivalent of 12 large power plants -- over the next decade.
While there are many areas of energy where California has been able to adopt a leadership role, the single greatest achievement must be the spirit of cooperation permeating the entire process. Unlike the old “business model” for getting energy policy done, California has stopped the name-calling and the public displays of discord between stakeholders.
There are several reasons for this development. However, the over-riding fact is that California has come through the gut-wrenching problems caused by the Energy Crisis of 2001. Some people liken that experience to having viewed one’s own hangman. In fact, it could be argued that California did not need any other reason to get its energy policy affairs in order.
There is a “perfect storm” of forces that have helped create this new spirit of cooperation. The single most important reason for the sanity of energy policy in California has to be the quality of leadership and economic maturity being exhibited throughout the process. One could argue California has a world-class roster of energy people ready for the challenge. In fact, several energy leaders like Art Rosenfeld of the CA Energy Commission have begun advising China on its growing need for electricity without a large environmental and carbon footprint.
Also, California has adopted a “loading order” for new sources of electricity. The loading order prioritizes all new sources, with the most environmentally friendly source being the first options and the least friendly being the last. Therefore, California’s first response to meeting growing energy needs is energy efficiency and demand response; then, renewable sources and distributed generation will be deployed; and lastly, clean and efficient fossil-fired generation will be utilized. This emphasis on clean power allows the CPUC to play an active role in California's emission reduction efforts and Greenhouse Gas reporting being spearheaded by the California Climate Action Registry.
In addition, California is using a two-pronged attack to distribute rebates for energy efficiency, with a combination of utility administered public benefits programs and energy efficiency procurement programs mandated by the CPUC and run by the utilities are both being used to reduce overall electrical consumption. The other benefits of these energy efficiency programs are that they come with technical and design assistance along with energy education and product information. In fact, it could be argued that this combined approach is more powerful than either program is alone, especially now that the resulting energy savings can be strictly measured and verified.
California should be honored for the orderly process it has used to advance its best ideas into the Energy Action Plan II, which offers one of the most comprehensive roadmaps for energy policy in the U.S. As importantly, California has become the leader in developing energy efficiency and demand response programs that will be a formidable tool for the demand-side of the global energy market in the future.
Vermont
In another example of an innovative approach to energy policy, the state of Vermont has started a program that they call “Efficiency Vermont,” which establishes a portfolio standard for Energy Efficiency including measurement and verification protocol. It is a program that involves both Vermont individuals and businesses, because “the bottom line is that energy efficiency is one of the best investments we can make in meeting our needs for electricity.” In 2003, the cost savings from Efficiency Vermont represent 28% of what utilities would have had to pay on the wholesale market.
Nevada
First, let me say that the Nevada energy bill is much more targeted than the recently passed federal energy bill. While the national energy bill is ladened with subsidies for controversial, dirty and costly energy options such as nuclear power and coal-fired power plants, the Nevada bill has almost no such subsidies. It can be read as a practical bill that addresses many state issues without succumbing to the pressures of self-serving industry lobbyists.
By way of background, Nevada is currently the fastest growing state in the country in terms of population and energy consumption, with consumption increasing nearly 70% from 1990 to 2000. While growth in energy consumption has slowed because of the energy crisis that gripped all of the western states, not just California, in 2001. Nevada’s economy has since rebounded.
In fact, the Western Governor’s Association (WGA) thinks energy efficiency is so important that it adopted a “clean energy resolution” in June of 2004, which includes a goal of increasing energy efficiency in the Western region 20% by 2020. This is similar to the European Union’s recent call for 20% of energy efficiency from all energy sources by 2020.
In order to dispel any hints of corporate welfare, the Nevada energy bill has a strict measurement and verification protocol; on the other hand, the bill addresses the four important business barriers to business participation: lack of awareness, difficulty of implementing energy projects, lack of operational priority and the limited capital available. In fact, the Southwest Energy Efficiency Project (SWEEP) found that “all of these factors lead industries to typically implement energy efficiency projects that have a two-year payback or less, if such projects are implemented at all.”
Another key component to Nevada’s Energy Bill is that it addresses the chasm between landlord and tenant, which is especially problematic when it comes to commercial and industrial properties. In those settings, the landlord generally uses a “triple-net” lease for their property, which requires the tenant to pay all operational expenses for the property including electricity. Usually, this means that there is no incentive for landlords to make energy efficiency improvements to existing buildings, because the tenant gets the value of the energy savings. To overcome this problem, Nevada has established a partial exemption from real estate taxes for privately owned buildings that meet some provisions of the green building standards of the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED).
Then, there is the matter of combining energy efficiency and renewable energy into a “clean energy portfolio standard.” Nevada’s new energy bill establishes clean energy standards that allow energy savings from cost-effective energy efficiency measures as well as energy supply from more costly but important renewable energy technologies to qualify. The overall standard was increased to 20% of total electricity supply in 2015, and the amount provided by energy efficiency measures is capped so that the emphasis remains on renewable energy technology implementation.
State governments, utilities and regulators are finally starting to treat energy efficiency as a supply side option, with an allowable return on investment. In the case of Nevada’s investor-owned utilities, they can now justify to their shareowners their investments to reduce demand and make energy efficiency a growing part of their portfolio of energy options.
Wisconsin
“We applaud the Public Service Commission for equalizing energy-efficiency incentives and recognizing the value of our Shared Savings program,” said Wisconsin Power and Light President Barbara Swan. “The PSC made a strong statement — investments in energy efficiency are as important as investments in new generation, and should be equally encouraged. This decision is good for our business customers and good for us.”
Ultimately, what makes the Wisconsin idea of utility programs for energy efficiency compelling is that it establishes practical rules for achieving large energy efficiencies. The potential for such an approach is substantial, because: (1) utility programs can help increase market penetration because they know their customers best; (2) with the opportunity for profit, utilities can provide the necessary personnel and capital to test new and existing technologies; and (3) utilities can provide their business and industrial customers with objective advice about the array of energy efficiencies most appropriate for their needs.
The U.S. Business Community
U.S. businesses - rightly or wrongly- have been branded as some of the country’s worst polluters, so who can blame them when they seize the initiative by reducing significant amounts of electrical consumption in order to cut energy costs and improve their environmental footprint at the same time.
There is one over-riding reason why the business community can have such a large effect on the economics of energy and the environment: They use approximately 50% of all electricity produced in the U.S. In practical terms, this means that the U.S. business community can employ large-scale energy efficiencies that would have the same effect as reducing the entire energy consumption of whole towns and cities.
In other words, the old “command and control” methodology used by governments and the utilities can be enhanced by a capitalistic marketplace created by energy efficiency providers and individual businesses. The ultimate goal of this new economic model is to reduce enough energy costs to justify the purchase of the energy efficient products or services, with a good solid return on investment.
Construction of new power plants and transmission lines may be inevitable, but appropriate deployment of energy efficiency could have an impact, and perhaps even a significant impact, on how many and how soon. With all that is at stake from an electric rate and environmental perspective, we simply cannot afford to allow current barriers to using our most cost-effective and cleanest solution—energy efficiency—to persist.
Conclusion
All of these examples of individual states and programs suggest that the U.S. could harvest large economic, environmental, and energy benefits if it took a broad view of electricity. Instead of dribs and drabs, we have an historic opportunity to change the way we fund, build, and use sources of new energy. By including state inspired energy efficiency initiatives into any broad energy plan, the U.S. can expect to derive as much as 2/3 of all new sources of energy from energy efficiency efforts, according to former Secretary of Energy Spencer Abraham.
Additionally, the Electric Power Research Institute (EPRI) has found that a 1% reduction in load during high peak periods can reduce wholesale prices by 10% and a 5% reduction load can reduce peak prices by as much as 20%. In California’s extreme example, the threat of blackouts forced the state to adopt a series of energy efficiencies resulting in an overall reduction of electricity use of 5% in 2001.
With great examples of leadership from California, Vermont, Wisconsin and Nevada, there is every reason to be optimistic that real energy solutions will bubble up through the states and finally transform U.S. energy policy. The world should be interested observers as they watch the U.S. and examples like California’s Energy Action Plan II unfold. Ultimately, the utility community can take its rightful place as energy expert and full service provider of all energy services including energy efficiency.
This paper was presented at the World Renewable Energy Congress in Florence, Italy on August 24, 2006.
