Issues and Challenges Regarding Including Mechanisms for Energy
Efficiency-Based Allowances Within a Multi-Pollutant Emissions Trading
System
— One of a Series of ACEEE Fact Sheets
In the first fact sheet in this
series (http://aceee.org/energy/objattrib.htm), we discussed
the background and objectives for providing energy efficiency-based
allowances within a multi-pollutant trading system. In this fact
sheet, we continue this discussion by identifying key issues and
challenges facing adoption of such a system. We also propose some
possible approaches to meeting these challenges.
Issues and Challenges Regarding Energy Efficiency-Based Allowances
- Possibly
the biggest challenge facing inclusion of energy efficiency-based
allowances is the need to aggregate projects into a relatively
large minimum size, which is necessary for an entity to participate
effectively and economically in the multi-pollutant allowance
market. This is a major program challenge since most efficiency
improvements yield relatively small increments of kilowatt-hour
and kilowatt savings. The transaction costs of aggregation and
participation in the multi-pollutant allowance trading markets
generally would be too big a barrier for small businesses and
other small organizations to overcome to participate in this market.
- A variety
of different types of companies engaged in the generation, transmission,
distribution, and sales of electricity will be well suited to
serve as aggregators of energy efficiency projects. These types
of companies include traditional, vertically integrated, regulated
utilities; distribution utilities; independent power producers;
and retail power marketers. Integrated utilities, independent
power producers, and other electricity-generating companies have
to obtain and hold sufficient numbers of multi-pollutant allowances
to generate the amount of electricity they wish, which will provide
an incentive for them to obtain energy efficiency-based allowances.
For distribution companies and retail power marketers, serving
as an aggregator might well complement their business activities
related to sales and services to their customers. Experience with
demand-side management (DSM) programs would be especially valuable
to companies that serve as aggregators since this requires many
of the same types of skills, such as evaluation, measurement,
and verification. While different types of companies may have
different motivations, the program administrator should be able
to develop incentives that attract and engage a variety of different
types of companies in aggregating energy efficiency-based allowances
and participating in multi-pollutant allowances markets.
- Generating
companies may have an inherent bias against and possible disincentive
regarding purchasing energy efficiency-based allowances as it
would mean that they would be promoting and even funding activities
that would decrease the demand for their product. This may not
be as much of a problem if the companies buy allowances from outside
their service territories or markets.
- Energy efficiency-based
allowances should be allocated a credit premium to provide additional
incentive for utilities, generators, and other types of energy
companies to procure such allowances. This should help overcome
any inherent reluctance to pursue energy efficiency by these entities,
and also help cover some of their transaction costs. Providing
a premium for energy efficiency-based allowances can be justified
by the additional benefits that energy efficiency provides, including
conservation of non-renewable fuels, enhanced system reliability,
and certain stimuli to local economies, such as job creation.
A credit premium is also justified due to the transaction costs
of aggregating energy efficiency improvements.
- Protocols
will need to be established to address the issue of identifying
net efficiency impacts of energy efficiency improvements that
qualify to receive allowances. Net efficiency impact in this context
(also sometimes referred to as additionality) is the difference
between the energy use of a more energy-efficient technology and
a reference level of energy efficiency for the technology. For
retrofit and replacement applications, the reference level is
generally the technology being replaced or upgraded. For new purchases
and applications, the reference level might be the applicable
standard or code. Establishing an acceptable reference level can
be difficult, especially for energy systems and entire new buildings
or facilities. The program administrator will have to establish
clearly defined reference levels and/or protocols for all eligible
energy efficiency improvements. This will need to be done in a
manner that is reasonably simple for participants and practical
for the administrator.
- The effects
of energy efficiency improvements will have to be factored into
the baseline projections of generation output that are made to
determine levels for awarding allowances. There will have to be
a mechanism established to account for reference level energy
efficiency in these projections—as well as some kind of rolling
update to include energy efficiency improvements for which allowances
are awarded.
- Awarding
allowance credits for purchase of selected new, energy-efficient
products will be a promising mechanism to increase sales of efficient
goods and services and help achieve environmental objectives.
- Customers
who purchase eligible energy-efficient products should receive
the allowance credits. The customers could then transfer the credits
to a third party—such as manufacturers, utilities, or energy service
companies. For example, the third party would purchase the allowance
credit from the customer through some transaction, such as a rebate.
This approach has several benefits. It first establishes a clear
mechanism for aggregating numerous small purchases necessary to
achieve the threshold for participating effectively and economically
in the allowance trading market. Also, a rebate and associated
records also help the savings look more "legitimate" to the customer,
thus increasing likelihood of buying high efficiency. It also
educates customers about the energy-environment link and sends
the right market signal to the consumer regarding the energy and
environmental benefits of more efficient products.
- Awarding
and tracking energy efficiency-based allowances poses some challenges
and raises some issues. An objective for including energy efficiency-based
allowances in a multi-pollutant allowance trading system would
be to promote new investments in energy efficiency. However, equity
concerns would dictate that existing programs should get the same
credits as new programs. This also would help prevent "gaming"
of programs in order to qualify. Ongoing programs should get credit
for savings beyond what would happen in a no-program base case.
- The allowance
award protocol should include adequate provisions to ensure that
installation of energy efficiency measures is appropriately documented
and verified before allowances are awarded. Utilities, aggregators,
or others submitting applications for allowances would be responsible
for meeting reasonable documentation and verification requirements.
- An overall
challenge to the program administrator will be to make energy
efficiency cost-competitive with other emission-reduction options.
This means that program rules for applying for and receiving energy
efficiency-based allowances should not impose undue costs on entities
seeking this option. The program rules must strike an effective
balance between the need for accurate accounting of emission reductions
and the need for user-friendly, streamlined administrative processes
required of participating entities.
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