Energy Efficiency and Resource Standards: Experience and Recommendations

Executive Summary

An Energy Efficiency Resource Standard (EERS) is a simple, market-based mechanism to encourage more efficient generation, transmission, and use of electricity and natural gas. An EERS consists of electric and/or gas energy savings targets for utilities, often with flexibility to achieve the target through a market-based trading system. All EERS’s include end-user energy saving improvements that are aided and documented by utilities or other program operators. Sometimes distribution system efficiency improvements and combined heat and power (CHP) systems and other high-efficiency distributed generation systems are included as well. EERS’s are typically implemented at the state level but can also be implemented over smaller or wider areas. With trading, a utility that saves more than its target can sell savings credits to utilities that fall short of their savings targets. Trading would also permit the market to find the lowest-cost savings. However, unlike other resources such as renewable energy and coal, energy-saving opportunities are distributed throughout the 50 states; studies on many states have found cost-effective opportunities to reduce energy use by 20% or more.

EERS-like laws are now in operation in several states and countries. Texas’s electricity restructuring law created a requirement for electric utilities to offset 10% of their demand growth through end-use energy efficiency. Utilities in Texas have had no difficultly meeting their targets and are currently exceeding them. Hawaii and Nevada recently expanded their renewable portfolio standards to include energy efficiency. Connecticut and California have both established energy savings targets for utility energy efficiency programs (Connecticut by law and California by regulation) while Vermont has specific savings goals in the performance contract with the nonprofit organization that runs statewide programs under a contract with the Public Service Board. Pennsylvania’s new Advanced Energy Portfolio Standard includes end-use efficiency among other clean energy resources. Colorado’s largest utility has energy savings goals as part of a settlement agreement approved by the Public Service Commission. And Illinois and New Jersey are planning to begin programs soon. EERS-like programs have been working well in the United Kingdom and the Flemish region of Belgium. Italy has recently started a program, and another is about to start in France. Details on each of these programs are provided in the body of this report.

Based on the experiences summarized above, we recommend that both states and the federal government enact EERS’s covering both electric and gas utilities. So far, states have led EERS efforts and more states should consider policies of this type. Eventually, the federal government should follow these leading states and enact a national EERS so as to expand the savings and benefits throughout the country as well as to provide national emissions reduction and price reduction effects that benefit all states, including those with state EERS’s.

We recommend that EERS targets generally start at modest levels (e.g., savings of 0.25% of sales annually) and ramp-up over several years to savings levels currently achieved by the most successful states (e.g., 0.75% to 1.25% of sales annually). However, states with substantial current programs can ramp-up much more quickly. Peak demand savings should also be included. To ensure that costs will be moderate, we recommend that trading of savings credits be permitted. If there are concerns about the cost of efficiency programs, a “safety valve” could be created and electric and gas utilities could be permitted to buy credits from the implementing agency for about half of the current retail costs of these energy sources with the monies used to fund government-operated energy efficiency programs. Additional important implementation details are discussed in the body of this report including such issues as measurement and evaluation and complementary supportive policies.

Because EERS annual requirements are cumulative, savings would steadily mount. If an EERS calls for 0.75% savings per year, after a two-year ramp-in period, by 2020 annual electricity and natural gas use in the covered region would be reduced by nearly 10%. At the national level, EERS savings would amount to about one-quarter of the currently projected growth in electric sales over the 2007–2020 period and about one-half of projected growth in natural gas sales over this same period. A national EERS at this level would reduce U.S. energy use in 2020 by about 5.6 quadrillion Btu (“quads”), which represent about 4.6% of projected U.S. energy use for that year. These savings are significantly greater than the projected savings from the combined efficiency provisions in the federal Energy Policy Act of 2005. Overall, an EERS at this level would provide net benefits to consumers and businesses of about $170 billion (i.e., discounted benefits minus discounted costs). These savings are summarized in Table ES-1.

Table ES-1. Summary of Savings from a National EERS

Note: 2010 and 2020 savings include savings from measures installed in prior years.

With savings of this magnitude, EERS’s represent one of the largest opportunities for capturing cost-effective energy savings, savings that will save consumers money, promote economic development, and reduce emissions of air pollutants and greenhouse gas that contribute to global warming.

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61 pp., February 2006, $20.00, E063