William R. Prindle, Anna Monis Shipley, and R. Neal Elliott

Executive Summary (abbreviated)

Background

This report summarizes the results of a ground-breaking effort to calculate the regional benefits of increased energy efficiency investment in the Regional Greenhouse Gas Initiative (RGGI), an eight-state carbon cap-and-trade program stretching from Maine to Maryland. It is an important advance in the climate policy sphere because it is the most specific study yet conducted of energy efficiency’s impacts on such important factors as allowance prices, energy prices, and economic growth. ACEEE served as a stakeholder in the two-year RGGI development process, which encompassed a state agency working group, a stakeholder group, and other mechanisms set up to develop a model regulatory document.

Methodology

As a core part of the rule’s development, the working group conducted extensive modeling of the regional power sector using ICF Consulting’s Integrated Planning Model (IPM) linear programming model plus Regional Economic Models, Inc.’s (REMI) 20/20 Insight™ regional economic model to assess RGGI’s potential impacts. Part of the IPM and REMI modeling effort was dedicated to simulating the impact of accelerated energy efficiency deployment scenarios.  The RGGI staff working group invited ACEEE to develop energy efficiency resource data as input for the IPM efficiency runs. ACEEE used a 2003 study of electric efficiency potential developed for the New York State Energy Research and Development Authority (NYSERDA) as the basis for this analysis.

Results

IPM’s outputs showed that doubling the current level of energy efficiency spending in the RGGI region would have several very favorable effects on the carbon cap-and-trade system. It would reduce electricity load growth, future electricity prices, carbon emissions, carbon emission prices, and total energy bills for electricity customers of all types.

• Electricity load growth—Comparing the reference case to cases with increased efficiency investment shows that doubling efficiency would cut load growth by about two-thirds in 2024, from about 20% to about 6% above 2006 levels.
• Generation capacity additions—the doubled-efficiency scenario would reduce 2024 capacity additions by about 8,000 MW, or about 25% of the reference case forecast for new capacity.
• Carbon emissions—Comparing the reference case to increased-efficiency scenarios shows that the efficiency scenario would keep carbon emissions virtually flat through 2024, compared to about 15% growth in the reference case.
• Energy prices—doubling efficiency would reduce energy price growth to almost nothing; no significant prices impacts would occur until after 2020, when they would have less than a 1% impact on wholesale power market prices.
• Carbon allowance prices—Comparing the RGGI policy scenario to one in which energy efficiency results are doubled, shows that allowance prices would also be substantially lower with increased energy efficiency investment, falling by about one-third to around $2/ton in 2024.
• Power imports or “leakage”—The IPM modeling process indicates that increased efficiency investment would substantially reduce power imports to levels lower than the reference case. While many factors affect leakage, efficiency can help reduce it, allaying one of the biggest concerns about RGGI, which was that the program might result in increased emissions from plants selling power into the region.

The regional economic impacts, as projected by the REMI input-output model, also would show positive impacts from increased efficiency investment:

• Consumer energy savings—Analysis of energy savings from the IPM modeling results showed that under the doubled-efficiency scenario, 2021 household electricity bills would be an average of $109 lower than under the reference case.
• Economic output—Doubling efficiency would increase regional economic growth from almost no effect to 0.6% positive in 2021, relative to the reference case.
• Personal income—The doubled-efficiency scenario would increase personal income by almost 1% in 2021.
• Employment—The increased efficiency future would increase private-sector job growth by 0.8% in 2021.

Policy Implications

The RGGI modeling results show that an increased investment in energy efficiency results in the most positive set of economic impacts for the region. This puts a new premium on the value of stepping up public commitments to efficiency in the RGGI states. With strong efficiency programs and policies in place, the region could enhance economic growth while cutting carbon emissions. The report recommends a two-part policy approach:

1. A public-benefits allowance allocation, in which a large fraction of carbon allowances would be allocated at the start of the program to public entities, which would then sell the allowances and use the proceeds to invest in public goods like energy efficiency. The RGGI Memorandum of Understanding (MOU) and draft Model Rule set a minimum public-benefits allocation of 25%. Some states are considering public-benefit allocations up to 100%.
2. A parallel commitment to achieving energy savings targets in the power sector. Almost all of the RGGI states have a public funding program for efficiency. However, some states, including Connecticut and New Jersey, are developing quantitative targets as well as funding mechanisms. Known generically as Energy Efficiency Resource Standards (EERS), these mechanisms can be both simple and powerful ways to achieve desired results from efficiency programs.

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28 pp., May 2006, $20.00, E064