Meeting Aggressive New State Goals for Utility-Sector Energy Efficiency: Examining Key Factors Associated with High Savings

Martin Kushler, Dan York, and Patti Witte

March 2009

Executive Summary

Background

The role of utility-sector¹ energy efficiency has undergone a dramatic transformation.  In just the last few years, energy efficiency has evolved from being largely a token gesture or a “public benefits” set-aside, to being a top-priority utility system resource.  Indeed, several states have established state policies which mandate that energy efficiency is “first” in the “loading order” of utility resources, and/or that their states should capture all cost-effective energy efficiency.

The causes of this profound increase in prominence are painfully familiar to those associated with electric utility industry.  They include: (1) dramatic increases and great volatility in the prices of all fuels; (2) large and unprecedented increases in the costs of constructing new power plants; (3) shrinking reserve margins leading to concerns about electric system reliability in many regions; (4) growing concerns about the ability to finance and secure cost-recovery for large electric generation construction projects; and (5) mounting concerns about global warming and the realization that some type of monetization of carbon costs is probably inevitable.  Together these factors have helped elevate energy efficiency to the status of an essential core utility system resource.

For all of the above reasons, states have been rushing to establish aggressive new energy savings goals for utility-sector energy efficiency programs.  In just the last two years, Minnesota has passed legislation requiring energy efficiency savings equivalent to 1.5% of total sales each year; Illinois and Ohio have passed legislation requiring a ramp-up to 2% per year in the next decade; New York and Maryland are discussing policies that would require over 2% per year by 2015; and Vermont is heading toward a commitment of over 2% per year in the next few years.  A number of other states are discussing goals in the 1% to 2% range or more.  To put this in context, in our last comprehensive review (Kushler, York & Witte 2004), the very few top performing states in the nation were only achieving savings in the area of 0.8% per year.

Not surprisingly, the gap between past experience and the new policy requirements has led to questions such as: “Are these goals reasonable?” and “How are we going to accomplish this?”  Broadly stated, the purpose of this study is to gather information to help address those questions.

More specifically, this project has two basic objectives: First, to identify the historical top-performing states in terms of utility-sector energy efficiency programs (e.g., using such indicators as energy efficiency savings as a percentage of total sales) and seek to identify factors that have contributed to their high level of performance; and second, to identify factors that may enable significant increases in those top levels of performance, both by examining states currently engaged in preparing for such increases and by consulting with leading industry experts.

Results

Through expert review and analysis of available quantitative data, this project identified a list of 14 “top states” in terms of electric utility-sector energy efficiency performance.  In order of rankings by a panel of industry experts, those states were: California, Massachusetts, Connecticut, Vermont, Wisconsin, New York, Oregon, Minnesota, New Jersey, Washington, Texas, Iowa, Rhode Island, and Nevada.

Once we identified this pool of top states, we gathered and analyzed considerable additional information in order to attempt to identify key factors associated with high energy efficiency savings performance.
Energy Efficiency Spending and Savings

In this report we present data for these top 14 states on electric utility-sector energy efficiency spending and savings for 2006 and 2007, including the calculation of several performance benchmarks (i.e., energy efficiency spending as a percent of revenues, energy efficiency spending per capita, and energy efficiency savings as a percent of sales).  Where available, we also present some disaggregated data on energy efficiency spending and savings by sector, and by major end-use categories.

Some noteworthy findings include the fact that energy efficiency spending was relatively balanced between the residential and non-residential sectors (median across the states of 44% and 56% respectively), but that savings were relatively skewed toward the non-residential sector (63% non- residential).  Also striking was the extent to which the lighting end use dominated the savings accomplishments, accounting for nearly two-thirds of all savings in the states which had disaggregated data available.  In the residential sector alone, lighting accounted for between 63% and 92% of reported savings.

Policy Factors

This project also reviewed the utility-sector energy efficiency policy framework in each of the 14 top states, including: administrative approach; type of cost recovery mechanism; whether there is a decoupling mechanism and/or shareholder incentive mechanism; and whether there is an Energy Efficiency Resource Standard (EERS) requirement.  Those results are presented in Table 7 of the report, along with a discussion of patterns observed.

Expert Ratings

The project took advantage of the extensive experience of our panel of industry experts to ask them to rate the relative importance of a total of 16 key factors relating to the regulatory, economic and policy conditions within a state, in terms of how important each factor is “in enabling a state to achieve large utility-sector energy efficiency program savings results”.  We also asked them to rate each factor in terms of its “importance up until now” as well as its “likely importance in achieving future higher goals”.  A number of interesting results from these ratings are discussed in the report.

Recommendations from the States

As a fourth category of information, we sought to gather feedback directly from key representatives in each of the targeted states.  Through telephone interviews we asked them for their thoughts on key factors contributing to strong energy efficiency accomplishments in their states, including both program-related factors and policy-related factors.  Those results are presented in the body of the report, using their verbatim comments.

State Profiles

Finally, through interviews and document review we produced brief “summary profiles” of several of the leading states that have recently been engaged in efforts to increase their utility-sector energy efficiency goals.  That information is provided in Appendix C.

Conclusions

The following are some of our highlight observations from this project.

• A number of states are achieving very significant levels of utility-sector energy efficiency savings, and these savings levels show increases over what was being achieved earlier in this decade.

• However, with one exception (Vermont), no states are yet reporting energy efficiency savings at the higher levels being called for in a number of recent state policy decisions (i.e., in the range of 1.5% to 2.0% per year or more).

• A number of key factors are associated with high levels of utility-sector energy efficiency achievements, including having relatively high levels of funding for energy efficiency programs and having strong legislative and regulatory requirements and support for energy efficiency.

• In meeting future, higher, energy efficiency savings requirements, key additional factors identified by industry experts include: having appropriate incentives for utilities to pursue energy efficiency (including both shareholder incentives and decoupling) and securing the commitment of top utility management; having high quality energy efficiency programs; and appropriately recognizing the cost of carbon emissions.

• Other issues such as who administers the energy efficiency programs (utilities or state government or independent 3rd parties); or whether a state is “restructured”; or particular demographics or climate; are not regarded as particularly important factors in whether or not a state can achieve high levels of energy efficiency achievements.

• To date, utility-sector energy efficiency savings achievements have been heavily dominated by savings in the “lighting” area, and there is a widely-acknowledged need to increase savings in other end-use and program areas.

• The major increases in utility “supply side” costs (e.g., fuel costs and power plant construction costs) that have occurred in the last few years should allow for program portfolios to more aggressively pursue energy efficiency savings in “non-lighting” areas and still be cost-effective.  This will likely include raising energy efficiency incentives to customers.

• A number of leading states have recently announced goals to dramatically increase utility-sector energy efficiency savings, and are taking concrete actions to implement those policies.  Several state examples are described in Appendix C.

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56pp., 2009, $30.00, U091