Energy Efficiency Action Plan

Kathleen HoganDirector, Climate Protection Partnerships DivisionU.S. Environmental Protection Agency

NARUC Winter MeetingsCommittee on Energy Resources and the EnvironmentFebruary 13, 2006

2

Time for Action on Energy Efficiency

• Energy demand continues to grow

• Higher energy prices than seen for decades

• High energy expenditures

• Reliability issues

• Capital expenses for generation, transmission and congestion relief

• Investment risk associated with climate change

• Security concerns

• Efficiency can help control electricity growth 50%+

Sources: EIA Annual Energy Review 2004

Total Energy Consumption by End-Use Sector, 1949-2004

0

10

20

30

40

1949 1959 1969 1979 1989 1999

Year

Co

nsu

mp

tio

n (

Qu

adri

llio

n B

tu)

Commercial

Transportation

Industrial

Residential

0

5

10

15

20

25

1949 1959 1969 1979 1989 1999

Year

Nat

ura

l Gas

(T

cf)

0

1

2

3

4

Electricity (T

rillion

kWh

)

Electricity

Natural Gas

Growth in U.S. Electricity and Natural Gas Consumption, 1949-2004

3

Energy Efficiency Action Plan

Goal Statement

To create a sustainable, aggressive national commitment to energy efficiency through gas and electric utilities, utility regulators,

and partner organizations.

4

Overview of Energy Efficiency Action Plan

• Many cost-effective energy efficiency solutions – Well-designed and cost-effective programs that work

– Significant potential for greater investment and savings

• Utilities well positioned to deliver more efficiency, but barriers exist

• Leadership Group:– Recognizes that utilities and regulators have critical role

– Recognizes success requires the joint efforts

– Will work across their spheres of influence to remove barriers

– Commits to take action within their own organization

5

Energy Efficiency Action Plan

• Who: Leadership Group Comprised of electric and gas utilities, state public utility

commissions, state energy/environment agencies, energy consumers, energy service providers, NGOs

• What: Working Groups to Address Barriers and Develop Business Solutions

– Utility Ratemaking and Revenue Requirements– Rate Design– Planning Processes– Programs Best Practices

Facilitated by US DOE and EPA

6

Path to Increased EE Investment

Policy Structure

Develop Utility Incentives for Energy Efficiency

Develop Rate Designs to Encourage Energy Efficiency

Utility Resource Planning

Program Implementation

Include Energy Efficiency in Utility Resource Mix

Measurement & Evaluation

Program Roll-out

Model Program

Documentation

Planning Processes

Utility Ratemaking &Revenue

RequirementRate Design

Action Plan Working Groups and Key Barriers

Develop Effective Energy Efficiency Programs

Rates do not encourage

EE investments.

EE reduces utility earnings

Planning does notincorporate demand-

side resources

Limited information on existing best practices

Revise Plans and Policies Based on Results

Timeline: Actions to Encourage Greater Energy Efficiency

Policy Structure

Develop Utility Incentives for Energy Efficiency

Develop Rate Designs to Encourage Energy Efficiency

Utility Resource Planning

Program Implementation

Include Energy Efficiency in Utility Resource Mix

Measurement & Evaluation

Program Roll-out

Model Program

Documentation

Planning Processes

Utility Ratemaking &Revenue

RequirementRate Design

Action Plan Working Groups and Key Barriers

Develop Effective Energy Efficiency Programs

Rates do not encourage

EE investments.

EE reduces utility earnings

Planning does notincorporate demand-

side resources

Limited information on existing best practices

Revise Plans and Policies Based on Results

Timeline: Actions to Encourage Greater Energy Efficiency

7

Key Barrier -- Utility Incentive Structures

• Net revenue linked to throughput creates disincentive for utility EE investment and other policies leading to lower use

– Decoupling mechanisms are a solution

• Investor-owned utilities do not earn the same rate of return on EE as supply side investments

– Shareholder incentive mechanisms can reward investor-owned utilities

• Publicly-owned utilities must justify rate increases or decrease net revenue to promote energy efficiency investments

– Evaluate Average Bill Impact rather than Rate Impact

8

Key Barrier – Rate Designs

• Frequently does not encourage energy efficiency

• Do not encourage less usage when high costs for energy or capacity

• Rate design changes to promote EE can be difficult, particularly when mandatory

– Pilots are exploring what can work

• Must address trade-off between economic efficiency and complexity to develop rates that provide appropriate signals

9

Key Barrier -- Utility Planning Processes

• Standard utility resource planning processes do not typically evaluate EE as a competitive resource

– While M&V is well-developed, there remains some skepticism that the system benefits from energy efficiency will be available when needed

• Comparison of EE, supply side resources, T&D requires consideration of appropriate trade-offs in key areas

– Cost

– Reliability

– Environmental Impact

– Others

• Portfolio of demand and supply options should consider policy direction, incentives and goals of commissions (Investor-owned) or communities (publicly-owned)

10

Key Barrier: Lack of Information/Awareness on Programs that Work

• Document programs that work– Political/ administrative

factors

– Across end-use sectors and customer classes

– Designing the portfolio

– Cost-effectiveness tests

• Established M&V procedures– Gross to net

– Persistence of savings

$0.00

$0.02

$0.04

$0.06

$0.08

$0.10

$0.12

ENERGY STA

R New

Hom

es

ENERGY STA

R Pro

ducts

Home

Impr

ovem

ent

Low In

com

e/Mult

ifam

ily

Comm

New

Con

struc

tion

Comm

Effic

iency

Impr

ovem

ents

Comm

ercia

l Pro

ducts

Small

Bus

iness

Co

st (

$ /

kWh

)

Residential Commercial

Sources: NYSERDA, CA, MN Xcel, VT, NWPPC

11

Expected Outcomes

• Documenting business practices / solutions for overcoming barriers limiting utility investment in energy efficiency– Removing disincentives / providing incentives

– Integrating EE into utility planning

– Examples of EE programs that work

– Tactics that help EE succeed

• Communication strategy for spreading practices / solutions during Summer/Fall 2006– regional/state workshops

• A network of experts and resource materials on energy efficiency practices

12

Upcoming Milestones

• Draft working group materials by early March 2006– Short reports with links to additional resources

– High-level spreadsheet tool to illustrate the value of energy efficiency to resource planning, customer bills and utility revenues based on your specific inputs

• Next Leadership Group Meeting on March 23– Review all draft Working Group material

– Agree to Communication Strategy

• Summer 2006– Final Working Group materials

– Initiate Communication Strategy

– Update at Summer NARUC Meetings