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Are Utilities Retrenching Their Customer-funded Energy Efficiency Programs?
By Matthew Rose, Enerdynamics Instructor
The level of spending and activity in customer-funded energy efficiency programs is rising. With the increase in state-level energy efficiency resource standards (EERS) and compliance targets, funding for energy efficiency programs reflects an increasing commitment.
At last count there are 26 states with various forms of directives requiring utilities or independent state administrators to spend ratepayer dollars on energy efficiency programs that meet specified savings targets.
A recent study by Lawrence Berkeley Laboratory points to continued growth and suggests that spending on electric and gas efficiency programs (excluding load management programs) is projected to increase from $4.8 billion in 2010 to a moderate estimate of $9.5 billion in 2025.
Total Spending on EE Programs ($billion, Nominal)
Despite this forecast growth in spending, there exists a small but growing undercurrent of utilities and state regulators looking at retrenching DSM expenditures and accompanying program impacts. As described below, the move to reconsider efficiency targets reflects a confluence of industry issues and trends that, in some cases, counter the presumed growth in customer-funded energy efficiency.
How do changes in the energy market affect savings?
Utilities, state lawmakers, and regulators face a number of challenges as the industry evolves. (See Enerdynamics’ blog for recent discussions on many such challenges.) In regard to customer-funded programs, policy makers continually position utilities as key conduits of energy efficiency. As evidence, some utilities may be penalized for non-compliance and given financial rewards for superior performance.
Utility responsibilities range from collecting system benefits charges from ratepayers to formally administering large-scale energy efficiency programs. With some exceptions, utilities face a slew of issues that may affect their receptivity to promoting energy efficiency. Most notable is a utility’s task of managing revenue impacts as customers are incented to use less of the utility’s product. Many jurisdictions have addressed this concern through performance incentives or decoupling as a rate treatment option. As an example, Xcel Energy (Minnesota) recently filed for decoupled electric rates to minimize revenue losses from energy efficiency.
Utilities are also forced to balance energy efficiency efforts against issues of resulting rate impacts, declining avoided costs, decreasing overall demand, and the impacts of building codes and appliance standards. These issues vary state to state and may give pause to utilities in regard to meeting their specified compliance targets.
A common issue voiced by utilities is the advancement of building codes and appliance standards that may limit the ability to capture cost-effective savings. For example, the implementation of the Energy Independence and Security Act (EISA) standards effectively removes incandescent light bulbs as a customer option and reduces the pool of lighting savings.
In response to the challenges of capturing cost-effective energy savings some states have advanced policies that modify the value of avoided energy and capacity costs to incorporate energy and non-energy benefits. This translates to a larger potential of cost-effective measures. For example, the State of Maryland recently commissioned an avoided-cost study that includes both energy and non-energy benefits for consideration.
These concerns are exacerbated for some utilities that are subject to energy efficiency policies set years ago requiring compliance with targets well out in the future. The tension becomes apparent as the evolving industry issues within the designated time frame may conflict with meeting designated savings goals.
Examples of customer-funded energy efficiency program retrenchment
The following are examples of states or utilities that are reexamining relevant energy efficiency spending and impacts to business operations. Examples of goal setting that have been impacted by changing market conditions are also noted.
Colorado: Xcel Energy filed for Commission approval on its 2014 Energy Efficiency Plan that includes reduced savings goals for some traditional energy efficiency programs. The filing is based on a recent market potential analysis that indicated an inability to capture enough cost-effective savings to meet previously established goals. The study identified the advancement of appliance standards as a key element in the goal shortfall. The filing calls for a proposed $6.9 million in electric DSM budget cuts across 10 programs.
Iowa: The Iowa Utilities Board recently approved Alliant Energy's Interstate Power and Light Company energy efficiency plan. Under the new goals, Alliant plans to save energy reflecting 1.1% of retail sales each year over the next five years. This is less than the utility’s current goal of 1.3% and its recent performance of 1.4%. The Board also allowed the company to suspend its incentive program for renewable energy installations, which has been in place for about five years. The Iowa Utilities Board is considering a similar proposal by MidAmerican Energy, with a final order expected before the end of the year.
Ohio: A recent Senate Bill (SB 58) was filed that would overhaul Ohio's energy efficiency and renewable energy law. SB 58 would nix the requirement that half of the renewable power come from Ohio-based projects. SB 58 also allows large industrial consumers to opt out of state-mandated programs. The Bill would also allow utilities to count upgrades they might have made anyway — such as equipment replacement or power plant upgrades — to count for increases in energy efficiency. The bill is currently stalled in committee.
Maryland: The State of Maryland (and its statewide Empower Maryland Program) has not met expected interim savings targets and is in jeopardy of falling short of its "15 x 15" energy efficiency targets (15% reduction by 2015). The state is trying to accelerate savings, and the Maryland Energy Administration anticipates a near doubling in impacts in 2013-2015 (as compared to 2010-2012), but overall the savings have a strong possibility of falling short.
Arizona: Arizona Corporation Commissioner (ACC) Gary Pierce recently filed a letter requesting the Commission reevaluate the state’s EERS rules. Arizona Public Service has informally noted that, given changes in the marketplace and the economy, it may be difficult to meet the current 22% reduction by 2020. No imminent changes are expected in the short term as the ACC is focused on addressing issues of restructuring and net metering.
In addition to the above states, there is anecdotal evidence suggesting other utilities are closely monitoring the impact of energy efficiency on their operations and trying to determine the ability and costs for complying with savings targets.
Implications and strategies
There seems to be some acknowledgement that industry changes may affect the landscape of customer-funded energy efficiency. This includes the need to consider strategies and policies that either directly support existing goals or the need to modify current compliance targets to align specified goals with achievable results. Current responses to such issues include:
Consideration of non-energy benefits: The declining value of energy-based avoided costs has reduced the magnitude of cost-effective savings available for capture. More and more states have incorporated non-energy benefits in their avoided-costs calculations to reflect a larger value for saved energy and capacity.
Shorter-term planning and compliance periods: Some states have decided to limit planning and compliance timelines so as to reduce the impacts of market changes and allow states to modify goals based on market considerations. For example, Pennsylvania imposed a three-year horizon on its Phase 2 initiatives. In contrast, other states including Arizona and Ohio have longer-term time horizons and are exposed to the risks of market changes.
Include codes and standards impacts: Some regulators allow utilities to count code and appliance standards that they actively promote. This policy helps ease a utility’s concern that codes and standards are reducing the pool of potential savings. For example, Arizona Public Service (APS) gets credit for energy savings resulting from selected appliance standards that the utility advances. APS gets savings credits for establishing standards for swimming pool pumps over and above national levels.
Limits on program spending: In response to concerns over rate hikes to recover customer-funded energy efficiency costs, some states have imposed limits on total spending. In Pennsylvania and Michigan the electric utilities are limited to spending no more than 2% of company revenues on energy efficiency programs. The spending caps serve as a limit on resulting rate impacts.
These examples demonstrate how some utilities and state regulators are facing various challenges to meet specified savings targets. Whether these are isolated exceptions or the origins of a larger movement is not yet clear. It is clear, however, that utilities are carefully measuring the impacts of delivering energy efficiency and looking for ways to reduce risks and limit exposure.
 American Council for an Energy Efficient Economy, York, Kushler, Hayes, Sienkowski, Bell and Kihm, Making the Business Case for Energy Efficiency: Case Studies of Supportive Utility Regulations, December 2013
 Lawrence Berkeley National Laboratory, Barbose, Goldman, Hoffman, Billingsley. The Future of Utility Customer-Funded Energy Efficiency Programs in the United States: Projected Spending and Savings to 2025, January 2013
 Exeter Associates Inc. Avoided Energy Costs in Maryland-Draft Report, November 2013
 Xcel Energy filing, Colorado-Docket Number 13A-0686EG
 Iowa Environmental Council, Iowa Utilities Board Approves Cuts to Alliant Energy’s Efficiency Efforts, December 2, 2013
 As Pending in the Senate Public Utilities Committee-130th General Assembly 2013-2014 Regular Session- Sub S.B. No. 58
 Ohio considers: Is energy efficiency worth the money? by Chrissie Thompson, Cinncinnatti.com, December 4, 2013
 Maryland ninth on energy efficiency, may fall short of goal; Two reports on efficiency say utility programs must ramp up, by Jamie Smith Hopkins, The Baltimore Sun, November 06, 2013
 Source: American Council for an Energy Efficient Economy, webinar presentation. Energy Efficiency in the States: 2013 Outlook, March 2013