It's Time for Indiana to Look Beyond Coal for Energy Solutions: National Group Surveys State-Level Energy Efficiency Programs

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The more forward-looking states are implementing statewide energy efficiency programs to capture the economic and environmental benefits of making our homes and businesses more efficient in their use of electricity and natural gas. The American Council for an Energy Efficient Economy recently surveyed those states. The message: Savings far outweigh costs for these programs.

The following is a synopsis of the American Council for an Energy-Efficient Economy (ACEEE) report, "Five Years In: An Examination of the First Half-Decade of Public Benefits Energy Efficiency Policies" by Martin Kushler, Dan York, and Patti Witte.

The ACEEE conducted an examination of this strategy in 2000, concluding that while the policies looked promising, it was too early to tell what would happen. In 2004 a follow-up to that report was conducted, finding that overall, the policies have shown to be successful.

"Public benefits" programs-energy efficiency, renewable energy, low-income programs, and public-interest-oriented research and development-have traditionally been provided through the regulated utility industry. A restructuring of the electric industry and, specifically, the move towards less regulation under restructuring, has caused utilities to abandon these traditional services. In response, a number of states have created formal funding mechanisms to support these public benefits since the mid-1990s. Today, 18 states have energy efficiency programs in place, 13 have direct funding to support renewable energy, and 10 have a renewable portfolio standard (RPS) that requires electricity suppliers to provide a minimum percentage of their electricity from renewable sources. Now that several of these programs have been in place for a substantial length of time, we have the benefit of examining their effectiveness so far.

20 states have adopted public benefits energy efficiency policies, while 18 are currently operating programs.

States with public benefits energy efficiency programs:
Arizona, California, Connecticut, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New York, Ohio, Oregon, Rhode Island, Vermont, Wisconsin

So far, key stakeholders in these states generally have been pleased with the programs. No state so far has cancelled a public benefits energy efficiency policy, while at least four have passed legislation to extend the time period for the policy to be effective.

The public benefits energy efficiency programs produce significant energy savings impacts: Eight states combined cut about 1,060 MW electricity use each year. The programs have also shown to be cost-effective: estimated benefit/cost rations range from 1.0 to 4.3 with an average of approximately 2.3. Additionally, the reduction in electricity use has cut air pollution emissions significantly.

What do state public benefits policies look like?

Funding Mechanisms, Sources, and Amount
The most common is a non-bypassable system benefit charge or public benefit charge per kilowatt hour. 12 states use this approach. The other 6 have funding provided through a flat monthly rate.

One concern with funding is whether all customer classes should have to pay. Many large industrial customers, for example, argue that they do not want these programs and should not have to pay for them. The predominant approach has been that all customers should pay to help support these programs. Some states provide discounts for large customers based on self-spending on energy efficiency projects.

The required funding level for the 18 states with public benefits energy efficiency programs ranges from $.0003 to $.003 per kWh with a median value of about $.0012 per kWh.

Administration: Who administers public benefits programs?
Administration approaches can be divided into three basic categories: utility administration, independent administration by a state government agency or independent non-profit organization, or some kind of hybrid approach.

Feedback from key stakeholders in states that have implemented such programs:

  • Having utilities involved in administration can bring positive aspects, such as knowledge of the electric system, experience in dealing with electric equipment and technologies, and a history with customers. But incentives should be provided to keep them motivated.
  • It is generally a good idea to keep funds out of the state government. A number of states experienced funding raids from these programs when the state underwent a serious budget crisis. Funding raids seem less likely when the state does not manage these funds. A good role for the government is to set goals and provide funding, allow experts to design and implement the program, and be held accountable.
  • Independent (non-profit) administration can be effective.
  • No matter what kind of administration approach a state takes, it is critical that that organization bring experience and capability in the field.

Duration of funding/policy requirement
In 2000:

  • 6 states did not specify did not set a specific duration for the funding requirement, leaving it open-ended;
  • 4 specified a 10-year funding period;
  • 9 specified funding periods ranging from 3 to 5 years.

Since then, only one state (Washington) has terminated its public benefits policies, but in the context of abandoning its entire electric restructuring policy. Four states have officially extended the duration of their public benefits policy, two have adopted new public benefits policies, and the others have continued their original policies.

There appears to be a trend towards a longer funding period, which is likely in recognition of the fact that transforming markets to be energy efficient is neither simple nor quick. It also appears that support for public benefits policies in states that have adopted them remains strong.

How are state public benefits policies working?
The effectiveness of state public benefits policies have been evaluated in the following ways: 1) They have been assigned letter grades by key state agencies, utilities, and advocacy groups; 2) savings impacts and cost-effectiveness, and 3) other objectives (such as environmental impacts).

Grading Public Benefits Policies and Implementation
In 2000, telephone interviews were conducted with representatives of key organizations in each of the 19 states that had passed an energy efficiency public benefits policy. They were asked to assign a letter grade (A to F) to both 1) the quality of the policy their state had adopted "on paper" and 2) the quality of the implementation of that policy so far. Four years later, key groups were re-contacted and asked to do the same thing. By that time, three of the original states (Delaware, Maryland, and Pennsylvania) had never really implemented their policies, so interviews were conducted in the original 16 states.

Results:

Policy (on paper)
In 2000, respondents were pleased overall with the policy adopted by their state: Most states received a grade of B, while 4/5 of the policies received an A or a B. Reasons cited for assigning lower grades:

  • Lack of clarity in the legislation, leading to argument and delays;
  • Low funding levels.

Four years later, the policy grades were similar to those from 2000: Most states received a grade of B, while 4/5 of the policies received an A or a B.

Implementation of Policy
In 2000, grades assigned to the implementation of the policy to date tended to be the same or slightly lower than the on-paper policy grade. Several incompletes were assigned because it was simply too early to tell if the policy was working effectively.

Reasons cited for assigning lower grades for policy implementation:

  • Administrative delays or
  • Lack of support for the policy by agencies responsible for implementation.

Four years later, grades for implementation more closely matched the policy grades: most received a grade of B while 4/5 received an A or a B. Fewer incompletes were assigned this time because the programs had had time to mature. So, key stakeholders were generally pleased with the implementation of their state's policy.

Fluctuations in grades:
5 states showed a modest increase in grades assigned since 2000 (Massachusetts, New Hampshire, New York, Oregon, and Rhode Island).

Factors cited for the improvement:

  • Increased funding commitment to policy;
  • There was an effective collaborative process to ensure stakeholder input;
  • The state was making good use of evaluation to ensure continual program improvement.

5 states showed a modest decrease in grades assigned (Arizona, Connecticut, Maine, Ohio, and Wisconsin). Factors cited for the decrease:

  • Wisconsin and Connecticut saw significant funding raids of program funds;
  • Lack of commitment by state to aggressively implement the public benefits energy efficiency program.
  • Poor management by administrator.

Cost Effectiveness of Programs
Energy efficiency programs are achieving savings on electric sales of, on average, .4% each year. In addition to this, the programs have successfully decreased system demand. The combined total each year for eight states that reported data was 1,059 MW-the size of one large baseload power plant. This contributes to additional savings by reducing the need for new capacity and infrastructure. So, over a longer period, savings are more significant.

Where data is available, the public benefits from these programs outweighed the costs. The benefit to cost ratio ranges from 1.0 to 4.3. The cost of saved electricity ($/kWh) ranges from $.023 to $.044/kWh.

Environmental Benefits
Another benefit of electric savings is the reduction of emissions of air pollutants from fossil fuel combustion, such as sulfur dioxide, nitrous oxide, carbon dioxide, and mercury. In some cases (like Massachusetts, New York, and Rhode Island), states were working specifically to have the public benefits energy efficiency program savings to help them meet environmental objectives such as nitrous oxide caps and greenhouse gas emission reduction commitments. As clean air policies become better defined in the future, this will probably be a growing trend.

State SO2 (tons) NOx (tons) CO2 (tons) Mercury (lbs)
Connecticut 762 234 182,875 N/A
Maine 22 6 4837 N/A
Massachusetts 1581 791 280,100 N/A
New Hampshire 382 76 57,500 N/A
New Jersey 559 265 165,040 5.9
New York 1,115 713 584,000 N/A
Rhode Island 124 43 35,306 N/A
Vermont 1,461 448 350,667 N/A
Wisconsin 713 446 185,457 4.9

In summary, state public benefits energy efficiency programs appear to be working successfully. In the 18 states that have implemented programs, key stakeholders are generally pleased with them. They have shown to be cost-effective and bring environmental benefits, as well.

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