This is the fourth in a series of questions that highlights RFF’s Expert Forum on EPA’s Clean Power Plan.
RFF asks the experts: Did EPA appropriately construct building block 4?
Expanding utility and state efforts to promote greater efficiency in electricity use (the fourth building block in EPA’s proposed Clean Power Plan) will reduce demand on power plants, thereby reducing emissions and saving money for electricity consumers. To set the state-specific emissions rate reduction goals laid out in EPA’s proposal, the agency determined that each state can eventually achieve a 1.5 percent savings in energy consumption per year based on energy efficiency resource standard goals that have been adopted or recently achieved in selected states. Did EPA appropriately construct building block #4?
“Building block [#4] was constructed in a reasonable way, although [ACEEE] will be suggesting some refinements and improvements in our formal comments to EPA. . . . With these refinements, [we estimate] that the energy efficiency savings and emissions reductions could more than double.”
—Steven Nadel, Executive Director, American Council for an Energy-Efficient Economy (ACEE) (See full response.)
“EPA has not appropriately constructed building block #4 and has substantially overstated the amount of [energy efficiency] that could be achieved by states in the future in setting the 111(d) CO2 standards.”
—Bruce Braine, Vice President, American Electric Power (See full response.)
“The approach that EPA takes raises a couple of questions about the cost-effectiveness of this particular building block. . . . First, states with ambitious existing energy efficiency programs tend to have a larger obligation. . . . Second, state targets under building block #4 are not differentiated based on the potential for associated carbon reductions.”
—Karen Palmer, Research Director and Senior Fellow, Resources for the Future (See full response.)
Steven Nadel
Executive Director, American Council for an Energy-Efficient Economy (ACEEE)
EPA took a major step in explicitly embracing inclusion of energy efficiency in the Clean Power Plan (CPP). The agency determined that each state should be able to gradually ramp-up its energy efficiency programs in order to eventually reduce electricity use by 1.5 percent per year. This level of savings is readily achievable, as six states have already achieved or exceeded this level of savings (Arizona, Hawaii, Massachusetts, Michigan, Rhode Island, and Vermont). Additional states are on-record as planning to ramp-up to this level of savings, including Maine, Maryland, Minnesota, New York, and Washington. (Information on state accomplishments and plans will be detailed in ACEEE’s 2014 State Energy Efficiency Scorecard, to be released in October). These levels of annual savings are also supported by several “bottom up” studies of energy efficiency potential that go beyond today’s standard energy efficiency programs and also include new efficiency measures and program approaches.
In our opinion, this building block was constructed in a reasonable way, although we will be suggesting some refinements and improvements in our formal comments to EPA. These refinements and improvements include the following:
Explicitly adding efficiency opportunities from updated state building codes and from expanded use of combined heat and power systems to each state’s target. ACEEE estimated state-specific savings available from these two measures in an April 2014 report.
Increasing the rate by which states ramp-up to the 1.5 percent level, from the 0.2 percent per year proposed by EPA to 0.25 percent per year as achieved recently by such states as Arizona and Michigan.
Giving states full credit for the energy savings they achieve. In the current EPA proposal, states that import power (such as Maryland) receive only partial credit. Also, the formula by which energy efficiency savings are credited to emissions rate improvements needs to be refined as the current formula makes some math mistakes and does not give full credit for the efficiency savings; we will be suggesting corrections so efficiency savings are fully credited.
Clarifying a number of details on how building block #4 will be implemented; in particular, including good but reasonable procedures for evaluating and documenting energy efficiency savings.
Correcting the economic analysis to use recent actual costs of energy efficiency programs plus moderate escalation rates. The current EPA economic analysis is overly conservative as it applies multiple escalation rates, resulting in average costs more than double those reflected today (recent actual costs having averaged 2.8 cents per kWh savings as documented in a March 2014 ACEEE report).
With these refinements, ACEEE estimates that nationwide energy efficiency savings and emissions reductions would about double relative to what EPA estimates in its Clean Power Plan proposal. Furthermore, states will be free to include even more energy efficiency in their compliance plans. ACEEE’s April 2014 report estimates that many states can use energy efficiency to achieve all of the emissions reductions called for in the draft Clean Power Plan.
Bruce Braine
Vice President, American Electric Power
Building block #4, energy efficiency (EE), plays an important role in EPA’s development of state-by-state CO2 reduction requirements. However, EPA has identified no authority for regulating customer end-uses of electricity. Energy policies that include EE programs and goals are traditional areas of regulation reserved for states under the Tenth Amendment, and included in integrated planning processes in states with vertically integrated utilities. Thus, the use of building block #4 in setting the Section 111(d) proposed standards is not appropriate.
In addition, EPA has not appropriately constructed building block #4 and has substantially overstated the amount of EE that could be achieved by states in the future in setting the 111(d) CO2 standards. EPA projected increasing levels of EE based on its evaluation of “best practices” among the states, ultimately developing specific goals that increase each state’s EE measures by approximately 1.5 percent of sales of electricity each year. The proposed EE targets are detailed extensively in EPA’s Greenhouse Gas Abatement Technical Support Documents. Much of the data and methods were developed by EE advocacy organizations. The metrics adopted by EPA largely incorporate these findings, and differ substantially from the engineering-based analyses that have been conducted on the topic. One study conducted by Lawrence Berkeley National Laboratory reported potential estimates for EE savings from 0.5 percent (low case) to 1.1 percent (high case). Several other individual studies and meta-analyses of EE potential, conducted mostly by EE advocacy organizations or consultants to EPA, as well as EPA’s own analysis are nearly all “top-down, policy-based approach” studies. Only one study analyzed by EPA used a “conventional bottom-up engineering approach.” This study by the Electric Power Research Institute (EPRI) is contained in a report that was released in 2009 with an update in 2014. Notably, EPRI’s estimate for average annual achievable potential based upon its engineering approach was 0.5 percent to 0.6 percent per year. Ultimately, EPA chose to use 1.5 percent as the “best practice level.”
Additionally, EPA uses EIA Form 861 data as the baseline level of the amount of EE achievements by utility demand-side management programs. EPA acknowledges the consistency and quality issues with this data resulting from the self-reported sourcing and differing methodologies in estimating these data. EPA does not fundamentally address this issue.
While EPA did use state-specific data from Form 861 for establishing starting points for EE levels, it applies “national” estimates of EE potential to this data and applied an EE growth rate historically only experienced in other best-practice states. The applicability of both these metrics has some fundamental flaws, based on the variability of state-specific factors, such as:
Relative industrial, commercial, and residential consumption
Some states have higher manufacturing and industrial consumption than others (such as the Northeast) with higher levels of service-economy industries. States with larger commercial and industrial usage increases the base substantially (greater overall consumption levels due to more energy-intensive loads), which then increases the absolute EE goal levels as well. Also, states that currently allow industrial customers to opt out of utility programs may have to re-visit these determinations and encounter resistance from these customers.
Implementing utility-sponsored EE at manufacturing and industrial facilities is more challenging and costly. Many such customers have already implemented economically justified EE improvements for cost-competitiveness reasons because they often have better access to capital, at lower rates, and are generally better informed of the options.
Lighting standards
Utility-sponsored EE programs have traditionally relied heavily upon lighting programs for the vast majority of their savings (generally, compact fluorescent lamp programs for residential customers and T-8 lighting retrofit programs for commercial customers).
With adoption of new lighting standards from the Energy Independence and Security Act (EISA), this broad, inexpensive EE resource will largely fade quickly. Statements made regarding EE achieved “historically,” due largely to lighting programs, ignore the impact of EISA lighting standards and other code changes that limit future EE potential. In fact, there is no empirical evidence of any future utility-sponsored EE programs achieving levels even approaching those achieved through lighting programs of the past.
Other EE options
Other options need to be relied upon to achieve incremental improvements going forward. Utilities will need to mostly default to thermal efficiency measures, such as heating, ventilation and air conditioning (HVAC) upgrades and weatherization measures, which typically have a higher cost to achieve.
Customer economic challenges
EE improvements are also expensive for customers, often requiring significant capital investment. This is problematic. Customers usually avoid such large expenditures until a precipitating event occurs (HVAC failure, for example). And with current economic conditions, this is even the more challenging. Longer-term, we anticipate continued difficulty in motivating customers to pay premiums for such EE improvements due to significant portions of our service territory being economically disadvantaged. (For example, households served by our subsidiaries in Texas have household incomes 25 percent below the US national average.)
Karen Palmer
Research Director and Senior Fellow, Resources for the Future
The purpose of EPA’s building block #4 is to define the electricity generation savings that states could achieve through energy efficiency programs and incorporate those potential savings into the emissions rate target calculation as a non-emitting energy resource, similar to wind or solar power. The higher the energy savings potential, the tighter the state’s emissions rate obligation under the Clean Power Plan policy, all else equal.
EPA bases its calculations on existing state policies: 24 states have adopted Energy Efficiency Resource Standards (EERS) that target a specific minimum ratio of energy savings resulting from efficiency programs to total electricity consumption. Twelve of those states have EERS policies that require, or soon will require, a 1.5 percent incremental reduction in total statewide electricity consumption each year—and that is the target that EPA adopts in building block #4. For states that are net importers of electricity, savings targets are adjusted downward by the fraction of electricity consumed that is generated within the state; states that are net power exporters can claim the full amount of energy consumption savings in their target calculation. States that have no or limited experience with EERS policies or efficiency programs more generally are given time to ramp-up to the ultimate 1.5 percent annual energy savings goal.
Setting aside the uncertainty surrounding estimates of energy savings resulting from existing energy efficiency programs (and thus from state EERS policies), the approach that EPA takes raises a couple of questions about the cost-effectiveness of this particular building block. First, states with ambitious existing energy efficiency programs tend to have a larger obligation than states where energy efficiency policies are less advanced. How these differences will impact cost-effectiveness at the national level is an open question. One might expect there to be more low-cost opportunities for saving energy in the inexperienced states where energy-using equipment and buildings are presumably less efficient than in the more experienced states. But it could also be the case that more experience with running energy efficiency programs results in learning by doing—and greater future energy savings at a lower cost. Or both factors could be at play simultaneously with the ultimate answer depending on the balance between the two.
Second, state targets under building block #4 are not differentiated based on the potential for associated carbon reductions. Indeed, states with some of the highest building block #4 requirements, including Maine, California, and Connecticut, have some of the lowest historic CO2 emissions rates. In contrast, some high emitting states, including Wyoming and West Virginia, have some of the lowest efficiency potentials. (This latter observation is not surprising as high emissions rates tend to be correlated with low electricity prices and thus weak economic incentives to encourage energy savings through investments in efficiency, setting aside environmental arguments for such investments). Across the 50 states there is a small negative correlation between efficiency potential and average CO2 emissions rates in 2012. This lack of correlation raises the question of whether a more targeted approach would improve both the effectiveness and cost-effectiveness of this building block.
Another important question is how best to measure and verify energy savings, if states choose to incorporate energy efficiency into their state compliance plans. As I discuss in a blog post, current methods of efficiency evaluation, measurement, and verification are often lacking in the rigor necessary to provide a clean and unbiased estimate of energy savings. Going forward, states need to find ways to incorporate more robust evaluation methods into efficiency program designs if these programs are to play a role in their state plans under the Clean Power Plan. Such methods include more use of randomized control trials or quasi-experimental methods, as described in and recommended in the joint State and Local Energy Efficiency Action Network report on evaluation of behavioral energy efficiency programs, issued jointly by EPA and the Department of Energy. All efficiency programs have a behavioral aspect to them that current approaches to evaluation tend not to address very well.
The development of compliance plans for the Clean Power Plan provides an opportunity for states and utilities to gain experience with these more robust evaluation methods. Given the decade-long compliance period that starts in 2020, a full six years from now, there is time for utilities and states to experiment with new evaluation methods. As these experiments unfold, EPA, utilities, and the states can start to build a base of knowledge that will enable better forecasts of future energy savings and energy efficiency potential, better targeting of energy efficiency resources, and, ultimately, more cost-effective policies for saving energy and reducing carbon emissions.
