A PLAN DEVELOPED BY MORE THAN 50 LEADING 

ORGANIZATIONS IN PURSUIT OF ENERGY SAVINGS 

AND ENVIRONMENTAL BENEFITS THROUGH 

ELECTRIC AND NATURAL GAS ENERGY EFFICIENCY 

JULY 2006

The goal is to create a sustainable, 

aggressive national commitment 

to energy efficiency through gas and 

electric utilities, utility regulators, 

and partner organizations. 

Improving energy efficiency in our homes, businesses, schools, governments, and 

industries—which consume more than 70 percent of the natural gas and electricity used 

in the country—is one of the most constructive, cost-effective ways to address the 

challenges of high energy prices, energy security and independence, air pollution, and 

global climate change. 

The U.S. Department of Energy and U.S. Environmental Protection Agency facilitate the 

work of the Leadership Group and the National Action Plan for Energy Efficiency. 
Acknowledgements


The National Action Plan for Energy Efficiency Report discusses policy, planning, and program issues based on a formal 

work plan developed during the December 2005 and March 2006 Leadership Group meetings. The Leadership Group is 

led by co-chairs Diane Munns (Member of the Iowa Utilities Board and President of the National Association of Regulatory 

Utility Commissioners) and Jim Rogers (President and Chief Executive Officer of Duke Energy). A full list of Leadership 

Group members is provided in both the Executive Summary (Table ES-1) and Chapter 1 (Table 1-2) of this report. Rich 

Scheer of Energetics Inc. facilitated the Leadership Group discussions during both Leadership Group meetings. 

Expert consultants, funded by the U.S. Department of Energy (DOE) and the U.S. Environmental Protection Agency 

(EPA), drafted many chapters of the Action Plan Report. These consultants included: 

• Regulatory Assistance Project: Chapter 2 and Appendix A 

• Energy and Environmental Economics, Inc.: Chapters 3 through 5, Energy Efficiency Benefits Calculator, 

and Appendix B 

• KEMA: Chapter 6 

In addition, Rich Sedano of the Regulatory Assistance Project and Alison Silverstein of Alison Silverstein Consulting 

provided their expertise during review and editing of the overall report. 

DOE and EPA facilitated the work of the Leadership Group and this report, including Larry Mansueti with DOE’s Office 

of Electricity Delivery and Energy Reliability, Mark Ginsberg with DOE’s Office of Energy Efficiency and Renewable 

Energy, and Kathleen Hogan, Stacy Angel, Maureen McNamara, Katrina Pielli, and Tom Kerr with EPA’s Climate 

Protection Partnership Division. 

Eastern Research Group, Inc. provided technical review, copyediting, graphics, and production services. 

To create a sustainable, aggressive national commitment to energy efficiency i
List of Figures


Figure ES-1. National Action Plan for Energy Efficiency Recommendations.......................................ES-2


Figure ES-2. National Action Plan for Energy Efficiency Recommendations & Options.......................ES-8


Figure 1-1. Energy Efficiency Spending Has Declined ......................................................................1-5


Figure 1-2. Energy Efficiency Has Been a Resource in the Pacific Northwest for the Past Two Decades....1-7


Figure 1-3. National Action Plan for Energy Efficiency Report Addresses Actions to Encourage 


Greater Energy Efficiency ...........................................................................................1-11


Figure 3-1. Energy-Efficiency Supply Curve – Potential in 2011 .......................................................3-2


Figure 3-2. California Efficiency Structure Overview......................................................................3-10


Figure 3-3. California Investor-Owned Utility Process ....................................................................3-11


Figure 3-4. BPA Transmission Planning Process .............................................................................3-12


Figure 3-5. New York Efficiency Structure Overview.........................................................................3-13


Figure 4-1. Comparison of Deferral Length with Low- and High-Growth .......................................4-10


Figure 6-1. Impacts of the Northeast Lighting and Appliance Initiative ..........................................6-33


Figure 7-1. National Action Plan for Energy Efficiency Recommendations ........................................7-1


Figure 7-2. National Action Plan for Energy Efficiency Report Addresses Actions to Encourage 


Greater Energy Efficiency .............................................................................................7-2


ii National Action Plan for Energy Efficiency 
List of Tables


Table ES-1. Members of the National Action Plan for Energy Efficiency ..........................................ES-10


Table 1-1. Summary of Benefits for National Energy Efficiency Efforts .............................................1-8


Table 1-2. Members of the National Action Plan for Energy Efficiency ...........................................1-16


Table 2-1. Options to Mitigate the Throughput Incentive: Pros and Cons.............................................2-6


Table 2-2. Examples of Decoupling...............................................................................................2-12


Table 2-3. Examples of Incentives for Energy Efficiency Investments ..............................................2-15


Table 3-1. Levelized Costs and Benefits From Four Regions .............................................................3-9


Table 3-2. Incorporation of Energy Efficiency in California’s Investor-Owned Utilities’ 


Planning Processes.......................................................................................................3-11


Table 3-3. Incorporation of Energy Efficiency in BPA’s Planning Processes.......................................3-13


Table 3-4. Incorporation of Energy Efficiency in NYSERDA’s Planning Processes...................................3-14


Table 3-5. Incorporation of Energy Efficiency in Minnesota’s Planning Processes ............................3-15


Table 3-6. Incorporation of Energy Efficiency in Texas’ Planning Processes .....................................3-16


Table 3-7. Incorporation of Energy Efficiency in PacifiCorp’s Planning Processes .............................3-17


Table 4-1. Summary of Main Assumptions and Results for Each Business Case Analyzed..................4-3


Table 4-2. High- and Low-Growth Results: Electric Utility ................................................................4-6


Table 4-3. High- and Low-Growth Results: Natural Gas Utility .........................................................4-8


Table 4-4. Power Plant Deferral Results ........................................................................................4-11


Table 4-5. Vertically Integrated and Delivery Company Results ..........................................................4-13


Table 4-6. Publicly- and Cooperatively-Owned Utility Results.........................................................4-15


Table 5-1. Partial List of Utilities With Inclining Tier Residential Rates ..............................................5-6


Table 5-2. Pros and Cons of Rate Design Forms..............................................................................5-9


Table 5-3. Conditions That Assist Success.....................................................................................5-11


Table 6-1. Overview of Energy Efficiency Programs .........................................................................6-4


Table 6-2. Efficiency Measures of Natural Gas Savings Programs .........................................................6-6


Table 6-3. Efficiency Measures of Electric and Combination Programs .............................................6-8


Table 6-4. Achievable Energy Efficiency Potential From Recent Studies ..........................................6-16


Table 6-5. NYSERDA 2004 Portfolio .............................................................................................6-20


To create a sustainable, aggressive national commitment to energy efficiency iii
List of Tables (continued)


Table 6-6. Nevada Resource Planning Programs ............................................................................6-21


Table 6-7. Overview of Cost-Effectiveness Tests ............................................................................6-23


Table 6-8. Research & Development (R&D) Activities of Select Organizations .................................6-25


Table 6-9. Emerging Technologies for Programs............................................................................6-27


Table 6-10. Key Stakeholders, Barriers, and Program Strategies by Customer Segment.....................6-31


Table 6-11. Types of Financial Incentives.........................................................................................6-40


Table 6-12. Sample Progression of Program Designs........................................................................6-42


Table 6-13. Program Examples for Key Customer Segments ............................................................6-44


Table 6-14. Evaluation Approaches.................................................................................................6-46


Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter .....................7-3


iv National Action Plan for Energy Efficiency 
List of Acronyms


A


aMW average megawatts 

B 

Bcf billion cubic feet 

BOMA Building Owners & Managers 

Association 

BPA Bonneville Power Administration 

C 

C/I commercial and industrial 

CEC California Energy Commission 

CO2 carbon dioxide 

CPP critical peak pricing 

CPUC California Public Utility Commission 

D 

DEER Database for Energy Efficiency 

Resources 

DOE U.S. Department of Energy 

DSM demand-side management 

E 

EE energy efficiency 

EEPS energy efficiency portfolio standard 

EERS energy efficiency resource standard 

EPA U.S. Environmental Protection Agency 

EPRI Electric Power Research Institute 

ESCO energy services company 

ETO Energy Trust of Oregon 

F


FERC Federal Energy Regulatory Commission 

G 

GWh gigawatt-hour (1,000,000 kWh) 

H 

HERS Home Energy Rating System 

HVAC heating, ventilation, and air 

conditioning 

I 

IOU investor-owned utility 

IPMVP International Performance 

Measurement and Verification 

Protocol 

IRP integrated resource plan 

ISO independent system operator 

ISO-NE ISO New England 

K 

kWh kilowatt-hour (3,412 British thermal units) 

L 

LIHEAP	 Low-Income Home Energy Assistance 

Program 

LIPA	 Long Island Power Authority 

To create a sustainable, aggressive national commitment to energy efficiency v
List of Acronyms (continued)


M


M&V measurement and verification 

Mcf one thousand cubic feet 

MMBtu million British thermal units 

MW megawatt (1,000,000 watts) 

MWh megawatt-hour (1,000 kWh) 

N 

NEEP Northeast Energy Efficiency Partnerships 

NERC North American Electric Reliability 

Council 

NOX nitrogen oxides 

NPV net present value 

NSPC Non-Residential Standard 

Performance Contract 

NWPCC Northwest Power and Conservation 

Council 

NYSERDA New York State Energy Research and 

Development Authority 

P 

PBL Power Business Line 

PG&E Pacific Gas & Electric 

PIER Public Interest Energy Research 

PSE Puget Sound Energy 

PUCT Public Utility Commission of Texas 

PURPA Public Utility Regulatory Policies Act 

R


R&D research and development 

RARP Residential Appliance Recycling 

Program 

REAP Residential Energy Affordability 

Partnership Program 

RFP request for proposals 

RGGI Regional Greenhouse Gas Initiative 

RIM rate impact measure 

ROE return on equity 

RPC revenue per customer 

RTO regional transmission organization 

RTP real-time pricing 

S 

SBC system benefits charge 

SCE Southern California Edison 

SMUD Sacramento Municipal Utility District 

SO2 sulfur dioxide 

T 

TOU time of use 

TRC total resource cost 

V 

VOLL value of lost load 

VOS value of service 

W 

WAP Weatherization Assistance Program


vi National Action Plan for Energy Efficiency 
Table of Contents


Acknowledgements ...........................................................................................................................i


List of Figures....................................................................................................................................ii


List of Tables.....................................................................................................................................iii


List of Acronyms ...............................................................................................................................v


Executive Summary......................................................................................................................ES-1


Chapter 1: Introduction and Background..........................................................................................1-1


Chapter 2: Utility Ratemaking & Revenue Requirements....................................................................2-1


Chapter 3: Energy Resource Planning Processes................................................................................3-1


Chapter 4: Business Case for Energy Efficiency .................................................................................4-1


Chapter 5: Rate Design....................................................................................................................5-1


Chapter 6: Energy Efficiency Program Best Practices .........................................................................6-1


Chapter 7: Report Summary ............................................................................................................7-1


Appendix A: Additional Guidance on Removing the Throughput Incentive .......................................A-1


Appendix B: Business Case Details...................................................................................................B-1


To create a sustainable, aggressive national commitment to energy efficiency vii

Executive Summary 

This National Action Plan for Energy Efficiency (Action Plan) presents policy recommendations for creating 

a sustainable, aggressive national commitment to energy efficiency through gas and electric utilities, 

utility regulators, and partner organizations. Such a commitment could save Americans many billions of 

dollars on energy bills over the next 10 to 15 years, contribute to energy security, and improve our 

environment. The Action Plan was developed by more than 50 leading organizations representing key 

stakeholder perspectives. These organizations pledge to take specific actions to make the Action Plan a reality. 

A National Action Plan 

for Energy Efficiency 

We currently face a set of serious challenges with regard 

to the U.S. energy system. Energy demand continues to 

grow despite historically high energy prices and mounting concerns over energy security and independence as 

well as air pollution and global climate change. The decisions we make now regarding our energy supply and 

demand can either help us deal with these challenges 

more effectively or complicate our ability to secure a 

more stable, economical energy future. 

Improving the energy efficiency1 of our homes, businesses, schools, governments, and industries—which 

consume more than 70 percent of the natural gas and 

electricity used in the country—is one of the most 

constructive, cost-effective ways to address these challenges.2 Increased investment in energy efficiency in our 

homes, buildings, and industries can lower energy bills, 

reduce demand for fossil fuels, help stabilize energy 

prices, enhance electric and natural gas system reliability, and help reduce air pollutants and greenhouse gases. 

Despite these benefits and the success of energy efficiency programs in some regions of the country, energy 

efficiency remains critically underutilized in the nation’s 

energy portfolio.3 Now we simultaneously face the challenges of high prices, the need for large investments in 

new energy infrastructure, environmental concerns, and 

security issues. It is time to take advantage of more than 

two decades of experience with successful energy efficiency programs, broaden and expand these efforts, and 

capture the savings that energy efficiency offers. Much 

more can be achieved in concert with ongoing efforts to 

advance building codes and appliance standards, provide 

tax incentives for efficient products and buildings, and 

promote savings opportunities through programs such 

as ENERGY STAR®. Efficiency of new buildings and those 

already in place are both important. Many homeowners, 

businesses, and others in buildings and facilities already 

standing today—which will represent the vast majority 

of the nation’s buildings and facilities for years to 

come—can realize significant savings from proven energy 

efficiency programs. 

Bringing more energy efficiency into the nation’s energy 

mix to slow demand growth in a wise, cost-effective 

manner—one that balances energy efficiency with new 

generation and supply options—will take concerted 

efforts by all energy market participants: customers, utilities, regulators, states, consumer advocates, energy 

service companies (ESCOs), and others. It will require 

education on the opportunities, review of existing policies, identification of barriers and their solutions, assessment of new technologies, and modification and adoption of policies, as appropriate. Utilities,4 regulators, and 

partner organizations need to improve customer access 

to energy efficiency programs to help them control their 

own energy costs, provide the funding necessary to 

To create a sustainable, aggressive national commitment to energy efficiency ES-1
deliver these programs, and examine policies governing 

energy companies to ensure that these policies facilitate—not impede—cost-effective programs for energy 

efficiency. Historically, the regulatory structure has 

rewarded utilities for building infrastructure (e.g., power 

plants, transmission lines, pipelines) and selling energy, 

while discouraging energy efficiency, even when the 

energy-saving measures cost less than constructing new 

infrastructure.5 And, it has been difficult to establish the 

funding necessary to capture the potential benefits that 

cost-effective energy efficiency offers. 

This National Action Plan for Energy Efficiency is a call to 

action to bring diverse stakeholders together at the 

national, regional, state, or utility level, as appropriate, 

and foster the discussions, decision-making, and commitments necessary to take investment in energy efficiency to 

a new level. The overall goal is to create a sustainable, 

aggressive national commitment to energy efficiency 

through gas and electric utilities, utility regulators, and 

partner organizations. 

The Action Plan was developed by a Leadership Group 

composed of more than 50 leading organizations representing diverse stakeholder perspectives. Based upon the 

policies, practices, and efforts of many organizations 

across the country, the Leadership Group offers five 

recommendations as ways to overcome many of the 

barriers that have limited greater investment in programs 

to deliver energy efficiency to customers of electric and 

gas utilities (Figure ES-1). These recommendations may 

be pursued through a number of different options, 

depending upon state and utility circumstances. 

As part of the Action Plan, leading organizations are committing to aggressively pursue energy efficiency opportunities in their organizations and assist others who want to 

increase the use of energy efficiency in their regions. 

Because greater investment in energy efficiency cannot 

happen based on the work of one individual or organization alone, the Action Plan is a commitment to bring the 

appropriate stakeholders together—including utilities, 

state policy-makers, consumers, consumer advocates, 

businesses, ESCOs, and others—to be part of a collaborative effort to take energy efficiency to a new level. As 

energy experts, utilities may be in a unique position to play 

a leading role. 

The reasons behind the National Action Plan for Energy 

Efficiency, the process for developing the Action Plan, 

and the final recommendations are summarized in 

greater detail as follows. 

Figure ES-1. National Action Plan for Energy Efficiency Recommendations 

• Recognize energy efficiency as a high-priority energy resource. 

• Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and opportunities for energy efficiency. 

• Promote sufficient, timely, and stable program funding to deliver energy efficiency where cost-effective. 

• Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and 

modify ratemaking practices to promote energy efficiency investments. 

ES-2 National Action Plan for Energy Efficiency 
The United States Faces Large and 

Complex Energy Challenges 

Our expanding economy, growing population, and rising 

standard of living all depend on energy services. Current 

projections anticipate U.S. energy demands to increase 

by more than one-third by 2030, with electricity demand 

alone rising by more than 40 percent (EIA, 2006). At 

work and at home, we continue to rely on more and 

more energy-consuming devices. At the same time, the 

country has entered a period of higher energy costs and 

limited supplies of natural gas, heating oil, and other 

fuels. These issues present many challenges: 

Growing energy demand stresses current systems, 

drives up energy costs, and requires new investments. 

Events such as the Northeast electricity blackout of 

August 2003 and Hurricanes Katrina and Rita in 2005 

increased focus on energy reliability and its economic 

and human impacts. Transmission and pipeline systems 

are becoming overburdened in places. Overburdened 

systems limit the availability of low-cost electricity and 

fossil fuels, raise energy prices in or near congested 

areas, and potentially compromise energy system reliability. High fuel prices also contribute to higher electricity prices. In addition, our demand for natural gas to heat 

our homes, for industrial and business use, and for 

power generation is straining the available gas supply in 

North America and putting upward pressure on natural 

gas prices. Addressing these issues will require billions of 

dollars in investments in energy efficiency, new power 

plants, gas rigs, transmission lines, pipelines, and other 

infrastructure, notwithstanding the difficulty of building 

new energy infrastructure in dense urban and suburban 

areas. In the absence of investments in new or expanded capacity, existing facilities are being stretched to the 

point where system reliability is steadily eroding, and the 

ability to import lower cost energy into high-growth load 

areas is inhibited, potentially limiting economic expansion. 

High fuel prices increase financial burdens on households and businesses and slow our economy. Many 

household budgets are being strained by higher energy 

costs, leaving less money available for other household 

purchases and needs. This burden is particularly harmful 

for low-income households. Higher energy bills for 

industry can reduce the nation’s economic competitiveness and place U.S. jobs at risk. 

Growing energy demand challenges attainment of 

clean air and other public health and environmental 

goals. Energy demand continues to grow at the same 

time that national and state regulations are being implemented to limit the emission of air pollutants, such as sulfur dioxide (SO2), nitrogen oxides (NOx), and mercury, to 

protect public health and the environment. In addition, 

emissions of greenhouse gases continue to increase. 

Uncertainties in future prices and regulations raise 

questions about new investments. New infrastructure 

is being planned in the face of uncertainties about future 

energy prices. For example, high natural gas prices and 

uncertainty about greenhouse gas and other environmental regulations, impede investment decisions on new 

energy supply options. 

Our energy system is vulnerable to disruptions in 

energy supply and delivery. Natural disasters such as 

the hurricanes of 2005 exposed the vulnerability of the 

U.S. energy system to major disruptions, which have significant impacts on energy prices and service reliability. In 

response, national security concerns suggest that we 

should use fossil fuel energy more efficiently, increase 

supply diversity, and decrease the vulnerability of domestic infrastructure to natural disasters. 

Energy Efficiency Can Be a Beneficial 

Resource in Our Energy Systems 

Greater investment in energy efficiency can help us tackle these challenges. Energy efficiency is already a key 

component in the nation’s energy resource mix in many 

parts of the country. Utilities, states, and others across 

the United States have decades of experience in delivering energy efficiency to their customers. These programs 

can provide valuable models, upon which more states, 

To create a sustainable, aggressive national commitment to energy efficiency ES-3
Benefits of Energy Efficiency 

Lower energy bills, greater customer control, and 

greater customer satisfaction. Well-designed energy 

efficiency programs can provide opportunities for customers of all types to adopt energy savings measures 

that can improve their comfort and level of service, 

while reducing their energy bills.6 These programs can 

help customers make sound energy use decisions, 

increase control over their energy bills, and empower 

them to manage their energy usage. Customers are 

experiencing savings of 5, 10, 20, or 30 percent, 

depending upon the customer, program, and average 

bill. Offering these programs can also lead to greater 

customer satisfaction with the service provider. 

Lower cost than supplying new generation only 

from new power plants. In some states, welldesigned energy efficiency programs are saving energy at an average cost of about one-half of the typical 

cost of new power sources and about one-third of the 

cost of natural gas supply (EIA, 2006).7 When integrated into a long-term energy resource plan, energy 

efficiency programs could help defer investments 

in new plants and lower the total cost of delivering 

electricity. 

Modular and quick to deploy. Energy efficiency programs can be ramped up over a period of one to three 

years to deliver sizable savings. These programs can 

also be targeted to congested areas with high prices 

to bring relief where it might be difficult to deliver 

new supply in the near term. 

Significant energy savings. Well-designed energy 

efficiency programs are delivering annual energy savings on the order of 1 percent of electricity and natural gas sales.8 These programs are helping to offset 20 

to 50 percent of expected growth in energy demand 

in some areas without compromising the end users’ 

activities and economic well-being (Nadel et al., 2004; 

EIA, 2006). 

Environmental benefits. While reducing customers’ 

energy bills, cost-effective energy efficiency offers 

environmental benefits related to reduced demand 

such as lower air pollution, reduced greenhouse gas 

emissions, lower water use, and less environmental 

damage from fossil fuel extraction. Energy efficiency 

can be an attractive option for utilities in advance of 

requirements to reduce greenhouse gas emissions. 

Economic development. Greater investment in energy efficiency helps build jobs and improve state 

economies. Energy efficiency users often redirect their 

bill savings toward other activities that increase local 

and national employment, with a higher employment 

impact than if the money had been spent to purchase 

energy (Kushler et al., 2005; NYSERDA, 2004). Many 

energy efficiency programs create construction and 

installation jobs, with multiplier impacts on employment and local economies. Local investments in energy efficiency can offset imports from out-of-state, 

improving the state balance of trade. Lastly, energy 

efficiency investments usually create long-lasting 

infrastructure changes to building, equipment and 

appliance stocks, creating long-term property 

improvements that deliver long-term economic value 

(Innovest, 2002). 

Energy security. Energy efficiency reduces the level of 

U.S. per capita energy consumption, thus decreasing 

the vulnerability of the economy and individual consumers to energy price disruptions from natural disasters and attacks on domestic and international energy 

supplies and infrastructure. In addition, energy efficiency can be used to reduce the overall system peak 

demand or the peak demand in targeted load areas 

with limited generating or transport capability. 

Reducing peak demand improves system reliability 

and reduces the potential for unplanned brownouts or black-outs, which can have large adverse 

economic consequences. 

ES-4 National Action Plan for Energy Efficiency 
utilities, and other organizations can build. Experience 

shows that energy efficiency programs can lower 

customer energy bills; cost less than, and help defer, 

new energy infrastructure; provide energy savings to 

consumers; improve the environment; and spur local 

economic development (see box on Benefits of 

Energy Efficiency). Significant opportunities for energy 

efficiency are likely to continue to be available at low 

costs in the future. State and regional studies have found 

that adoption of economically attractive, but as yet 

untapped, energy efficiency could yield more than 20 

percent savings in total electricity demand nationwide by 

2025. Depending on the underlying load growth, these 

savings could help cut load growth by half or more compared to current forecasts (Nadel et al., 2004; SWEEP, 

2002; NEEP, 2005; NWPCC, 2005; WGA, 2006). 

Similarly, savings from direct use of natural gas could 

provide a 50 percent or greater reduction in natural gas 

demand growth (Nadel et al., 2004). 

Capturing this energy efficiency resource would offer 

substantial economic and environmental benefits across 

the country. Widespread application of energy efficiency 

programs that already exist in some regions could deliver a large part of these potential savings.9 Extrapolating 

the results from existing programs to the entire country 

would yield annual energy bill savings of nearly $20 billion, with net societal benefits of more than $250 billion 

over the next 10 to 15 years. This scenario could defer 

the need for 20,000 megawatts (MW), or 40 new 500­

MW power plants, as well as reduce U.S. emissions from 

energy production and use by more than 200 million 

tons of carbon dioxide (CO2), 50,000 tons of SO2, and 

40,000 tons of NOx annually.

10 These significant economic and environmental benefits can be achieved relatively quickly because energy efficiency programs can be 

developed and implemented within several years. 

Additional policies and programs are required to help 

capture these potential benefits and address our substantial underinvestment in energy efficiency as a nation. 

An important indicator of this underinvestment is that 

the level of funding across the country for organized efficiency programs is currently less than $2 billion per year 

while it would require about 4 times today’s funding levels to achieve the economic and environment benefits 

presented above.11, 12 

The current underinvestment in energy efficiency is due 

to a number of well-recognized barriers, including some 

of the regulatory policies that govern electric and natural gas utilities. These barriers include: 

• Market barriers, such as the well-known “splitincentive” barrier, which limits home builders’ and 

commercial developers’ motivation to invest in energy 

efficiency for new buildings because they do not 

pay the energy bill; and the transaction cost barrier, 

which chronically affects individual consumer and 

small business decision-making. 

• Customer barriers, such as lack of information on 

energy saving opportunities, lack of awareness of 

how energy efficiency programs make investments 

easier, and lack of funding to invest in energy 

efficiency. 

• Public policy barriers, which can present prohibitive 

disincentives for utility support and investment in 

energy efficiency in many cases. 

• Utility, state, and regional planning barriers, which 

do not allow energy efficiency to compete with 

supply-side resources in energy planning. 

• Energy efficiency program barriers, which limit 

investment due to lack of knowledge about the 

most effective and cost-effective energy efficiency 

program portfolios, programs for overcoming 

common marketplace barriers to energy efficiency, 

or available technologies. 

While a number of energy efficiency policies and programs 

contribute to addressing these barriers, such as building 

codes, appliance standards, and state government leadership programs, organized energy efficiency programs 

To create a sustainable, aggressive national commitment to energy efficiency ES-5
provide an important opportunity to deliver greater 

energy efficiency in the homes, buildings, and facilities 

that already exist today and that will consume the majority of the energy used in these sectors for years to come. 

The Leadership Group and National 

Action Plan for Energy Efficiency 

Recognizing that energy efficiency remains a critically 

underutilized resource in the nation’s energy portfolio, 

more than 50 leading electric and gas utilities, state utility commissioners, state air and energy agencies, energy 

service providers, energy consumers, and energy efficiency and consumer advocates have formed a 

Leadership Group, together with the U.S. Department of 

Energy (DOE) and the U.S. Environmental Protection 

Agency (EPA), to address the issue. The goal of this 

group is to create a sustainable, aggressive national commitment to energy efficiency through gas and electric 

utilities, utility regulators, and partner organizations. The 

Leadership Group recognizes that utilities and regulators 

play critical roles in bringing energy efficiency programs 

to their communities and that success requires the joint 

efforts of customers, utilities, regulators, states, and 

other partner organizations. 

Under co-chairs Diane Munns (Member of the Iowa 

Utilities Board and President of the National Association 

of Regulatory Utility Commissioners) and Jim Rogers 

(President and Chief Executive Officer of Duke Energy), 

the Leadership Group members (see Table ES-1) have 

developed the National Action Plan for Energy Efficiency 

Report, which: 

• Identifies key barriers limiting greater investment in 

energy efficiency. 

• Reviews sound business practices for removing these 

barriers and improving the acceptance and use of 

energy efficiency relative to energy supply options. 

• Outlines recommendations and options for 

overcoming these barriers. 

The members of the Leadership Group have agreed to 

pursue these recommendations and consider these 

options through their own actions, where appropriate, 

and to support energy efficiency initiatives by other 

industry members and stakeholders. 

Recommendations 

The National Action Plan for Energy Efficiency is a call to 

action to utilities, state utility regulators, consumer advocates, consumers, businesses, other state officials, and 

other stakeholders to create an aggressive, sustainable 

national commitment to energy efficiency.

1 The Action 

Plan offers the following recommendations as ways to 

overcome barriers that have limited greater investment 

in energy efficiency for customers of electric and gas utilities in many parts of the country. The following recommendations are based on the policies, practices, and 

efforts of leading organizations across the country. For 

each recommendation, a number of options are available to be pursued based on regional, state, and utility 

circumstances (see also Figure ES-2). 

Recognize energy efficiency as a high-priority energy 

resource. Energy efficiency has not been consistently 

viewed as a meaningful or dependable resource compared to new supply options, regardless of its demonstrated contributions to meeting load growth.13 

Recognizing energy efficiency as a high-priority energy 

resource is an important step in efforts to capture the 

benefits it offers and lower the overall cost of energy 

services to customers. Based on jurisdictional objectives, 

energy efficiency can be incorporated into resource plans 

to account for the long-term benefits from energy savings, capacity savings, potential reductions of air pollutants and greenhouse gases, as well as other benefits. 

The explicit integration of energy efficiency resources 

into the formalized resource planning processes that 

exist at regional, state, and utility levels can help establish the rationale for energy efficiency funding levels and 

for properly valuing and balancing the benefits. In some 

jurisdictions, these existing planning processes might 

need to be adapted or even created to meaningfully 

ES-6 National Action Plan for Energy Efficiency 
incorporate energy efficiency resources into resource 

planning. Some states have recognized energy efficiency 

as the resource of first priority due to its broad benefits. 

Make a strong, long-term commitment to implement 

cost-effective energy efficiency as a resource. Energy 

efficiency programs are most successful and provide the 

greatest benefits to stakeholders when appropriate policies are established and maintained over the long-term. 

Confidence in long-term stability of the program will 

help maintain energy efficiency as a dependable 

resource compared to supply-side resources, deferring or 

even avoiding the need for other infrastructure investments, and maintain customer awareness and support. 

Some steps might include assessing the long-term 

potential for cost-effective energy efficiency within a 

region (i.e., the energy efficiency that can be delivered 

cost-effectively through proven programs for each customer class within a planning horizon); examining the 

role for cutting-edge initiatives and technologies; establishing the cost of supply-side options versus energy efficiency; establishing robust measurement and verification 

(M&V) procedures; and providing for routine updates to 

information on energy efficiency potential and key costs. 

Broadly communicate the benefits of and opportunities for energy efficiency. Experience shows that energy efficiency programs help customers save money and 

contribute to lower cost energy systems. But these benefits are not fully documented nor recognized by customers, utilities, regulators, or policy-makers. More 

effort is needed to establish the business case for energy efficiency for all decision-makers and to show how a 

well-designed approach to energy efficiency can benefit 

customers, utilities, and society by (1) reducing customers’ bills over time, (2) fostering financially healthy 

utilities (e.g., return on equity, earnings per share, and 

debt coverage ratios unaffected), and (3) contributing to 

positive societal net benefits overall. Effort is also necessary to educate key stakeholders that although energy 

efficiency can be an important low-cost resource to integrate into the energy mix, it does require funding just as 

a new power plant requires funding. Further, education 

is necessary on the impact that energy efficiency programs can have in concert with other energy efficiency 

policies such as building codes, appliance standards, and 

tax incentives. 

Promote sufficient, timely, and stable program funding to deliver energy efficiency where cost-effective. 

Energy efficiency programs require consistent and longterm funding to effectively compete with energy supply 

options. Efforts are necessary to establish this consistent 

long-term funding. A variety of mechanisms have been, 

and can be, used based on state, utility, and other stakeholder interests. It is important to ensure that the efficiency programs’ providers have sufficient long-term 

funding to recover program costs and implement the 

energy efficiency measures that have been demonstrated to be available and cost effective. A number of states 

are now linking program funding to the achievement of 

energy savings. 

Modify policies to align utility incentives with the 

delivery of cost-effective energy efficiency and modify 

ratemaking practices to promote energy efficiency 

investments. Successful energy efficiency programs 

would be promoted by aligning utility incentives in a 

manner that encourages the delivery of energy efficiency as part of a balanced portfolio of supply, demand, and 

transmission investments. Historically, regulatory policies 

governing utilities have more commonly compensated 

utilities for building infrastructure (e.g., power plants, 

transmission lines, pipelines) and selling energy, while 

discouraging energy efficiency, even when the energysaving measures might cost less. Within the existing regulatory processes, utilities, regulators, and stakeholders 

have a number of opportunities to create the incentives 

for energy efficiency investments by utilities and customers. A variety of mechanisms have already been 

used. For example, parties can decide to provide incentives for energy efficiency similar to utility incentives for 

new infrastructure investments, provide rewards for prudent management of energy efficiency programs, and 

incorporate energy efficiency as an important area of 

consideration within rate design. Rate design offers 

To create a sustainable, aggressive national commitment to energy efficiency ES-7
Figure ES-2. National Action Plan for Energy Efficiency Recommendations & Options 

Recognize energy efficiency as a high priority 

energy resource. 

Options to consider: 

• Establishing policies to establish energy efficiency as 

a priority resource. 

• Integrating energy efficiency into utility, state, and 

regional resource planning activities. 

• Quantifying and establishing the value of energy 

efficiency, considering energy savings, capacity savings, and environmental benefits, as appropriate. 

Make a strong, long-term commitment to implement 

cost-effective energy efficiency as a resource. 

Options to consider: 

• Establishing appropriate cost-effectiveness tests for 

a portfolio of programs to reflect the long-term 

benefits of energy efficiency. 

• Establishing the potential for long-term, costeffective energy efficiency savings by customer class 

through proven programs, innovative initiatives, 

and cutting-edge technologies. 

• Establishing funding requirements for delivering 

long-term, cost-effective energy efficiency. 

• Developing long-term energy saving goals as part 

of energy planning processes. 

• Developing robust measurement and verification 

(M&V) procedures. 

• Designating which organization(s) is responsible 

for administering the energy efficiency programs. 

• Providing for frequent updates to energy 

resource plans to accommodate new information 

and technology. 

Broadly communicate the benefits of and 

opportunities for energy efficiency. 

Options to consider: 

• Establishing and educating stakeholders on the 

business case for energy efficiency at the state, utility, and other appropriate level addressing relevant 

customer, utility, and societal perspectives. 

• Communicating the role of energy efficiency in 

lowering customer energy bills and system costs 

and risks over time. 

• Communicating the role of building codes, appliance standards, and tax and other incentives. 

Provide sufficient, timely, and stable program funding 

to deliver energy efficiency where cost-effective. 

Options to consider: 

• Deciding on and committing to a consistent 

way for program administrators to recover energy 

efficiency costs in a timely manner. 

• Establishing funding mechanisms for energy 

efficiency from among the available options such 

as revenue requirement or resource procurement 

funding, system benefits charges, rate-basing, 

shared-savings, incentive mechanisms, etc. 

• Establishing funding for multi-year periods. 

Modify policies to align utility incentives with the 

delivery of cost-effective energy efficiency and 

modify ratemaking practices to promote energy 

efficiency investments. 

Options to consider: 

• Addressing the typical utility throughput incentive 

and removing other regulatory and management 

disincentives to energy efficiency. 

• Providing utility incentives for the successful 

management of energy efficiency programs. 

• Including the impact on adoption of energy 

efficiency as one of the goals of retail rate design, 

recognizing that it must be balanced with other 

objectives. 

• Eliminating rate designs that discourage energy 

efficiency by not increasing costs as customers 

consume more electricity or natural gas. 

• Adopting rate designs that encourage energy 

efficiency by considering the unique characteristics 

of each customer class and including partnering 

tariffs with other mechanisms that encourage 

energy efficiency, such as benefit sharing programs 

and on-bill financing. 

ES-8 National Action Plan for Energy Efficiency 
opportunities to encourage customers to invest in 

efficiency where they find it to be cost effective and 

participate in new programs that provide innovative 

technologies (e.g., smart meters) to help customers 

control their energy costs. 

National Action Plan for Energy 

Efficiency: Next Steps 

In summer 2006, members of the Leadership Group of 

the National Action Plan on Energy Efficiency are 

announcing a number of specific activities and initiatives 

to formalize and reinforce their commitments to energy 

efficiency as a resource. To assist the Leadership Group 

and others in making and fulfilling their commitments, a 

number of tools and resources have been developed: 

National Action Plan for Energy Efficiency Report. 

This report details the key barriers to energy efficiency in 

resource planning, utility incentive mechanisms, rate 

design, and the design and implementation of energy 

efficiency programs. It also reviews and presents a variety of policy and program solutions that have been used 

to overcome these barriers as well as the pros and cons 

for many of these approaches. 

Energy Efficiency Benefits Calculator. This calculator 

can be used to help educate stakeholders on the broad 

benefits of energy efficiency. It provides a simplified 

framework to demonstrate the business case for energy 

efficiency from the perspective of the consumer, the utility, and society. It has been used to explore the benefits 

of energy efficiency program investments under a range 

of utility structures, policy mechanisms, and energy 

growth scenarios. The calculator can be adapted and 

applied to other scenarios. 

Experts and Resource Materials on Energy Efficiency. 

A number of educational presentations on the potential 

for energy efficiency and various policies available for 

pursuing the recommendations of the Action Plan will be 

developed. In addition, lists of policy and program 

experts in energy efficiency and the various policies available for pursuing the recommendations of the Action 

Plan will be developed. These lists will be drawn from 

utilities, state utility regulators, state energy offices, 

third-party energy efficiency program administrators, 

consumer advocacy organizations, ESCOs, and others. 

These resources will be available in fall 2006. 

DOE and EPA are continuing to facilitate the work of the 

Leadership Group and the National Action Plan 

for Energy Efficiency. During winter 2006–2007, the 

Leadership Group plans to report on its progress and 

identify next steps for the Action Plan. 

To create a sustainable, aggressive national commitment to energy efficiency ES-9
Table ES-1. Members of the National Action Plan for Energy Efficiency 

Co-Chairs 

Diane Munns Member Iowa Utilities Board 

President National Association of Regulatory Utility Commissioners 

Jim Rogers President and Chief Executive Officer Duke Energy 

Leadership Group 

Barry Abramson Senior Vice President Servidyne Systems, LLC 

Angela S. Beehler Director of Energy Regulation Wal-Mart Stores, Inc. 

Bruce Braine Vice President, Strategic Policy Analysis American Electric Power 

Jeff Burks Director of Environmental Sustainability PNM Resources 

Kateri Callahan President Alliance to Save Energy 

Glenn Cannon General Manager Waverly Light and Power 

Jorge Carrasco Superintendent Seattle City Light 

Lonnie Carter President and Chief Executive Officer Santee Cooper 

Mark Case Vice President for Business Performance Baltimore Gas and Electric 

Gary Connett Manager of Resource Planning and Great River Energy 

Member Services 

Larry Downes Chairman and Chief Executive Officer New Jersey Natural Gas 

(New Jersey Resources Corporation) 

Roger Duncan Deputy General Manager, Distributed Energy Services Austin Energy 

Angelo Esposito Senior Vice President, Energy Services and Technology New York Power Authority 

William Flynn Chairman New York State Public Service Commission 

Jeanne Fox President New Jersey Board of Public Utilities 

Anne George Commissioner Connecticut Department of Public Utility Control 

Dian Grueneich Commissioner California Public Utilities Commission 

Blair Hamilton Policy Director Vermont Energy Investment Corporation 

Leonard Haynes Executive Vice President, Supply Technologies, Southern Company 

Renewables, and Demand Side Planning 

Mary Healey Consumer Counsel for the State of Connecticut Connecticut Consumer Counsel 

Helen Howes Vice President, Environment, Health and Safety Exelon 

Chris James Air Director Connecticut Department of Environmental Protection 

Ruth Kinzey Director of Corporate Communications Food Lion 

Peter Lendrum Vice President, Sales and Marketing Entergy Corporation 

Rick Leuthauser Manager of Energy Efficiency MidAmerican Energy Company 

Mark McGahey Manager Tristate Generation and Transmission Association, Inc. 

Janine Migden- Consumers’ Counsel Office of the Ohio Consumers’ Counsel 

Ostrander 

Richard Morgan Commissioner District of Columbia Public Service Commission 

Brock Nicholson Deputy Director, Division of Air Quality North Carolina Air Office 

Pat Oshie Commissioner Washington Utilities and Transportation Commission 

Douglas Petitt Vice President, Government Affairs Vectren Corporation 

ES-10 National Action Plan for Energy Efficiency 
Bill Prindle Deputy Director American Council for an Energy-Efficient Economy 

Phyllis Reha Commissioner Minnesota Public Utilities Commission 

Roland Risser Director, Customer Energy Efficiency Pacific Gas and Electric 

Gene Rodrigues Director, Energy Efficiency Southern California Edison 

Art Rosenfeld Commissioner California Energy Commission 

Jan Schori General Manager Sacramento Municipal Utility District 

Larry Shirley Division Director North Carolina Energy Office 

Michael Shore Senior Air Policy Analyst Environmental Defense 

Gordon Slack Energy Business Director The Dow Chemical Company 

Deb Sundin Director, Business Product Marketing Xcel Energy 

Dub Taylor Director Texas State Energy Conservation Office 

Paul von Director, Energy and Environmental Affairs Johnson Controls 

Paumgartten 

Brenna Walraven Executive Director, National Property Management USAA Realty Company 

Devra Wang Director, California Energy Program Natural Resources Defense Council 

Steve Ward Public Advocate State of Maine 

Mike Weedall Vice President, Energy Efficiency Bonneville Power Administration 

Tom Welch Vice President, External Affairs PJM Interconnection 

Jim West Manager of energy right & Green Power Switch Tennessee Valley Authority 

Henry Yoshimura Manager, Demand Response ISO New England Inc. 

Observers 

James W. (Jay) Counsel Steel Manufacturers Association 

Brew 

Roger Cooper Executive Vice President, Policy and Planning American Gas Association 

Dan Delurey Executive Director Demand Response Coordinating Committee 

Roger Fragua Deputy Director Council of Energy Resource Tribes 

Jeff Genzer General Counsel National Association of State Energy Officials 

Donald Gilligan President National Association of Energy Service Companies 

Chuck Gray Executive Director National Association of Regulatory Utility 

Commissioners 

John Holt Senior Manager of Generation and Fuel National Rural Electric Cooperative Association 

Joseph Mattingly Vice President, Secretary and General Counsel Gas Appliance Manufacturers Association 

Kenneth Mentzer President and Chief Executive Officer North American Insulation Manufacturers Association 

Christina Mudd Executive Director National Council on Electricity Policy 

Ellen Petrill Director, Public/Private Partnerships Electric Power Research Institute 

Alan Richardson President and Chief Executive Officer American Public Power Association 

Steve Rosenstock Manager, Energy Solutions Edison Electric Institute 

Diane Shea Executive Director National Association of State Energy Officials 

Rick Tempchin Director, Retail Distribution Policy Edison Electric Institute 

Mark Wolfe Executive Director Energy Programs Consortium 

To create a sustainable, aggressive national commitment to energy efficiency ES-11
Notes 

1 Energy efficiency refers to using less energy to pro- See highlights of some of these programs in Chapter 

vide the same or improved level of service to the 6: Energy Efficiency Program Best Practices, Tables 

energy consumer in an economically efficient way. 6-1 and 6-2. 

The term energy efficiency as used here includes 10 These economic and environmental savings estiusing less energy at any time, including at times of mates are extrapolations of the results from regionpeak demand through demand response and peak al program to a national scope. Actual savings at the 

shaving efforts. regional level vary based on a number of factors. For 

2 Addressing transportation-related energy use is also these estimates, avoided capacity value is based on 

an important challenge as energy demand in this peak load reductions de-rated for reductions that do 

sector continues to increase and oil prices hit histor­ not result in savings of capital investments. 

ical highs. However, transportation issues are out- Emissions savings are based on a marginal on-peak 

side the scope of this effort, which is focused only generation fuel of natural gas and marginal offon electricity and natural gas systems. peak fuel of coal; with the on-peak period capacity 

3 This effort is focused on energy efficiency for regu­ requirement double that of the annual average. 

lated energy forms. Energy efficiency for unregulat- These assumptions vary by region based upon situaed energy forms, such as fuel oil for example, is tion-specific variables. Reductions in capped emisclosely related in terms of actions in buildings, but is sions might reduce the cost of compliance. 

quite different in terms of how policy can promote 11 This estimate of the funding required assumes 2 

investments. percent of revenues across electric utilities and 0.5 

4 A utility is broadly defined as an organization that percent across gas utilities. The estimate also 

delivers electric and gas utility services to end users, assumes that energy efficiency is delivered at a total 

including, but not limited to, investor-owned, pub- cost (utility and participant) of $0.04 per kWh and 

licly-owned, cooperatively-owned, and third-party $3 per million British thermal units (MMBtu), which 

energy efficiency utilities. are higher than the costs of many of today’s programs. 

5 Many energy efficiency programs have an average 12 This estimate is provided as an indicator of underinlife cycle cost of $0.03/kilowatt-hour (kWh) saved, vestment and is not intended to establish a national 

which is 50 to 75 percent of the typical cost of new funding target. Appropriate funding levels for propower sources (ACEEE, 2004; EIA, 2006). The cost grams should be established at the regional, state, 

of energy efficiency programs varies by program and or utility level. In addition, energy efficiency investcan include higher cost programs and options with ments by customers, businesses, industry, and govlower costs to a utility such as modifying rate designs. ernment also contribute to the larger economic and 

6 See Chapter 6: Energy Efficiency Program Best environment benefits of energy efficiency. 

Practices for more information on leading programs. 13 One example of energy efficiency’s ability to meet 

7 Data refer to EIA 2006 new power costs and gas load growth is the Northwest Power Planning 

prices in 2015 compared to electric and gas pro- Council’s Fifth Power Plan which uses energy congram costs based on leading energy efficiency pro­ servation and efficiency to meet a targeted 700 MW 

grams, many of which are discussed in Chapter 6: of forecasted capacity between 2005 and 2009 

Energy Efficiency Program Best Practices. (NWPCC, 2005). 

8 Based on leading energy efficiency programs, many 

of which are discussed in Chapter 6: Energy 

Efficiency Program Best Practices. 

9 These estimates are based on assumptions of average program spending levels by utilities or other 

program administrators, with conservatively high 

numbers for the cost of energy efficiency programs. 

ES-12 National Action Plan for Energy Efficiency 
References For More Information


American Council for an Energy-Efficient Economy 

[ACEEE] (2004). A Federal System Benefits Fund: 

Assisting States to Establish Energy Efficiency and 

Other System Benefit Programs. Washington, DC. 

Innovest Strategic Value Advisors [Innovest] (2002, 

October). Energy Management & Investor Returns: 

The Real Estate Sector. 

Kushler, M., Ph.D., York, D., Ph.D., and Witte, P., M.A. 

(2005, January). Examining the Potential for Energy 

Efficiency to Help Address the Natural Gas Crisis in 

the Midwest. Washington, DC: American Council 

for an Energy-Efficient Economy [ACEEE]. 

Nadel, S., Shipley, A., and Elliott, R.N. (2004). The 

Technical, Economic and Achievable Potential for 

Energy Efficiency in the U.S.—A Meta-Analysis of 

Recent Studies. Washington, DC: American Council 

for an Energy-Efficient Economy [ACEEE]. 

New York State Energy Research and Development 

Authority [NYSERDA] (2004, May). New York 

Energy $martSM Program Evaluation and Status 

Report, Report to the System Benefits Charge 

Advisory Group, Final Report. Albany. 

Northeast Energy Efficiency Partnerships [NEEP] (2005, 

May). Economically Achievable Energy Efficiency 

Potential in New England. Optimal Energy. 

Northwest Power and Conservation Council [NWPCC] 

(2005, May). The 5th Northwest Electric Power and 

Conservation Plan. <http://www.nwcouncil.org/ 

energy/powerplan/default.htm> 

Southwest Energy Efficiency Project [SWEEP] (2002, 

November). The New Mother Lode: The Potential 

for More Efficient Electricity Use in the Southwest. 

Report for the Hewlett Foundation Energy Series. 

U.S. Energy Information Administration [EIA] (2006). 

Annual Energy Outlook 2006. Washington, DC. 

Western Governors’ Association [WGA] (2006, June). 

Clean Energy, a Strong Economy and a Healthy 

Environment. A Report of the Clean and Diversified 

Energy Advisory Committee. 

Stacy Angel 

U.S. Environmental Protection Agency 

Office of Air and Radiation 

Climate Protection Partnerships Division 

Tel: (202) 343-9606 

E-mail: angel.stacy@epa.gov 

Larry Mansueti 

U.S. Department of Energy 

Office of Electricity Delivery and Energy Reliability 

Tel: (202) 586-2588 

E-mail: lawrence.mansueti@hq.doe.gov 

Or visit www.epa.gov/cleanenergy/eeactionplan 

To create a sustainable, aggressive national commitment to energy efficiency ES-13

1:Introduction 

and Background 

Overview


We currently face a number of challenges in securing 

affordable, reliable, secure, and clean energy to meet 

our nation’s growing energy demand. Demand is outpacing supply, costs are rising, and concerns for the environment are growing. 

Improving the energy efficiency1 of our homes, businesses, schools, governments, and industries – which consume more than 70 percent of the energy used in the 

country—is one of the most constructive, cost-effective 

ways to address these challenges. Greater investment in 

energy efficiency programs across the country could help 

meet our growing electricity and natural gas demand, 

save customers billions of dollars on their energy bills, 

reduce emissions of air pollutants and greenhouse gases, 

and contribute to a more secure, reliable, and low-cost 

energy system. Despite this opportunity, energy efficiency remains an under-utilized resource in the nation’s 

energy portfolio. 

There are many ways to increase investment in costeffective energy efficiency including developing building 

codes and appliance standards, implementing government leadership efforts, and educating the public 

through programs such as ENERGY STAR®.2 Another 

important area is greater investment in organized energy efficiency programs that are managed by electric and 

natural gas providers, states, or third-party administrators. Energy efficiency programs already contribute to 

the energy mix in many parts of the country and have 

delivered significant savings and other benefits. Despite 

the benefits, these programs face hurdles in many areas 

of the country. Identifying and removing these barriers is 

a focus of this effort. 

October 2005 

Excerpt from Letter From Co-Chairs to the 

National Action Plan for Energy Efficiency 

Leadership Group 

Energy efficiency is a critically under-utilized resource in 

the nation’s energy portfolio. Those states and utilities 

that have made significant investments in energy efficiency have lowered the growth for energy demand and 

moderated their energy costs. However, many hurdles 

remain that block broader investments in cost-effective 

energy efficiency. 

That is why we have agreed to chair the Energy Efficiency 

Action Plan. It is our hope that with the help of leading 

organizations like yours, we will identify and overcome 

these hurdles. 

Through this Action Plan, we intend to identify the major 

barriers currently limiting greater investment by utilities in 

energy efficiency. We will develop a series of business 

cases that will demonstrate the value and contributions 

of energy efficiency and explain how to remove these 

barriers (including regulatory and market challenges). 

These business cases, along with descriptions of leading 

energy efficiency programs, will build upon practices 

already in place across the country. 

Diane Munns Jim Rogers 

President,NARUC President and CEO 

Member, Iowa Utilities Board Duke Energy 

To drive a sustainable, aggressive national commitment 

to energy efficiency through gas and electric utilities, 

utility regulators, and partner organizations, more than 

50 leading organizations joined together to develop this 

National Action Plan for Energy Efficiency. The Action 

Plan is co-chaired by Diane Munns, Member of the Iowa 

1 Energy efficiency refers to using less energy to provide the same or improved level of service to the energy consumer in an economically efficient way. 

The term energy efficiency as used here includes using less energy at any time, including at times of peak demand through demand response and peak 

shaving efforts. 

2 See EPA 2006 for a description of a broad set of policies being used at the state level to advance energy efficiency. 

To create a sustainable, aggressive national commitment to energy efficiency 1-1
Utilities Board and President of the National Association 

of Regulatory Utility Commissioners, and Jim Rogers, 

President and Chief Executive Officer of Duke Energy. 

The Leadership Group includes representatives from a 

broad set of stakeholders, including electric and gas 

utilities, state utility commissioners, state air and energy 

agencies, energy service providers, energy consumers, 

and energy efficiency and consumer advocates. This 

effort is facilitated by the U.S. Department of Energy 

(DOE) and the U.S. Environmental Protection Agency 

(EPA). The National Action Plan for Energy Efficiency: 

• Identifies key barriers limiting greater investment in 

energy efficiency, 

• Reviews sound business practices for removing these 

barriers and improving the acceptance and use of energy efficiency relative to energy supply options, and 

• Outlines recommendations and options for overcoming 

these barriers. 

In addition, members of the Leadership Group are committing to act within their own organizations and 

spheres of influence to increase attention and investment in energy efficiency. Greater investment in energy 

efficiency cannot happen based on the work of one individual or organization alone. The Leadership Group 

recognizes that the joint efforts of the customer, utility, 

regulator, and partner organizations are needed to reinvigorate and increase the use of energy efficiency in 

America. As energy experts, utilities may be in a unique 

position to play a leadership role. 

The rest of this introduction chapter establishes why 

now is the time to increase our investment in energy efficiency, outlines the approach taken in the National 

Action Plan for Energy Efficiency, and explains the structure of this report. 

Why Focus on Energy Efficiency?


Energy Challenges 

We currently face multiple challenges in providing 

affordable, clean, and reliable energy in today’s complex 

energy markets: 

• Electricity demand continues to rise. Given current 

energy consumption and demographic trends, DOE 

projects that U.S. energy consumption will increase by 

more than one-third by the year 2025. Electric power 

consumption is expected to increase by almost 40 

percent, and total fossil fuel use is projected to 

increase similarly (EIA, 2005). At work and at home, 

we continue to rely on more energy-consuming 

devices. This growth in demand stresses current 

systems and requires substantial new investments in 

system expansions. 

• High energy prices. Our demand for natural gas to 

heat our homes, for industrial and business uses, and 

for power plants is straining the available gas supply in 

North America and putting upward pressure on natural gas prices. Many household budgets are being 

strained by higher energy costs, leaving less money 

available for other household purchases and needs; 

this situation is particularly harmful for low-income 

households. Consumers are looking for ways to manage their energy bills. Higher energy bills for industry 

are reducing the nation’s economic competitiveness 

and placing U.S. jobs at risk. Higher energy prices also 

raise the financial risk associated with the development of new natural gas-fired power plants, which 

had been expected to make up more than 60 percent 

of capacity additions over the next 20 years (EIA, 

2005). Coal prices are also increasing and contributing 

to higher electricity costs. 

• Energy system reliability. Events such as the Northeast 

electricity blackout of August 2003 and Hurricanes 

Katrina and Rita in 2005 highlighted the vulnerability 

of our energy system to disruptions. This led to an 

1-2 National Action Plan for Energy Efficiency 
increased focus on energy reliability and its economic 

and human impacts, as well as national security concerns using fossil fuel more efficiently and increasing 

energy supply diversity. 

• Transmission systems are overburdened in some places, 

limiting the flow of economical generation and, in 

some cases, shrinking reserve margins of the electricity 

grid to inappropriately small levels. This situation can 

cause reliability problems and high electricity prices in 

or near congested areas. 

• Environmental concerns. Energy demand continues to 

grow as national and state regulations are being implemented to significantly limit the emissions of air pollutants, such as sulfur dioxide (SO2), nitrogen oxides (NOx), 

and mercury, to protect public health and the environment. Many existing base load generation plants are 

aging and significant retrofits are needed to ensure old 

generating units meet these emissions regulations. 

In addition, emissions of greenhouse gases continue 

to increase. 

Addressing these issues will require billions of dollars in 

investments in new power plants, gas rigs, transmission 

lines, pipelines, and other infrastructure, notwithstanding the difficulty of building new energy infrastructure in 

dense urban and suburban locations even with current 

energy efficiency investment. The decisions we make 

now regarding our energy supply and demand can either 

help us deal with these challenges more effectively or 

complicate our ability to secure a more stable, economical energy future. 

Benefits of Energy Efficiency 

Greater investment in energy efficiency can help us tackle 

these challenges. Energy efficiency is already a key component in the nation’s energy resource mix in many parts of 

the country, and experience shows that energy efficiency 

programs can lower customer energy bills; cost less than, 

and help defer, new energy production; provide environmental benefits; and spur local economic development. 

Some of the major benefits of energy efficiency include: 

• Lower energy bills, greater customer control, and 

greater customer satisfaction. Well-designed programs 

can provide opportunities for all customer classes to 

adopt energy savings measures and reduce their energy bills.3 These programs can help customers make 

sound energy use decisions, increase control over their 

energy bills with savings of 5 to 30 percent, and 

empower them to manage their energy usage. 

Customers often express greater satisfaction with electricity and natural gas providers where energy efficiency is offered. 

• Lower cost than supplying new generation only from 

new power plants. Well-designed energy efficiency 

programs are saving energy at an average cost of onehalf of the typical cost of new power sources and 

about one-third of the cost of providing natural gas.4 

When integrated into a long-term energy resource 

plan, energy efficiency could help defer investments in 

new plants and lower the total energy system cost. 

• Modular and quick to deploy. Energy efficiency programs can be ramped up over a period of one to three 

years to deliver sizable savings. These programs can 

also be targeted to congested areas with high prices to 

bring relief where it might be difficult to deliver new 

supply in the near term. 

• Significant energy savings. Well-designed energy efficiency programs are delivering energy savings each 

year on the order of 1 percent of total electric and natural gas sales.5 These programs are helping to offset 

20 to 50 percent of expected growth in energy 

3 See Chapter 6: Energy Efficiency Program Best Practices for more information on leading programs. 

4 Based on new power costs and gas prices in 2015 (EIA, 2006) compared to electric and gas program costs based on leading energy programs, many of 

which are discussed in Chapter 6: Energy Efficiency Program Best Practices. 

5 Based on leading energy efficiency programs, many of which are discussed in Chapter 6: Energy Efficiency Program Best Practices. 

To create a sustainable, aggressive national commitment to energy efficiency 1-3
demand in some areas without compromising the end 

users’ activities and economic well-being (Nadel, et al., 

2004; EIA, 2006). 

• Environmental benefits. Cost-effective energy efficiency offers environmental benefits related to reduced 

demand, such as reduced air pollution and greenhouse 

gas emissions, lower water use, and less environmental 

damage from fossil fuel extraction. Energy efficiency is 

an attractive option for generation owners in advance 

of requirements to reduce greenhouse gas emissions. 

• Economic development. Greater investment in energy 

efficiency helps build jobs and improve state economies. 

Energy efficiency users often redirect their bill savings 

toward other activities that increase local and national 

employment, with a higher employment impact than if 

the money had been spent to purchase energy (York 

and Kushler, 2005; NYSERDA, 2004). Many energy efficiency programs create construction and installation 

jobs, with multiplier impacts on other employment and 

local economies (Sedano et al., 2005). Local investments in energy efficiency can offset energy imports 

from out-of-state, improving the state balance of trade. 

Lastly, energy efficiency investments usually create longlasting infrastructure changes to building, equipment 

and appliance stocks, creating long-term property 

improvements that deliver long-term economic value 

(Innovest, 2002). 

• Energy security. Energy efficiency reduces the level of 

U.S. per capita energy consumption, thus decreasing 

the vulnerability of the economy and individual consumers to energy price disruptions from natural disasters 

and attacks upon domestic and international energy 

supplies and infrastructure. 

Decades of Experience With Energy 

Efficiency 

Utilities and their regulators began recognizing the


potential benefits of improving efficiency and reducing


demand in the 1970s and 1980s. These “demand-side


Long Island Power Authority’s (LIPA) 

Clean Energy Program Drives Economic 

Development, Customer Savings, and 

Environmental Quality Enhancements 

LIPA started its Clean Energy Initiative in 1999 and 

has invested $229 million over the past 6 years. 

LIPA’s portfolio of energy efficiency programs from 

1999 to 2005 produced significant energy savings, 

emissions reductions and stimulated economic 

growth on Long Island: 

• 296 megawatts (MW) peak demand savings 

• 1,348 gigawatt-hours (GWh) cumulative savings 

• Emissions reductions of: 

• Greater than 937,402 tons of 


carbon dioxide (CO2) 


• Greater than 1,334 tons of NOX 

• Greater than 4,298 tons of SO2 

• $275 million in customer bill savings and rebates 

• $234 million increase in net economic output on 

Long Island 

• 4,500 secondary jobs created 

Source: LIPA, 2006 

management” (DSM) approaches meet increased 

demands for electricity or natural gas by managing the 

demand on the customer’s side of the meter rather than 

increasing or acquiring more supplies. Planning processes, 

such as “least-cost planning” or “integrated resource 

planning,” have been used to evaluate DSM programs 

on par with supply options and allow investment in 

DSM programs when they cost less than new supply 

options. 

DSM program spending exceeded $2 billion a year (in 

2005 dollars) in 1993 and 1994 (York and Kushler, 

2005). In the late 1990s, funding for utility-sponsored 

energy efficiency was reduced in about half of the states 

due to changed regulatory structures and increased 

political and regulatory pressures to hold down electricity prices. This funding has partially recovered with new 

1-4 National Action Plan for Energy Efficiency 
policies and funding mechanisms (see Figure 1-1) implemented to ensure that some level of cost-effective 

energy efficiency was pursued. 

Notwithstanding the policy and regulatory changes that 

have affected energy efficiency program funding, wide 

scale, organized energy efficiency programs have now 

been operating for decades in certain parts of the country. These efforts have demonstrated the following: 

• Energy efficiency programs deliver significant savings. 

In the mid-1990s, based on the high program funding 

levels of the early 1990s, electric utilities estimated program savings of 30 gigawatts (the output of about 100 

medium-sized power plants) and more than 60 million 

megawatt-hours (MWh). 

• Energy efficiency programs can be used to meet a significant portion of expected load growth. For example: 

— The Pacific Northwest region has met 40 percent 

of its growth over the past two decades through 

energy efficiency programs (see Figure 1-2). 

— California’s energy efficiency goals, adopted in 

2004 by the Public Utilities Commission, are to 

Connecticut’s Energy Efficiency Programs 

Generate Savings of $550 Million in 2005 

In 2005, the Connecticut Energy Efficiency 

Fund, managed by the Energy Conservation 

Management Board, invested $80 million in energy efficiency. This investment is expected to produce $550 million of bill savings to Connecticut 

electricity consumers. In addition, the 2005 programs, administered by Northeast Utilities and 

United Illuminating, resulted in: 

• 126 MW peak demand reduction 

• 4,398 GWh lifetime savings 

• Emissions reductions of: 

— Greater than 2.7 million tons of CO2 

— Greater than 1,702 tons of NOX 

— Greater than 4,616 tons of SO2 

• 1,000 non-utility jobs in the energy efficiency 

industry 

Source: CECMB, 2006 

Figure 1-1: Energy Efficiency Spending Has Declined 

$2.5

Puget Sound Energy’s (PSE) Resource 

Plan Includes Accelerated Conservation 

to Minimize Risks and Costs 

PSE’s 2002 and 2005 Integrated Resource Plans 

(IRPs) found that the accelerated development of 

energy efficiency minimizes both costs and risks. 

As a result, PSE significantly expanded its energy 

efficiency efforts. PSE is now on track to save 279 

average MW (aMW) between 2006 and 2015,


more than the company had saved between 1980


and 2004. The 279 aMW of energy efficiency rep­


resents nearly 10 percent of its forecasted 2015


Investment in billions real 2005 dollars $0.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

$2.0

$1.5

$1.0

$0.5

Year sales.


Source: Data derived from ACEEE 2005 Scorecard (York and Kushler, Source: Puget Sound Energy, 2005 2005) adjusted for inflation using U.S. Department of Labor Bureau of 

Labor Statistics Inflation Calculator 

To create a sustainable, aggressive national commitment to energy efficiency 1-5
use energy efficiency to displace more than half of 

future electricity load growth and avoid the need 

to build three large (500 MW) power plants. 

• Energy efficiency is being delivered cost-competitively 

with new supply. Programs across the country are 

demonstrating that energy efficiency can be delivered 

at a cost of 2 to 4 cents per kilowatt-hour (kWh) and a 

cost of $1.30 to $2.00 per lifetime million British thermal units (MMBtu) saved. 

• Energy efficiency can be targeted to reduce peak 

demand. A variety of programs address the peak 

demand of different customer classes, lowering the 

strain on existing supply assets (e.g., pipeline capacity, 

transmission and distribution capacity, and power plant 

capability), allowing energy delivery companies to better utilize existing assets and deferring new capital 

investments. 

• Proven, cost-effective program models are available to 

build upon. These program models are available for 

almost every customer class, both gas and electric. 

Southern California Edison’s (SCE) 

Energy Efficiency Investments Provide 

Economic and Environmental Savings 

SCE’s comprehensive portfolio of energy efficiency 

programs for 2006 through 2008 will produce: 

• 3 percent average bill reduction by 2010 

• 3.5 billion kWh of energy savings 

• 888 MW of demand savings 

• 20.5 million tons of CO2 emission reductions 

• 5.5 million tons of NOX emission reductions 

• Energy saved at a cost of less than 4.1 cents/kWh 

Source: Southern California Edison, 2006 

New York State’s Aggressive 

Energy Efficiency Programs Help 

Power the Economy As Well As Reduce 

Energy Costs 

New York State Energy Research and Development 

Authority’s (NYSERDA’s) portfolio of energy efficiency 

programs for the period from 1999 to 2005 produced significant energy savings, as well as stimulated economic growth and jobs, and reduced energy 

prices in the state: 

• 19 billion kWh/year of energy savings 

• 4,166 added jobs/year (created/retained) from 

1999 to 2017 

• $244 million/year in added total economic growth 

from 1999 to 2017 

• $94.5 million in energy price savings over three 

years


Source: NYSERDA, 2006


National Case for Energy Efficiency 

Improving the energy efficiency of homes, businesses, 

schools, governments, and industries—which consume 

more than 70 percent of the energy used in the country — 

is one of the most constructive, cost-effective ways to 

address the nation’s energy challenges. Many of these 

buildings and facilities are decades old and will consume the 

majority of the energy to be used in these sectors for years 

to come. State and regional studies have found that adoption of economically attractive, but as yet untapped, energy 

efficiency could yield more than 20 percent savings in total 

electricity demand nationwide by 2025. Depending on the 

underlying load growth, these savings could help cut load 

growth by half or more compared to current forecasts 

(Nadel et al., 2004; SWEEP, 2002; NEEP, 2005; NWPCC, 

2005; WGA, 2006). Similarly, energy efficiency targeted at 

direct natural gas use could lower natural gas demand 

growth by 50 percent (Nadel et al., 2004). Furthermore, 

studies also show that significant reductions in energy 

consumption can be achieved quickly (Callahan, 2006) and 

at low costs for many years to come. 

1-6 National Action Plan for Energy Efficiency 
0

500

Figure 1-2: Energy Efficiency Has Been a Resource in the Pacific Northwest for the Past Two Decades 

Pacific Northwest Energy Efficiency 	 Energy Efficiency Met Nearly 40 Percent of Pacific 

Achievements 1978 - 2004	 Northwest Regional Firm Sales Growth Between 1980 

to 2003 Since 1978, Bonneville Power 

3,000 Administration (BPA) & Utility 


Programs, Energy Codes & Federal
 2,500 Efficiency Standards Have Produced 


Nearly 3000 aMW of Savings.
 2,000

1,500

1,000

Generation Conservation

Average Megawatts (aMW) 

1978 1982 1986 1990 1994 1998 2002

BPA and Utility Programs 

Alliance Programs 

State Codes 

Federal Standards 

Source: Eckman, 2005 

Capturing this energy efficiency resource would offer • Avoided annual air emissions of more than 200 million 

substantial economic and environmental benefits across tons of CO2, 50,000 tons of SO2, and 40,000 tons of NOX. 

the country. Widespread application of energy efficiency 

programs that already exist in some regions6 could deliv- These benefits illustrate the magnitude of the benefits 

er a large part of these potential savings. Extrapolating cost-effective energy efficiency offers. They are estimated 

the results from existing programs to the entire country based on (1) assumptions of average program spending 

would yield over the next 10 to 15 years7: levels by utilities or other program administrators that 

currently sponsor energy efficiency programs and 

• Energy bill savings of nearly $20 billion annually. (2) conservatively high estimates for the cost of the energy 

efficiency programs themselves (see Table 1-1).9 They are 

• Net societal benefits of more than $250 billion.8 not meant as a prescription; there are differences in 

opportunities and costs for energy efficiency that need 

• Avoided need for 20,000 MW (40 new 500 MW- to be addressed at the regional, state, and utility level to 

power plants). design and operate effective programs. 

6	 See highlights of some of these programs in Chapter 6: Energy Efficiency Program Best Practices, Tables 6-1 and 6-2. 

7	 These economic and environmental savings estimates extrapolate the results from regional programs to a national scope. Actual savings at the regional level vary based on a number of factors. For these estimates, avoided capacity value is based on peak load reductions de-rated for reductions that 

do not result in savings of capital investments. Emission savings are based on a marginal on-peak generation fuel of natural gas and marginal off-peak 

fuel of coal; with the on-peak period capacity requirement double that of the annual average. These assumptions vary by region based upon situationspecific variables. Reductions in capped emissions might reduce the cost of compliance. 

8	 Net present value (NPV) assuming 5 percent discount rate. 

9	 This estimate of the funding required assumes 2 percent of revenues across electric utilities and 0.5 percent across gas utilities. The estimate also 

assumes that energy efficiency is delivered at a total cost (utility and participant) of $0.04 per kWh and $3 per MMBtu, which are higher than the costs 

of many of today’s programs. 

To create a sustainable, aggressive national commitment to energy efficiency 1-7
Table 1-1. Summary of Benefits for National Energy Efficiency Efforts 

Program Cost Electric Natural Gas Total 

Utility Program Spending (% of utility revenue) 2.0% 0.5% 

Total Cost of Efficiency (customer & utility) $35/MWh $3/MMBtu 

Cost of Efficiency (customer) $15/MWh $2/MMBtu 

Average Annual Cost of Efficiency ($MM) $6,800 $1,200 

Total Cost of Efficiency (NPV, $MM) $140,000 $25,000 $165,000 

Efficiency Spending - Customer (NPV, $MM) $60,000 $13,000 $73,000 

Efficiency Program Spending - Utility (NPV, $MM) $80,000 $13,000 $93,000 

Resulting Savings Electric Natural Gas Total 

Net Customer Savings (NPV, $MM) $277,000 $76,500 $353,500 

Annual Customer Savings $MM $18,000 $5,000 $23,000 

Net Societal Savings (NPV, $MM) $270,000 $74,000 $344,000 

Annual Net Societal Savings ($MM) $17,500 $5,000 $22,500 

Decrease in Revenue Requirement (NPV, $MM) $336,000 $89,000 $425,000 

Annual Decrease in Revenue Requirement ($MM) $22,000 $6,000 $28,000 

Energy Savings Electric Natural Gas Total 

Percent of Growth Saved, Year 15 61% 52% 

Percent of Consumption Saved, Year 15 12% 5% 

Peak Load Reduction, Year 15 (De-rated)1 34,000 MW 

Energy Saved, Year 15 588,000 GWh 1,200 BcF 

Energy Saved (cumulative) 9,400,000 GWh 19,000 BcF 

Emission Reductions Electric Natural Gas Total 

CO2 Emission Reduction (1,000 Tons), Year 15 338,000 72,000 410,000 

NOx Emission Reduction (Tons), Year 15 67,000 61,000 128,000 

Other Assumptions Electric Natural Gas 

Load Growth (%) 2% 1% 

Utility NPV Discount Rate 5% 5% 

Customer NPV Discount Rate 5% 5% 

EE Project Life Term (years) 15 15 

Source: Energy Efficiency Benefits Calculator developed for the National Action Plan for Energy Efficiency, 2006. 


NPV = net present value; $MM = million dollars


1 De-rated peak load reduction based on the coincident peak load reduced multiplied by the percent of growth-related capital expenditures that are saved.


Peak load reductions in unconstrained areas are not counted. 

1-8 National Action Plan for Energy Efficiency 
As a nation we are passing up these savings by substantially underinvesting in energy efficiency. One indicator of this underinvestment is the level of energy 

efficiency program funding across the country. Based 

on the effectiveness of current energy efficiency programs operated in certain parts of the country, the 

funding necessary to yield the economic and environmental benefits presented above is approximately four 

times the funding levels for organized efficiency programs today (less than $2 billion per year). Again, this 

is one indicator of underinvestment and not meant to 

be a national funding target. Appropriate funding levels 

need to be established at the regional, state, or utility 

level based on the cost-effective potential for energy 

efficiency as well as other factors. 

The current underinvestment in energy efficiency is due 

to a number of well-recognized barriers. Some key barriers arise from choices concerning regulation of electric 

and natural gas utilities. These barriers include: 

• Market barriers, such as the well-known “split-incentive” barrier, which limits home builders’ and commercial developers’ motivation to invest in new building 

energy efficiency because they do not pay the energy 

bill, and the transaction cost barrier, which chronically 

affects individual consumer and small business 

decision-making. 

• Customer barriers, such as lack of information on energy saving opportunities, lack of awareness of how 

energy efficiency programs make investments easier 

through low-interest loans, rebates, etc., lack of time 

and attention to implementing efficiency measures, 

and lack of availability of necessary funding to invest in 

energy efficiency. 

• Public policy barriers, which often discourage efficiency investments by electric and natural gas utilities, 

transmission and distribution companies, power producers and retail electric providers. Historically these 

organizations have been rewarded more for building 

infrastructure (e.g., power plants, transmission lines, 

pipelines) and increasing energy sales than for helping 

their customers use energy wisely even when the energysaving measures might cost less.10 

• Utility, state, and region planning barriers, which do 

not allow energy efficiency to compete with supplyside resources in energy planning. 

• Energy efficiency program barriers, which limit investment due to lack of knowledge about the most effective and cost-effective energy efficiency program 

portfolios, programs for overcoming common market 

barriers to energy efficiency, or available technologies. 

While a number of energy efficiency policies and programs contribute to addressing these barriers such as 

building codes, appliance standards, and state government leadership programs, energy efficiency programs 

organized through electricity and gas providers also 

encourage greater energy efficiency in the homes, 

buildings, and facilities that exist today that will consume the majority of the energy used in these sectors 

for years to come. 

10 Many energy efficiency programs have an average lifecycle cost of $0.03/kWh saved, which is 50-75% of the typical cost of new power sources 

(ACEEE, 2004; EIA, 2006). 

To create a sustainable, aggressive national commitment to energy efficiency 1-9
The National Action Plan for Energy 

Efficiency 

To drive a sustainable, aggressive national commitment 

to energy efficiency through gas and electric utilities, 

utility regulators, and partner organizations, more than 

50 leading organizations joined together to develop this 

National Action Plan for Energy Efficiency. The Leadership 

Group members (Table 1-2) have developed this National 

Action Plan for Energy Efficiency Report, which: 

• Reviews the barriers limiting greater investment in 

energy efficiency by gas and electric utilities and partner organizations. 

• Presents sound business strategies that are available to 

overcome these barriers. 

• Documents a set of business cases showing the 

impacts on key stakeholders as utilities under different 

circumstances increase energy efficiency programs. 

• Presents best practices for energy efficiency program 

design and operation. 

• Presents policy recommendations and options for 

spurring greater investment in energy efficiency by utilities and energy consumers. 

The report chapters address four main policy and program areas (see Figure 1-3): 

• Utility Ratemaking and Revenue Requirements. Lost 

sales from the expanded use of energy efficiency have 

a negative effect on the financial performance of electric and natural gas utilities, particularly those that are 

investor-owned under conventional regulation. Costrecovery strategies have been designed and implemented to successfully “decouple” utility financial 

health from electricity sales volumes to remove financial disincentives to energy efficiency, and incentives 

have been developed and implemented to make energy efficiency investments as financially rewarding as 

capital investments. 

The goal of the National Action Plan for 

Energy Efficiency is to create a sustainable, aggressive national commitment 

to energy efficiency through gas and 

electric utilities, utility regulators, and 

partner organizations. 

The Leadership Group: 

• Recognizes that utilities and regulators have critical roles in creating and delivering energy efficiency programs to their communities. 

• Recognizes that success requires the joint efforts 

of the customer, utility, regulator, and partner 

organizations. 

• Will work across their spheres of influence to 

remove barriers to energy efficiency. 

• Commits to take action within their own organization to increase attention and investment in 

energy efficiency. 

Leadership Group Recommendations: 

• Recognize energy efficiency as a high-priority 

energy resource. 

• Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and opportunities for energy efficiency. 

• Promote sufficient, timely, and stable program 

funding to deliver energy efficiency where costeffective. 

• Modify policies to align utility incentives with the 

delivery of cost-effective energy efficiency and 

modify ratemaking practices to promote energy 

efficiency investments. 

1-10 National Action Plan for Energy Efficiency 
• Planning Processes. Energy efficiency, along with other 

customer-side resources, are not fully integrated into 

state and utility planning processes that identify the 

need to acquire new electricity and natural gas 

resources. 

• Rate Design. Some regions are successfully using rate 

designs such as time-of-use (TOU) or seasonal rates to 

more accurately reflect the cost of providing electricity 

and to encourage customers to consume less energy. 

• Energy Efficiency Program Best Practices Documentation. 

One reason given for slow adoption of energy efficiency 

is a lack of knowledge about the most effective and 

cost-effective energy efficiency program options. 

However, many states and electricity and gas providers 

are successfully operating energy efficiency programs 

across end-use sectors and customer classes, including 

residential, commercial, industrial, low-income, and 

small business. These programs employ a variety of 

approaches, including providing public information 

and training, offering financing and financial incentives, allowing energy savings bidding, and offering 

performance contracting. 

Figure 1-3: National Action Plan for Energy Efficiency Report Addresses Actions to Encourage Greater Energy Efficiency 

Timeline: Actions to Encourage Greater Energy Efficiency 

Utility Resource Program 

Policy Structure Planning Implementation 

Develop Utility Incentives 

for Energy Efficiency 

Develop Rate Designs to 

Encourage Energy Efficiency 

Include Energy Efficiency

 in Utility Resource Mix 

Measurement & Evaluation 

Program Roll-out 

Develop Effective Energy 

Efficiency Programs 

Revise Plans and Policies Based on Results 

Action Plan Report Chapter Areas and Key Barriers 

Utility Ratemaking

 & Revenue 

Requirements 

Energy efficiency reduces 

utility earnings 

Planning 

Processes 

Planning does not 

incorporate demandside resources 

Rate Design


Rates do not 

encourage energy 

efficiency investments 

Model 

Program 

Documentation 

Limited information on 

existing best practices 

To create a sustainable, aggressive national commitment to energy efficiency 1-11
Business Cases for Energy Efficiency 

A key element of the National Action Plan for Energy 

Efficiency is exploring the benefits of energy efficiency 

and the mechanisms and policies that might need to be 

modified so that each of the key stakeholders can benefit from energy efficiency investments. A key issue is that 

adoption of energy efficiency saves resources and utility 

costs, but also reduces utility sales. Therefore, the effect 

on utility financial health must be carefully evaluated. To 

that end, the Leadership Group offers an Energy 

Efficiency Benefits Calculator (Calculator) that evaluates 

the financial impact of energy efficiency on its major 

stakeholders—utilities, customers, and society. The 

Calculator allows stakeholders to examine different efficiency and utility cases with transparent input assumptions. 

The business cases presented in Chapter 4 of this report 

show the impact of energy efficiency investments upon 

sample utility’s financial health and earnings, upon customer energy bills, and upon social resources such as 

net efficiency costs and pollutant emissions. In general, 

the impacts of offering energy efficiency programs versus not offering efficiency follow the trends and findings illustrated below from the customer, utility and 

society perspectives. 

Utility Perspective. Energy efficiency affects utility revenues, shareholder earnings, and costs associated with capital 

investments. The utility can be financially neutral to investments in energy efficiency, at a minimum, or encourage 

greater investment through the implementation of a variety of decoupling, ratemaking, and incentives policies. 

These policies can ensure that shareholder returns and earnings could be the same or increased. Utility investment 

in infrastructure and contractual obligations for energy procurement could be reduced, providing a favorable 

balance sheet impact. 

Utility Returns – No Change or Increase 

Utility earnings remain stable or increase if decoupling or the use of shareholder incentives accompanies an energy efficiency program. Without incentives, earnings might be 

lower because effective energy efficiency will reduce the utility’s sales volume and 

reduce the utility’s rate base, and thus the scope of its earnings. 

Change in Utility Earnings – Results Vary 

Depending on the inclusion of decoupling and/or shareholder incentives, utility earnings vary. Utility earnings increase if decoupling or shareholder incentives are included. 

If no incentives, earnings might be lower due to reduced utility investment. 

Peak Load Growth and Associated Capital Investment – Decreases 

Capital investments in new resources and energy delivery infrastructure are reduced 

because peak capacity savings are captured due to energy efficiency measures. 

Customer Perspective. Customers’ overall bills will decrease with energy efficiency because lower energy usage 

offsets potential rate increases to cover the cost of offering the efficiency program. 

Customer Bills – Decrease 

Total customer bills decline over time as a result of investment in cost-effective energy 

efficiency programs as customers save due to lower energy consumption. This decline 

follows an initial rise in customer bills reflecting the cost of energy efficiency programs, 

which will then reduce costs over many years. 

1-12 National Action Plan for Energy Efficiency 
Customer Perspective (continued) 

Customer Rates – Mild Increase12 

Rates might increase slightly to cover the cost of the energy efficiency program. 

Community or Society Perspective. From a broad community/society perspective, energy efficiency produces real savings over time. While initially, energy efficiency can raise energy costs slightly to finance the new energy efficiency 

investment, the reduced bills (as well as price moderation effects) provide a rapid payback on these investments, 

especially compared to the ongoing costs to cover the investments in new energy production and delivery infrastructure costs. Moreover, the environmental benefits of energy efficiency continue to grow. The Calculator evaluates the 

net societal savings, utility savings, emissions reductions, and the avoided growth in energy demand associated with 

energy efficiency. 

Net Resources Savings – Increases 

Over time, as energy efficiency programs ramp up, cumulative energy efficiency savings lead to cost savings that exceed the energy efficiency program cost. 

Total Resource Cost (TRC) per Unit - Declines 

Total cost of providing each unit of energy (MWh, MMBtu gas) declines over time 

because of the impacts of energy savings, decreased peak load requirements, and 

decreased costs during peak periods. Well-designed energy efficiency programs can 

deliver energy at an average cost less than that of new power sources. 

Emissions and Cost Savings – Increases 

Efficiency prevents or avoids producing many annual tons of emissions and emission 

control costs. 

Growth Offset by EE – Increases 

As energy efficiency programs ramp up, the percent of growth that is offset by energy 

efficiency climbs and then levels as cumulative savings as a percent of demand growth 

stabilizes. 

12	 The changes shown in the business cases indicate a change from what would have otherwise occurred. This change does not include a one-time infrastructure investment in the assumptions, but it does include smooth capital expenditures. Energy efficiency will moderate prices of fossil fuels. The fuel 

price reductions from an aggressive energy efficiency program upon fuel prices have not been included and could result in an overall rate reduction. 

To create a sustainable, aggressive national commitment to energy efficiency 1-13
About This Report


The National Action Plan for Energy Efficiency is structured as follows: 

Chapter 2: Utility Ratemaking & Revenue Requirements 

• Reviews mechanisms for removing disincentives for 

utilities to consider energy efficiency. 

• Reviews the pros and cons for different strategies to 

reward utility energy efficiency performance, including 

the use of energy efficiency targets, shared savings 

approaches, and shareholder/company performance 

incentives. 

• Reviews various funding options for energy efficiency 

programs. 

• Presents recommendations and options for modifying 

policies to align utility incentives with the delivery of 

cost-effective energy efficiency and providing for sufficient and stable program funding to deliver energy efficiency where cost effective. 

Chapter 3: Energy Resource Planning Processes 

• Reviews state and regional planning approaches, 

including Portfolio Management and Integrated 

Resource Planning, which are being used to evaluate a 

broad array of supply and demand options on a level 

playing field in terms of their ability to meet projected 

energy demand. 

• Reviews methods to quantify and simplify the value 

streams that arise from energy efficiency investments— 

including reliability enhancement/congestion relief, peak 

demand reductions, and greenhouse gas emissions 

reductions—for direct comparison to supply-side options. 

• Presents recommendations and options for making a 

strong, long-term commitment to cost-effective energy 

efficiency as a resource. 

Chapter 4: Business Case for Energy Efficiency 

• Outlines the business case approach used to examine 

the financial implications of enhanced energy efficiency investment on utilities, consumers, and society. 

• Presents case studies for eight different electric and 

natural gas utility situations, including different ownership structures, gas and electric utilities, and different 

demand growth rates. 

Chapter 5: Rate Design 

• Reviews a variety of rate design structures and their 

effect in promoting greater investment in energy efficiency by the end-user. 

• Presents recommended strategies that encourage 

greater use of energy efficiency through rate design. 

Chapter 6: Energy Efficiency Program Best Practices 

• Reviews and presents best practices for operating successful energy efficiency programs at a portfolio level, 

addressing issues such as assessing energy efficiency 

potential, screening energy efficiency programs for 

cost-effectiveness, and developing a portfolio of 

approaches. 

• Provides best practices for successful energy efficiency 

programs across end-use sectors, customer classes, and 

a broad set of approaches. 

• Documents the political and administrative factors that 

lead to program success. 

Chapter 7: Report Summary 

• Summarizes the policy and program recommendations 

and options. 

1-14 National Action Plan for Energy Efficiency 
For More Information


Visit the National Action Plan for Energy Efficiency 

Web site: www.epa.gov/cleanenergy/eeactionplan.htm 

or contact: 

Stacy Angel 

U.S. Environmental Protection Agency 

Office of Air and Radiation 

Climate Protection Partnerships Division 

Angel.Stacy@epa.gov 

Larry Mansueti 

U.S. Department of Energy 

Office of Electricity Delivery and Energy Reliability 

Lawrence.Mansueti@hq.doe.gov 

To create a sustainable, aggressive national commitment to energy efficiency 1-15
Table 1-2. Members of the National Action Plan for Energy Efficiency 

Co-Chairs 

Diane Munns Member Iowa Utilities Board 

President National Association of Regulatory Utility Commissioners 

Jim Rogers President and Chief Executive Officer Duke Energy 

Leadership Group 

Barry Abramson Senior Vice President Servidyne Systems, LLC 

Angela S. Beehler Director of Energy Regulation Wal-Mart Stores, Inc. 

Bruce Braine Vice President, Strategic Policy Analysis American Electric Power 

Jeff Burks Director of Environmental Sustainability PNM Resources 

Kateri Callahan President Alliance to Save Energy 

Glenn Cannon General Manager Waverly Light and Power 

Jorge Carrasco Superintendent Seattle City Light 

Lonnie Carter President and Chief Executive Officer Santee Cooper 

Mark Case Vice President for Business Performance Baltimore Gas and Electric 

Gary Connett Manager of Resource Planning and Great River Energy 

Member Services 

Larry Downes Chairman and Chief Executive Officer New Jersey Natural Gas 

(New Jersey Resources Corporation) 

Roger Duncan Deputy General Manager, Distributed Energy Services Austin Energy 

Angelo Esposito Senior Vice President, Energy Services and Technology New York Power Authority 

William Flynn Chairman New York State Public Service Commission 

Jeanne Fox President New Jersey Board of Public Utilities 

Anne George Commissioner Connecticut Department of Public Utility Control 

Dian Grueneich Commissioner California Public Utilities Commission 

Blair Hamilton Policy Director Vermont Energy Investment Corporation 

Leonard Haynes Executive Vice President, Supply Technologies, Southern Company 

Renewables, and Demand Side Planning 

Mary Healey Consumer Counsel for the State of Connecticut Connecticut Consumer Counsel 

Helen Howes Vice President, Environment, Health and Safety Exelon 

Chris James Air Director Connecticut Department of Environmental Protection 

Ruth Kinzey Director of Corporate Communications Food Lion 

Peter Lendrum Vice President, Sales and Marketing Entergy Corporation 

Rick Leuthauser Manager of Energy Efficiency MidAmerican Energy Company 

Mark McGahey Manager Tristate Generation and Transmission Association, Inc. 

Janine Migden- Consumers’ Counsel Office of the Ohio Consumers’ Counsel 

Ostrander 

Richard Morgan Commissioner District of Columbia Public Service Commission 

Brock Nicholson Deputy Director, Division of Air Quality North Carolina Air Office 

Pat Oshie Commissioner Washington Utilities and Transportation Commission 

Douglas Petitt Vice President, Government Affairs Vectren Corporation 

1-16 National Action Plan for Energy Efficiency 
Bill Prindle Deputy Director American Council for an Energy-Efficient Economy 

Phyllis Reha Commissioner Minnesota Public Utilities Commission 

Roland Risser Director, Customer Energy Efficiency Pacific Gas and Electric 

Gene Rodrigues Director, Energy Efficiency Southern California Edison 

Art Rosenfeld Commissioner California Energy Commission 

Jan Schori General Manager Sacramento Municipal Utility District 

Larry Shirley Division Director North Carolina Energy Office 

Michael Shore Senior Air Policy Analyst Environmental Defense 

Gordon Slack Energy Business Director The Dow Chemical Company 

Deb Sundin Director, Business Product Marketing Xcel Energy 

Dub Taylor Director Texas State Energy Conservation Office 

Paul von Director, Energy and Environmental Affairs Johnson Controls 

Paumgartten 

Brenna Walraven Executive Director, National Property Management USAA Realty Company 

Devra Wang Director, California Energy Program Natural Resources Defense Council 

Steve Ward Public Advocate State of Maine 

Mike Weedall Vice President, Energy Efficiency Bonneville Power Administration 

Tom Welch Vice President, External Affairs PJM Interconnection 

Jim West Manager of energy right & Green Power Switch Tennessee Valley Authority 

Henry Yoshimura Manager, Demand Response ISO New England Inc. 

Observers 

James W. (Jay) Counsel Steel Manufacturers Association 

Brew 

Roger Cooper Executive Vice President, Policy and Planning American Gas Association 

Dan Delurey Executive Director Demand Response Coordinating Committee 

Roger Fragua Deputy Director Council of Energy Resource Tribes 

Jeff Genzer General Counsel National Association of State Energy Officials 

Donald Gilligan President National Association of Energy Service Companies 

Chuck Gray Executive Director National Association of Regulatory Utility 

Commissioners 

John Holt Senior Manager of Generation and Fuel National Rural Electric Cooperative Association 

Joseph Mattingly Vice President, Secretary and General Counsel Gas Appliance Manufacturers Association 

Kenneth Mentzer President and Chief Executive Officer North American Insulation Manufacturers Association 

Christina Mudd Executive Director National Council on Electricity Policy 

Ellen Petrill Director, Public/Private Partnerships Electric Power Research Institute 

Alan Richardson President and Chief Executive Officer American Public Power Association 

Steve Rosenstock Manager, Energy Solutions Edison Electric Institute 

Diane Shea Executive Director National Association of State Energy Officials 

Rick Tempchin Director, Retail Distribution Policy Edison Electric Institute 

Mark Wolfe Executive Director Energy Programs Consortium 

To create a sustainable, aggressive national commitment to energy efficiency 1-17
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[ACEEE] (2004). A Federal System Benefits Fund: 

Assisting States to Establish Energy Efficiency and 

Other System Benefit Programs. Washington, DC. 

Callahan, K. Alliance to Save Energy (2006, January 

17). Energy Efficiency As a Cornerstone of National 

Energy Policy. Presented to United States Energy 

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Connecticut Energy Conservation Management Board 

[CECMB] (2006, March) Energy Efficiency: Investing 

in Connecticut’s Future: Report of The Energy 

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<http://www.dpuc.state.ct.us/Electric.nsf/cafda4284 

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Eckman, T. (2005, September 26). The Northwest 

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May). Economically Achievable Energy Efficiency 

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(2005, May). The 5th Northwest Electric Power and 

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May). Electric Energy Efficiency and Renewable 

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U.S. Energy Information Administration [EIA] (2005, 

January). Annual Energy Outlook 2005. 

Washington, DC). <http://www.eia.doe.gov/oiaf/ 

archive/aeo05/index.html> 

U.S. Environmental Protection Agency [EPA] (2006). 

Clean Energy-Environment Guide to Action: 

Policies, Best Practices, and Action Steps for States. 

Washington, DC. 

Western Governors’ Association [WGA] (2006, June). 

Clean Energy, a Strong Economy and a Healthy 

Environment. A Report of the Clean and Diversified 

Energy Advisory Committee. 

York, D. and Kushler, M. (2005, October). ACEEE’s 3rd 

National Scorecard on Utility and Public Benefits 

Energy Efficiency Programs: A National Review and 

Update of State Level Activity. 

http://www.aceee.org/pubs/u054.pdf 

1-18 National Action Plan for Energy Efficiency 
2:Utility Ratemaking 

& Revenue Requirements 

While some utilities manage aggressive energy efficiency programs as a strategy to diversify their portfolio, 

lower costs, and meet customer demand, many still face important financial disincentives to implementing 

such programs. Regulators working with utilities and other stakeholders, as well as boards working with 

publicly owned utilities, can establish or reinforce several policies to help address these disincentives, including overcoming the throughput incentive, ensuring program cost recovery, and defining shareholder 

performance incentives. 

Overview


The practice of utility regulation is, in part, a choice 

about how utilities make money and manage risk. These 

regulatory choices can guide utilities toward or away 

from investing in energy efficiency, demand response, 

and distributed generation (DG). Traditional ratemaking 

approaches have strongly linked a utility’s financial 

health to the volume of electricity or gas sold via the 

ratemaking structure, creating a disincentive to investment in cost-effective demand-side resources that 

reduce sales. The ratemaking structure and process 

establishes the rates that generate the revenues that gas 

and electric utilities, both public and private, can recover 

based on the just and reasonable costs they incur to 

operate the system and to procure and deliver energy 

resources to serve their customers. 

Alternate financial incentive structures can be designed 

to encourage utilities to actively promote implementation of energy efficiency when it is cost effective to do 

so. Aligning utility and public interest aims by disconnecting profits and fixed cost recovery from sales volumes, ensuring program cost recovery, and rewarding 

shareholders can “level the playing field” to allow for a 

fair, economically based comparison between supplyand demand-side resource alternatives and can yield a 

lower cost, cleaner, and reliable energy system. 

This chapter explores the utility regulatory approaches 

that limit greater deployment of energy efficiency as a 

resource in U.S. electricity and natural gas systems. 

Generally, it is within the power of utility commissions 

and utilities to remove these barriers.1 Eliminating the 

throughput incentive is one way to remove a disincentive 

to invest in efficiency. Offering shareholder incentives 

will further encourage utility investment. Other disincenLeadership Group Recommendations 

Applicable to Utility Ratemaking and 

Revenue Requirements 

• Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and modify 

ratemaking practices to promote energy efficiency 

investments. 

• Make a strong, long-term commitment to implement 

cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and opportunities 

for energy efficiency. 

• Provide sufficient, timely, and stable program funding 

to deliver energy efficiency where cost-effective. 

A more detailed list of options specific to the objective of 

promoting energy efficiency in ratemaking and revenue 

requirements is provided at the end of this chapter. 

1 In some cases, state law limits the latitude of a commission to grant ratemaking or earnings flexibility. Removing barriers to energy efficiency in these 

states faces the added challenge of amending statutes. 

To create a sustainable, aggressive national commitment to energy efficiency 2-1
tives for energy efficiency include a short-term resource 

acquisition horizon and wholesale market rules that do 

not capture the system value of energy efficiency. After 

an introduction to these barriers and solutions, this 

chapter will report on successful efforts in states to 

implement these solutions. The chapter closes with a set 

of recommendations for pursuing the removal of these 

barriers. 

This chapter refers to utilities as integrated energy companies selling electricity as well as delivering it. Many of 

these concepts, however, also apply to states that 

removed retail electricity sales responsibilities from utilities—turning the utility into an electric transmission and 

distribution company without a retail sales function. 

Barriers and Solutions to Effective 

Energy Efficiency Deployment 

Common disincentives for utilities to invest more in costeffective energy efficiency programs include the 

“throughput incentive,” the lack of a mechanism for 

utilities to recover the costs of and provide funding for 

energy efficiency programs, and a lack of shareholder 

and other performance incentives to compete with those 

for investments in new generation. 

Traditional Regulation Motivates Utilities to 

Sell More: The Throughput Incentive 

Rates change with each major “rate case,” the traditional and dominant form of state-level utility ratemaking.2 

Between rate cases, utilities have a financial incentive to 

increase retail sales of electricity (relative to forecast or 

historic levels, which set “base” rates) and to maximize 

the “throughput” of electricity across their wires. This 

incentive exists because there is often a significant incremental profit margin on incremental sales. When rates 

are reset, the throughput incentive resumes with the 

new base. In jurisdictions where prices are capped for an 

extended time, the utility might be particularly anxious 

to grow sales to add revenue to cover cost increases that 

might occur during the freeze. 

With traditional ratemaking, there are few mechanisms 

to prevent “over-recovery” of costs, which occurs if sales 

are higher than projected, and no way to prevent 

“under-recovery,” which can happen if forecast sales are 

too optimistic (such as when weather or regional economic conditions deviate from forecasted or “normal” 

conditions).3 

This dynamic creates an automatic disincentive for utilities to promote energy efficiency, because those actions 

will reduce the utility’s net income—even if energy efficiency is clearly established and agreed-upon as a less 

expensive means to meet customer needs as a least-cost 

resource and is valuable to the utility for risk management, congestion reduction, and other reasons (EPA, 

2006). The effect of this disincentive is exacerbated in 

the case of distribution-only utilities, because the revenue impact of electricity sales reduction is disproportionately larger for utilities without generation resources. 

While some states have ordered utilities to implement 

energy efficiency, others have questioned the practicality 

of asking a utility to implement cost-effective energy 

efficiency when their financial self-interest is to have 

greater sales. 

Several options exist to help remove this financial barrier 

to greater investment in energy efficiency: 

Decouple Sales from Profits and Fixed Cost Recovery 

Utilities can be regulated or managed in a manner that 

allows them to receive their revenue requirement with less 

linkage to sales volume. The point is to regulate utilities such 

that reductions in sales from consumer-funded energy 

2 Public power utilities and cooperative utilities have their own processes to adjust rates that do not require state involvement. 

3 Over-recovery means that more money is collected from consumers in rates than is needed to pay for allowed costs, including return on investment. This 

happens because average rates tend to collect more for sales in excess of projected demand than the marginal cost to produce and deliver the electricity for those increased sales. Likewise, under-recovery happens if sales are less than the amount used to set rates (Moskovitz, 2000). 

2-2 National Action Plan for Energy Efficiency 
Utility and Industry Structure and Energy Efficiency 

Publicly and Cooperatively Owned Utilities


Compared With Investor-Owned Utilities


The throughput incentive affects municipal and cooperative utilities in a distinctive way. Public power and 

co-ops and their lenders are concerned with ensuring 

that income covers debt costs, while they are not concerned about “profits.” Available low-cost financing 

for co-ops sometimes comes with restrictions that 

limit its use to power lines and generation, further 

diminishing interest in energy efficiency investments. 

Natural Gas vs. Electric Utilities 

Natural gas and electric utilities both experience the 

throughput incentive under traditional ratemaking. 

Natural gas utilities operate in a more competitive 

environment than do electric utilities because of the 

non-regulated alternative fuels, but this situation can 

cut either way for energy efficiency. For some gas utilities, energy efficiency is an important customer service tool, while in other cases, it is just seen as an 

imposed cost that competitors do not have. Natural 

gas companies in the United States also generally see 

a decline in sales due to state-of-the-art efficiencies in 

gas end uses, a phenomenon not seen by electric 

companies. Yet cost-effective efficiency opportunities 

for local gas distribution companies remain available. 

efficiency, building codes, appliance standards, and distributed generation are welcomed, and not discouraged. 

For example, if utility revenues were connected to the 

number of customers, instead of sales, the utility would 

experience different incentives and might behave quite differently. Under this approach, at the conclusion of a conventional revenue requirement proceeding, a utility’s revenues per customer could be fixed. An automatic adjustment to the revenue requirement would occur to account 

for new or departing customers (a more reliable driver of 

Restructured vs. Traditional Markets 

The transition to retail electric competition threw open 

for reconsideration all assumptions about utility structure. The effects on energy efficiency have been 

strongly positive and negative. The throughput incentive is stronger for distribution-only companies with 

no generation and transmission rate base. Price caps, 

which typically are imposed in a transition to retail 

competition, diminish utility incentive to reduce sales 

because added revenue helps cope with new costs. 

Price caps also discourage utilities from adding nearterm costs that can produce a long-term benefit, such 

as energy efficiency. As a result, energy efficiency is 

often disconnected from utility planning. On the other 

hand, several states have provided stable funding for 

energy efficiency as part of the restructuring process. 

High-Cost vs. Low-Cost States 

Energy efficiency has been more popular in high-cost 

states. Low-cost states tend to see energy efficiency as 

more expensive than their supplies from hydroelectric 

and coal sources, though there are exceptions where 

efficiency is seen as a low-cost incremental resource 

and a way to meet environmental goals. Looking forward, all states face similar, higher cost options for 

new generation, suggesting that the current resource 

mix will be less important than future resource options 

in considering the value of new energy efficiency 

investments. 

costs than sales). An alternative to the revenue per customer approach is to use a simple escalation formula to 

forecast the fixed cost revenue requirement over time. 

Under this type of rate structure, a utility that is more efficient and reduces its costs over time through energy efficiency will be able to increase profits. Furthermore, if sales 

are reduced by any means (e.g., efficiency, weather, or economic swings) revenues and profits will not be affected. 

To create a sustainable, aggressive national commitment to energy efficiency 2-3
This approach eliminates the throughput disincentive and 

does not require a commission resolution of the amount 

of lost revenues associated with energy efficiency (see 

Table 2-1). A critical element of revenue decoupling is a 

true-up of actual results to forecasted results. Rates 

would vary up or down reflecting a balancing account for 

total authorized revenue requirements and actual revenues from electricity or gas consumed by customers. The 

true-up is fundamental to accomplish decoupling profits 

and fixed cost revenues from sales volumes. Annual 

adjustments have been typical and can be modeled in the 

Energy Efficiency Benefits Calculator (see Chapter 4: 

Business Case for Energy Efficiency), but a quarterly or 

monthly adjustment might be preferred. The plan may 

also include a deadband, meaning that modest deviations from the forecast would produce no change in 

rates, while larger deviations will result in a rate change. 

The plan might also share some of the deviations 

between customers and the utility. The magnitude of rate 

changes at any one time can be capped if the utility and 

regulators agree to defer the balance of exceptional 

changes to be resolved later. Prudence reviews should be 

unaffected by a decoupling plan. A decoupling plan 

would typically last a few years and could be changed to 

reflect new circumstances and lessons learned. 

Decoupling has the potential to lower the risk of the utility, and this feature should lead to consumer benefits 

through an overall lower cost of capital to the utility.4 

Decoupling through a revenue per customer cap is 

presently more prevalent in natural gas companies, but 

can be a sound tool for electric companies also. Rate 

design need not be affected by decoupling (see Chapter 

5: Rate Design for rate design initiatives that promote 

energy efficiency), and a shift of revenues from the variable portion of rates to the fixed portion does not 

address the throughput incentive. The initial revenue 

requirement would be determined in a routine rate case, 

the revenue per customer calculation would flow from 

the same billing determinants used to set rates. Service 

performance measures can be added to assure that cost 

reductions result from efficiency rather than service 

reductions. Some state laws limit the use of balancing 

accounts and true-ups, so legislative action would be 

necessary to enable decoupling in those states. 

A decoupling system can be simple or complex, depending on the needs of regulators, the utility, or other parties and the value of a broad stakeholder process leading 

up to a decoupling system (Kantor, 2006). As the text 

box addressing lessons learned suggests, it is important 

to establish the priorities that the system is being created to address so it can be as simple as possible while 

avoiding unintended consequences. Additionally, it is 

important to evaluate any decoupling system to ensure 

it is performing as expected.5 

Shifting More Utility Fixed Costs Into Fixed Customer 

Charges 

Traditionally, rates recover a portion of the utility’s fixed 

costs through volumetric rates, which helps service 

remain affordable. To better assure recovery of capital 

asset costs with reduced dependence on sales, state utility commissions could reduce variable rates and increase 

the fixed rate component, often referred to as the fixed 

charge or customer charge. This option might be particularly relevant in retail competition states because wiresonly electric utilities have relatively high proportions of 

fixed costs. This shift is attractive to some natural gas 

systems experiencing sales volume attrition due to 

improved furnace efficiency and other trends. This shift 

reduces the throughput incentive for distribution companies and is an alternative to decoupling. There are some 

limiting concerns, including the effect a reduction in the 

variable charge might have on consumption and consumers' motivation to practice energy efficiency, and the 

potential for high using consumers to benefit from the 

change while low-using customers pay more. 

4 The lowering of a gas utility’s cost of capital because of the reduced risk introduced by a revenue decoupling mechanism was recently affirmed by Barone 

(2006). 

5 Two recent papers discuss decoupling in some detail: Costello, 2006 and NERA, 2006. 

2-4 National Action Plan for Energy Efficiency 
The First Wave of Decoupling and Lessons Learned 

In the early 1990s, several state commissions and utilities responded to the throughput incentive by creating decoupling systems. In all cases, decoupling was 

discontinued by the end of the decade. The reasons 

for discontinuation provide guidance to those considering decoupling today and indicate that the initial 

idea was good, but that the execution left important 

issues unaddressed. 

In the case of California, decoupling was functioning 

well, using forecasted revenues and true-ups to actuals, but the move to retail competition precipitated its 

end in 1996 (CPUC, 1996). Following the energy crisis of 2000-2001, California recognized the importance of long-term energy efficiency investments and 

reinstated mechanisms to eliminate the throughput 

incentive. 

Puget Sound Energy in Washington adopted a decoupling plan in 1990. There were several problems. The 

split between variable power costs (recovered via a 

true-up based on actual experience) and fixed costs 

(recovered based on a revenue-per-customer calculation) was wrong. While customer numbers (and 

revenue) were increasing, new investments in transmission were not needed so the fixed cost part of the 

plan over-recovered. Meanwhile, new generation 

from independent generators was too expensive, and 

this added power cost (minus a prudence disallowance, which further complicated the scene) was 

passed to ratepayers. Unlike the current California 

decoupling method, there was no reasonable forecast 

over time for power costs. Risk of power cost increases was insufficiently shared. The results were a big rate 

increase and anger among customers. In retrospect, 

risk allocation and the split of fixed and variable costs 

were incompatible to the events that followed and 

offer a useful lesson to future attempts. The true-up 

process and the weather normalization process 

worked well. The power costs that ignited the controversy over the decoupling plan would have been 

recoverable in rates under the traditional system. A 

recent effort to restore decoupling with Puget 

foundered over a dispute about whether the allowed 

return on equity during a prior rate case should be 

changed if decoupling was reinstated (Jim Lazar, personal communication, October 21, 2005). 

Central Maine Power also adopted a decoupling plan 

at the beginning of the 1990s. The plan was illequipped, however, to account for an ensuing steep 

economic downturn that reduced sales by several percentage points. Unfortunately, this effect far outweighed any benefits from energy efficiency. The 

true-ups called for in the plan were onerous due to 

the dip in sales, and authorities decided to delay them 

in hopes that the economy would turn around. When 

that did not happen, the rate change was quite large 

and was attributed to the decoupling plan, even 

though most of the rate increase was due to reduced 

sales and would have occurred anyway. A lesson from 

this experience is to not let the period between trueups go on too long and to consider more carefully 

what happens if market prices, the economy, the 

weather, or other significant drivers are well outside 

expected ranges. 

In both the Puget and Central Maine cases, responsibility for large rate increases was misassigned to the 

decoupling plan, when high power costs from independent power producers (Puget) or general economic 

conditions (Central Maine) were primarily responsible. 

That said, serious but correctable flaws in the decoupling plans left consumers exposed to more risk than 

was necessary. 

To create a sustainable, aggressive national commitment to energy efficiency 2-5
Provide Utilities the Profit Lost Through Efficiency 

Another way to address the throughput incentive is to 

calculate the profits foregone to successful energy efficiency. Lost Revenue Adjustment Mechanisms (LRAM) 

allow a utility to directly recoup the “lost” profits and 

contributions to fixed costs associated with not selling 

additional units of energy because of the success of 

energy efficiency programs in reducing electricity consumption. The amount of lost profit can be estimated by 

multiplying the fixed portion of the utility’s prices by the 

energy savings from energy efficiency programs or the 

energy generated from DG, based on projected savings 

or ex post impact evaluation studies. The amount of lost 

estimated profits is then directly returned to the utility’s 

shareholders. Some states have adopted these mechanisms either through rate cases or add-ons to the fuel 

adjustment clause calculations. 

Experience has shown that LRAM can allow utilities to 

recover more profits than the energy efficiency program 

Table 2-1. Options to Mitigate the Throughput Incentive: Pros and Cons 

Policy Pros Cons 

Traditional cost of service 

plus return regulation 

• Familiar system for regulators and utilities. 

• Rate changes follow rate cases (except for fuel/purchased 

gas adjustment clause states). 

• Reduced sales reduce net income and contributions to 

fixed costs. 

• Sales forecasts can be contentious. 

• Harder to connect good utility performance to a financial 

consequence. Risks outside control of utility might be 

assigned to the utility. 

Decoupling (use of a forecast 

of revenue or revenue per 

customer, with true-ups to 

actual results during a 

defined timeframe) 

• Removes sales incentive and distributed resource disincentives. 

• Authorized fixed costs covered by revenue. 

• All beneficial actions and policies that reduce sales (distributed generation, energy efficiency programs, codes and 

standards, voluntary actions by customers, demand 

response) can be promoted by the utility without adversely 

affecting net income or coverage of fixed costs. 

Opportunity to easily reward or penalize utilities based on 

performance. 

• True-ups from balancing accounts or revenue per customer 

are simple. 

• Easy to add productivity factors, inflation adjustments, and 

performance indicators with rewards and penalties that 

can be folded into the true-up process. 

• Reduces volatility of utility revenue resulting from many 

causes. Risks from abnormal weather, economic performance, or energy markets can be allocated explicitly between 

customers and the utility. 

• Lack of experience. Viewed by some as a more complex 

process. 

• Quality of forecasts is very important. 

• Some consumer advocates are uncomfortable with rate 

adjustments outside rate case or familiar fuel adjustment 

clause. 

• Frequent rate adjustments from true-ups are objectionable 

to those favoring rate stability who worry about accountability for rate increases. 

• Process of risk allocation can cause decoupling plan to 

break down. Connection between reconstituted risks and 

cost of capital can cause impasse. 

• Many issues to factor into the decoupling agreement. Past 

experience with decoupling indicates that it can be hard to 

“get it right,” though these experiences suggest solutions. 

Lost revenue adjustment • Restores revenue to utility that would have gone to earnings and coverage of fixed costs but is lost by energy efficiency. 

• Diminishes the throughput disincentive for specific qualifying programs. 

• Any sales reductions from efficiency initiatives outside qualifying programs are not addressed, leaving the throughput 

incentive in place. 

• Historically contentious, complex process to decide on lost 

revenue adjustment. Potentially rewards under-performing 

energy efficiency programs. 

Independent energy efficiency 

administration 

• Administration of energy efficiency is assigned to an entity 

without the conflict of the throughput incentive. 

• Utility can still promote load building. Programs that would 

reduce sales outside the activities of the independent 

administrator might still be discouraged due to the 

throughput incentive. 

2-6 National Action Plan for Energy Efficiency 
actually saved because the lost profit is based on projected, rather than actual, energy savings. Resolving LRAM 

in rate cases has been contentious in some states. 

Furthermore, because utilities still earn increased profits 

on additional sales, this approach still discourages utilities from implementing additional energy efficiency or 

supporting independent energy efficiency activities. A 

comparison of decoupling and the LRAM approach is 

provided in Table 2-1. 

A variation is to roughly estimate the amount of lost profits and make a specified portion (50 to 100 percent) available to the utility to collect based on its performance at 

achieving certain program goals. This approach is simpler 

and more constructive than a commission docket to calculate lost revenue. It provides a visible way for the utility to earn back lost profits with program performance 

and achievements consistent with the public interest. This 

system translates well into employee merit pay systems, 

and the goals can fit nicely into management objectives 

reported to shareholders, a utility’s board of directors, or 

Governors. Public interest groups appreciate the connection to performance. 

Non-Utility Administration 

Several states, such as Oregon, Vermont and New York, 

have elected to relieve utilities from the task of managing energy efficiency programs. In some cases, state government has taken on this responsibility, and in others, a 

third party was created or hired for this purpose. The 

utility still has the throughput incentive, so while efficiency administration might be without conflict, the utility may still engage in load-building efforts contrary to 

the messages from the efficiency programs. Addressing 

the throughput incentive remains desirable even where 

non-utility administration is in place. Non-utility energy 

efficiency administration can apply to either electricity or 

natural gas. Where non-utility energy efficiency administration is in place, cooperation with the utility remains 

important to ensure that the customer receives good 

service (Harrington, 2003). 

Wholesale Power Markets and the Throughput 

Incentive 

In recent years, wholesale electric power prices have 

increased, driven by increases in commodity fuel costs. In 

many parts of the country, these increases have created 

a situation in which utilities with generation or firm 

power contracts that cost less than clearing prices might 

make a profit if they can sell excess energy into the 

wholesale market. Some have questioned whether or 

not the situation of utilities seeing wholesale profits from 

reduced retail sales diminishes or removes the throughput incentive. 

Empirically, these conditions do not appear to have 

moved utilities to accelerate energy efficiency program 

deployment. In states in which generation is divested 

from the local utility, the companies serving retail customers see no change to the throughput incentive. 

There is little to suggest how these market conditions 

will persist or change. In the absence of a more definitive course change, evidence suggests that the recent 

trend should not dissuade policymakers and market participants from addressing the throughput incentive. 

Recovering Costs / Providing Funding for 

Energy Efficiency Programs 

Removing the throughput incentive is a necessary step in 

addressing the barriers many utilities face to investing more 

in energy efficiency. It is unlikely to be sufficient by itself in 

promoting greater investment, however, because under 

traditional ratemaking, utilities might be unable to cover 

the costs of running energy efficiency programs.6 To 

ensure funds are available for energy efficiency, policymakers can utilize and establish the following mechanisms 

with cooperation from stakeholders: 

Revenue Requirement or Procurement Funding 

Policy-makers and regulators can set clear expectations 

that utilities should consider energy efficiency as a 

resource in their resource planning processes, and it 

should spend money to procure that resource as it would 

6 See Chapter 3: Energy Resource Planning Processes for discussion of utility resource planning budgets being used to fund energy efficiency. 

To create a sustainable, aggressive national commitment to energy efficiency 2-7
for other resources. This spending would be part of the 

utility revenue requirement and would likely appear as 

part of the resource procurement spending for all 

resources needed to meet consumer demand in all 

hours. In retail competition states, the default service 

provider, the distribution company, or a third party can 

handle the responsibility of acquiring efficiency 

resources. 

Spending Budgets 

To reduce regulatory disputes and create an atmosphere 

of stability among utility managers, trade allies, and customers, the legislature or regulator can determine a 

budget level for energy efficiency spending—generally a 

percentage of utility revenue. This budget level would be 

set to achieve some amount of the potentially available, 

cost-effective, program opportunities. The spending 

budget allows administrator staff, trade allies, and consumers to count on a baseline level of effort and reduces 

the likelihood of spending disruptions that erode customer expectations and destroy hard-to-replace market 

infrastructure needed to deliver energy efficiency. 

Unfortunately, spending budgets are sometimes treated 

as a maximum spending level even if more cost-effective 

efficiency can be gained. Alternatively, a spending budget can be treated as a minimum if policymakers also 

declare efficiency to be a resource. In that event, additional cost-effective investments would be recovered as 

part of the utility revenue requirement. 

Savings Target 

An alternative to minimum spending levels is a minimum energy savings target. This alternative could be 

policy-driven (designed for consistency to obtain a certain percentage of existing sales or forecasted growth, 

or as an Energy Efficiency Portfolio Standard [EEPS]) or 

resource-driven (changing as system needs dictate). 

Efficiency budgets can be devised annually to achieve 

the targets. The use of savings targets does not address 

how money is collected from customers, or how program administration is organized. For more information 

on how investments are selected, see Chapter 3: Energy 

Resource Planning Processes. 

Clear, Reliable, and Timely Energy Efficiency Cost 

Recovery System 

Utilities value a clear and timely path to cost recovery, 

and a well-functioning regulatory process should provide 

that. Such a process contributes to a stable regulatory 

atmosphere that supports energy efficiency programs. 

Cost recovery can be linked to program performance (as 

discussed in the next section) so that utilities would be 

responsible for prudent spending of efficiency funds. 

The energy efficiency program cost recovery issue is eliminated from the utility perspective if a non-utility administrative structure is used; however, this approach does 

not eliminate the throughput incentive. Furthermore, 

funding still needs to be established for the non-utility 

administrator. 

Tariff Rider for Energy Efficiency 

A tariff rider for energy efficiency allows for a periodic 

rate adjustment to account for the difference between 

planned costs (included in rates) and actual costs. 

System Benefits Charge 

In implementing retail competition, several states added 

a separate charge to customer bills to collect funds for 

energy efficiency programs; several other states have 

adopted this idea as well. A system benefits charge (SBC) 

is designed to provide a stable stream of funds for 

public purposes, like energy efficiency. SBCs do have 

disadvantages. If the funds enter the purview of state 

government, they can be vulnerable to decisions to use 

the funds for general government purposes. Also, the 

charge appears to be an add-on to bills, which can irritate some consumers. This distinct funding stream can 

lead to a disconnection in resource planning between 

energy efficiency and other resources. Regulators and 

utilities might need to take steps to ensure a comprehensive planning process when dealing with this type of 

funding.7 

7 This device might also pool funds for other public benefit purposes, such as renewable energy system deployment and bill assistance for low-income 

consumers. 

2-8 National Action Plan for Energy Efficiency 
Providing Incentives for Energy Efficiency 

Investment 

Some suggest that if energy efficiency is a cost-effective 

resource, utilities should invest in it for that reason, with no 

reason for added incentives. Others say that for effective 

results, incentives should be considered because utilities 

are not rewarded financially for energy efficiency resources 

as they are for supply-side resources. This section reviews 

options for utility incentives to promote energy efficiency. 

When utilities invest in hard assets, they depreciate these 

costs over the useful lives of the assets. Consumers pay 

a return on investment for the un-depreciated balance of 

costs not yet recovered, which spreads the rate effect of 

the asset over time. Utilities often do not have any 

opportunity to earn a return on energy efficiency spending, 

as they do with hard assets. This lack of opportunity for 

profit can introduce a bias against efficiency investment. 

Incentives for energy efficiency should be linked to 

achieving performance objectives to avoid unnecessary 

expenditures, and be evaluated by regulators based on 

their ability to produce cost-effective program performance. Performance objectives can also form the basis of 

penalties for inferior program performance. Financial 

incentives for utilities should represent revenues above 

those that would normally be recovered in a revenue 

requirement from a rate case. 

Energy Efficiency Costs: Capitalize or Expense? 

In most jurisdictions, energy efficiency costs are 

expensed, which means all costs incurred for energy efficiency are placed into rates during the year of the 

expense. When a utility introduces an energy efficiency 

program, or makes a significant increase or decrease in 

energy efficiency spending, rates must change to collect 

all annual costs. An increase in rates might be opposed 

by consumer advocates and other stakeholders, especially 

if parties disagree on whether the energy efficiency 

programs are cost-effective. 

To moderate the rate effect of efficiency, regulators 

could capitalize efficiency costs, at least in part.8 

Capitalizing helps the utility by allowing for cost recovery over time but can cost consumers more than expensing in the long run. Some efficiency programs can meet 

short term rate-oriented cost-effectiveness tests if costs 

are capitalized. However, if the choice is made to capitalize, the regulator still has to decide the appropriate 

amortization period for program costs, balancing concern for immediate rate impacts and long term costs.9 

Capitalizing energy efficiency investments may be limited by the magnitude of “regulatory assets” that is 

appropriate for a utility. Bond ratings might decline if the 

utility asset account has too many assets that are not 

backed by physical capital. The limit on capitalized efficiency investment varies depending on the rest of the 

utility balance sheet. 

Some argue that capitalizing energy efficiency is too costly 

and that rate effects from expensing are modest. Others 

note that in some places, capitalizing energy efficiency is 

the only way to deal with transitional rate effects and can 

provide a match over time between the costs and benefits 

of the efficiency investments (Arthur Rosenfeld, personal 

communication, February 20, 2006). 

In some cases, it might be appropriate to consider 

encouraging unregulated utility affiliates to invest in and 

benefit from energy efficiency and other distributed 

resources. 

Bonus Return, Shared Savings 

To encourage energy efficiency investments over supply 

investments, regulators can authorize a return on investment that is slightly higher (e.g., 5 percent) for energy 

efficiency investments or offer a bonus return on equity 

investment for superior performance. Another approach 

is to share a percentage of the energy savings value, perhaps 5 to 20 percent, with the utility. A shared savings 

system has the virtue of linking the magnitude of the 

8 Capitalizing energy efficiency also reinforces the idea of efficiency as a substitute to supply and transmission. 

9 Iowa and Vermont initially capitalized energy efficiency spending, but transitioned to expense in the late 1990s. 

To create a sustainable, aggressive national commitment to energy efficiency 2-9
reward with the level of program performance. A variation is to hold back some of the funds allocated to energy efficiency for award to shareholders for achieving 

energy efficiency targets. Where this incentive is used, 

the holdback can run between 3 and 8 percent of the 

program budget. Some of these funds can be channeled 

to employees to reward their efforts (Arthur Rosenfeld, 

personal communication, February 20, 2006; Plunkett, 

2005). 

Bonus returns, shared savings, and other incentives can 

raise the total cost of energy efficiency. However, if the 

incentives are well-designed and effective, they will 

encourage the utility to become proficient at achieving 

energy efficiency savings. The utility might be motivated 

to provide greater savings for consumers through more 

cost-effective energy efficiency. 

Energy Efficiency Lowers Risk 

Energy efficiency can help the financial ratings of utilities 

if it reduces the risks associated with regulatory uncertainty, long-term investments in gas supply and transport 

and electric power and transmission, and the risks associated with fossil fuel market prices that are subject to 

volatility and unpredicted price increases. By controlling 

usage and demand, utilities can also control the need for 

new infrastructure and exposure to commodity markets, 

providing risk management benefits. To the extent that a 

return on efficiency investments is likely and the chance 

of a disallowance of associated costs is minimized, 

investors will be satisfied. Decoupling tends to stabilize 

actual utility revenues, providing a better match to actual 

cost, which should further benefit utility bond ratings. 

Reversing a Short-Term Resource Acquisition 

Focus: Focus on Bills, Not Just Rates 

Policy-makers tend to focus on electric rates because 

they can be easily compared across states. They become 

a measure for business-friendliness, and companies consider rate levels in manufacturing siting and expansion 

decisions. But rates are not the only measure of service. 

A short-term focus on low rates can lead to costly missed 

investment opportunities and higher overall costs of 

electricity service over the long run. 

Over the long term, energy efficiency benefits can 

extend to all consumers. Eventually, reduced capital 

commitments and lower energy costs resulting from 

cost-effective energy efficiency programs benefit all 

consumers and lower overall costs to the economy, freeing customer income for more productive purposes, like 

private investment, savings, and consumption. 

Improved rate stability and risk management from limited sales growth tends to improve the reputation of the 

utility. Incentives and removing the throughput incentive make it easier for utilities to embrace stable or 

declining sales. 

A commitment to energy efficiency means accepting a 

new cost in rates over the short-term to gain greater system benefits and lower long-term costs, as is the case 

with other utility investments. State and local political 

support with a measure of public education might be 

needed to maintain stable programs in the face of persistent immediate pressure to lower rates. 

Related Issues With Wholesale Markets and 

Long-Term Planning 

Regulatory factors can hinder greater investment in costeffective energy efficiency programs. These factors 

include the demand-side of the wholesale market not 

reacting to supply events like shortages or wholesale 

price spikes, and, for the electric sector, a short-term 

generation planning horizon, especially in retail competition states. In addition, transmission system planning 

by regional transmission organizations (RTOs) and utilities tends to focus on wires and supply solutions, not 

demand resources like efficiency. The value of sustained 

usage reductions through energy efficiency, demand 

response and distributed generation is not generally considered, nor compensated for in wholesale tariffs. These 

are regulatory choices and are discussed further in 

Chapter 3: Energy Resource Planning Processes.10 

10 Planning and rate design implications are more thoroughly discussed in Chapters 3: Energy Resource Planning Processes and Chapter 5: Rate Design. 

2-10 National Action Plan for Energy Efficiency 
Energy Efficiency Makes Wholesale Energy Markets 

Work Better 

In the wholesale market venue, the value of energy efficiency would be revealed by a planning process that 

treats customer load as a manageable resource like supply and transmission, with investment in demand-side 

solutions in a way that is equivalent to (not necessarily 

the same as) supply and transmission solutions. Demand 

response and efficiency can be called forth that specifically reduces demand at peak times or in other strategic 

ways, or that reduces demand year-round. 

Declare Energy Efficiency a Resource 

To underscore the importance of energy efficiency, states 

can declare in statute or regulatory policy that energy 

efficiency is a resource and that utilities should factor 

energy efficiency into resource planning and acquisition. 

States concerned with risks on the supply side can also 

go one step further and designate that energy efficiency 

is the preferred resource. 

Link Energy and Environmental Regulation 

Environmental policy-makers have observed that energy 

efficiency is an effective and comparatively inexpensive 

way to meet tightening environmental limits to electric 

power generation, yet this attribute rarely factors into 

decisions by utility regulators about deployment of energy efficiency. This issue is discussed further in Chapter 3: 

Energy Resource Planning Processes. 

State and Regional Examples of 

Successful Solutions to Energy 

Efficiency Deployment 

Numerous states have previously addressed or are currently exploring energy efficiency electric and gas incentive mechanisms. Experiments in incentive regulation 

occurred through the mid-1990s but generally were 

overtaken by events leading to various forms of restructuring. States are expressing renewed interest in incentive regulation due to escalating energy costs and a 

recognition that barriers to energy efficiency still exist. 

Many state experiences are highlighted in the following 

text and Table 2-2. 

Addressing the Throughput Disincentive 

Direction Through Legislation 

New Mexico offers a bold statutory statement directing 

regulation to remove barriers to energy efficiency: “It 

serves the public interest to support public utility investments in cost-effective energy efficiency and load management by removing any regulatory disincentives that 

might exist and allowing recovery of costs for reasonable 

and prudently incurred expenses of energy efficiency 

and load management programs” (New Mexico Efficient 

Use of Energy Act of 2005). 

Decoupling Net Income From Sales 

California adopted decoupling for its investor-owned 

companies as it restored utility responsibility for acquiring all cost-effective resources. The state has also 

required these companies to pursue all cost-effective 

energy efficiency at or near the highest levels in the 

United States. A balancing account collects forecasted 

revenues, and rates are reset periodically to adjust for 

the difference between actual revenues and forecasts. 

Because some utility cost changes are factored into 

most decoupling systems, rate cases can become less 

frequent, because revenues and costs track more closely 

over time.11 

11 See, for example, orders in California PUC docket A02-12-027. http://www.cpuc.ca.gov/proceedings/A0212027.htm. Oregon had used this method 

successfully for PacifiCorp, but when the utility was acquired by Scottish Power, the utility elected to return to the more familiar regulatory form. 

To create a sustainable, aggressive national commitment to energy efficiency 2-11
Maryland and Oregon have decoupling mechanisms in 

place for natural gas. In Maryland, Baltimore Gas and 

Electric has operated with decoupling for more than 

seven years, and Washington Gas recently adopted 

decoupling, indicating that regulators view decoupling 

as a success.12 In Oregon, Northwest Natural Gas has a 

similar decoupling mechanism in place.13 

The inherently cooperative nature of decoupling is 

demonstrated by utilities and public interest advocates 

agreeing on a system that addresses public and private 

interests. In all these instances, no rate design shift was 

needed to implement decoupling—the change is invisible 

to customers. A new proposal for New Jersey Natural 

Gas would adopt a system similar to those in use in 

Oregon and Maryland. 

See Table 2-2 for additional examples of decoupling. 

Reducing Cost Recovery Through Volumetric Charges 

After New York moved to retail competition and separated energy commodity sales from the electricity delivery utility, the distribution utilities’ rates were modified to 

increase fixed cost recovery through per-customer 

charges, and to decrease the magnitude of variable, volumetric rates. Removing fixed generation costs, as these 

Table 2-2. Examples of Decoupling 

State Type of Utility Key Features 

Related Rate 

Design Shifts? 

Political/Administrative 

Factors 

California 

Investor-owned electric and gas 

Balancing account to collect 

forecasted revenue; annual 

true-up. 

No Driven by commission, outcome of 

energy crisis; consensus oriented. 

http://www.epa.gov/cleanrgy/pdf/keystone/PrusnekPresentation.pdf 

http://www.cpuc.ca.gov/Published/Final_decision/15019.htm 

Maryland 

Investor-owned gas only Revenue per customer cap; 

monthly true-up. No Revenue stability primary motive of utility; frequent true-ups. 

http://www.energetics.com/madri/pdfs/timmerman_101105.pdf 

http://www.bge.com/vcmfiles/BGE/Files/Rates%20and%20Tariffs/Gas%20Service%20Tariff/Brdr_3.doc 

Investor-owned gas only at present; investor-owned electric in the 

past 

Revenue per customers cap; 

annual true-up. No Revenue stability primary motive of utility; renewed in 2005. 

Oregon http://www.raponline.org/Pubs/General/OregonPaper.pdf 

http://www.advisorinsight.com/pub/indexes/600_mi/nwn_ir.htm 

http://www.nwnatural.com/CMS300/uploadedFiles/24190ai.pdf 

http://apps.puc.state.or.us/orders/2002ords/02-633.pdf 

New Jersey 

Investor-owned gas (proposed) Revenue per customer. No 

Explicit intent of utility to promote 

energy efficiency and stabilize fixed 

cost recovery. 

http://www2.njresources.com/news/trans/newsrpt.asp?Year=2005 (see 12/05/05) 

Vermont 

Investor-owned electric (proposed) 

Forecast revenue cap and 

costs; balancing account and 

true-ups. 

No 

Legislative change promoted utility 

proposal; small utility looking for 

stability. 

http://www.greenmountainpower.biz/atyourservice/2006ratefiling.shtml 

12 BG&E’s “Monthly Rate Adjustment” tariff rider is downloadable at http://www.bge.com/portal/site/bge/menuitem.6b0b25553d65180159c031e0da 

6176a0/. 

13 The full agreement can be found in Appendix A of Order 02-634, available at http://apps.puc.state.or.us/orders/2002ords/02-634.pdf. See also Hansen 

and Braithwait (2005) for an independent assessment of the Northwest Natural Gas decoupling plan prepared for the commission. 

2-12 National Action Plan for Energy Efficiency 
assets were divested, dampened the effects on consumers. In combination with tracking and deferral mechanisms to protect the utility from unanticipated costs 

and savings, the utilities have little incentive to increase 

electric sales. 

Using a Lost Revenue Adjustment 

Minnesota provided Xcel Energy with lost revenue 

adjustments for energy efficiency through 1999, and 

then moved to a performance-based incentive. Iowa 

currently provides utilities with lost revenue adjustments 

for energy efficiency. Connecticut allows lost revenue 

recovery for all electric energy efficiency. Massachusetts 

allows lost revenue recovery for all gas energy efficiency, 

requiring the accumulated lost revenues to be recovered 

within three years to prevent large accumulated balances. Oregon allows lost revenue recovery for utility 

efficiency programs. Lost revenue adjustments have 

been removed in many states because of their cost to 

consumers. New Jersey is in the midst of a transition to 

a state-run administrator and provides lost revenue for 

utility-run programs in the meantime. 

Non-Utility Administration 

Several states have taken over the administration of 

energy efficiency, including Wisconsin (Focus on 

Energy), Maine (Efficiency Maine), New Jersey, and 

Ohio. In other states, a third party has been set up to 

administer programs, including Vermont (Efficiency 

Vermont) and Oregon (Energy Trust of Oregon). The 

New York State Energy Research and Development 

Authority (NYSERDA), a public authority, fits into both 

categories. There is no retail competition in Vermont or 

Wisconsin; this change was based entirely on an expectation of effectiveness. Oregon combines natural gas 

and electric efficiency programs, but only for the larger 

companies in each sector. Statewide branding of energy 

efficiency programs is a dividend of non-utility administration. Connecticut introduced an aspect of non-utility 

administration by vesting its Energy Conservation 

Management Board, a state board including state officials, utility managers, and others, with responsibility to 

approve energy efficiency plans and budgets. 

Recovering Costs / Providing Funding for 

Energy Efficiency Programs 

Revenue Requirement 

When energy efficiency programs first began, they were 

funded as part of a utility revenue requirement. In many 

states, like Iowa, this practice has continued uninterrupted. 

In California, retail competition interrupted this method of 

acquiring energy efficiency, but since 2003, California is 

again funding energy efficiency along with other resources 

through the revenue requirement, a practice known there 

as “procurement funding.” California also funds energy 

efficiency through SBC funding. 

Capitalizing Energy Efficiency Costs 

Oregon allows capitalization of costs, and the small 

electrics do so. Washington, Vermont, and Iowa capitalized energy efficiency costs when programs began in the 

1980s to moderate rate effects. Vermont, for example, 

amortized program costs over five years. In the late 

1990s, however, as program spending declined, these 

states ended the practice of capitalizing energy efficiency costs, electing to expense all costs. Currently, 

Vermont stakeholders are discussing how to further 

increase efficiency spending beyond the amount collected 

by the SBC, and they are reconsidering moderating new 

rate effects through capitalizing costs. 

Spending Budgets, Tariff Riders, 

and System Benefits Charges 

Several states have specified percentages of net utility 

revenue or a specific charge per energy unit to be spent for 

energy efficiency resources. Massachusetts, for example, 

specifies 2.5 mills per kilowatt-hour (kWh) (while spending 

for natural gas energy efficiency is determined case by 

case). In Minnesota, there is a separate percentage 

designated for electric (1.5 percent of gross operating 

revenues) and for natural gas (0.5 percent) utilities. 

Vermont adopted a statewide SBC for its vertically integrated electric sector, while its gas energy efficiency costs 

remain embedded in the utility revenue requirement. 

Strong statutory protections guard funds from government 

appropriation. Wisconsin requires a charge, but leaves the 

commission to determine the appropriate level for each 

To create a sustainable, aggressive national commitment to energy efficiency 2-13
utility. There is a history of SBC funds being used for general government within the state; 2005 legislation 

apparently intended to make funding more secure 

(Wisconsin Act 141 of 2005). 

The New York commission chose to establish an annual 

spending budget for its statewide effort (exclusive of the 

public authorities and utilities), increasing it to $150 million in 2001 and to $175 million in 2006. Washington 

tariffs include a rider that allows adjustment of rates to 

recover energy efficiency costs that diverge from 

amounts included in rates, with annual true-ups. 

Providing Incentives for Energy Efficiency 

Investment 

Performance Incentives 

In Connecticut, the two electric utilities managing energy 

efficiency programs are eligible for “performance 

management fees” tied to performance goals approved 

by the regulators, including lifetime energy savings, 

demand savings, and other measures. Incentives are 

available for a range of outcomes from 70 to 130 percent 

of pre-determined goals. In 2004, the two utilities 

collectively reached 130 percent of their energy savings 

goals and 124 percent of their demand savings goals. 

They received performance management fees totaling 

$5.27 million. The 2006 joint budget anticipates $2.9 

million in performance incentives. 

In 1999, the Minnesota Commission adopted performance incentives for the electric and natural gas investorowned utilities that began at 90 percent of performance 

targets and are awarded for up to 150 percent of target 

levels. Performance targets for Minnesota utilities spending more than the minimum spending requirement are 

adjusted to the minimum spending level for purposes of 

calculating the performance incentive. 

Rhode Island and Massachusetts offer similarly structured incentives. Rhode Island sets aside roughly 5 percent of the efficiency budget for performance incentives. 

This amount is less than the amount that would probably be justified if a lost revenue adjustment were used. A 

collaborative group of stakeholders recommends performance indicators and levels to qualify for incentives. 

In Massachusetts, utilities achieving performance targets earn 5 percent on money spent for efficiency (in 

addition to being able to expense efficiency costs). 

Efficiency Vermont operates under a contract with the 

Vermont Public Service Board. The original contract 

called for roughly 3 percent of the budget for efficiency 

programs to be held back and paid if Efficiency Vermont 

meets a variety of performance objectives. 

Shared Savings 

Before retail competition, California used a shared savings approach, in which the utilities received revenue 

equal to a portion of the savings value produced by the 

energy efficiency programs. A similar mechanism might 

be reinstated in 2006 (Arthur Rosenfeld, personal 

communication, February 20, 2006). 

Bonus Rate of Return 

Nevada allows a bonus rate of return for demand-side 

management that is 5 percent higher than authorized 

rates of return for supply investments. Regulations specify 

programs that qualify and the process to account for 

qualifying investments (Nevada Regulation of Public 

Utilities Generally, 2004). 

Lower Risk of Disallowance Through MultiStakeholder Collaborative 

California, Rhode Island, and other states employ 

stakeholder collaboratives to resolve important program 

and administrative issues and to provide settlements to 

the regulator. 

See Table 2-3 for additional examples of incentives for 

energy efficiency investments. 

2-14 National Action Plan for Energy Efficiency 
Table 2-3. Examples of Incentives for Energy Efficiency Investments 

State Type of Utility Key Features Political/Administrative Factors 

California Investor-owned electric Shared savings Encouraged by energy commission and utilities. 

Incentive proportionate to value of savings; no cap. 

http://www.raponline.org/Conferences/Minnesota/Presentations/PrusnekCAEEMinnesota.pdf 

Connecticut 

Investor-owned electric Performance incentives 

Part of retail competition bargain; incentive limited to a 

percentage of program budget; simple to compare 

results to performance goals. 

http://www.state.ct.us/dpuc/ecmb/index.html 

Massachusetts, 

Rhode Island Investor-owned electric Performance incentives 

Part of retail competition bargain; incentive limited to a 

percentage of program budget; simple to compare 

results to performance goals. 

http://www.mass.gov/dte/electric/04-11/819order.pdf (Docket 04-11) 

http://www.ripuc.org/eventsactions/docket/3463_NEC-2004DSMSettle(9.12.03).pdf 

Minnesota 

Investor-owned electric and natural gas Performance incentives 

Utility-specific plan arising to resolve other regulatory 

issues; incentive awarded on a sliding scale of performance compared with goals; decoupling not authorized 

by statute. 

http://www.raponline.org/Pubs/RatePayerFundedEE/RatePayerFundedMN.pdf 

Nevada Investor-owned electric Bonus rate of return on equity Process to establish bonus is statutory. 

See http://www.leg.state.nv.us/NAC/NAC-704.html#NAC704Sec9523 

Vermont 

Efficiency utility Performance incentives 

Incentive structure set by contract; result of bargain 

between commission and third-party efficiency 

provider. 

http://www.state.vt.us/psb/eeucontract.html 

Regulatory Drivers for Efficiency in Resource 

Planning and Energy Markets 

Declare Energy Efficiency a Resource 

In New Mexico, the legislature has declared a goal of 

“decreasing electricity demand by increasing energy efficiency and demand response, and meeting new generation needs first with renewable and distributed generation 

resources, and second with clean fossil-fueled generation.” 

(New Mexico Efficient Use of Energy Act of 2005) 

In California, the state has made it very clear that energy 

efficiency is the most important resource (California SB 

1037, 2005). After the crises of 2000 and 2001, state 

leaders used energy efficiency to dampen demand 

growth and market volatility. An Energy Action Plan, 

adopted in 2003 by the California Public Utilities 

Commission (CPUC), the California Energy Commission 

(CEC), and the power authority, developed a “loading 

order” for new electric resources; the Energy Action Plan 

has been revised but the energy efficiency preference 

remains firm. The intent of the loading order is to 

“decreas(e) electricity demand by increasing energy efficiency and demand response, and meeting new generation needs first with renewable and distributed generation 

resources, and second with clean fossil-fueled generation” 

(CEC, 2005). As a result, utilities are acquiring energy 

efficiency in amounts well in excess of those that would be 

procured with the SBC alone. Further, the utilities are 

integrating efficiency into their resource plans and using 

efficiency to solve resource problems. 

Clarifying the primary regulatory status of efficiency 

makes it clear that sympathetic regulation and cost 

recovery policies are important. California has adopted 

decoupling of net income and sales for its investorowned utilities to remove regulatory barriers to a full 

financial commitment to energy efficiency. 

To create a sustainable, aggressive national commitment to energy efficiency 2-15
One device for implementing this policy is an energy efficiency supply curve. The CEC created such a curve based 

on an assessment of energy efficiency potential to provide 

guidance as it reintroduced energy efficiency procurement 

expectations for the utilities in 2003. Furthermore, the 

CPUC cooperated with the CEC to set energy savings 

targets for each of the California investor-owned utilities 

based on an assessment of cost-effectiveness potential. 

A different approach to declaring energy efficiency a 

resource is to establish a portfolio or performance standard for energy efficiency. In 2005, Pennsylvania and 

Connecticut included energy efficiency in their resource 

portfolio standards. Requiring all retail sellers to acquire 

sufficient certificates of energy savings will allocate revenue to efficiency providers in an economically efficient 

way (Pennsylvania Alternative Energy Portfolio Standards 

Act of 2004; Connecticut Act Concerning Energy 

Independence of 2005). 

As an outcome of its electric restructuring law, Texas is 

using energy efficiency as a resource to reduce demand. 

Texas’ spending for energy efficiency is intended to produce savings to meet 10% of forecasted electric demand 

growth. Performance is exceeding this level. 

Consider Energy Efficiency As a System Reliability 

Solution 

In New England, Independent System Operator New 

England (ISO-NE) faced a reliability problem in southwest 

Connecticut. A transmission line to solve the problem 

was under development, but would not be ready in time. 

New central station generation could not be sited in this 

congested area. Because the marketplace was not providing a solution, ISO-NE issued a Request for Proposal (RFP) 

for any resources that would address the reliability problem and be committed for four years. One energy efficiency bid was selected—a commercial office building lighting 

project worth roughly 5 megawatts (MW). Conditions of 

the award were very strict about availability of the 

capacity savings. This project will help to demonstrate 

how energy efficiency does deliver capacity. While ISO-NE 

deemed the RFP an emergency step that it would not 

undertake routinely, this process demonstrates that energy 

efficiency can be important to meeting reliability goals and 

can be paid for through federal jurisdictional tariffs. 

Other states, including Indiana, Vermont, and 

Minnesota direct that energy efficiency be considered 

as an alternative when utilities are proposing a power 

line project (Indiana Resource Assessment, 1995; 

Vermont Section 248; Minnesota Certificate of need for 

large energy facility, 2005.) 

Key Findings 

This chapter reviews opportunities to make energy efficiency an attractive business prospect by modifying electric and gas utility regulation, and by the way that 

utilities collect revenue and make a profit. Key findings 

of this chapter indicate: 

• There are real financial disincentives that hinder all utilities in their pursuit of energy efficiency as a resource, 

even when it is cost-effective and would lead to a 

lower cost energy system. Regulation, which is a key 

source of these disincentives, can be modified to 

remove these barriers. 

• Many states have experience in addressing financial 

disincentives in the following areas: 

—	 Overcoming the throughput incentive. 

—	 Providing reliable means for utilities to recover energy 

efficiency costs. 

—	 Providing a return on investment for efficiency programs 

that is competitive with the return utilities earn on new 

generation. 

—	 Addressing the risk of program costs being disallowed 

and other risks. 

—	 Recognizing the full value of energy efficiency to the 

utility system. 

2-16 National Action Plan for Energy Efficiency 
Recommendations and Options 


The National Action Plan for Energy Efficiency Leadership 

Group offers the following recommendations as ways to 

overcome many of the barriers to energy efficiency in utility ratemaking and revenue requirements, and provides a 

number of options for consideration by utilities, regulators, 

and stakeholders (as presented in the Executive Summary): 

Recommendation: Modify policies to align utility 

incentives with the delivery of cost-effective energy 

efficiency and modify ratemaking practices to promote 

energy efficiency investments. Successful energy 

efficiency programs would be promoted by aligning utility 

incentives in a manner that encourages the delivery of 

energy efficiency as part of a balanced portfolio of supply, 

demand, and transmission investments. Historically, regulatory policies governing utilities have more commonly 

compensated utilities for building infrastructure (e.g., 

power plants, transmission lines, pipelines) and selling 

energy, while discouraging energy efficiency, even when 

the energy-saving measures might cost less. Within the 

existing regulatory processes, utilities, regulators, and 

stakeholders have a number of opportunities to create the 

incentives for energy efficiency investments by utilities and 

customers. A variety of mechanisms have already been 

used. For example, parties can decide to provide incentives 

for energy efficiency similar to utility incentives for new 

infrastructure investments, and provide rewards for 

prudent management of energy efficiency programs. 

Options to Consider: 

• Addressing the typical utility throughput incentive and 

removing other regulatory and management disincentives 

to energy efficiency. 

• Providing utility incentives for the successful management of energy efficiency programs. 

Recommendation: Make a strong, long-term commitment to implement cost-effective energy efficiency as 

a resource. Energy efficiency programs are most successful 

and provide the greatest benefits to stakeholders when 

appropriate policies are established and maintained over 

the long-term. Confidence in long-term stability of the program will help maintain energy efficiency as a dependable 

resource compared to supply-side resources, deferring or 

even avoiding the need for other infrastructure investments, and maintain customer awareness and support. 

Options to Consider: 

• Establishing funding requirements for delivering longterm, cost-effective energy efficiency. 

• Designating which organization(s) is responsible for 

administering the energy efficiency programs. 

Recommendation: Broadly communicate the benefits 

of and opportunities for energy efficiency. 

Experience shows that energy efficiency programs help 

customers save money and contribute to lower cost energy systems. But these benefits are not fully documented 

nor recognized by customers, utilities, regulators, or policymakers. More effort is needed to establish the business 

case for energy efficiency for all decision-makers and to 

show how a well-designed approach to energy efficiency 

can benefit customers, utilities, and society by (1) reducing 

customers’ bills over time, (2) fostering financially healthy 

utilities (e.g., return on equity, earnings per share, and debt 

coverage ratios unaffected), and (3) contributing to positive societal net benefits overall. Effort is also necessary to 

educate key stakeholders that although energy efficiency 

can be an important low-cost resource to integrate into the 

energy mix, it does require funding, just as a new power 

plant requires funding. 

Options to Consider: 

• Establishing and educating stakeholders on the business case for energy efficiency at the state, utility, other 

appropriate level addressing customer, utility, and 

societal perspectives. 

• Communicating the role of energy efficiency in lowering 

customer energy bills, and system costs and risks 

over time. 

To create a sustainable, aggressive national commitment to energy efficiency 2-17
Recommendation: Provide sufficient, timely, and stable 

program funding to deliver energy efficiency where 

cost-effective. Energy efficiency programs require consistent and long-term funding to effectively compete with 

energy supply options. Efforts are necessary to establish 

this consistent long-term funding. A variety of mechanisms have been, and can be used, based on state, utility, 

and other stakeholder interests. It is important to ensure 

that the efficiency program providers have sufficient 

long-term funding to recover program costs, and implement the energy efficiency measures that have been 

demonstrated to be available and cost-effective. A number 

of states are now linking program funding to the 

achievement of energy savings. 

Options to Consider: 

• Deciding on, and committing to, a consistent way for 

program administrators to recover energy efficiency 

costs in a timely manner. 

• Establishing funding mechanisms for energy efficiency 

from among the available options, such as revenue 

requirement or resource procurement funding, SBCs, 

rate-basing, shared-savings, incentive mechanisms, etc. 

• Establishing funding for multi-year periods. 

2-18 National Action Plan for Energy Efficiency 
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To create a sustainable, aggressive national commitment to energy efficiency 2-19

3:Energy Resource 

Planning Processes 

Including energy efficiency in the resource planning process is essential to realizing its full value and setting resource savings and funding targets accordingly. Many utilities, states, and regions are estimating 

and verifying the wide range of benefits from energy efficiency and are successfully integrating energy 

efficiency into the resource planning process. This chapter of the National Action Plan for Energy Efficiency 

Report discusses the barriers that obstruct incorporating energy efficiency in resource planning and presents six regional approaches to demonstrate how those barriers have been successfully overcome. 

Overview


Planning is a core function of all utilities: large and small, 

natural gas and electric, public and private. The decisions 

made in planning affect customer costs, reliability of 

service, risk management, and the environment. Many 

stakeholders are closely involved and participate in planning processes and related decisions. Active participants 

often include utilities, utility regulators, city councils, 

state and local policy-makers, regional organizations, 

environmental groups, and customer groups. Regional 

planning processes organized through regional transmission organizations (RTOs) also occur with the collaborations of utilities and regional stakeholders. 

Different planning processes are employed within each utility, state, and region. Depending on a utility’s purpose and 

context (e.g., electric or gas utility, vertically integrated or 

restructured), different planning decisions must be made. 

Local and regional needs also affect planning and resource 

requirements and the scope of planning processes. Further, 

the role of states and regions in planning affects decisions 

and prescribes goals for energy portfolios, such as resource 

priority, fuel diversity, and emissions reduction. 

Through different types of planning processes, utilities 

analyze how to meet customer demands for energy and 

capacity using supply-side resource procurement (including natural gas supply contracts and building new generation), transmission, distribution, and demand-side 

resources (including energy efficiency and demand 

response). Such planning often requires iteration and testing to find the combination of resources that offer maximum value over a range of likely future scenarios, for the 

short- and long-term. The value of each of these resources 

is determined at the utility, local, state and regional level, 

based on area-specific needs and policy direction. In order 

to fully integrate the value of all resources into planning— 

including energy efficiency—resource value and benefits 

must be determined early in the planning process and 

projected over the life of the resource plan. 

Planning processes focus on two general areas: (1) energyrelated planning, such as electricity generation and 

wholesale energy procurement; and (2) capacity-related 

planning, such as construction of new pipelines, power 

plants, or electric transmission and distribution projects. 

The value of energy efficiency can be integrated into 

resource planning decisions for both of these areas. 

Leadership Group Recommendations 

Applicable to Energy Resource 

Planning Processes 

• Recognize energy efficiency as a high-priority energy 

resource. 

• Make a strong, long-term commitment to implement 

cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of, and opportunities for, energy efficiency. 

• Provide sufficient, timely, and stable program funding 

to deliver energy efficiency where cost-effective. 

A more detailed list of options specific to the objective 

of promoting energy efficiency in resource planning 

processes is provided at the end of this chapter. 

To create a sustainable, aggressive national commitment to energy efficiency 3-1
This chapter identifies common challenges for integrating energy efficiency into existing planning processes 

and describes examples of successful energy efficiency 

planning approaches that are used in six regions of the 

country. Finally, this chapter summarizes ways to 

address barriers, and offers recommendations and 

several options to consider for specific actions that 

would facilitate incorporation of energy efficiency into 

Figure 3-1. Energy Efficiency Supply Curve - Potential 

in 2011 (Levelized Cost in $/kilowatt-hours [kWh] Saved) 

$1.00


$0.90


$0.80


$0.70


resource planning.


$/kwh$0.60 

$0.50 

Challenges to Incorporating Energy 

Efficiency Into Planning 

The challenges to incorporating energy efficiency into 

resource planning have common themes for a wide 

range of utilities and markets. This section describes these 

challenges in the context of two central questions: 

A) determining the value of energy efficiency in the 

resource planning, and B) setting energy efficiency targets 

and allocating budgets, which are guided by resource 

planning, as well as regulatory and policy decisions. 

Determining the Value of Energy Efficiency 

It is generally accepted that well-designed efficiency 

measures provide measurable resource savings to utilities. However, there are no standard approaches on 

how to appropriately quantify and incorporate those 

benefits into utility resource planning. Also, there are 

many different types of energy efficiency programs 

with different characteristics and target customers. 

Energy efficiency can include utility programs (rebates, 

audits, education, and outreach) as well as building 

efficiency codes and standards improvements for new 

construction. Each type of program has different characteristics that should be considered in the valuation 

process. The program information gathered in an energy efficiency potential study can be used to create an 

energy efficiency supply curve, as illustrated in Figure 3-1. 

$0.40 

$0.30 

$0.20 

$0.10 

$0.00 

0 10,000 20,000 30,000 40,000 50,000 60,000 

GWh 

Source: McAuliffe, 2003 

Common Challenges to Incorporating Energy Efficiency 


Into Planning


A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimating energy savings 

Valuing energy savings 

Capacity & Resource Adequacy 

Estimating capacity savings 

Valuing capacity benefits 

Factors in achieving benefits 

Other Benefits 

Incorporating non-energy benefits 

B. Setting Targets and Allocating Budget 

Quantity of EE to implement 

Estimating program effectiveness 

Institutional difficulty in reallocating budget 

Cost expenditure timing vs. benefits 

Ensuring program costs are recaptured 

3-2 National Action Plan for Energy Efficiency 
The analysis commonly used to value energy efficiency 

compares the costs of energy efficiency resources to the 

costs of the resources that are displaced by energy efficiency. The sidebar shows the categories of benefits for 

electric and gas utilities that are commonly evaluated. 

The approach is to forecast expected future costs with 

and without energy efficiency resources and then estimate the level of savings that energy efficiency will provide. This analysis can be conducted with varying levels 

of sophistication depending on the metrics used to compare alternative resource plans. Typically, the evaluation 

is made based on the expected cost difference; however, 

”portfolio” approaches also evaluate differences in cost 

variance and reliability, which can provide additional 

rationale for including energy efficiency as a resource. 

The resource benefits of energy efficiency fall into two 

general categories: 

(1) Energy-related benefits that affect the procurement 

of wholesale electric energy and natural gas, and 

delivery losses. 

(2) Capacity-related benefits that affect wholesale electric capacity purchases, construction of new facilities, 

and system reliability. 

The energy-related benefits of energy efficiency are relatively easy to forecast. Because utilities are constantly 

adjusting the amount of energy purchased, short-term 

deviations in the amount of energy efficiency achieved 

can be accommodated. The capacity-related benefits 

occur when construction of a facility needed to reliably 

serve customers can be delayed or avoided because the 

need has already been met. Therefore, achieving capacity 

benefits requires much more certainty in the future 

success of energy efficiency programs (particularly the 

measures targeting peak loads) and might be harder to 

achieve in practice. However, the ability to provide 

capacity benefits has been a focus in California, the 

Pacific Northwest, and other regions, and it should 

become easier to assess capacity savings as more programs gain experience, and capacity savings are measured and verified. Current methods for estimating energy 

benefits and capacity benefits are presented here. 

Estimating Energy Benefits 

Estimating energy benefits requires established methods 

for estimating the quantity of energy savings and the 

benefits of these savings to the energy system. 

• Estimating Quantity of Energy Savings. Savings estimates for a wide variety of efficiency measures have 

been well studied and documented. Approaches to 

estimate the level of free-riders and program participants who would have implemented the energy efficiency on their own have been established. Similarly, 

the expected useful lives of energy efficiency measures 

and their persistence are commonly evaluated and 

included in the analysis. Detailed databases of efficiency 

measures have been developed for several regions, 

including California and the Pacific Northwest. 

However, it is often necessary to investigate and validate the methods and assumptions behind those estimates to build consensus around measured savings 

that all stakeholders find credible. Savings estimates 

can be verified through measurements and load 

research. Best practices for measurement and verification (M&V) are discussed in more detail in Chapter 6: 

Energy Efficiency Program Best Practices. 

Benefits of Energy Efficiency in Resource Planning 

Electricity Natural Gas 

Energy-related 

benefits 

Reduced wholesale energy 

purchases 

Reduced wholesale natural 

gas purchases 

Reduced line losses Reduced losses and 

unaccounted for gas 

Reduced air emissions Reduced air emissions 

Capacityrelated 

benefits 

Generation capacity/ 

resource adequacy/ 

regional markets 

Production and liquified 

natural gas facilities 

Operating reserves and 

other ancillary services 

Pipeline capacity 

Transmission and 

distribution capacity 

Local storage and pressure 

Other benefits Market price reductions (consumer surplus) 

Lower portfolio risk 

Local/in-state jobs 

Low-income assistance and others 

To create a sustainable, aggressive national commitment to energy efficiency 3-3
• Quantifying Value of Energy Savings. The most readily 

available benchmark for the value of energy savings is 

the prevailing price of wholesale electricity and natural 

gas. Even for a vertically integrated utility with its own 

production, energy efficiency might decrease the need 

to make market purchases; or if the utility has excess 

energy, energy efficiency can allow the utility to sell 

more into the market. In cases when the market prices 

are not appropriate benchmarks (because of contract 

limitations on reselling energy or limited market 

access), contract prices or production costs can be 

used. In addition, the value of losses and other variable 

costs associated with energy delivery can be quantified 

and are well known. 

The challenge that remains is in forecasting future energy 

costs beyond the period when market data are available 

or contracts are in place. Long-run forecasts vary in complexity from a simple escalation rate to market-based 

approaches that forecast the cost of new resource additions, to models that simulate the system of existing 

resources (including transmission constraints) and evaluate the marginal cost of operating the system as new 

generation is added to meet the forecasted load growth. 

Most utilities have an established approach to forecast 

long-term market prices, and the same forecasting technique and assumptions should be used for energy efficiency as are used to evaluate supply-side resource 

options. In addition to a forecast of energy prices, some 

regions include the change in market prices as a result of 

energy efficiency. Estimating these effects requires modeling of complex interactions in the energy market. 

Furthermore, reduced market prices are not necessarily a 

gain from a societal perspective, because the gains of 

consumers result in an equal loss to producers; therefore, 

whether to include these savings is a policy decision. 

Estimating Capacity Benefits 

Estimating capacity benefits requires estimating the level 

of capacity savings and the associated benefits. If energy 

efficiency’s capacity benefits are not considered in the 

resource plan, the utility will overinvest in capital assets, 

such as power plants and transmission and distribution, 

and underinvest in energy efficiency. 

• Estimating Capacity Savings. In addition to energy savings, electric efficiency reduces peak demand and the 

need for new investments in generation, transmission, 

and distribution infrastructure. Natural gas efficiency 

can reduce the need for a new pipeline, storage, 

liquefied natural gas (LNG) facility, or other investments necessary to maintain pressure during high-load 

periods. Because of the storage and pressure variation 

possible in the natural gas system, capacity-related 

costs are not as extreme in the natural gas system as 

they are for electricity. In both cases, estimating reductions of peak demand is more difficult for electricity 

than it is for natural gas, and timing is far more critical. 

For peak demand savings to actually be realized, the 

targeted end-use load reductions must occur, and the 

efficiency measure must provide savings coincident 

with the utility’s peak demand. Therefore, different 

energy efficiency measures that reduce load at different 

times of day (e.g., commercial vs. residential lighting) 

might have different capacity values. Area- and timespecific marginal costing approaches have been developed to look at the value of coincident peak load 

reductions, which have significantly higher value 

during critical hours and in constrained areas of the 

system (see sidebar on page 3-5). 

A critical component of the resource planning process, 

whether focused on demand- or supply-side resources, 

is accurate, unbiased load forecasting. Inaccurate load 

forecasts either cause excessive and expensive investment in resources if too aggressive, or create costly 

shortages if too low. Similarly, tracking and validation 

of energy efficiency programs are important for 

increasing the accuracy of estimates of their effects in 

future resource plans. 

Estimating the capacity savings to apply to load growth 

forecasts requires estimating two key factors. The first 

is determining the amount of capacity reduced by 

energy efficiency during critical or peak hours. The 

3-4 National Action Plan for Energy Efficiency 
second factor is estimating the ”equivalent reliability” 

of the load reduction. This measure captures both the 

probability that the savings will actually occur, and that 

the savings will occur during system-constrained hours. 

Applying estimates of equivalent reliability to various 

types of resources allows comparison on an equal basis 

with traditional capacity investments. This approach is 

similar in concept to the equivalent capacity factor 

used to compare renewable resources such as wind 

and solar with traditional fossil-fueled generation. In 

markets where capacity is purchased, ”counting” rules 

for different resource types determine the equivalent 

reliability. The probability that savings will actually 

occur during peak periods is easier to estimate with 

some certainty for a large number of distributed efficiency measures (e.g., air conditioners) as opposed to a 

limited number of large, centralized measures (e.g., 

water treatment plants). 

California Avoided Costs by Time and Location 

California is a good example of the effect of area and 

time-differentiation for efficiency measures that have 

dramatically different impact profiles. The average 

avoided cost for efficiency (including energy and capacity 

cost components) in California is $71/megawatt-hour 

(MWh). Applying avoided costs for each of six time of 

use (TOU) periods (super-peak, mid-peak and off-peak 

for summer and winter seasons) increases the value of 

air conditioning to $104/MWh or 45 percent and lowers the value of outdoor lighting to $57/MWh or 20 percent. Refrigeration, with its consistent load profile 

throughout the day and year, is unaffected. Applying 

avoided costs by hour captures the extreme summer 

peak prices and increases the value of air conditioning 

savings still further to $123/MWh. Incorporating hourly 

avoided costs increases the total benefits of air conditioning load reduction by more than $50/MWh. This 

type of hourly analysis is currently being used in 

California’s avoided cost proceedings for energy 

efficiency. 

Avoided distribution capacity costs are also estimated by 

region in California. The Greater San Francisco Bay Area 

region is shown above in detail. In San Francisco and 

Oakland, avoided capacity costs are low because those 

areas are experiencing little load growth and have little 

need for new distribution investment. The Stockton 

area, on the other hand, is experiencing high growth 

and has significant new distribution infrastructure 

requirements. 

Comparison of Avoided Costs for 

Three Implementation Approaches 

$­

$20 

$40 

$60 

$80 

$100 

$120 

$140 

Air Conditioning Outdoor Lighting Refrigeration 

Weighted Average Avoided Cost

($/MWh) 

Hourly TOU Average Annual Average 

$80.00 

$42.50 

$5.00 

$/MW 

Greater San Francisco Bay Area Avoided 

Distribution Costs 

To create a sustainable, aggressive national commitment to energy efficiency 3-5
• Valuing Capacity Benefits. The value of capacity benefits lies in the savings of not having to build or purchase 

new infrastructure, or make payments to capacity markets for system reliability. Because reliability of the 

nation’s energy infrastructure is critical, it is difficult to 

make the decision to defer these investments without 

some degree of certainty that the savings will be 

achieved. Disregarding or undervaluing the transmission and generation capacity value of energy efficiency 

can, however, lead to underinvestment in energy efficiency. Realizing energy efficiency’s capacity savings 

requires close coordination between efficiency and 

resource planners1 to ensure that specific planned 

investments can actually be deferred as a result of 

energy efficiency programs. In the long term, lower 

load levels will naturally lead to lower levels of infrastructure requirements without a change in existing 

planning processes. 

Targeted implementation of energy efficiency designed 

to defer or eliminate traditional reliability investments in 

the short term (whether generation, transmission, or distribution) requires that energy efficiency ramp up in time 

to provide sufficient peak load savings before the new 

infrastructure is needed. States with existing efficiency 

programs can use previous experience to estimate future 

adoption rates. In states that do not have previous experience with energy efficiency, however, the adoption rate 

of efficiency measures is difficult to estimate, making it 

hard to precisely quantify the savings that will be 

achieved by a certain date. Therefore, if the infrastructure project is critical for reliability, it is difficult to rely on 

energy as an alternative. The value of the targeted 

reductions and project deferrals can also be a challenge 

to quantify because of the uncertainty in the future 

investment needs and costs. However, there are examples of how to overcome this challenge, such as the 

Bonneville Power Administration (BPA) transmission 

planning process (described later). Vermont Docket 7081 

is another collaborative process—initiated at the direction of the legislature—that is working on a new transmission planning process that will explicitly incorporate 

energy efficiency (Vermont Public Service Board, 2005). 

Both BPA and Vermont Docket 7081 stress the need to 

start well in advance of the need for reductions to allow 

the energy efficiency program to be developed and validated. In addition, by starting early, conventional alternatives can serve as a back-stop if needed. Starting early 

is also easier organizationally if alternatives are initiated 

before project proponents are vested in building new 

transmission lines. 

The deferral of capacity expenditures can produce the 

same reliability level for customers. In cases when an 

energy efficiency program changes the expected reliability 

level (either higher or lower), the value to customers 

must be introduced as either a benefit or cost. A typical 

approach is to use the customer’s Value of Lost Load 

(VOLL) as determined through Value of Service (VOS) 

studies and multiply by the expected change in customer 

outage hours. However, VOS studies based on customer 

surveys typically show wide-ranging results and are often 

difficult to substantiate. 

In regions with established capacity markets, the valuation process is easier because the posted market prices 

are the value of capacity. The approach to value these 

benefits is therefore similar to the market price forecasting 

approach described to value energy benefits. Regional 

planning processes can also include energy efficiency in 

their resource planning. Regional electricity planning 

processes primarily focus on developing adequate 

resources to meet regional reliability criteria as defined in 

each of the North American Electric Reliability Council 

(NERC) regions. Establishing capacity and ancillary service market rules that allow energy efficiency and 

customer load response to participate can bring energy 

efficiency into the planning process. For example, 

Independent System Operator New England (ISO-NE) 

Demand Resources Working Group will be including 

1 The transmission planning process requires collaboration of regional stakeholders including transmission owners, utilities, and regulators. Distribution 

planning departments of electric utilities typically make the decisions for distribution-level and local transmission facilities. Planning and development of 

high-voltage transmission facilities on the bulk-supply system is done at the independent system operator (ISO)/RTO and North American Electric 

Reliability Council (NERC) regional levels. At a minimum, transmission adequacy must uphold the established NERC reliability standards. 

3-6 National Action Plan for Energy Efficiency 
energy efficiency and demand response as qualifying 

resources for the New England Forward Capacity 

Market. Another example is PJM Interconnection (PJM), 

which has recently made its Economic Load Response 

Program a permanent feature of the PJM markets (in 

addition to the Emergency Load Response Program that 

was permanently established in 2002) and has recently 

opened its Synchronized and Non-Synchronized Reserve 

markets to demand response providers. 

Other Benefits 

Energy efficiency provides several types of non-energy 

benefits not typically included in traditional resource 

planning. These benefits include environmental improvement, support for low-income customers, economic 

development, customer satisfaction and comfort, and 

other potential factors such as reduced costs for bill collection and service shut-offs, improvements in household 

safety and health, and increased property values. As an 

economic development tool, energy efficiency attracts 

and retains businesses, creates local jobs, and helps business competitiveness and area appeal. 

Environmental benefits, predominantly air emissions 

reductions, might or might not have specific economic 

value, depending on the region and the pollutant. The 

market price of energy will include the producer’s costs 

of obtaining required emission allowances (e.g., nitrogen 

oxides [NOX], sulfur dioxide [SO2]), and emission reduction equipment. Emissions of carbon dioxide (CO2), also 

are affected by planning decisions of whether to consider 

the value of unregulated emissions. The costs of CO2 

were included in California’s assessment of energy efficiency on the basis that these costs might become priced 

in the future and the expected value of future CO2 prices 

should be considered when making energy efficiency 

investments.2 Even without regulatory policy guidance, 

several utilities incorporate the estimated future costs of 

emissions such as CO2 into their resources planning 

process to control the financial risks associated with 

future regulatory changes.3 For example, Idaho Power 

Company includes an estimated future cost of CO2 emissions in its resource planning, and in determining the 

cost-effectiveness of efficiency programs. 

Many of these benefits do not accrue directly to the utility, 

raising additional policy and budgeting issues regarding 

whether, and how, to incorporate those benefits for 

planning purposes. Municipal utilities and governmental 

agencies have a stronger mandate to include a wider 

variety of non-energy benefits in energy efficiency planning than do investor-owned utilities (IOUs). Regulators 

of IOUs might also determine that these benefits should 

be considered. Many of the benefits are difficult to 

quantify. However, non-energy benefits can also be considered qualitatively when establishing the overall energy efficiency budget, and in developing guidelines for 

targeting appropriate customers (e.g., low income or 

other groups). 

Setting Energy Efficiency Targets and 

Allocating Budget 

One of the biggest barriers to energy efficiency is developing a budget to fund energy efficiency, particularly at 

utilities or in states that haven’t had significant programs, historically. This is a not strictly a resource planning issue, but a regulatory, policy, and organizational 

issue as well. The two main organizational approaches 

for funding energy efficiency are resource planning 

processes, which establish the energy efficiency budget 

and targets within the planning process, and public 

goods-funded charges, which create a separate budget 

to support energy efficiency through a rate surcharge. 

There are successful examples of both approaches, as 

well as examples that use both mechanisms (California, 

BPA, PacifiCorp, and Minnesota). 

Setting targets for energy efficiency resource savings and 

budgets is a collaborative process between resource 

planning staff, which evaluates cost-effectiveness, and 

other key stakeholders. Arguably, all energy efficiency 

2 California established a cost of $8/ton of CO2 in 2004, escalating at 5% per year (CPUC, 2005). 

3 For further discussion, see Bokenkamp, et al., 2005. 

To create a sustainable, aggressive national commitment to energy efficiency 3-7
measures identified as cost effective in an integrated 

resource plan (IRP) should be implemented.4 In practice, 

a number of other factors must be considered. For example, 

the achievable level of savings and costs, expertise and 

labor, and ability to ramp up programs also affects the 

size, scope, and mix of energy efficiency programs. All of 

these considerations, plus the cost-effectiveness of energy efficiency, should be taken into account when establishing the funding levels for energy efficiency. The funding process might also require an iterative process that 

describes the alternative plans to regulators and other 

stakeholders. Some jurisdictions use a policy directive 

such as ”all cost-effective energy efficiency” (California) 

while others allocate a fixed budget amount (New York), 

specify a fixed percentage of utility revenue (Minnesota 

and Oregon), or a target load reduction amount (Texas). 

Implementation of a target for electric and gas energy 

savings, or Energy Efficiency Resources Standard (EERS) 

or Energy Efficiency Portfolio Standard (EEPS), such as 

the Energy Efficiency Goal adopted in Texas (PUCT Subst. 

R. §25.181), is an emerging policy tool adopted or being 

considered in a number of states (ACEEE, 2006). Some 

states have adopted standards with flexibility for how 

utilities meet such targets, such as savings by end users, 

improvements in distribution system efficiency, and 

market-based trading systems. 

Resource Planning Process 

If energy efficiency is considered as a resource, then the 

appropriate amount of energy efficient funding will be 

allocated through the utility planning process, based on 

cost-effectiveness, portfolio risk, energy and capacity 

benefits, and other criteria. Many utilities find that a 

resource plan that includes energy efficiency yields a 

lower cost portfolio, so overall procurement costs should 

decline more than the increase in energy efficiency 

program costs, and the established revenue requirement 

of the utility will be sufficient to fund the entire supply 

and demand-side resource portfolio. 

A resource planning process that includes energy efficiency must also include a mechanism to ensure costrecovery of energy efficiency spending. Most resource 

planning processes are collaborative forums to ensure 

that stakeholders understand and support the overall 

plan and its cost recovery mechanism. In some cases, 

utility costs might have to be shifted between utility 

functions (e.g., generation and transmission) to enable 

cost recovery for energy efficiency expenditures. For 

example, transmission owners might not see energy efficiency as a non-wires solution to transmission system 

deficiencies because it is unclear to what extent energy 

efficiency costs can be collected in the Federal Energy 

Regulatory Commission (FERC) transmission tariff. 

Therefore, even if energy efficiency is less costly than the 

transmission upgrade, it is unclear whether the transmission upgrade budget can be shifted to energy efficiency 

and still collected in rates. Another challenge for collecting 

efficiency funding in the transmission tariff is allocation 

of energy efficiency costs across multiple transmission 

owners, particularly if energy efficiency costs are 

incurred by a single transmission owner, while transmission costs are shared among several owners. 

These examples demonstrate that in order to implement 

integrated resource planning, the regulatory agency 

responsible for determining rates must allow rates 

designed to support transmission, distribution, or other 

functions to be used for efficiency. The transmission 

companies in Connecticut have been allowed to include 

reliability-driven energy efficiency in tariffs, although this 

is noted as an emergency situation not to be repeated as 

a normal course of business. These interactions between 

regulatory policy and utility resource planning demonstrate that utilities cannot be expected to act alone in 

increasing energy efficiency through their planning 

process. 

Public Purpose- or System Benefits Charge-Funded 

Programs 

One way to fund energy efficiency is to develop a separate 

funding mechanism, collected in rates, to support 

4 Established cost-effectiveness tests, such as the total resource cost (TRC) test, are commonly used to determine the cost-effectiveness of energy efficiency 

programs. Material from Chapter 6: Energy Efficiency Program Best Practices describes these tests in more detail. 

3-8 National Action Plan for Energy Efficiency 
investment in energy efficiency. In deregulated markets 

with unbundled rates, this mechanism can appear as a 

separate customer charge, often referred to as a system 

benefits charge (SBC). Establishing a public purpose 

charge has the advantage of ensuring policy-makers that 

there is an allocation of funding towards energy efficiency, 

and can be necessary in deregulated markets where the 

delivery company cannot capture the savings of energy 

efficiency. This approach separates the energy efficiency 

budget from the resource planning process, however. 

Developing a new rate surcharge or expanding an 

existing surcharge also raises many of the questions 

addressed in Chapter 2: Utility Ratemaking & Revenue 

Requirements. For example, are the customer segments 

paying into SBCs receiving a comparable level of energy 

efficiency assistance in return, or are the increases a 

cross-subsidy? Often, industrial customers prefer to 

implement their own efficiency rather than contribute to 

a pool. Also, if the targets are used to set shareholder 

incentives, the incentives should be appropriate for the 

aggressiveness of the program. Additionally, because the 

targeted budget allocation in public purpose-funded 

programs is often set independently of the utility’s overall 

resource planning process (and is not frequently 

changed), utilities might not have funding available to 

procure all cost-effective savings derived from energy 

efficiency measures. This type of scenario can result in 

potentially higher costs for customers than would occur 

if each cost-effective efficiency opportunity were pursued. 

Overcoming Challenges: Alternative 

Approaches 

Successful incorporation of energy efficiency into the 

resource planning process requires utility executives, 

resource planning staff, regulators, and other stakeholders 

to value energy efficiency as a resource, and to be committed to making it work within the utility or regional 

resource portfolio. To illustrate approaches to overcoming 

these barriers, we highlight several successful energy 

efficiency programs by California, the New York State 

Energy Research and Development Authority (NYSERDA), BPA, Minnesota, Texas, and PacifiCorp. The energy 

efficiency programs in these six regions demonstrate several different ways to incorporate energy efficiency into 

planning processes; in each example, the economics 

generally work well for efficiency programs. 

The primary driver of energy efficiency in planning is the 

low levelized cost of energy savings. Table 3-1 shows the 

reported levelized cost of electricity and natural gas efficiency from three of the regions surveyed. The reported 

utility cost of efficiency ranges between $0.01/kilowatthour (kWh) and $0.03/kWh for Pacific Gas & Electric 

(PG&E), NYSERDA, and the Northwest Power and 

Conservation Council (NWPCC). When including both 

utility program costs and customer costs, the range is 

$0.03/kWh to $0.05/kWh. The range of reported benefits 

for electric energy efficiency is from $0.06/kWh to 

$0.08/kWh. For natural gas, only P&GE reported specific 

natural gas efficiency measures; these show similarly low 

levelized costs relative to benefits. 

Table 3-1: Levelized Costs and Benefits From Four Regions 

Electric ($/kWh) Natural Gas ($/therm) 

Utility 

Cost 

Utility & 

Customer 

Cost 

Benefit Utility 

Cost 

Utility & 

Customer 

Cost 

Benefit 

PG&E 1 0.03 0.05 0.08 0.28 0.56 0.81 

NYSERDA 2 0.01 0.03 0.06 N/A N/A N/A 

NWPCC 3 0.024 N/A 0.060 N/A N/A N/A 

Texas 4 0.025 N/A 0.0606 N/A N/A N/A 

1 PG&E, 2005 

2 NYSERDA, 2005 

3 NWPCC, 2005 

4 Calculated based on Texas Utility Avoided Cost (PUCT Substantive Rule 

§25.18 of 2000). $0.0268/kWh for energy and $78.50/kW-year for 

capacity converted to $/kWh based on assumption of 10-year measure 

life, load factor of 26.4 percent, which is calculated from Texas’ 2004 

efficiency-based reductions of 193 MW of peak demand and 448 GWh 

of energy (Frontier Associates, 2005). 

5 Based on 2004 spending of $87 million, 448 GWh annual. Assumed life 

of 10 years (PUCT Substantive Rule §25.181 of 2000). 

6 Based on Public Utility Commission of Texas (PUCT) Deemed Avoided 

Costs of $0.0268/kWh for energy and $78.50/kW-year for capacity; 

448GWh and 193MW of peak load reduction. 

To create a sustainable, aggressive national commitment to energy efficiency 3-9
California 

California has had a continued commitment to energy 

efficiency since the late 1970s. Two major efforts are currently being coordinated in the state that address energy 

use in new buildings as well as efficiency upgrades in 

existing buildings. Figure 3-2 shows the policy structure, 

with the California Energy Commission (CEC) leading 

the building codes and standards process, and the 

California Public Utility Commission (CPUC) leading the 

IOU and third-party administered efficiency programs. 

Jointly, the agencies publish the Energy Action Plan that 

explicitly states a goal to integrate ”all cost-effective 

energy efficiency.” Recently, the CPUC approved an efficiency budget of $2 billion over the next three years to 

serve a population of approximately 35 million. 

The process for designing and implementing efficiency 

programs in California by the IOUs is to develop the programs (either by the utility or through third-party solicitation), evaluate cost-effectiveness, establish and gain 

approval for the program funding, and evaluate the program’s success through M&V. Figure 3-2 illustrates this 

approach. 

Table 3-2 describes how California addresses barriers for 

incorporating energy efficiency in planning for the IOU 

process. 

Source: Energy and Environmental Economics, Inc. 

3-10 National Action Plan for Energy Efficiency 
Figure 3-3. California Investor-Owned Utility (IOU) Process 

Resources and 

Ramp-up Limits 

Rank and 

Estimate Potential 

for Cost Effective 

Portfolios 

Determine Target Energy Evaluate Program Funding Level Efficiency Cost Effectiveness (through CPUC Programs process) 

CPUC Avoided 

Costs 

Implement 

Approved 

Programs to 

Approved Levels 

Perform M&V 

and Adjust 

Programs for 

Next Year 

Source: Energy and Environmental Economics, Inc. 

Table 3-2. Incorporation of Energy Efficiency in California’s Investor-Owned Utilities’ Planning Processes 

Barriers California CPUC-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimated energy savings Customer adoption rates are forecast into the energy efficiency plans with monthly or quarterly reporting of program 

success for tracking. 

Valuing energy savings Energy savings are based on market prices of future electricity and natural gas, adjusted by loss factors. Emission savings 

are based on expected emission rates of marginal generating plants in each hour (electricity) or emissions for natural gas. 

Capacity & Resource Adequacy 

Estimating capacity savings Capacity savings are evaluated using the load research data for each measure. 

Valuing capacity benefits 

Factors in achieving benefits 

Each capacity-related value is estimated by climate zone of the state and incorporated into an ”all-in” energy value. 

Transmission and distribution capacity for electricity is allocated based on weather in each climate zone, and by season 

for natural gas. California's energy market (currently) includes both energy and capacity so there is no explicit capacity 

value for electric generation. 

Capacity benefits are based on the best forecast of achieved savings. There is no explicit link between forecasted benefits of 

energy efficiency and actual capacity savings. 

Other Benefits 

Incorporating non-energy benefits Non-energy benefits are considered in the development of the portfolio of energy efficiency, but not explicitly quantified 

in the avoided cost calculation. 

B. Setting Targets and Allocating Budget 

Quantity of energy efficiency to 

implement 

Estimating program effectiveness 

Institutional difficulty in 

reallocating budget 

Cost expenditure timing vs. benefits 

Ensuring the program costs are 

recaptured 

CPUC has approved budget and targets for the state’s efficiency programs, which are funded through both a public purpose 

charge and procurement funding. 

A portion of the public purpose funds are dedicated to evaluation, measurement, and verification with the goal of 

improving the understanding and quantification of savings and benefit estimates. 

By using public purpose funds, budget doesn't have to be reallocated from other functions for energy efficiency. 

Capacity benefits are based on the best forecast of achieved savings. 

CPUC requires that the utilities integrate energy efficiency into their long-term procurement plans to address this issue. 

To create a sustainable, aggressive national commitment to energy efficiency 3-11
Bonneville Power Administration Transmission 

Planning and Regional Roundtable 

In the Northwest, BPA has been leading an industry 

roundtable to work with distribution utilities, local and 

state government, environmental interests, and other 

stakeholders to incorporate energy efficiency and other 

distributed energy resources (DER) into transmission 

planning. DER includes energy efficiency as well as distribution generation and other nonwires solutions. Figure 

3-4 illustrates the analysis approach and data sources. 

Within BPA, the Transmission Business Line (TBL) works 

with the energy efficiency group in Power Business Line 

(PBL) to develop an integrated transmission plan. The 

process includes significant stakeholder contributions in 

both input data assumptions (led by NWPCC) and in 

reviewing the overall analysis at the roundtable.5 

Table 3-3 describes how BPA works with stakeholders to 

address barriers for incorporating energy efficiency in 

planning processes. 

Figure 3-4. BPA Transmission Planning Process 

IOUs and Public Utilities 

BPA: Transmission 

Business Line 

Transmission 

Planning 

Regional Stakeholder Group: BPA Roundtable 

Utilities, interest groups, other stakeholders discuss 

issues and provide analysis review 

Distributed resource 

analysis results 

NWPCC: Regional Planning Process 

BPA PBL Efficiency Group: 

Evaluate cost-effective DER 

based on transmission plan 

and other forecasts 

Load 

forecasts Publicly vetted energy 

price forecasts, 

conservation database 

Transmission 

costs and 

required DER 

load relief 

Revise transmission 

plan as appropriate, and 

fund transmission and 

DER investments 

Transmission plans 

Group Data Decision 

Source: Energy and Environmental Economics, Inc. 

5 NWPCC conducts regional energy efficiency planning. More information can be found at <http://www.nwcouncil.org>. 

3-12 National Action Plan for Energy Efficiency 
Table 3-3. Incorporation of Energy Efficiency in BPA ’s Planning Processes 

Barriers BPA-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimated energy savings The process uses the NWPCC database to define the measure impact and costs. NWPCC maintains a publicly available 

regional efficiency database that is well regarded and has its own process for stakeholder collaboration. Adoption rates 

are estimated based on a range of historical program success. 

Valuing energy savings Energy savings are valued based on the NWPCC long-run forecast of energy value for the region, plus marginal losses. 

Capacity & Resource Adequacy 

Estimating capacity savings Capacity savings are based on expected NWPCC efficiency measure coincident peak impacts. 

Valuing capacity benefits The deferral value of transmission investments is used to evaluate the transmission capacity value, which is the focus of 

these studies. The approach is to calculate the difference in present value revenue requirement before and after the 

energy efficiency investment (Present Worth Method). 

Factors in achieving benefits The BPA energy efficiency and transmission planning staff work together to ensure that the revised plan with NonConstruction Alternatives (NCAs) satisfies reliability criteria. Ultimately the decision to defer transmission and rely on 

NCAs will be approved by transmission planning. 

Other Benefits 

Incorporating non-energy benefits The analysis includes an evaluation of the environmental externalities, but no other non-energy benefits. 

B. Setting Targets and Allocating Budget 

Quantity of energy efficiency to 

implement 

The target for NCAs is established by the amount of load that must be reduced to defer the transmission line and maintain 

reliability. This target is driven by the load growth forecasts of the utilities in the region. 

Estimating program effectiveness BPA has been doing demonstrations and pilots of high-potential NCAs to refine the estimates of program penetration, 

cost, necessary timeline for achieving load reductions, customer acceptance, and other factors. The results of these pilots 

will help to refine the estimates used in planning studies. 

Institutional difficulty in 

reallocating budget 

If NCAs have lower cost than transmission, transmission capital budget will be reallocated to support NCA investments 

up to the transmission deferral value. Additional costs of NCAs that are justified based on energy value are supported by 

other sources (BPA energy efficiency, local utility programs, and customers). 

Cost expenditure timing vs. benefits Both transmission and NCAs require upfront investments so there is no significant time lag between costs and benefits. 

The transmission savings benefit is achieved concurrently with the decision to defer the transmission investment. Energy 

benefits, on the other hand, occur over a longer timeframe and are funded like other energy efficiency programs. 

Ensuring the program costs are 

recaptured 

By developing an internal planning process to reallocate budget, it is easier to ensure that the savings occur. 

New York State Energy Research and 

Development Authority (NYSERDA) 

In the mid-1990s, New York restructured the electric utilities and moved responsibility for implementing energy 

efficiency programs to the NYSERDA. The following 

figure shows an overview of the NYSERDA process. The 

programs are funded through the SBC funds (approximately $175 million per year), and NYSERDA reports on 

the program impact and cost-effectiveness to the New 

York State Public Service Commission (NYS PSC) 

annually. 

Table 3-4 describes how NYSERDA addresses the barriers 

to implementing energy efficiency. 

Source: Energy and Environmental Economics, Inc. 

To create a sustainable, aggressive national commitment to energy efficiency 3-13
Table 3-4. Incorporation of Energy Efficiency in NYSERDA ’s Planning Processes 

Barriers NYSERDA-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimating energy savings NYSERDA internally develops estimates of savings for individual energy efficiency programs and the portfolio in aggregate. In addition, NYSERDA accounts for free-riders and spillover effects ("net to gross" ratio) when estimating energy 

savings. Savings estimates are verified and refined with an M&V program. 

Valuing energy savings A long-run forecast of electricity demand is developed using a production simulation model, which is then calibrated to 

market prices. An estimate of reduced market prices due to decreased demand is also included as a benefit. 

Capacity & Resource Adequacy 

Estimating capacity savings Similar to energy savings, capacity savings are estimated for individual energy efficiency programs and the portfolio in 

aggregate. Savings estimates are verified and refined with an M&V program. 

Valuing capacity benefits The value of generation capacity in New York is established by examining historical auction clearing prices in the 

NYISO’s unforced capacity market. The baseline values are then escalated over time using a growth rate derived from 

NYSERDA’s electric system modeling results. These capacity costs are used to value those NYSERDA programs that effectively lower system peak demand. 

Factors in achieving benefits The capacity value is included as the best estimate of future capacity savings by New York utilities. There is no direct 

link, however, between the forecasted savings and the actual change in utility procurement budgets. 

Other Benefits 

Incorporating non-energy benefits The cost-effectiveness of NYSERDA programs is estimated using four scenarios of increasing NEB levels from (1) energy 

savings benefits, (2) adding market price effects, (3) adding non-energy benefits, and (4) adding macro-economic effects 

of program spending. 

B. Setting Energy Efficiency Targets 

Quantity of energy efficiency to 

implement 

The overall size of the NYSERDA program is determined by the aggregate funding level established by the NYS PSC. 

NYSERDA, with advice from the SBC Advisory Group, recommends specific sub-program funding levels for approval by 

the staff at NYS PSC. 

Estimating program effectiveness NYSERDA prepares an annual report on program effectiveness including estimated and verified impacts and cost effectiveness, which is then reviewed by the SBC Advisory Group and submitted to the NYS PSC. 

Institutional difficulty in 

reallocating budget 

By establishing a separate state research and development authority to administer energy efficiency, the institutional 

problems of determining and allocating budget towards energy efficiency are eliminated. NYSERDA is supported 

primarily by SBCs collected by the utilities at the direction of NYS PSC. 

Cost expenditure timing vs. benefits Similarly, by funding the programs through an SBC, the customers are directly financing the program, thereby making 

the timing of benefits less important. 

Ensuring the program costs are 

recaptured 

Forecasts of savings are based on the best estimate of future savings. There is no direct link to ensure these savings 

actually occur. 

Minnesota 

The Minnesota legislature passed the Conservation 

Improvement Program (CIP) in 1982. State law requires 

that (1) electric utilities that operate nuclear-power 

plants devote at least 2 percent of their gross operating 

revenue to CIP, (2) other electric utilities devote at least 

1.5 percent of their revenue, and (3) natural gas utilities 

devote at least 0.5 percent. Energy is supplied predominantly by two utilities: Xcel, which provides 49 percent 

of the electricity and 25 percent of the natural gas, and 

CenterPoint Energy, which provides 45 percent of the 

natural gas. Facilities with a peak electrical demand of at 

least 20 megawatts (MW) are permitted to opt out of 

CIP and avoid paying the program’s rate adjustment in 

their electric and natural gas bills (10 facilities have done 

so). While the Minnesota Department of Commerce 

oversees the CIP programs of all utilities in the state, the 

department only has the authority to order changes in 

the programs of the IOUs. 

Utilities are required to file an IRP every 2 years, using 

5-, 10- and 15-year planning horizons to determine the 

need for additional resources. The statutory emphasis is 

on demand-side management (DSM) and renewable 

resources. A utility must first show why these resources 

will not meet future needs before proposing traditional 

utility investments. The plans are reviewed and approved 

by the Minnesota Public Utilities Commission. CIP is the 

3-14 National Action Plan for Energy Efficiency 
Table 3-5. Incorporation of Energy Efficiency in Minnesota’s Planning Processes 

Barriers Minnesota-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimating energy savings Energy savings and avoided costs are determined independently by each utility, resulting in a wide range of estimates 

that are not consistent. Energy costs are considered a trade secret and not disclosed publicly. Valuing energy savings 

Capacity & Resource Adequacy 

Estimating capacity savings Capacity savings and avoided costs are determined independently by each utility, resulting in a wide range of estimates 

that are not consistent. Power plant, transmission, and distribution costs are considered trade secrets and are not 

V disclosed publicly. aluing capacity benefits 

Factors in achieving benefits There is no direct link between the forecasted capacity savings and the actual change in utility procurement budgets. 

Other Benefits 

Incorporating non-energy benefits Differences in the utilities’ valuation methods produce varying estimates. In addition, the Department of Commerce 

incorporates an externality avoided cost in the electric societal cost benefit test, providing utilities with values in $/ton 

for several emissions, which the utilities translate to amounts in $/MWh based on each utility’s emissions profile. 

B. Setting Targets and Allocating Budget 

Quantity of energy efficiency to 

implement 

The Department of Commerce approves budget and targets for each utility. Funding levels are determined by state law, 

which requires 0.5 percent to 2 percent of utility revenues be dedicated to conservation programs, depending on the 

type of utility. 

Estimating program effectiveness Program effectiveness is handled by each utility. Minnesota’s IOUs rely on the software tools DSManager and BENCOST 

to measure electric and gas savings respectively. 

Institutional difficulty in 

reallocating budget 

Budget is not reallocated from other functions. Funding is obtained via a surcharge on customer bills. 

Cost expenditure timing vs. benefits By using a percentage of revenue set-aside, utility customers are directly financing the program; therefore timing of 

benefits is not critical. 

Ensuring the program costs are 

recaptured 

State law requires that each utility file an IRP with the Public Utilities Commission. The conservation plans approved by 

the Department of Commerce are the primary mechanism by which utilities meet conservation targets included in their 

IRPs. 

primary mechanism by which the electric utilities achieve 

the conservation targets included in their IRPs. 

The Department of Commerce conducts a biennial 

review of the CIP plan for each investor-owned utility. 

Interested parties may file comments and suggest alternatives before the department issues a decision approving or modifying the utility’s plan. Utilities that meet or 

exceed the energy savings goals established by the 

Department of Commerce receive a financial bonus, 

which they are permitted to collect through a rate 

increase. Both electric utilities have exceeded their goals 

for the last several years. Table 3-5 describes how the 

Minnesota Department of Commerce addresses barriers 

to implementing energy efficiency. 

Texas 

Texas Senate Bill 7 (1999), enacted in the 1999 Texas 

legislature, mandates that at least 10 percent of an 

investor-owned electric utility’s annual growth in electricity 

demand be met through energy efficiency programs 

each year. The Public Utility Commission of Texas (PUCT) 

Substantive Rule establishes procedures for meeting this 

legislative mandate, directing the transmission and distribution (T&D) utilities to hire third-party energy efficiency 

providers to deliver energy efficiency services to every 

customer class, using “deemed savings” estimates for 

each energy efficiency measure (PUCT, 2000). Approved 

program costs are included in the IOU’s transmission and 

distribution rates, and expenditures are reported 

separately in the IOU’s annual energy efficiency report to 

the PUCT. Actual energy and capacity savings are verified 

by independent experts chosen by the PUCT. Incentives 

are based on prescribed avoided costs, which are set by 

To create a sustainable, aggressive national commitment to energy efficiency 3-15
Table 3-6. Incorporation of Energy Efficiency in Texas’ Planning Processes 

Barriers Texas-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimating energy savings Energy savings are based on either deemed savings or through M&V. All savings estimates are subject to verification by 

a commission-appointed M&V expert. 

Valuing energy savings Avoided costs shall be the estimated cost of new gas turbine, which for energy was initially set in PUCT section 25.181­

5 to be $0.0268 /kWh saved annually at the customer’s meter. 

Capacity & Resource Adequacy 

Estimating capacity savings Capacity savings are based on either deemed savings or through M&V. All savings estimates are subject to verification 

by a commission-appointed M&V expert. 

Valuing capacity benefits Avoided costs shall be the estimated cost of new gas turbine, which for capacity was initially set in PUCT section 

25.181-5 to be $78.5/kW saved annually at the customer’s meter. 

Other Benefits 

Incorporating non-energy benefits Environmental benefits of up to 20 percent above the cost effectiveness standard can be applied for projects in an area 

that is not in attainment of ambient air quality standards. 

B. Setting Energy Efficiency Targets 

Quantity of energy efficiency to 

implement 

Senate Bill 7 (SB7) mandates that, beginning in 2004, at least 10 percent of an investor-owned electric utility’s annual 

growth in electricity demand be met through energy efficiency programs each year (based on historic five-year growth 

rate for the firm). Funding for additional programs is available if deemed cost-effective. 

Estimating program effectiveness Each year, the utility submits to the PUCT an energy efficiency plan for the year ahead and an energy efficiency report 

for the past year. The plan must be approved by the commission, and the year-end report must include information 

regarding the energy and capacity saved. Also, independent M&V experts selected by the commission to verify the 

achieved savings as reported in each utility’s report. 

Institutional difficulty in 

reallocating budget 

Funds required for achieving the energy efficiency goal are included in transmission and distribution rates, and energy 

efficiency expenditures are tracked separately from other expenditures. 

Cost expenditure timing vs. benefits By using a percentage of revenue set aside, utility customers directly finance the program; therefore timing of benefits is 

not critical. 

Ensuring the program costs are 

recaptured 

The annual energy efficiency report submitted by the IOU to the PUCT includes energy and capacity savings, program 

expenditures, and unspent funds. There is no verification that the estimated avoided costs are captured in utility savings. 

the PUCT. El Paso Electric Company will be included in 

the program beginning with an efficiency target of 5 percent of growth in 2007 and 10 percent of growth in 2008. 

The 2004 report on Texas’ program accomplishments 

highlights the level of savings and success of the 

program: “In 2004, the investor-owned utilities in Texas 

achieved their statewide goals for energy efficiency once 

again. 193 MW of peak demand reduction was 

achieved, which was 36% above its goal of 142 MW. In 

addition, 448 gigawatt-hours (GWh) of demand 

eduction was achieved. These energy savings correspond 

to a reduction of 1,460,352 pounds of nitrogen oxide 

(NOX) emissions. Incentives or rebates were provided to 

project sponsors to offset the costs of a variety of energy efficiency improvements. Two new energy efficiency 

programs were voluntarily introduced by the Texas utilities.” Table 3-6 describes how Texas utilities address barriers to implementing energy efficiency. 

PacifiCorp 

PacifiCorp is an investor-owned utility with more than 

8,400 MW of generation capacity that serves approximately 1.6 million retail customers in portions of Utah, 

Oregon, Wyoming, Washington, Idaho, and California. 

PacifiCorp primarily addresses its energy efficiency planning objectives as part of its IRP process. Efficiency-based 

measures are evaluated based on their effect on the 

overall cost of PacifiCorp’s preferred resource portfolio, 

defined as the overall supply portfolio with the best balance of cost and risk. 

3-16 National Action Plan for Energy Efficiency 
Additionally, some states that are in PacifiCorp’s service territory, such as Oregon and California, also mandate that the 

company allocate funds for efficiency under related 

statewide public goods regulations. “In Oregon, SB 1149 

requires that investor-owned electric companies collect from 

all retail customers a public purpose charge equal to 3% of 

revenues collected from customers. Of this amount, 57% 

(1.7% of revenues) goes toward Class 2 [energy efficiencybased] demand side management (DSM). The Energy Trust 

of Oregon (ETO) was set up to determine the manner in 

which public purpose funds will be spent”(PacifiCorp, 

2005). Using the IRP model to determine investment in energy efficiency, however, PacifiCorp allocates more money to 

efficiency than required by state statute. 

As of the 2004 IRP, PacifiCorp planned to implement a 

base of 250 average megawatts (aMW) of energy 

efficiency, and to seek an additional 200 aMW of new 

efficiency programs if cost-effective options could be 

identified. PacifiCorp models the impact of energy efficiency as a shaped load reduction to their forecasted 

load, and computes the change in supply costs with, and 

without, the impact of DSM. This approach allows different types of DSM to receive different values based on the 

alternative supply costs in different parts of the 

PacifiCorp service territory. For example, the IRP plan 

indicates that “residential air conditioning decrements 

produce the highest value [in the East and West]. 

Table 3-7. Incorporation of Energy Efficiency in PacifiCorp’s Planning Processes 

Barriers PacifiCorp-Administered Programs 

A. Determining the Value of Energy Efficiency 

Energy Procurement 

Estimating energy savings The load forecast in the IRP is reduced by the amount of energy projected to be saved by existing programs, existing 

programs that are expanded to other states, and new cost-effective programs that resulted from the 2003 DSM request 

for proposals (RFPs). These load decrements have hourly shapes based on the types of measures installed for each program. 

Valuing energy savings Efficiency-based (or Class 2) DSM programs are valued based on cost effectiveness from a utility cost test perspective, 

minimizing the present value revenue requirement. The IRP (using the preferred portfolio of supply-side resources) is run 

with and without these DSM decrements, and their value in terms of cost-savings is calculated as the difference in revenue 

requirements for that portfolio with and without these Class 2 load reductions. 

Capacity & Resource Adequacy 

Estimating capacity savings 

Valuing capacity benefits 

PacifiCorp explicitly evaluates the capacity value of dispatchable and price-based DSM, or ‘Class 1’ DSM, and the ability to 

hit target reserve margins in the system with these resources. The IRP resulted in a recommendation to defer three different 

supply-side projects. The capacity benefits of more traditional energy efficiency programs are not explicitly evaluated; 

however, the planned energy efficiency reductions are used to update the load forecast in the next year’s IRP, which could 

result in additional deferrals. 

Capacity savings are valued at the forecasted costs of displaced generation projects. By integrating the evaluation of DSM 

into the overall portfolio, the value of energy efficiency is directly linked to specific generation projects. It does not appear 

that PacifiCorp evaluates the potential for avoided transmission and distribution capacity. 

Other Benefits 

Incorporating non-energy benefits Non-energy benefits are considered in the selection of a preferred portfolio of resources, but the non-energy benefits of 

efficiency are not explicitly used in the IRP. 

B. Setting Energy Efficiency Targets 

Quantity of energy efficiency to 

implement 

Estimating program effectiveness 

Institutional difficulty in 

reallocating budget 

Cost expenditure timing vs. benefits 

Ensuring the program costs are 

recaptured 

As part of the 2004 IRP, PacifiCorp determined that a base of 250 aMW of efficiency should be included in the goals for 

the next 10 years, and that an additional 200 aMW should be added if cost-effective programs could be identified. 

Measurement methodology for new projects is not explicitly identified in the IRP, but values from existing programs and 

the forecasted load shapes for PacifiCorp’s customers will be used to predict benefits. 

Funding is integrated into the overall process of allocating budget to resource options (both supply side and demand side), and 

faces only challenges associated with any resource option, namely proof of cost-effective benefit to the resource portfolio. 

The IRP process for PacifiCorp seeks to gain the best balance of cost and risk using the present value of revenue requirements, which accounts for timing issues associated with any type of resource evaluated, including efficiency. 

Successive IRPs will continue to evaluate the cost-effectiveness of energy efficiency programs to determine their effect on 

overall costs of the resource portfolio. 

To create a sustainable, aggressive national commitment to energy efficiency 3-17
Programs with this end use impact provide the most 

value to PacifiCorp’s system because they reduce 

demand during the highest use hours of the year, summer heavy load hours. The commercial lighting and system load shapes with the highest load factors provide 

the lowest avoided costs.” It does not appear that 

PacifiCorp recomputes the overall risk of its portfolio 

with increased energy efficiency. Table 3-7 describes how 

PacifiCorp addresses barriers to implementing energy 

efficiency. 

Key Findings 

This section describes the common themes in the 

approaches used to navigate and overcome the barriers 

to incorporating energy efficiency in the planning 

process. While there are many approaches to solving 

each issue, the following key findings stand out: 

• Cost and Savings Data for Energy Efficiency Measures 

Are Readily Available. Given the long history of energy 

efficiency programs in several regions, existing 

resources to assist in the design and implementation of 

energy efficiency programs are widely available. Both 

California and the Northwest maintain extensive, publicly available online databases of energy efficiency 

measures and impacts: the Database for Energy 

Efficiency Resources (DEER) in California6 and NWPCC 

Database in the Northwest.7 DEER includes both electricity and natural gas measures while NWPCC contains 

only electricity measures. These databases incorporate a 

number of factors affecting savings estimates, including 

climate zones, building type, building vintage, and customer usage patterns. Energy efficiency and resource 

planning studies containing detailed information on 

efficiency measures are available for regions throughout 

the United States. It is often possible to adjust existing 

data for use in a specific utility service area with relatively 

straightforward assumptions. 

• Energy, Capacity, and Non-Energy Benefits Can 

Justify Robust Energy Efficiency Programs. Energy 

savings alone are usually more than sufficient to justify 

and fund a wide range of efficiency measures for electricity and natural gas. However, the capacity and nonenergy benefits of energy efficiency are important factors 

to consider in assessing energy efficiency measures on 

an equal basis with traditional utility investments. In 

practice, policy, budget, expertise, and human 

resources are the more limiting constraints to effectively 

incorporating energy efficiency into planning. 

—	 Estimating the quantity and value of energy savings 

is relatively straightforward. Well-established methods 

for estimating the quantity and value of energy 

savings have been used in many regions and forums. 

All of the regional examples for estimating energy 

and capacity savings for energy efficiency evaluate 

the savings for an individual measure using either 

measurements or engineering simulation, and then 

aggregate these by the expected number of customers who will adopt the measure. Both historical 

and forward market prices are readily available, particularly for natural gas where long-term forward 

markets are more developed. 

—	 Estimating capacity savings is more difficult, but 

challenges are being overcome. Capacity savings 

depend more heavily on regional weather conditions 

and timing of the peak loads and, therefore, are 

difficult to estimate. Results from one region do not 

readily transfer to another. Also, publicly available 

market data for capacity are not as readily available 

as for energy, even though the timing and location 

of the savings are critical. Because potential capacity 

savings are larger for electricity energy efficiency 

than natural gas, capturing capacity value is a larger 

issue for electric utilities. Production simulation can 

explicitly evaluate the change in power plant investment and impact of such factors as re-dispatch due 

to transmission constraints, variation in load growth, 

6 The DEER Web site, description, and history can be found at: http://www.energy.ca.gov/deer/. The DEER database of measures can be found at: 

http://eega.cpuc.ca.gov/deer/. 

7 The NWPCC Web site, comments, and efficiency measure definition can be found at: http://www.nwcouncil.org/comments/default.asp. 

3-18 National Action Plan for Energy Efficiency 
and other factors. But these models are analytically 

complex and planning must be tightly integrated 

with other utility planning functions to accurately 

assess savings. These challenges can and have been 

overcome in different ways in regions with a long 

track-record of energy efficiency programs (e.g., 

California, BPA, New York). 

—	 Estimating non-energy benefits is an emerging 

approach in many jurisdictions. Depending on the 

jurisdiction, legislation and regulatory commission 

policies might expressly permit, and even require, the 

consideration of non-energy benefits in cost-effectiveness determinations. However, specific guidelines 

regarding the quantification and inclusion of nonenergy benefits are still under discussion or in development in most jurisdictions. The consideration of 

both non-energy and capacity benefits of energy 

efficiency programs is relatively new, compared to 

the long history of valuing energy savings. 

• A Clear Path to Funding Is Needed to Establish a 

Budget for Energy Efficiency Resources. There are 

three main approaches to funding energy efficiency 

investments: 1) utility resource planning processes, 

2) public purpose funding, and 3) a combination of 

both. In a utility resource planning process, such as the 

BPA non-construction alternatives process, efficiency 

options for meeting BPA’s objectives are compared to 

potential supply-side investments on an equal basis 

when allocating the available budget. In this type of 

resource planning process, budget is allocated to efficiency measures from each functional area according 

to the benefits provided by efficiency programs. The 

advantage of this approach is that the budget for efficiency is linked directly to the savings it can achieve; 

however, particularly in the case of capacity-related 

benefits, which have critical timing and load reduction 

targets to maintain reliability, it is a difficult process. 

The public purpose funding and SBC approaches in 

New York, Minnesota, and other states are an alternative to budget reallocation within the planning process. 

In California, funding from both planning processes 

and public purpose funding is used. Public purpose 

funds do not have the same direct link to energy savings, so programs might not capture all the savings 

attributed to the program. Funding targets might be 

set before available efficiency options have been 

explored, so if other cost-effective efficiency measures 

are later identified, additional funding might not be 

available. This situation can result in customer costs 

being higher than they would have been if all costeffective efficiency savings opportunities had been supported. Using public purpose funding significantly simplifies the planning process, however, and puts more 

control over the amount of energy efficiency in the 

control of regulators or utility boards. As compared to 

resource planning, far less time and effort are required 

on the part of regulators or legislators to direct 

a specific amount of funding to cost-effective 

efficiency programs. 

• Integrate Energy Efficiency Early in the Resource 

Planning Process. In order to capture the full value of 

deferring the need for new investments in capacity, 

energy efficiency must be integrated early in the planning process. This step will avoid sunk investment associated with longer lead-time projects. Efficiency should 

also be planned to target investments far enough into 

the future so that energy efficiency programs have the 

opportunity to ramp up and provide sufficient load 

reduction. This timeline will allow the utility to build 

expertise and establish a track record for energy efficiency, as well as be able to monitor peak load reductions. Starting early also allows time to gain support of 

the traditional project proponents before they are vested 

in the outcome. 

To create a sustainable, aggressive national commitment to energy efficiency 3-19
Recommendations and Options


The National Action Plan for Energy Efficiency Leadership 

Group offers the following recommendations as ways to 

overcome many of the barriers to energy efficiency in 

resource planning, and provides a number of options for 

consideration for consideration by utilities, regulators and 

stakeholders (as presented in the Executive Summary). 

Recommendation: Recognize energy efficiency as a high 

priority energy resource. Energy efficiency has not been 

consistently viewed as a meaningful or dependable 

resource compared to new supply options, regardless of 

its demonstrated contributions to meeting load growth. 

Recognizing energy efficiency as a high-priority energy 

resource is an important step in efforts to capture the 

benefits it offers, and lower the overall cost of energy 

services to customers. Based on jurisdictional objectives, 

energy efficiency can be incorporated into resource plans 

to account for the long-term benefits from energy 

savings, capacity savings, potential reductions of air pollutants and greenhouse gases, as well as other benefits. 

The explicit integration of energy efficiency resources 

into the formalized resource planning processes that 

exist at regional, state, and utility levels can help establish the rationale for energy efficiency funding levels and 

for properly valuing and balancing the benefits. In some 

jurisdictions, these existing planning processes might 

need to be adapted or even created to meaningfully 

incorporate energy efficiency resources into resource 

planning. Some states have recognized energy efficiency 

as the resource of first priority due to its broad benefits. 

Options to Consider: 

• Establishing policies to establish energy efficiency as a 

priority resource. 

• Integrating energy efficiency into utility, state, and 

regional resource planning activities. 

• Quantifying and establishing the value of energy efficiency, considering energy savings, capacity savings, 

and environmental benefits, as appropriate. 

Recommendation: Make a strong, long-term commitment 

to implement cost-effective energy efficiency as a 

resource. Energy efficiency programs are most successful and provide the greatest benefits to stakeholders 

when appropriate policies are established and maintained over the long-term. Confidence in long-term stability of the program will help maintain energy efficiency 

as a dependable resource compared to supply-side 

resources, deferring or even avoiding the need for other 

infrastructure investments, and maintain customer 

awareness and support. Some steps might include 

assessing the long-term potential for cost-effective energy efficiency within a region (i.e., the energy efficiency 

that can be delivered cost-effectively through proven 

programs for each customer class within a planning horizon); examining the role for cutting-edge initiatives and 

technologies; establishing the cost of supply-side options 

versus energy efficiency; establishing robust M&V procedures; and providing for routine updates to information 

on energy efficiency potential and key costs. 

Options to Consider: 

• Establishing appropriate cost-effectiveness tests for a 

portfolio of programs to reflect the long-term benefits 

of energy efficiency. 

• Establishing the potential for long-term, cost-effective 

energy efficiency savings by customer class through 

proven programs, innovative initiatives, and cuttingedge technologies. 

• Establishing funding requirements for delivering longterm, cost-effective energy efficiency. 

• Developing long-term energy saving goals as part of 

energy planning processes. 

• Developing robust M&V procedures. 

• Designating which organization(s) is responsible for 

administering the energy efficiency programs. 

• Providing for frequent updates to energy resource plans 

to accommodate new information and technology. 

3-20 National Action Plan for Energy Efficiency 
Recommendation: Broadly communicate the benefits of, 

and opportunities for, energy efficiency. Experience 

shows that energy efficiency programs help customers 

save money and contribute to lower cost energy systems. But these benefits are not fully documented nor 

recognized by customers, utilities, regulators, or policymakers. More effort is needed to establish the business 

case for energy efficiency for all decision-makers and to 

show how a well-designed approach to energy efficiency 

can benefit customers, utilities, and society by (1) reducing 

customers’ bills over time, (2) fostering financially 

healthy utilities (e.g., return on equity, earnings per 

share, and debt coverage ratios unaffected), and (3) contributing to positive societal net benefits overall. Effort is 

also necessary to educate key stakeholders that although 

energy efficiency can be an important low-cost resource 

to integrate into the energy mix, it does require funding 

just as a new power plant requires funding. 

Options to Consider: 

• Establishing and educating stakeholders on the business 

case for energy efficiency at the state, utility, and other 

appropriate level addressing customer, utility, and 

societal perspectives. 

• Communicating the role of energy efficiency in lowering 

customer energy bills and system costs and risks over 

time. 

Recommendation: Provide sufficient, timely, and stable 

program funding to deliver energy efficiency where 

cost-effective. Energy efficiency programs require consistent and long-term funding to effectively compete with 

energy supply options. Efforts are necessary to establish 

this consistent long-term funding. A variety of mechanisms has been and can be used based on state, utility, 

and other stakeholder interests. It is important to ensure 

that the efficiency program providers have sufficient 

long-term funding to recover program costs and implement the energy efficiency measures that have been 

demonstrated to be available and cost-effective. A number 

of states are now linking program funding to the 

achievement of energy savings. 

Options to Consider: 

• Deciding on and committing to a consistent way for 

program administrators to recover energy efficiency 

costs in a timely manner. 

• Establishing funding mechanisms for energy efficiency 

from among the available options, such as revenue 

requirements or resource procurement funding, SBCs, 

rate-basing, shared-savings, incentive mechanisms, etc. 

• Establishing funding for multi-year periods. 

To create a sustainable, aggressive national commitment to energy efficiency 3-21
References


American Council for an Energy Efficient Economy 

[ACEEE] (2006, February). Energy Efficiency Resource 

Standards: Experience and Recommendations. 

<http://aceee.org/pubs/eo63.htm>. 

Bokenkamp, K., LaFlash, H., Singh V., and Wang, D. 

(2005, July). Hedging Carbon Risk: Protecting 

Customers and Shareholders from the Financial Risk 

Associated with Carbon Dioxide Emissions. The 

Electricity Journal. 10(6):11–24. 

California Public Utilities Commission [CPUC]. (2005, 

April 7). Interim Opinion On E3 Avoided Cost 

Methodology. Order Instituting Rulemaking to 

Promote Consistency in Methodology and Input 

Assumptions in Commission Applications of ShortRun and Long-run Avoided Costs, Including Pricing 

for Qualifying Facilities. Rulemaking 04-04-025 

(Filed April 22, 2004). <http://www.ethree.com/ 

CPUC/45195.pdf>. 

Frontier Associates (2005, November 1). Energy 

Efficiency Accomplishments on the Texas Investor 

Owned Utilities (Calendar Year 2004). 

McAluliffe, P. (2003, June 20). Presentation to the 

California Energy Commission. 

New York State Energy Research and Development 

Authority [NYSERDA] (2005, May). New York 

Energy $martSM Program Cost-Effectiveness 

Assessment. Albany, New York. 

Northwest Power and Conservation Council [NWPCC] 

(2005, May). The 5th Northwest Electric Power and 

Conservation Plan. <http://www.nwcouncil.org/ 

energy/ powerplan/default.htm> 

Pacific Gas & Electric Company [PG&E] (2005, June). 

2006-2008 Energy Efficiency Program Portfolio, 

Volume I, Prepared Testimony. 

PacifiCorp. (2005, January). 2004 Integrated Resource 

Plan. <http://www.pacificorp.com/Navigation/ 

Navigation23807.html> 

Public Utilities Commission of Texas [PUCT]. (2000, 

March). Substantive Rule §25.181. Energy Efficiency 

Goal. <http://www.puc.state.tx.us/rules/ 

subrules/electric/25.181/25.181.pdf> 

Texas Senate Bill 7, Section 39.905 (1999) 

<http://www.capitol.state.tx.us/ 

cgi-bin/tlo/textframe.cmd?LEG=76&SESS= 

R&CHAMBER=S&BILLTYPE=B&BILLSUFFIX= 

00007&VERSION=5&TYPE=B> 

Vermont Public Service Board (2005, July 20). Docket 

7081: Investigation into Least-Cost Integrated 

Resource Planning for Vermont Electric Power 

Company, Inc.'s Transmission System. 

3-22 National Action Plan for Energy Efficiency 
4:Business Case for 

Energy Efficiency 

A well-designed approach to energy efficiency can benefit utilities, customers, and society by (1) fostering 

financially healthy utilities, (2) reducing customers’ bills over time, and (3) contributing to positive societal 

net benefits overall. By establishing and communicating the business case for energy efficiency across utility, 

customer, and societal perspectives, cost-effective energy efficiency can be better integrated into the energy 

mix as an important low-cost resource. 

Overview


Energy efficiency programs can save resources, lower 

utility costs, and reduce customer energy bills, but they 

also can reduce utility sales. Therefore, the effect on utility 

financial health must be carefully evaluated, and policies 

might need to be modified to keep utilities financially 

healthy (return on equity [ROE], earnings per share, debt 

coverage ratios unaffected) as they pursue efficiency. 

The extent of the potential economic and environmental 

benefits from energy efficiency, the impact on a utility’s 

financial results, and the importance of modifying existing policies to support greater investment in these energy 

efficiency programs depend on a number of market conditions that can vary from one region of the country 

to another. 

To explore the potential benefits from energy efficiency 

programs and the importance of modifying existing policies, a number of business cases have been developed. 

These business cases show the impact of energy efficiency 

investments on the utility’s financial health and earnings, 

customer energy bills, and social resources such as net 

Leadership Group Recommendation 

Applicable to the Business Case for 

Energy Efficiency 

• Broadly communicate the benefits of and 

opportunities for energy efficiency. 

A more detailed list of options specific to the 

objective of promoting the business case for energy 

efficiency is provided at the end of this chapter. 

Key Findings From the Eight Business 

Cases Examined 

• For both electric and gas utilities, energy efficiency 

investments consistently lower costs over time 

for both utilities and customers while providing 

positive net benefits to society. When enhanced 

by ratemaking policies to address utility financial 

barriers to energy efficiency, such as decoupling 

the utility’s revenues from sales volumes, 

utility financial health can be maintained while 

comprehensive, cost-effective energy efficiency 

programs are implemented. 

• The costs of energy efficiency and reduced sales 

volume might initially raise gas or electricity bills 

due to slightly higher rates from efficiency investment and reduced sales. However, as the efficiency gains help participating customers lower 

their energy consumption, the decreased energy 

use offsets higher rates to drive their total energy 

bills down. In the eight cases examined, average 

customer bills were reduced by 2 percent to 

9 percent over a ten year period, compared to the 

no-efficiency scenario. 

• Investment in cost-effective energy efficiency 

programs yield a net benefit to society—on the 

order of hundreds of millions of dollars in net 

present value (NPV) for the illustrative case studies 

(small- to medium-sized utilities). 

To create a sustainable, aggressive national commitment to energy efficiency 4-1
efficiency costs and pollutant emissions. The business 

cases were developed using an Energy Efficiency Benefits 

Calculator (Calculator) that facilitates evaluation of the 

financial impact of energy efficiency on its major stakeholders—utilities, customers, and society. The Calculator 

allows users to examine efficiency investment scenarios 

across different types of utilities using transparent input 

assumptions (see Appendix B for detailed inputs and 

results).1 Policies evaluated with the Calculator are 

discussed in more detail in Chapter 2: Utility Ratemaking 

& Revenue Requirements and Chapter 3: Energy 

Resource Planning Processes. 

Eight business cases are presented to illustrate the 

impact of comprehensive energy efficiency programs on 

utilities, their customers, and society. The eight cases 

represent a range of utility types under different growth 

and investment situations. Each case compares the 

consequences of three scenarios—no energy efficiency 

programs without a decoupling mechanism, energy efficiency without decoupling, and energy efficiency with 

decoupling. Energy efficiency spending was assumed to 

be equal to 2 percent of electricity revenue and 0.5 percent of natural gas revenue across cases, regardless of 

the decoupling assumption; these assumptions are similar 

to many of the programs being managed in regions of 

the country today.

2 In practice, decoupling and shareholder incentives often lead to increased energy efficiency 

investments by utilities, increasing customer and 

societal benefits. 

Business Cases Evaluated 

Cases 1 and 2: Investor-Owned Electric and 


Natural Gas Utilities


• Case 1: Low-Growth 

• Case 2: High-Growth 

Cases 3 and 4: Electric Power Plant Deferral 

• Case 3: Low-Growth 

• Case 4: High-Growth 

Cases 5 and 6: Investor-Owned Electric 


Utility Structure


• Case 5: Vertically Integrated Utility 

• Case 6: Restructured Delivery-Only Utility 

Cases 7 and 8: Publicly and Cooperatively


Owned Electric Utilities


• Case 7: Minimum Debt Coverage Ratio 

• Case 8: Minimum Cash Position 

Table 4-1 provides a summary of main assumptions and results of the business cases. 

Table 4-1 summarizes assumptions about the utility size, 

energy efficiency program, and each business case. All 

values shown compare the savings with and without 

energy efficiency over a 15-year horizon. The present 

value calculations are computed over 30 years, to 

account for the lifetime of the energy efficiency investments over 15 years. 

1 The Calculator was designed to assess a wide variety of utility types using easily obtainable input data. It was not designed for applications requiring 

detailed data for specific applications such as rate setting, comparing different types of energy efficiency policies, cost-effectiveness testing, energy 

efficiency resource planning, and consumer behavior analysis. 

2 See Chapter 6: Energy Efficiency Program Best Practices for more information on existing programs. 

3 Cumulative and NPV business case results are calculated using a 5 percent discount rate over 30 years to include the project life term for energy efficiency investments of 15 years. All values are in nominal dollars with NPV reported in 2007 dollars (year 1 = 2007). Consistent rates are assumed in year 

0 and then adjusted by the Calculator for case-specific assumptions. Reductions in utility revenue requirement do not change with decoupling in the 

Calculator, but might in practice if decoupling motivates the utility to deliver additional energy efficiency. In these cases, societal benefits conservatively equals only the savings from reduced wholesale electricity purchases and capital expenditures minus utility and participant costs of energy efficiency. 

Energy efficiency program costs given in $/megawatt-hour (MWh) for electric utilities and $/million British thermal units (MMBtu) 

for gas utilities. 

4-2 National Action Plan for Energy Efficiency 
Table 4-1. Summary of Main Assumptions and Results for Each Business Case Analyzed3 

To create a sustainable, aggressive national commitment to energy efficiency Case 1: Case 2: Low Low Growth Growth Electric Electric Utility Utility Case 3: Case 4: Low Growth Low Growth with 2009 with 2009 

Power Power Plant Plant 

Case 5: Case 6: Vertical Delivery Utility Utility 

Case 7: Case 8: Electric Electric Public/Coop Public/Coop Debt Coverage No Debt Ratio 

Utility SizeAnnual Revenue ($MM) - Year 0Peak Load (MW) or Sales (BcF) - Year 0 

$284 $284 600 MW 600 MW 

$284 $284 600 MW 600 MW 

$284 $284 600 MW 600 MW 

$237 $237 600 MW 600 MW 

Parameter Tested Load Load 

Growth Growth 

Load Growth Load Growth Vertical Delivery 

Utility Utility 

Debt Coverage Cash PositionRatio 

Assumptions That Differ BetweenCasesLoad Growth AssumptionAverage Rate - Year 1 

1% 5% $0.12/MWh $0.12/MWh 

1% 5% $0.12/MWh $0.12/MWh 

2% 2% $0.12/MWh $0.12/MWh 

2% 2% $0.10/MWh $0.10/MWh 

EE Program Cumulative Savings (EE vs No EE case)Utility Spending as Percent of Revenue (%)Annual Utility Spending (NPV in $MM)EE Project Life Term (years)Percent of Growth SavedTotal Cost of EE in Year 0 ($/MWh or $/MMBtu)Utility Cost in Year 0 ($/MWh or $/MMBtu)Customer Cost in Year 0 ($/MWh or $/MMBtu) 

8,105 GWh 8,105 GWh 2.0% 2.0% $70 $70 15 15 142% 21% $35.00 $35.00 $20.00 $20.00 $15.00 $15.00 

8,105 GWh 8,105 GWh 2.0% 2.0% $70 $70 15 15 142% 21% $35.00 $35.00 $20.00 $20.00 $15.00 $15.00 

8,105 GWh 8,105 GWh 2.0% 2.0% $70 $70 15 15 66% 66% $35.00 $35.00 $20.00 $20.00 $15.00 $15.00 

6,754 GWh 6,754 GWh 2.0% 2.0% $58 $58 15 15 55% 55% $35.00 $35.00 $20.00 $20.00 $15.00 $15.00 

Business Case Results(NPV in $MM)Reduction in Revenue Requirement ($MM)% of Total Revenue RequirementNet Customer Savings - no decoupling ($MM)% of Total Customer BillsNet Customer Savings - decoupling ($MM)% of Total Customer BillsNet Societal Savings ($MM)% of Total Societal Cost 

$396 $318 5.5% 3.0% $504 $372 7.0% 3.5% $344 $266 4.8% 2.5% $289 $258 237.5% 211.9% 

$476 $338 6.0% 3.0% $608 $375 7.7% 3.3% $424 $286 5.4% 2.5% $332 $269 272.6% 221.0% 

$372 $348 4.1% 4.4% $447 $437 6.4% 5.6% $320 $296 4.5% 3.8% $282 $271 6.7% 222.2% 

$288 $270 4.0% 4.3% $459 $266 6.4% 4.2% $245 $226 43.4% 3.6% $225 $225 222.2% 222.2% 

Air Emission Savings1000 Tons CO2 Tons NOx 

311 311 61 61 

311 311 61 61 

311 311 61 61 

259 259 51 51 

EE Program Results do not change when decoupling is activated

Revenue Requirement and Net Societal Savings do not change with decoupling.Business Case results are the difference between the No EE and EE cases.

Air Emission Savings are the difference between No EE and EE cases and do not change when decoupling is activated 

Case 1: Case 2: High Low Growth Growth Gas Utility Gas Utility$344 $344 33 BcF 33 BcF 

Load Growth Load Growth 0% 2% $1/therm $1/therm 31 BcF 31 BcF 0.5% 0.5% $21 $21 15 15 410% 18% $3.00 $3.00 $1.50 $1.50 $1.50 $1.50 

$211 $142 3.8% 2.2% $258 $156 4.6% 2.4% $158 $90 2.8% 1.4% $143 $119 338.0% 282.6% 

128 128 107 107 

BcF = billion cubic feet; CO2 = carbon dioxide; EE = energy efficiency; GWh = gigawatt-hour; NOx = nitrous oxides; $MM = million dollars; MMBtu = million British thermal units;

MWh = megawatt-hour; NPV = net present value 

4-3
While these eight business cases are not comprehensive, 

they allow some generalizations about the likely financial 

implications of energy efficiency investments. These generalizations depend upon the three different perspectives analyzed: 

• Utility Perspective. The financial health of the utility is 

modestly impacted because the introduction of energy 

efficiency reduces sales. If energy efficiency is accompanied with mechanisms to protect shareholders— 

such as a decoupling mechanism to buffer revenues 

and profits from sales volumes—the utility’s financial 

situation can remain neutral to the efficiency investments.4 This effect holds true for both public and investorowned utilities. 

• Customer Perspective. Access to energy efficiency 

drives customer bills down over time. Across the eight 

case studies, energy bills are reduced by 2 percent to 9 

percent over a 10 to 15-year period. Even though the 

efficiency investment and decreased sales drives rates 

slightly higher, this increase is more than offset in 

average customer bills due to a reduction in energy usage. 

• Societal Perspective. The monetary benefits from energy 

efficiency exceed costs and are supplemented by other 

benefits such as lower air emissions. 

Generalizations may also be made about the impact of 

policies to remove the throughput incentive, such as 

decoupling mechanisms, across these business cases.5 

These generalizations include: 

• Utility Perspective. Policies that remove the throughput 

incentive can provide utilities with financial protection 

from changes in throughput due to energy efficiency, 

by smoothing the utility’s financial performance while 

lowering customer bills. Generally, the business case 

results show that a decoupling mechanism benefits 

utilities more if the energy savings from efficiency are a 

greater percent of load growth. Also, because small 

reductions in throughput have a greater effect on the 

financial condition of distribution utilities, decoupling 

generally benefits distribution utilities more than vertically integrated utilities. A utility’s actual results will 

depend on the structure of its efficiency program, as 

well as the specific decoupling and attrition mechanisms. 

• Customer Perspective. Decoupling generates more frequent, but smaller, rate adjustments over time because 

variations in throughput require periodic rate “trueups.” Decoupling leads to modestly higher rates earlier 

for customers, when efficiency account for a high percent of load growth. In all cases, energy efficiency 

reduces average customer bills over time, with and 

without decoupling. 

• Societal Perspective. The societal benefits of energy 

efficiency are tied to the amount of energy efficiency 

implemented. Therefore, to the extent that decoupling 

encourages investment in energy efficiency, it is a positive 

from a societal perspective. Decoupling itself does not 

change the societal benefits of energy efficiency. 

While these cases are a good starting point, each utility 

will have some unique characteristics, such as differences 

in fuel and other costs, growth rates, regulatory structure, and required capital expenditures. These and other 

inputs can be customized in the Calculator so users can 

consider the possible impacts of energy efficiency on 

their unique situations. The Calculator was developed to 

aid users in promoting the adoption of energy efficiency 

programs, and the results are therefore geared for 

education and outreach purposes.6 

4 Though not modeled in these business case scenarios, incentive mechanisms can also be used to let shareholders profit from achieving efficiency goals, 

further protecting shareholders. Such incentives can increase the utility and shareholder motivations for increased energy efficiency investment. 

5 The decoupling mechanism assumed by the Calculator is a “generic” balancing account that adjusts rates annually to account for reduced sales 

volumes, thereby maintaining revenue at target projections. Differences in utility incentives that alternative decoupling mechanisms provide are discussed 

in Chapter 2: Utility Ratemaking & Revenue Requirements, but are not modeled. The decoupling mechanism does not protect the utility from 

cost variations. 

6 The Calculator was designed to assess a wide variety of utility types using easily obtainable input data. It was not designed for applications requiring 

detailed data for specific applications such as rate setting, comparing different types of energy efficiency policies, cost effectiveness testing, energy efficiency resource planning, and consumer behavior analysis. 

4-4 National Action Plan for Energy Efficiency 
Business Case Results


The eight cases evaluated were designed to isolate the impact 

of energy efficiency investments and decoupling mechanisms 

in different utility contexts (e.g., low-growth and high-growth 

utilities, vertically integrated and restructured utility, or cashonly and debt-financed publicly and cooperatively owned 

utilities). For each case, three energy efficiency scenarios are 

evaluated (no efficiency without decoupling, efficiency without decoupling, and efficiency with decoupling), while holding all other utility conditions and assumptions constant. The 

eight scenarios are divided into four sets of two cases each 

with contrasting assumptions. 

An explanation of the key results of the business cases is 

provided below, with further details provided for each 

case in Appendix B. 

Cases 1 and 2: Low-Growth and High-Growth 

Utilities 

In this first comparison, the results of implementing 

energy efficiency on two investor-owned electric and 

natural gas distribution utilities are contrasted. These 

utilities are spending the same percent of revenue on 

energy efficiency and vary only by load growth. The lowgrowth electric utility (Case 1) has a 1 percent sales 

growth rate and the low-growth gas utility has a 0 percent sales growth rate, while the high-growth electric 

utility (Case 2) has a 5 percent sales growth rate and the 

high-growth gas utility has a 2 percent sales growth rate. 

Table 4-2 compares the results for electric utilities, and 

Table 4-3 compares the results for the natural gas utilities. In both cases (and all other cases examined), the 

Calculator assumes a ‘current year’ test year for ratesetting. When rate adjustments are needed, the rates are 

set based on the costs and sales in that same year. 

Therefore, differences between forecasted and actual 

growth rates do not affect the results. 

Both electric and natural gas utilities show similar trends. 

With low load growth, the same level of energy efficiency 

investment offsets a high percentage of load growth, and 

utility return on equity (ROE) falls below target until the next 

rate case unless decoupling is in place.7 In contrast, the 

high-growth utility has an ROE that exceeds the target rate 

of return until the rates are decreased to account for the 

increasing sales. In both cases, energy efficiency reduces the 

utility return from what it would have been absent energy 

efficiency. Generally speaking, energy efficiency investments 

that account for a higher percentage of load growth expose 

an electric or natural gas utility to a greater negative financial effect unless decoupling is in place. 

These cases also look at the difference between the two 

utilities with and without a decoupling mechanism. Both 

utilities earn their target ROE in rate case years, with and 

without the energy efficiency in place. (Note that in practice, decoupling does not guarantee achieving the target 

ROE.) For the low-growth utility, the decoupling mechanism drives a rate adjustment to reach the target ROE, 

and the utility has higher ROE than without decoupling 

(Case 1). In the high-growth case, decoupling decreases 

ROE relative to the case without decoupling (Case 2), 

and prevents the utility from earning slightly above its 

target ROE from increased sales in between rate cases, 

allowing customer rates to decline sooner in the highgrowth electric case if decoupling is in place. 

In both electric and natural gas Case 1 and Case 2, 

average customer bills decline over time. The average bill 

is lower beginning in year 3 in the electric utility with no 

decoupling comparison, and in year 5 with decoupling. 

A similar pattern is found for the gas utility example. 

Average bills decrease more when the efficiency is a 

higher percent of load growth, even though rates 

slightly increase due to efficiency investments and 

reduced sales. The average customer bill declines more 

smoothly when a decoupling mechanism is used due to 

more frequent rate adjustments. 

For both electricity and natural gas energy efficiency, the net 

societal benefit is computed as the difference of the total 

benefits of energy efficiency, less the total costs. From a societal perspective, the benefits include the value of reduced 

expenditure on energy (including market price reductions— 

7 In Cases 1 and 2, the electric utility invests 2 percent of revenue in energy efficiency and the gas utility invests 0.5 percent of revenue. 

To create a sustainable, aggressive national commitment to energy efficiency 4-5
Table 4-2. High- and Low-Growth Results: Electric Utility 

Case 1: Low-Growth (1%) 

Return on Equity (ROE) 

Without efficiency and decoupling, the low sales drive 

ROE below the target return. Target ROE is achieved 

with energy efficiency (EE) and decoupling. Increasing 

energy efficiency without decoupling decreases ROE. 

Case 2: High-Growth (5%) 

Return on Equity (ROE) 

With high load growth, without decoupling, the utility achieves greater than the target ROE until rates are 

adjusted. With energy efficiency, sales and earnings 

are reduced, reducing ROE. 

Investor-Owned Utility Comparison of Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE ROE% - EE no Decoupling ROE% - EE and Decoupling Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Year 

Case 1 Case 2 After Tax ROE (%) 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Comparison of Average Rate Average Rate ($/kWh) 

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Average Rate ($/kWh) 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Year Year 

Case 1 Case 2 

Case 1: Low-Growth (1%) 

Rates 

Without energy efficiency, the utility sells higher 

volumes than in the no efficiency scenarios and has 

slightly lower rates. Rates in the energy efficiency 

scenario increase primarily due to lower throughput; 

rates are slightly higher in the decoupling scenario due to 

increase earnings to the target ROE. 

Case 2: High-Growth (5%) 

Rates 

In the high-growth case, rates are relatively flat. 

Without energy efficiency, the utility sells higher 

volumes and has slightly lower rates. Decoupling does 

not have a great impact in this case because the ROE 

is near target levels without any rate adjustments. 

4-6 National Action Plan for Energy Efficiency 
if any), reduced losses, reduced capital expenditures, and societal benefits are positive, the energy efficiency is costreduced air emissions (if emissions are monetized).8 The effective from a societal perspective. In both Case 1 and 

costs include both utility program and administration costs Case 2 (and all other cases evaluated using the tool), the net 

as well as the participant costs of energy efficiency. If the net societal benefits are positive for investments in energy 

Table 4-2. High- and Low-Growth Results: Electric Utility (continued) 

Case 1: Low-Growth (1%)


Bills 

Total customer bills with energy efficiency programs 

decline over time, indicating customer savings resulting 

from lower energy consumption. Rate increases 

through the decoupling mechanism reduce the pace 

of bill savings in the decoupling case. 

Percent Change in Customer Bills 

Case 1 

6% 

Case 2: High-Growth (5%)


Bills 

Total customer bills with energy efficiency decline over 

time, indicating customer savings resulting from lower 

energy consumption. There is little difference between 

the decoupling and no decoupling cases in the highgrowth scenario. 

Case 2 

6% 

-18% 

1 2 3 4 5 6 7 8 9 10 

Change in Bills (%) 

-18% 

-21% -21% 

1 2 3 4 5 6 7 8 9 10 

Year Year 

3% 3%

Change in Bills (%)

0% 0% 

-3% -3% 

-6% -6% 

-9% -9% 

-12% -12% 

-15% -15% 

Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling 

Case 1: Low-Growth (1%)


Net Societal Benefits 

Over time, the savings from energy efficiency exceed 

the annual costs. The societal cost and societal savings 

are the same, with and without decoupling. 

Delivered Costs and Benefits of EE 

Case 1 $400 

$300 

Case 2: High-Growth (5%)


Net Societal Benefits 

Over time, the savings from energy efficiency exceed 

the annual costs. The societal cost and societal savings 

are the same, with and without decoupling. 

Case 2 $400 

$300 

1 2 3 4 5 6 7 8 9 10 

$100 $100

1 2 3 4 5 6 7 8 9 10 

$0 $0

Year Year 

$/MWh

$/MWh

$200 $200 

Societal Cost ($/MWh saved) Societal Savings ($/MWh saved) 

8 The cases discussed in this document include conservative assumptions and do not include market price reductions or monetize air emissions in net 

societal benefits. 

To create a sustainable, aggressive national commitment to energy efficiency 4-7
efficiency. In the low-growth case, the savings exceed costs years for the electric utility cases and four years for the natwithin two years for both the electric and natural case cases. ural gas utility cases. Energy efficiency has a similar effect 

In the high-growth case, the savings exceed costs within five upon natural gas utilities, as shown in Table 4-3. 

Table 4-3. High- and Low-Growth Results: Natural Gas Utility 

Case 1: Low-Growth (0%) 

Return on Equity (ROE) 

Without efficiency and decoupling, the low sales 

result in ROE falling below the target return. Similarly, 

energy efficiency without decoupling drops utility 

return below target ROE. Target ROE is achieved with 

decoupling. 

Case 2: High-Growth (2%) 

Return on Equity (ROE) 

With high load growth, energy efficiency has less 

impact on total sales and earnings. Thus, the utility 

achieves close to its target ROE in the early years, 

although without decoupling, ROE falls slightly in later 

years as energy efficiency reduces sales over time. 

Investor-Owned Utility Comparison of Return on Equity After Tax ROE (%) 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

After Tax ROE (%) 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Year 

ROE% - No EE ROE% - EE no Decoupling ROE% - EE and Decoupling Target ROE% 

Year 

Case 1 Case 2 

Comparison of Average Rate Average Rate ($/therm)

$0.80 

$0.85 

$0.90 

$0.95 

$1.00 

$1.05 

$1.10 

1 2 3 4 5 6 7 8 9 10 

Year Year 

Case 1 Case 2 Average Rate ($/therm)

$0.80 

$0.85 

$0.90 

$0.95 

$1.00 

$1.05 

$1.10 

1 2 3 4 5 6 7 8 9 10 

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling 

Case 1: Low-Growth (0%) 

Rates 

Rates increase over time because of increasing rate base 

and low sales growth. Without energy efficiency, the utility sells higher volumes and has lower rates. Decoupling 

increases rates when sales volumes are below target. 

Case 2: High-Growth (2%) 

Rates 

Without energy efficiency, the utility sells higher volumes 

and has lower rates. Energy efficiency increases rates 

slightly in later years by reducing sales volumes. 

4-8 National Action Plan for Energy Efficiency 
Table 4-3. High- and Low-Growth Results: Natural Gas Utility (continued) 

Case 1: Low-Growth (0%)


Customer Bills 

Total customer bills with energy efficiency decline over 

time, indicating customer savings resulting from lower 

energy consumption. Customer utility bills initially 

increase slightly with decoupling as rates are increased to 

hold ROE at the target level and spending increases 

on efficiency. 

Percent Change in Customer Bills 

Case 1 

4% 

Case 2: High-Growth (2%)


Customer Bills 

Customer utility bills with energy efficiency reflect the 

more limited impact of efficiency programs on rate profile. Total customer bills decline over time, indicating customer savings resulting from lower energy consumption. 

Case 2 4% 

-10% 

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 

-10% 

Year Year Change in Bills (%)

2% 2%

Change in Bills (%)

0% 0%

-2% -2% 

-4% -4% 

-6% -6% 

-8% -8% 

Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling 

Case 1: Low-Growth (0%)


Net Societal Benefits 

Over time, the savings from energy efficiency exceed 

the annual costs. The societal cost and societal savings 

are the same, with and without decoupling. 

Delivered Costs and Benefits of EE 

Case 1 $6 

$5 

Case 2: High-Growth (2%)


Net Societal Benefits 

Over time, the savings from energy efficiency exceed 

the annual costs. The societal cost and societal savings 

are the same, with and without decoupling. 

Case 2 $6 

$5 

$1 

1 2 3 4 5 6 7 8 9 10 

$1 

$0 $0 

1 2 3 4 5 6 7 8 9 10 

Year Year 

$4 $4

$/therm

$/therm

$3 $3 

$2 $2 

Societal Cost ($/therm saved) Societal Savings ($/therm saved) 

To create a sustainable, aggressive national commitment to energy efficiency 4-9
Cases 3 and 4: Electric Power Plant Deferral 

This case study examines an electric investor-owned utility 

with a large capital project (modeled here as a 500-MW 

combined-cycle power plant, although the conclusions 

are similar for other large capital projects), planned for 

construction in 2009.9 Again the effect of a 1 percent 

growth rate (Case 3) is compared with a 5 percent 

growth rate (Case 4) with identical energy efficiency 

investments of 2 percent of electric utility revenues. 

Figure 4-1 shows the capital expenditure for the project 

with and without an aggressive energy efficiency plan 

and a summary of the net benefits from each perspective. The length of investment deferral is based on the 

percent of peak load reduced due to energy efficiency 

investments. The vertical axis shows how the expenditure in nominal dollars starts at $500 million in 2009, or 

slightly higher (due to inflation) after deferral. With Case 

3, energy efficiency investments account for a higher 

percentage of peak load growth, and can defer the project until 2013. With higher growth and the same level of 

efficiency savings (Case 4), the same efficiency investment only defers the project until 2010. 

In Case 3, the energy efficiency program causes a 

greater reduction in revenue requirement—a 30-year 

reduction of $476 million rather than a Case 4 reduction 

of $338 million—providing benefits from a customer 

perspective. From a societal perspective, the low-growth 

case energy efficiency program yields higher net societal 

benefit as well: $332 million versus $269 million. 

Figure 4-1. Comparison of Deferral Length with Low- and High-Growth 

30-year savings impact from EE Low-Growth Utility High-Growth Utility 

Decrease in Revenue Requirement (net present value [NPV], million dollars [$MM]) $476 $338 

Net Customer Savings – decoupling (NPV, $MM) $319 $275 

Net Societal Benefit (NPV, $MM) $332 $269 

Comparison of Investment Timing - Electric Utility 

0 

100 

200 

300 

400 

500 

600 

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

Year 

Capital Expenditure (Nominal $Millions)

0 

100 

200 

300 

400 

500 

600 

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

Year 

Capital Expenditure (Nominal $Millions) 

Without Energy Efficiency With Energy Efficiency 

Case 3 Case 4 

Case 3: Low-Growth Investment Timing Case 4: High-Growth Investment Timing 

9 This illustration demonstrates how energy efficiency can be used, including efforts to reduce peak capacity requirements, to defer a single 500 MW 

combined cycle power plant. Energy efficiency can also be used to defer other, smaller investments. 

4-10 National Action Plan for Energy Efficiency 
Table 4-4 compares the reduction in revenue requirement 

due to the deferral of the power plant investment between 

the two cases. In Case 3, the reduction in revenue requirement due to the deferral to 2013 results in present value 

savings of $36 million over the three years that the plant 

was deferred. In Case 4, the deferral provides present value 

savings of $11 million for the one-year deferral. 

Although the project is deferred longer in the lowgrowth case, fewer sales overall and higher installed capital costs result in higher rates over time relative to the 

high-growth case. In both cases, the increase in rates 

from energy efficiency programs, starting in year 1, is 

significantly less than the rate increase that occurs after 

the new power plant investment is made, leading to 

lower customer bills. Customer bill savings are greatest 

during the years that the plant is deferred.10 

Cases 5 and 6: Vertically Integrated Utility vs. 

Restructured Delivery Company 

In this example, a vertically integrated electric utility 

(Case 5) is compared with the restructured electric delivery 

Table 4-4. Power Plant Deferral Results 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Year 

Average Rate ($/kWh) 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Case 3 Case 4 

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling 

Case 3: Low-Growth (1%) 

Revenue Requirement 

2009 project deferred to 2013, resulting in a reduction in revenue requirement due to deferring the 

power plant over three years of PV$36 million. 

Other Capital Expenditures 

The low-growth case leads to the savings of other capital expenditures compared to the high-growth case. 

Retail Rates 

With low load growth, a given amount of energy 

efficiency defers so much load growth that the 

new power plant can be deferred for three 

years, allowing the utility to conserve capital and postpone rate increases for several years. 

Case 4: High-Growth (5%) 

Revenue Requirement 

2009 project deferred to 2010, resulting in a reduction in revenue requirement from deferring the power 

plant over a year of PV$11 million. 

Other Capital Expenditures 

The low-growth case leads to the savings of other capital expenditures compared to the high-growth case. 

Retail Rates 

With high load growth, energy efficiency reduces load 

growth enough to defer the new power plant investment by one year, slowing implementation of a relatively smaller rate increase. 

10 The Calculator assumes that a rate case occurs in the year following a large capital investment. When a decoupling mechanism is used, a higher rate 

adjustment (and immediate decrease in bill savings) occurs once a new major infrastructure investment is brought online. This charge is due to the new 

level of capital expenditures at the same time a positive decoupling rate adjustment is making up for previous deficiencies. 

To create a sustainable, aggressive national commitment to energy efficiency 4-11
company (Case 6); both experiencing a 2 percent growth expenditures than a restructured delivery utility. 

rate and investing 2 percent of revenue in energy effi- In general, the financial impact of energy efficiency on 

ciency. These cases assume that the vertically integrated delivery utilities is more pronounced than on vertically 

utility has more capital assets and larger annual capital integrated utilities with the same number of customers and 

Table 4-4. Power Plant Deferral Results (continued) 

Case 3: Low-Growth (1%)


Customer Bills 

Although rates rise with large capital expenditures, bills 

continue to fall over time as energy efficiency drives 

customer volume down to offset the higher rates. 

Percent Change in Customer Bills 

Case 3 

6% 

Case 4: High-Growth (5%)


Customer Bills 

Although rates rise with large capital expenditures, bills 

continue to fall over time as energy efficiency drives 

customer volume down to offset the higher rates. 

Case 4 

6% 

Change in Bills (%) 

-21% 

3% 

0% 

-3% 

-6% 

-9% 

-12% 

-15% 

-18% 

3%

Change in Bills (%)

0% 

-3% 

-6% 

-9% 

-12% 

-15% 

-18% 

-21% 

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 

Year Year 

Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling 

Case 3: Low-Growth (1%) Case 4: High-Growth (5%) 

Load Impact Load Impact 

Energy efficiency significantly reduces load growth With high growth, energy efficiency has a limited 

and reduces the need for new capital investment. impact on peak load, and defers a modest amount of 

new capital investment. 

Comparison of Peak Load Growth 

Case 3 Case 4 

160% 160% 

Peak Load % of First Yr

Peak Load % of First Yr 150% 

140% 

130% 

120% 

110% 

100% 

150% 

140% 

130% 

120% 

110% 

100% 

90% 90% 

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 

Year Year 

Forecasted Growth - EE and Decoupling Forecasted Growth - No EE 

4-12 National Action Plan for Energy Efficiency 
sales. Once divested of a generation plant, the Table 4-5 summarizes the comparison of ROE, rates, bills 

distribution utility is a smaller company (in terms of total and societal benefits. Without implementing energy effirate base and capitalization), and fluctuations in through- ciency, both utilities are relatively financially healthy, 

put and earnings have a relatively larger impact on return. achieving near their target rate of return in each year; 

Table 4-5. Vertically Integrated and Delivery Company Results 

Case 5: Vertically Integrated


Return on Equity (ROE) 

Because the vertically integrated utility has a large rate 

base, the impact of energy efficiency upon total earnings 

is limited and it has little impact upon ROE (with or without decoupling). 

Investor-Owned Utility Comparison of Return on Equity 

Case 5 15% 

Case 6: Delivery Utility


Return on Equity (ROE) 

With a smaller rate base and revenues only from kWh 

deliveries, energy efficiency has a larger impact on a 

ROE without decoupling than a vertically integrated utility. 

Case 6 

15% 

After Tax ROE (%)

After Tax ROE (%)

12% 

9% 

6% 

12% 

9% 

6% 

3% 

1 2 3 4 5 6 7 8 9 10 

Year 

Case 5: Vertically Integrated


Rates 

Without energy efficiency, the utility sells higher 

volumes and has lower rates. Total retail rates, including 

delivery and energy, are similar for the vertically 

integrated and restructured utilities. 

Comparison of Average Rate 

Case 5 $0.30 

3% 

1 2 3 4 5 6 7 8 9 10 

Year 

ROE% - No EE ROE% - EE no Decoupling ROE% - EE and Decoupling Target ROE% 

Case 6: Delivery Utility 

Rates 

Without energy efficiency, the utility sells higher 

volumes and has lower rates. Total retail rates, 

including delivery and energy, are similar for the 

vertically integrated and restructured utilities. 

Case 6 $0.30 

Average Rate ($/kWh)

Average Rate ($/kWh) $0.25 

$0.20 

$0.15 

$0.25 

$0.20 

$0.15 

$0.10 $0.10 

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 

Year Year 

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling 

To create a sustainable, aggressive national commitment to energy efficiency 4-13
Table 4-5. Vertically Integrated and Delivery Company Results (continued) 

Case 5: Vertically Integrated


Bills 

Total customer bills with energy efficiency programs 

decline over time, indicating average customer savings 

resulting from lower energy consumption. Customer 

utility bills decrease more smoothly with decoupling 

as a result of the more frequent rate adjustments. 

Percent Change in Customer Bills 

Case 5 

6% 

Case 6: Delivery Utility


Bills 

Total customer bills with energy efficiency programs 

decline over time, indicating average customer savings 

resulting from lower energy consumption. Customer utility bills decrease more slowly in the decoupling case, 

because rates are increased earlier to offset reduced sales. 

Case 6 

6% 

Change in Bills (%)

Change in Bills (%)

3% 3% 

0% 

-3% 

-6% 

-9% 

-12% 

-15% 

-18% 

0% 

-3% 

-6% 

-9% 

-12% 

-15% 

-18% 

-21% 

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 

-21% 

Year Year 

Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling 

Case 5: Vertically Integrated


Net Societal Benefits 

Over time, the savings from energy efficiency exceed 

the annual costs. The societal cost and societal savings 

are the same, with and without decoupling. 

Delivered Costs and Benefits of EE 

Case 5 $400 

$300 

1 2 3 4 5 6 7 8 9 10 

$/MWh $200 

$100 $100 

Case 6: Delivery Utility


Net Societal Benefits 

As with the vertically integrated utility, savings from 

energy efficiency exceed the costs over time. The 

distribution utility has a lower initial societal savings 

because the distribution company reduces fewer 

capital expenditures at the outset of the energy 

efficiency investments. Over time, the societal costs 

and savings are similar to the distribution company. 

Case 6 $400 

$300 

1 2 3 4 5 6 7 8 9 10 

$/MWh $200 

$0 $0 

Year Year 

Societal Cost ($/MWh saved) Societal Savings ($/MWh saved) 

4-14 National Action Plan for Energy Efficiency 
however, introducing energy efficiency reduces ROE and 

earnings for both utilities unless a decoupling mechanism is put in place. Customer rates increases, bill 

savings, and societal benefits follow similar trends with 

energy efficiency, as discussed in Cases 1 and 2. 

Cases 7 and 8: Publicly and Cooperatively 

Owned Electric Utilities 

The first six cases used an investor-owned electric utility 

to illustrate the business case for energy efficiency. The 

Calculator also can evaluate the impact of efficiency 

programs on publicly and cooperatively owned electric 

utilities. Many of the issues related to the impact of 

growth rates and capital deferral discussed in the 

investor-owned utility examples apply equally to publicly 

and cooperatively owned utilities. From a net societal 

benefit perspective, the results are identical for publicly, 

cooperatively, and privately owned utilities. The ratemaking 

and utility financing perspectives are different, however. 

The financial position of publicly owned utilities is evaluated primarily based on either the debt coverage ratio 

(which is critical to maintaining a high bond rating and 

low cost capital) or the minimum cash position (for 

utilities with no debt). Table 4-6 shows the results of a 

publicly or cooperatively owned utility with an energy 

efficiency program of 2 percent of revenue and load 

growth of 2 percent. In both cases, the assumption is 

made that the utility adjusts rates whenever the debt 

coverage ratio or minimum cash position falls below a 

threshold. This assumption makes comparisons of different cases more difficult, but the trends are similar to the 

investor-owned utilities on a regular rate case cycle. The 

change in utility financial health due to energy efficiency 

is relatively modest because of the ability to adjust the 

retail rates to maintain financial health. The publicly and 

cooperatively owned utilities will experience similar 

financial health problems as investor-owned utilities if they 

do not adjust rates. 

Table 4-6. Publicly and Cooperatively Owned Utility Results 

Case 7: Minimum Debt Coverage Ratio 

Utility Financial Health 

A decoupling mechanism stabilizes the utility’s ability 

to cover debt by adjusting rates for variations in 

throughput. Without decoupling, rates are adjusted 

whenever the debt coverage rate falls below a threshold 

(ratio 2 in the example). The rate adjustment is 

required earlier in the energy efficiency scenario. 

Case 8: Minimum Cash Position 

Utility Financial Health 

In the no decoupling cases (with and without energy 

efficiency), rates are reset if the cash position falls 

below a minimum threshold ($70 million in this 

example). With decoupling, the utility adjusts rates to 

hit the target cash level in each year. The results are 

similar as long as there is an ability to reset rates when 

needed to maintain a minimum cash position. 

Public Power/Cooperative Debt Coverage Ratio 

Year 

Debt Coverage Ratio 

Debt Coverage Ratio - No EE 

Debt Coverage Ratio - EE no Decoupling 

Debt Coverage Ratio - EE and Decoupling 

1.00 

1.50 

2.00 

2.50 

1 2 3 4 5 6 7 8 9 10 

Cash Position at End of Year 

Year 

End of Year Cash ($MM)

$40 

$50 

$60 

$70 

$80 

1 2 3 4 5 6 7 8 9 10 

Cash Position - No EE 

Cash Position - EE no Decoupling 

Cash Position - EE and Decoupling 

Case 7 Case 8 

To create a sustainable, aggressive national commitment to energy efficiency 4-15
4-16 National Action Plan for Energy Efficiency 

Case 7: Minimum Debt Coverage Ratio 

Customer Rates 

With or without decoupling, rates are adjusted to 

maintain financial health. Rates are lowest without 

energy efficiency and highest with energy efficiency 

and decoupling. 

Case 8: Minimum Cash Position 

Customer Rates 

Once energy efficiency is implemented, retail rate levels 

are similar, with or without decoupling in place. The 

decoupling case is slightly smoother with smaller, 

more frequent rate adjustments. 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Year 

Average Rate ($/kWh) 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling 

Case 7 Case 8 

Table 4-6. Publicly and Cooperatively Owned Utility Results (continued) 

Case 7: Minimum Debt Coverage Ratio 

Customer Bills 

Average customer bills decline with energy efficiency 

investments, with and without decoupling. The 

‘randomness’ in the bill change is due to different timing of rate adjustments in the energy efficiency and 

no energy efficiency cases. However, overall the trend 

is downward. 

Case 8: Minimum Cash Position 

Customer Bills 

Average customer bills decline with energy efficiency 

investments in both the decoupling and no decoupling 

cases. 

Percent Change in Customer Bills 

Year 

1 2 3 4 5 6 7 8 9 10 

Year 

1 2 3 4 5 6 7 8 9 10 

Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling 

Case 7 Case 8 

Change in Bills (%)

Change in Bills (%) 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 
Key Findings


This chapter summarizes eight business cases for energy 

efficiency resulting from the Energy Efficiency Benefits 

Calculator. This Calculator provides simplified results 

from a utility, customer, and societal perspective. As stated 

on page 4-1, the key findings from the eight cases 

examined include: 

• For both electric and gas utilities, energy efficiency 

investments consistently lower costs over time for both 

utilities and customers, while providing positive 

net benefits to society. When enhanced by ratemaking 

policies to address utility financial barriers to 

energy efficiency, such as decoupling the utility’s 

revenues from sales volumes, utility financial health can 

be maintained while comprehensive, cost-effective 

energy efficiency programs are implemented. 

• The costs of energy efficiency and reduced sales 

volume might initially raise gas or electricity bills due to 

slightly higher rates from efficiency investment and 

reduced sales. However, as the efficiency gains help 

participating customers lower their energy consumption, the decreased energy use offsets higher rates to 

drive their total energy bills down. In the 8 cases examined, average customer bills were reduced by 2 percent 

to 9 percent over a ten year period, compared to the 

no-efficiency scenario. 

• Investment in cost-effective energy efficiency programs 

yields a net benefit to society—on the order of 

hundreds of millions of dollars in NPV for the illustrative 

case studies (small- to medium-sized utilities). 

Recommendations and Options


The National Action Plan for Energy Efficiency Leadership 

Group offers the following recommendation as a way to 

overcome many of the barriers to energy efficiency, and 

provides the following options for consideration by utilities, regulators, and stakeholders (as presented in the 

Executive Summary). 

Recommendation: Broadly communicate the benefits of, and opportunities for, energy efficiency. 

Experience shows that energy efficiency programs help 

customers save money and contribute to lower cost 

energy systems. But these impacts are not fully documented nor recognized by customers, utilities, regulators 

and policy-makers. More effort is needed to establish the 

business case for energy efficiency for all decision-makers 

and to show how a well-designed approach to energy 

efficiency can benefit customers, utilities, and society by 

(1) reducing customers bills over time, (2) fostering 

financially healthy utilities (return on equity [ROE], earnings per share, debt coverage ratios unaffected), and (3) 

contributing to positive societal net benefits overall. 

Effort is also necessary to educate key stakeholders that, 

although energy efficiency can be an important low-cost 

resource to integrate into the energy mix, it does require 

funding, just as a new power plant requires funding. 

Options to Consider: 

• Establishing and educating stakeholders on the business case for energy efficiency at the state, utility, and 

other appropriate level addressing relevant customer, 

utility, and societal perspectives. 

• Communicating the role of energy efficiency in lowering 

customer energy bills and system costs and risks 

over time. 

Reference 

National Action Plan for Energy Efficiency. (2006). 

Energy Efficiency Benefits Calculator. 

<http://www.epa.gov/cleanenergy/eeactionplan.htm> 

To create a sustainable, aggressive national commitment to energy efficiency 4-17

5: Rate Design 

Retail electricity and natural gas utility rate structures and price levels influence customer consumption, 

and thus are an important tool for encouraging the adoption of energy-efficient technologies and 

practices. The rate design process typically involves balancing multiple objectives, among which energy 

efficiency is often overlooked. Successful rate designs must balance the overall design goals of utilities, 

customers, regulators, and other stakeholders, including encouraging energy efficiency. 

Overview


Retail rate designs with clear and meaningful price 

signals, coupled with good customer education, can be 

powerful tools for encouraging energy efficiency. At the 

same time, rate design is a complex process that must 

take into account multiple objectives (Bonbright, 1961; 

Philips, 1988). The main priorities for rate design are 

recovery of utility revenue requirements and fair apportionment of costs among customers. 

Other important regulatory and legislative goals include: 

• Stable revenues for the utility. 

• Stable rates for customers. 

• Social equity in the form of lifeline rates for essential 

needs of households (PURPA of 1978). 

• Simplicity of understanding for customers and ease 

of implementation for utilities. 

• Economic efficiency to promote cost-effective load 

management. 

This chapter considers the additional goal of encouraging 

investment in energy efficiency. While it is difficult to 

achieve every goal of rate design completely, consideration of a rate design’s impact on adoption of energy efficiency and any necessary trade-offs can be included as 

part of the ratemaking process. 

Using Rate Design to Promote Energy 

Efficiency 

In developing tariffs to encourage energy efficiency, the 

following questions arise: (1) What are the key rate 

design issues, and how do they affect rate designs for 

energy efficiency? (2) What different rate design options 

are possible, and what are their pros and cons? (3) What 

other mechanisms can encourage efficiency that are not 

driven by tariff savings? and (4) What are the most 

successful strategies for encouraging energy efficiency 

in different jurisdictions? These questions are addressed 

throughout this chapter. 

Leadership Group Recommendations 

Applicable to Rate Design 

• Modify ratemaking practices to promote energy 

efficiency investments. 

• Broadly communicate the benefits of, and 

opportunities for, energy efficiency. 

A more detailed list of options specific to the 

objective of promoting energy efficiency in rate 

design is provided at the end of this chapter. 

Background: Revenues and Rates 

Utility rates are designed to collect a specific revenue 

requirement based on natural gas or electricity sales. As 

rates are driven by sales and revenue requirements, these 

three aspects of regulation are tightly linked. (Revenue 

requirement issues are discussed in Chapter 2: Utility 

Ratemaking & Revenue Requirements.) 

To create a sustainable, aggressive national commitment to energy efficiency 5-1
Until the 1970s, rate structures were based on the 

principle of average-cost pricing in which customer 

prices reflected the average costs to utilities of serving 

their customer class. Because so many of a utility’s costs 

were fixed, the main goal of rate design up until the 

1970s was to promote sales. Higher sales allowed fixed 

costs to be spread over a larger base and helped push 

rates down, keeping stakeholders content with averagecost based rates (Hyman et al., 2000). 

This dynamic began to change in many jurisdictions in 

the 1970s, with rising oil prices and increased emphasis 

on conservation. With the passage of the 1978 Public 

Utility Regulatory Policies Act (PURPA), declining block 

rates were replaced by flat rates or even inverted block 

rates, as utilities began to look for ways to defer new 

plant investment and reduce the environmental impact 

of energy consumption. 

Key Rate Design Issues 

Utilities and regulators must balance competing goals 

in designing rates. Achieving this balance is essential 

for obtaining regulatory and customer acceptance. 

The main rate design issues are described below. 

Provide Recovery of Revenue Requirements 

and Stable Utility Revenues 

A primary function of rates is to let utilities collect their 

revenue requirements. Utilities often favor rate forms 

that maximize stable revenues, such as declining block 

rates. The declining block rate has two or more tiers of 

usage, with the highest rates in the first tier. Tier 1 is 

typically a relatively low monthly usage level that most 

customers exceed. This rate gives utilities a high degree 

of certainty regarding the number of kilowatt-hours 

(kWh) or therms that will be billed in Tier 1. By designing 

Tier 1 rates to collect the utility’s fixed costs, the utility 

gains stability in the collection of those costs. At the 

same time, the lower Tier 2 rates encourage higher 

energy consumption rather than efficiency, which is 

detrimental to energy efficiency impacts.1 Because 

energy efficiency measures are most likely to change 

customer usage in Tier 2, customers will see smaller 

bill reductions under declining block rates than under 

flat rates. Although many utilities have phased out 

declining block rates, a number of utilities continue to 

offer them.2 

Another rate element that provides revenue stability 

but also detracts from the incentive to improve efficiency 

is collecting a portion of the revenue requirement 

through a customer charge that is independent of 

usage. Because the majority of utility costs do not vary 

with changes in customer usage level in the short run, 

the customer charge also has a strong theoretical basis. 

This approach has mixed benefits for energy efficiency. 

On one hand, a larger customer charge means a smaller 

volumetric charge (per kWh or therm), which lowers 

the customer incentive for energy efficiency. On the 

other hand, a larger customer charge and lower volumetric charge reduces the utilities profit from increased 

sales, reducing the utility disincentive to promote energy 

efficiency. 

Rate forms like declining block rates and customer 

charges promote revenue stability for the utility, but 

they create a barrier to customer adoption of energy 

efficiency because they reduce the savings that customers can realize from reducing usage. In turn, electricity demand is more likely to increase, which could 

lead to long-term higher rates and bills where new 

supply is more costly than energy efficiency. To promote energy efficiency, a key challenge is to provide a 

1 Brown and Sibley (1986) opine that a declining block structure can promote economic efficiency if the lowest tier rate can be set above marginal cost, 

while inducing additional consumption by some consumers. A rising marginal cost environment suggests, however, that a declining block rate structure 

with rates below the increasing marginal costs is economically inefficient. 

2 A partial list of utilities with declining block residential rates includes: Dominion Virginia Power, VA; Appalachian Power Co, VA; Indianapolis Power and 

Light Co., IN; Kentucky Power Co., KY; Cleveland Electric Illum Co., OH; Toledo Edison Co., OH; Rappahannock Electric Coop, VA; Lincoln Electric System, 

NE; Cuivre River Electric Coop Inc., MO; Otter Tail Power Co., ND; Wheeling Power Co., WV; Matanuska Electric Assn Inc., AK; Homer Electric Association 

Inc., AK; Lower Valley Energy, NE. 

5-2 National Action Plan for Energy Efficiency 
level of certainty to utilities for revenue collection 

without dampening customer incentive to use energy 

more efficiently. 

Fairly Apportion Costs Among Customers 

Revenue allocation is the process that determines the 

share of the utility’s total revenue requirement that will 

be recovered from each customer class. In regulatory 

proceedings, this process is often contentious, as each 

customer class seeks to pay less. This process makes it 

difficult for utilities to propose rate designs that shift 

revenues between different customer classes. 

In redesigning rates to encourage energy efficiency, it is 

important to avoid unnecessarily or inadvertently shifting 

costs between customer classes. Rate design changes 

should instead focus on providing a good price signal for 

customer consumption decisions. 

Promote Economic Efficiency for CostEffective Load Management 

According to economic theory, the most efficient outcome occurs when prices are equal to marginal costs, 

resulting in the maximum societal net benefit from 

consumption. 

Marginal Costs 

Marginal costs are the changes in costs required to produce one additional unit of energy. In a period of rising 

marginal costs, rates based on marginal costs more realistically reflect the cost of serving different customers, 

and provide an incentive for more efficient use of 

resources (Bonbright, 1961; Kahn, 1970; Huntington, 

1975; Joskow, 1976; Joskow, 1979). 

A utility's marginal costs often include its costs of complying with local, state, and federal regulations (e.g., Clean 

Air Act), as well as any utility commission policies addressing the environment (e.g., the use of the societal test for 

benefit-cost assessments). Rate design based on the 

utility's marginal costs that promotes cost-effective energy 

efficiency will further increase environmental protection 

by reducing energy consumption. 

Despite its theoretical attraction, there are significant barriers to fully implementing marginal-cost pricing in electricity, especially at the retail level. In contrast to other 

commodities, the necessity for generation to match load 

at all times means that outputs and production costs are 

constantly changing, and conveying these costs as real 

time “price signals” to customers, especially residential 

customers, can be complicated and add additional costs. 

Currently, about half of the nation’s electricity customers 

are served by organized real-time electricity markets, 

which can help provide time-varying prices to customers 

by regional or local area. 

Notwithstanding the recent price volatility, exacerbated 

by the 2005 hurricane season and current market conditions, wholesale natural gas prices are generally more 

stable than wholesale electricity prices, largely because 

of the ability to store natural gas. As a result, marginal 

costs have been historically a less important issue for 

natural gas pricing. 

Short-Run Versus Long-Run Price Signals 

There is a fundamental conflict between whether electricity 

and natural gas prices should reflect short-run or long-run 

marginal costs. In simple terms, short-run costs reflect the 

variable cost of production and delivery, while long-run 

costs also include the cost of capital expansion. For programs such as real-time pricing in electricity, short-run 

marginal costs are used for the price signals so they can 

induce efficient operating decisions on a daily or hourly 

basis. 

Rates that reflect long-run marginal costs will promote 

economically efficient investment decisions in energy 

efficiency, because the long-run perspective is consistent 

with the long expected useful lives of most energy efficiency measures, and the potential for energy efficiency 

to defer costly capital investments. For demand-response 

and other programs intended to alter consumption on a 

daily or hourly basis, however, rates based on short-run 

To create a sustainable, aggressive national commitment to energy efficiency 5-3
Applicability of Rate Design Issues 

Implications for Clean Distributed Generation and 

Demand Response. The rate issues for energy efficiency also apply to clean distributed generation and 

demand response, with two exceptions. Demand 

response is focused on reductions in usage that occur 

for only a limited number of hours in a year, and occur 

at times that are not known far in advance (typically 

no more than one day notice, and often no more than 

a few hours notice). Because of the limited hours of 

operation, the revenue erosion from demand 

response is small compared to an energy efficiency 

measure. In addition, it could be argued that shortrun, rather than long-run, costs are the appropriate 

cost metric to use in valuing and pricing demand 

response programs. 

Public Versus Private Utilities. The rate issues are 

essentially the same for both public and private utilities. Revenue stability might be a lesser concern for 

public utilities, as they could approach their city 

leaders for rate changes. Frequent visits to council 

chambers for rate changes might be frowned upon, 

however, so revenue stability will likely remain important to many public utilities as well. 

marginal cost might be more appropriate. Therefore, in 

developing retail rates, the goals of short-run and longrun marginal based pricing must be balanced. 

Cost Causation 

Using long-run marginal costs to design an energyefficiency enhancing tariff can present another challenge 

—potential inconsistency with the cost-causation principle that a tariff should reflect the utility's various costs of 

serving a customer. This potential inconsistency diminishes 

in the long run, however, because over the long run, 

some costs that might be considered fixed in the near 

term (e.g., generation or transmission capacity, new 

interstate pipeline capacity or storage) are actually variable. Such costs can be reduced through sustained load 

Gas Versus Electric. As discussed above, gas marginal 

costs are less volatile than electricity marginal costs, so 

providing prices that reflect marginal costs is generally 

less of a concern for the gas utilities. In addition, the 

nature of gas service does not lend itself to complicated 

rate forms such as those seen for some electricity customers. Nevertheless, gas utilities could implement 

increasing tier block rates, and/or seasonally differentiated rates to stimulate energy efficiency. 

Restructured Versus Non-Restructured Markets. 

Restructuring has had a substantial impact on the 

funding, administration, and valuation of energy efficiency programs. It is no coincidence that areas with 

high retail electricity rates have been more apt to 

restructure their electricity markets. The higher rates 

increase the appeal of energy efficiency measures, and 

the entry of third-party energy service companies can 

increase customer interest and education regarding 

energy efficiency options. In a retail competition environment, however, there might be relatively little ratemaking flexibility. In several states, restructuring has 

created transmission and distribution-only utilities, so 

the regulator’s ability to affect full electricity rates 

might be limited to distribution costs and rates for 

default service customers. 

reductions provided by energy efficiency investment, 

induced by appropriately designed marginal cost-based 

rates. Some costs of a utility do not vary with a customer's kWh usage (e.g., hookup and local distribution). 

As a result, a marginal cost-based rate design may 

necessarily include some fixed costs, which can be 

collected via a volumetric adder or a relatively small 

customer charge. However, utilities that set usage rates 

near long-run marginal costs will encourage energy efficiency and promote other social policy goals such as 

affordability for low-income and low-use customers 

whose bills might increase with larger, fixed charges. 

Hence, a practical implementation of marginal-cost 

based ratemaking should balance the trade-offs and 

competing goals of rate design. 

5-4 National Action Plan for Energy Efficiency 
Provide Stable Rates and Protect Low-Income Customers 

Rate designs to promote energy efficiency must consider whether or not the change will lead to bill 

increases. Mitigating large bill increases for individual 

customers is a fundamental goal of rate design, and 

in some jurisdictions low-income customers are also 

afforded particular attention to ensure that they are 

not adversely affected by rate changes. In some cases, 

low-income customers are eligible for special rates or 

rate riders that protect them from large rate increases, 

as exemplified by the lifeline rates provision in Section 

114 of the 1978 PURPA. Strategies to manage bill 

impacts include phasing-in rate changes to reduce the 

rate shock in any single year, creating exemptions for 

certain at-risk customer groups, and disaggregating 

customers into small customer groups to allow more 

targeted rate forms. 

Because of the concern over bill impacts, new and innovative rates are often offered as voluntary rates. While 

improving acceptance, voluntary rate structures generally 

attract a relatively small percentage of customers (less 

than 20 percent) unless marketed heavily by the utility. 

Voluntary rates can lead to some “free riders,” meaning 

customers who achieve bill reductions without changing 

their consumption behavior and providing any real savings to the utility. Rates to promote energy efficiency can 

be offered as voluntary, but the low participation and 

free rider issues should be taken into account in their 

design to ensure that the benefits of the consumption 

changes they encourage are at least as great as the 

resulting bill decreases. 

Maintain Rate Simplicity 

Economists and public policy analysts can become enamored with efficient pricing schemes, but customers generally prefer simple rate forms. The challenge for 

promoting energy efficiency is balancing the desire for 

rates that provide the right signals to customers with the 

need to have rates that customers can understand, and 

to which they can respond. Rate designs that are too 

complicated for customers to understand will not be 

effective at promoting efficient consumption decisions. 

Particularly in the residential sector, customers might pay 

more attention to the total bill than to the underlying 

rate design. 

Addressing the Issues: 

Alternative Approaches 

The prior sections listed the issues that stakeholders 

must balance in designing new rates. This section 

presents some traditional and non-traditional rate 

designs and discusses their merits for promoting energy 

efficiency. The alternatives described below vary by 

metering/billing requirement, information complexity, 

and ability to reflect marginal cost.3 

Rate Design Options 

Inclining Tier Block 

Inclining tier block rates, also referred to as inverted 

block rates, have per-unit prices that increase for each 

successive block of energy consumed. Inclining tiered 

rates offer the advantages of being simple to understand 

and simple to meter and bill. Inclining rates can also 

meet the policy goal of protecting small users, which 

often include low-income customers. In fact, it was the 

desire to protect small users that prompted the initiation 

of increasing tiers in California. Termed “lifeline rates” at 

the time, the intention was to provide a small base level 

of electricity to all residential customers at a low rate, 

and charge the higher rate only to usage above that 

base level. The concept of lifeline rates continues in various forms for numerous services such as water and 

sewer services, and can be considered for delivery or 

commodity rates for electricity and natural gas. However, 

in many parts of the country, low-income customers are 

not necessarily low-usage customers, so a lifeline rate 

might not protect all low-income customers from 

energy bills. 

3 As part of its business model, a utility may use innovative rate options for the purpose of product differentiation. For example, advanced metering that 

enables a design with continuously time-varying rates can apply to an end-use (e.g., air conditioning) that is the main contributor to the utility's system 

peak. Another example is the bundling of sale of electricity and consumer devices (e.g., a 10-year contract for a central air conditioner whose price 

includes operation cost). 

To create a sustainable, aggressive national commitment to energy efficiency 5-5
Tiered rates also provide a good fit for regions where 

the long-run marginal cost of energy exceeds the current average cost of energy. For example, regions with 

extensive hydroelectric resources might have low average costs, but their marginal cost might be set by much 

higher fossil plant costs or market prices (for purchase 

or export). 

See Table 5-1 for additional utilities that offer inclining 

tier residential rates. 

Time of Use (TOU) 

TOU rates establish varying charges by season or time of 

day. Their designs can range from simple on- and offpeak rates that are constant year-round to more complicated rates with seasonally differentiated prices for several time-of-day periods (e.g., on-, mid- and off-peak). 

TOU rates have support from many utilities because of 

the flexibility to reflect marginal costs by time of delivery. 

TOU rates are commonly offered as voluntary rates for 

residential electric customers,4 and as mandatory rates 

for larger commercial and industrial customers. Part of 

the reason for TOU rates being applied primarily to 

larger users is the additional cost of TOU metering and 

billing, as well as the assumed greater ability of larger 

customers to shift their loads. 

TOU rates are less applicable to gas rates, because the 

natural storage capability of gas mains allows gas utilities 

to procure supplies on a daily, rather than hourly, basis. 

Additionally, seasonal variations are captured to a large 

extent in costs for gas procurement, which are typically 

passed through to the customer. An area with constrained seasonal gas transportation capacity, however, 

could merit a higher distribution cost during the constrained season. Alternatively, a utility could recover a 

higher share of its fixed costs during the high demand 

season, because seasonal peak demand drives the 

sizing of the mains. 

As TOU rates are typically designed to be revenueneutral with the status quo rates, a high on-peak price 

will be accompanied by a low off-peak price. Numerous 

studies in electricity have shown that while the high onpeak prices do cause a reduction in usage during that 

period, the low off-peak prices lead to an increase in 

usage in the low-cost period. There has also been an 

Table 5-1. Partial List of Utilities With Inclining Tier Residential Rates 

Utility Name State Tariff URL 

Florida Power and Light FL http://www.fpl.com/access/contents/how_to_read_your_bill.shtml 

Consolidated Edison NY http://www.coned.com/documents/elec/201-210.pdf 

Pacific Gas & Electric CA http://www.pge.com/res/financial_assistance/medical_baseline_life_support/ 

understanding/index.html#topic4 

Southern California Edison CA http://www.sce.com/NR/rdonlyres/728FFC8C-91FD-4917-909BArizona Public Service Co AZ https://www.aps.com/my_account/RateComparer.html 

Sacramento Municipal Util Dist CA http://www.smud.org/residential/rates.html 

Indiana Michigan Power Co MI https://www.indianamichiganpower.com/global/utilities/tariffs/ 

Michigan/MISTD1-31-06.pdf 

Modesto Irrigation District CA http://www.mid.org/services/tariffs/rates/ums-d-residential.pdf 

Turlock Irrigation District CA http://www.tid.org/Publisher_PDFs/DE.pdf 

Granite State Electric Co NH http://www.nationalgridus.com/granitestate/home/rates/4_d.asp 

Vermont Electric Cooperative, Inc VT http://www.vtcoop.com/PageViewer.aspx?PageName=Rates%20Summary 

City of Boulder NV http://www.bcnv.org/utilities.html#electric,waterandsewer 

4 For a survey of optional rates with voluntary participation, see Horowitz and Woo (2006). 

5-6 National Action Plan for Energy Efficiency 
“income effect” observed where people buy more energy 

as their overall bill goes down, due to switching consumption to lower price periods. The net effect might 

not be a significant decrease in total electricity usage, 

but TOU rates do encourage reduced usage when that 

reduction is the most valuable. Another important consideration with TOU prices is the environmental impact. 

Depending on generation mix and the diurnal emissions 

profile of the region, shifting consumption from the onpeak period to off-peak period might provide environmental net benefits. 

The Energy Policy Act of 2005 Section 1252 requires 

states and non-regulated utilities, by August 8, 2007, to 

consider adopting a standard requiring electric utilities to 

offer all of their customers a time-based rate schedule 

such as time-of-use pricing, critical peak pricing, realtime pricing, or peak load reduction credits. 

Dynamic Rates 

Under a dynamic rate structure, the utility has the ability 

to change the cost or availability of power with limited, 

or no, notice. Common forms of dynamic rates include 

the following: 

• Real-time pricing (RTP) rates vary continuously over 

time in a way that directly reflects the wholesale price 

of electricity. 

• Critical peak pricing (CPP) rates have higher rates 

during periods designated as critical peak periods by 

the utility. Unlike TOU blocks, the days in which critical 

peaks occur are not designated in the tariff, but are 

designated on relatively short notice for a limited 

number of days during the year. 

• Non-firm rates typically follow the pricing form of the 

otherwise applicable rates, but offer discounts or 

incentive payments for customers to curtail usage during 

times of system need (Horowitz and Woo, 2006). Such 

periods of system need are not designated in advance 

through the tariff, and the customer might receive little 

notice before energy supply is interrupted. In some 

cases, customers may be allowed to “buy through” 

periods when their supply will be interrupted by paying 

a higher energy charge (a non-compliance penalty). In 

those cases, the non-firm rate becomes functionally 

identical to CPP rates. 

Dynamic rates are generally used to: 1) promote load 

shifting by large, sophisticated users, 2) give large users 

access to low “surplus energy” prices, or 3) reduce peak 

loads on the utility system. Therefore, dynamic rates are 

complementary to energy efficiency, but are more useful 

for achieving demand response during peak periods than 

reducing overall energy usage. 

Two-Part Rates 

Two-part rates refer to designs wherein a base level of 

customer usage is priced at rates similar to the status 

quo (Part 1) and deviations from the base level of usage 

are billed at the alternative rates (Part 2). Two-part rates 

are common among RTP programs to minimize the free 

rider problem. By implementing a two-part rate, customers receive the real time price only for their change 

in usage relative to their base level of usage. Without the 

two-part rate form, most low load-factor customers on 

rates with demand charges would see large bill reductions for moving to an RTP rate. 

A two-part rate form, however, could also be combined 

with other rate forms that are more conducive to energy 

efficiency program adoption. For example, a two-part 

rate could be structured like an increasing tiered block 

rate, with the Tier 1 allowance based on the customer’s 

historical usage. This structure would address many of 

the rate design barriers such as revenue stability. Of 

course, there would be implementation issues, such as 

determining what historical period is used to set Part 1, 

and how often that baseline is updated to reflect 

changes in usage. Also, new customers would need to 

be assigned an interim baseline. 

To create a sustainable, aggressive national commitment to energy efficiency 5-7
Demand Charges 

Demand charges bill customers based on their peak usage 

rather than their total usage during the month. For electricity, demand charges are based on usage during particular 

TOU periods (e.g., peak demand) or usage during any period in the month (e.g., maximum demand). Demand 

charges can also use a percentage of the highest demand 

over the prior year or prior season as a minimum demand 

level used for billing. For natural gas, demand can be based 

on the highest monthly usage over the past year or season. 

For both gas and electricity, utilities prefer demand 

charges over volumetric charges because they provide 

greater revenue certainty, and encourage more consistent asset utilization. In contrast to a demand charge, a 

customer charge that covers more of a utility’s fixed costs 

reduces profits from increased sales, and the utility 

disincentive to promote energy efficiency. 

For energy efficiency programs, demand charges could 

help promote reductions in usage for those end uses 

that cause the customer’s peak.5 In general, however, 

volumetric rates are more favorable for energy efficiency 

promotion. Increasing the demand charges would 

reduce the magnitude of the price signal that could be 

sent through a volumetric charge. 

Mechanisms Where Customer Benefits Are 

Not Driven by Tariff Savings 

The rate design forms discussed above allow customers 

to benefit from energy efficiency through bill reductions; 

however, other types of programs provide incentives that 

are decoupled from the customer’s retail rate. 

Discount for Efficiency via Conservation Behavior 

In some cases, energy efficiency benefits are passed on to 

customers through mechanisms other than retail rates. For 

example, in California the “20/20” program was implemented in 2001, giving customers a 20 percent rebate off 

their summer bills if they could reduce their electricity 

consumption by 20 percent compared to the summer period the prior year. The program's success was likely due to 

a combination of aggressive customer education, energy 

conservation behavior (reducing consumption through limiting usage of appliances and end-uses) and investment in 

energy efficiency. Pacific Gas & Electric (PG&E) has just 

implemented a similar program for natural gas, wherein 

customers can receive a rebate of 20 percent of their last 

winter’s bill if they can reduce natural gas usage by 10 percent this winter season. The 20/20 program was popular 

and effective. It was easy for customers to understand, and 

there might be a psychological advantage to a program 

that gives you a rebate (a received reward), as opposed to 

one that just allows you to pay less than you otherwise 

would have (a lessened penalty). Applying this concept 

might require some adjustments to account for changes in 

weather or other factors. 

Benefit Sharing 

There are two types of benefit sharing with customers.6 

Under the first type of shared savings, a developer (utility 

or third party) installs an energy-saving device. The customer shares the bill savings with the developer until the 

customer’s project load has been paid off. In the second 

type of shared savings, the utility is typically the developer 

and installs an energy efficiency or distributed generation device at the customer site. The customer then pays 

an amount comparable to what the bill would have been 

without the device or measures installed, less a portion 

of the savings of the device based on utility avoided 

costs. This approach decouples the customer benefits 

from the utility rate, but it can be complicated to determine what the consumption would have been without 

the device or energy efficiency. 

PacifiCorp in Oregon tackled this problem by offering a 

cash payment of 35 percent of the cost savings for residential weatherization measures, where the cost savings was 

based on the measure’s expected annual kWh savings and 

a schedule of lifecycle savings per kWh (PacifiCorp, 2002). 

5 Horowitz and Woo (2006) show that demand charges can be used to differentiate service reliability, thus implementing curtailable and interruptible service 

programs that are useful for meeting system resource adequacy. 

6 Note that benefit sharing is not the same as “shared savings,” used in the context of utility incentives for promoting energy efficiency programs. 

5-8 National Action Plan for Energy Efficiency 
Table 5-2. Pros and Cons of Rate Design Forms 

Program Type Criteria 

Avoided Cost Benefits Energy and Peak Customer Incentive and Impact on Non- Implementation and 

and Utility Incentives Reductions Bill Impact Participants Transition Issues 

Increasing Tier Block 

(Inverted block) 

http://www.pge.com/ 

tariffs/pdf/E-1.pdf 

http://www.sdge.com/ 

tm2/pdf/DR.pdf 

http://www.sdge.com/ 

tm2/pdf/GR.pdf 

Pro: Good match when 

long-run marginal costs 

are above average 

costs. 

Con: Might not be the 

right price signal if longrun marginal costs are 

below average costs. 

Pro: Can achieve annual 

energy reductions. 

Con: Does not encourage 

reductions in any particular period (unless combined with a time-based 

rate like TOU). 

Pro: Provides strong 

incentive to reduce 

usage. 

Con: Could result in 

large bill increases for 

users that cannot change 

their usage level, and 

could encourage more 

usage by the smaller 

customers. 

Pro: If mandatory, little 

impact on other customer 

classes. 

Con: Could not be 

implemented on a 

voluntary basis because 

of free rider losses. 

Pro: Simple to bill with 

existing meters. 

Con: Could require 

phased transition to 

mitigate bill impacts. 

Time of Use (TOU) 

http://www.nationalgridus 

.com/masselectric/ 

home/rates/4_tou.asp 

Pro: (1) Low implementation cost; (2) Tracks 

expected marginal 

costs. 

Con: Unclear if marginal 

costs should be shortor long-run. 

Pro: Can achieve peak 

load relief. 

Con: Might not achieve 

substantial energy 

reductions or produce 

significant emissions 

benefits. 

Pro: Provides customers 

with more control over 

their bills than flat rates, 

and incentive to reduce 

peak usage. 

Con: If mandatory, 

could result in large bill 

increases for users that 

cannot change their 

usage pattern. 

Pro: If mandatory, little 

average impact, but 

can be large on some 

customers. 

Con: If optional, 

potentially large impact 

due to free riders, which 

can be mitigated by a 

careful design. 

Pro: Extensive industry 

experience with TOU 

rate. 

Con: (1) If mandatory, 

likely opposed by 

customers, but not 

necessarily the utility; 

(2) If optional, opposed 

by non-participants and 

possibly the utility. 

Dynamic Rates: Real 

Time Pricing (RTP) 

http://www.exeloncorp.co 

m/comed/library/pdfs/ 

advance_copy_tariff_ 

revision6.pdf 

http://www.southern 

company.com/ 

gulfpower/pricing/gulf_ 

rates.asp?mnuOpco=gulf 

&mnuType=com&mnuIte 

m=er#rates 

http://www.nationalgridus 

.com/niagaramohawk/ 

non_html/rates_psc207 

.pdf 

Pro: (1) Tracks dayahead or day-of shortrun marginal cost for 

economically efficient 

daily consumption 

decisions; (2) RTP rates 

can be set to help 

allocate capacity in an 

economically efficient 

manner during 

emergencies. 

Con: No long-run price 

signal for investment 

decisions. 

Pro: Can achieve peak 

load relief. 

Con: (1) Not applicable 

to gas; (2) Might not 

achieve substantial 

annual energy reductions 

or produce significant 

emissions benefits. 

Same as above. Same as above. Con: (1) If mandatory, 

likely opposed by 

customers and the utility 

due to complexity and 

implementation cost; 

(2) High implementation 

cost for metering and 

information system 

costs. 

Dynamic Rates: 

Critical Peak Pricing 

(CPP) 

http://www.southerncompany.com/gulfpower/ 

pricing/pdf/rsvp.pdf 

http://www.idahopower. 

com/aboutus/ 

regulatoryinfo/tariffPdf. 

asp?id=263&.pdf 

http://www.pge.com/ 

tariffs/pdf/E-3.pdf 

Pro: (1) Tracks short-run 

marginal cost shortly 

before emergency; (2) If 

the CPP rates are set at 

correctly predicted 

marginal cost during 

emergency, they ration 

capacity efficiently. 

Con: High implementation cost. 

Pro: Likely to achieve 

load relief. 

Con: Unlikely to provide 

significant annual energy 

reductions. 

Same as above. Pro: Little impact, 

unless the utility heavily 

discounts the rate for 

the non-critical hours. 

Con: (1) If mandatory, 

likely opposed by 

customers and the 

utility due to high 

implementation cost; 

(2) If optional, few would 

object, unless the 

implementation cost 

spills over to other 

customer classes. 

To create a sustainable, aggressive national commitment to energy efficiency 5-9
Table 5-2. Pros and Cons of Rate Design Forms (continued) 

Program Type Criteria 

Avoided Cost Benefits Energy and Peak Customer Incentive and Impact on Implementation and 

and Utility Incentives Reductions Bill Impact Non-Participants Transition Issues 

Dynamic Rates 

Nonfirm 

http://www.pacificorp.com 

/Regulatory_Rule_Schedul 

e/Regulatory_Rule_Sched 

ule2220.pdf 

Pro: (1) Provides 

emergency load 

relief to support 

system reliability; 

(2) Implements 

efficient rationing. 

Con: (1) Does not track 

costs; (2) Potentially 

high implementation 

cost. 

Pro: (1) Can achieve 

load reductions to meet 

system needs; 

(2) Applicable to both 

gas and electric service. 

Con: Unlikely to 

encourage investment 

in energy efficiency 

measures. 

Pro: Bill savings compensate customer for 

accepting lower 

reliability. 

Pro: Little impact, 

unless the utility offers a 

curtailable rate discount 

that exceeds the utility's 

expected cost savings. 

Pro: (1) If optional, nonparticipants would not 

object unless discount is 

“excessive”; (2) If mandatory, different levels of 

reliability (at increasing 

cost) would need to be 

offered. 

Con: Complicated 

notice and monitoring 

requirements. 

Two-Part Rates 

http://www.aepcustomer. 

com/tariffs/Michigan/pdf/ 

MISTD4-28-05.pdf: 

Pro: Allows rate to be 

set at utility avoided 

cost. 

Con: Requires establishing customer baseline, which is subject 

to historical usage, 

weather, and other 

factors. 

Pro: Can be used to 

encourage or discourage 

peak usage depending 

on characteristics of 

“part two” rate form. 

Pro: Provides incentives 

for changes in customer’s 

usage. Therefore, no 

change in usage results 

in the same bill. 

Pro: Non-participants 

are held harmless. 

Pro: Complexity can 

be controlled through 

design of “part two” 

rate form. 

Con: (1) Customers 

might not be accustomed 

to the concept; 

(2) Difficult to implement 

for many smaller 

customers. 

Demand Charges 

http://www.sce.com/NR/ 

sc3/tm2/pdf/ce30-12.pdf 

Pro: Reflects the customer’s usage of the 

utility infrastructure. 

Con: Does not consider the duration of 

the usage (beyond 15 

minutes or one hour 

for electric). 

Pro: Can achieve load 

reductions. 

Con: Might not achieve 

substantial annual 

reductions. 

Pro: Provides customers 

with incentive to reduce 

peak usage and flatten 

their usage profile. 

Con: If mandatory, 

could result in large bill 

increases for users who 

cannot change their 

usage pattern. 

Pro: If mandatory, little 

average impact, but can 

be large on some customers. 

Con: If optional, potentially large impact due 

to free riders, but this 

can be mitigated by a 

careful design. 

Con: (1) If mandatory, 

likely opposed by 

customers and the utility 

due to high implementation cost; (2) If optional, 

few would object, unless 

the implementation cost 

spills over to other 

customer classes. 

Discount for 

Efficiency, Benefit 

Sharing, etc. 

http://www.cpuc.ca.gov/ 

PUBLISHED/NEWS_ 

RELEASE/51362.htm 

http://www.pacificorp. 

com/Regulatory_Rule_ 

Schedule/Regulatory_Rule 

_Schedule7794.pdf 

Pro: Incentive can be 

tied directly to avoided 

costs, without the 

need to change 

overall rate design. 

Con: Only a portion 

of the benefits are 

reflected in the incentive, as rate savings 

will still be a factor 

for most options. 

Pro: Utilities generally 

have control over what 

measures are eligible for 

an incentive, so the mix 

of peak and energy savings can be determined 

during program design. 

Con: Impacts might be 

smaller than those 

attainable through 

mandatory rate 

programs. 

Pro: (1) Provides direct 

incentive for program 

participation, plus 

ongoing bill reductions 

(for most options); 

(2) Does not require rate 

changes. 

Con: Existing rate forms 

might impede adoption 

because of overly low 

bill savings. 

Pro: Reflects the 

characteristics of the 

underlying rate form. 

Pro: Implementation 

simplified by the ability 

to keep status quo rates. 

Con: Places burden for 

action on the energy 

efficiency implementer, 

whereas a mandatory 

rate change could 

encourage customers to 

seek out efficiency 

options. 

Energy Efficiency 

Customer Rebate 

Programs (e.g., 20/20 

program in California) 

www.sce.com/Rebatesand 

Savings/2020 

www.sdge.com/tm2/pdf/ 

20-20-TOU.pdf 

www.pge.com/tariffs/pdf/ 

EZ-2020.pdf 

Pro: Can avoid more 

drastic rationing 

mechanisms when 

resources are significantly constrained. 

Con: Customer 

discounts are not set 

based on utility cost 

savings, and therefore 

these programs might 

over-reward cutomers 

who qualify. 

Pro: (1) Links payment 

of incentive directly to 

metered energy savings; 

(2) Easy to measure and 

verify. 

Con: Focused on 

throughput and not 

capacity savings. 

Pro: (1) Provides a clear 

incentive to customers to 

reduce their energy usage, 

motivates customers, and 

gets them thinking about 

their energy usage; 

(2) Can provide significant 

bill savings; (3) Doesn’t 

require customers to sign 

up for any program and 

can be offered to 

everyone. 

Con: Shifts costs to nonparticipants to the 

extent that the rebate 

exceeds the change in 

utility cost. 

Pro: Very successful 

during periods when 

public interest is served 

for short-term resource 

savings, (e.g. energy 

crisis.) 

Con: Implementation 

and effectiveness might 

be reduced after being 

in place for several 

years. 

5-10 National Action Plan for Energy Efficiency 
On-Bill Financing 

The primary function of on-bill financing is to remove the 

barrier presented by the high first-time costs of many energy efficiency measures. On-bill financing allows the customer to pay for energy efficiency equipment over time, 

and fund those payments through bill savings. On-bill 

financing can also deliver financial benefits to the participants by providing them access to low financing costs 

offered by the utility. An example of on-bill financing is the 

“Pay As You Save” (PAYS) program, which provides 

upfront funding in return for a monthly charge that is 

always less than the savings.7 

Pros and Cons of Various Designs 

Rate design involves tradeoffs among numerous goals. 

Table 5-2 summarizes the pros and cons of the various 

rate design forms from various stakeholder perspectives, 

considering implementation and transition issues. In most 

cases, design elements can be combined to mitigate 

weaknesses of any single design element, so the table 

should be viewed as a reference and starting point. 

Successful Strategies 

Rate design is one of a number of factors that contribute 

to the success of energy efficiency programs. Along with 

rate design, it is important to educate customers about 

their rates so they understand the value of energy efficiency investment decisions. Table 5-3 shows examples 

of four states with successful energy efficiency programs 

and complementary rate design approaches. Certainly, 

one would expect higher rates to spur energy efficiency 

adoption, and that appears to be the case for three of 

the four example states. However, Washington has an 

active and cost-effective energy efficiency program, 

despite an average residential rate far below the national 

average of 10.3 cents per kWh. (EIA, 2006) 

Table 5-3. Conditions That Assist Success 

California Washington State Massachusetts New York 

Rate Forms 

and Cost 

Structures 

Increasing tier block rates for residential (PG&E, SCE, and SDG&E). 

Increasing block rate for residential 

gas (SDG&E). 

http://www.pge.com/tariffs/pdf/E-1.pdf 

http://www.sce.com/NR/sc3/tm2/pdf/ 

ce12-12.pdf 

http://www.sdge.com/tm2/pdf/DR.pdf 

http://www.sdge.com/tm2/pdf/GR.pdf 

Increasing tier block rates for residential electric (PacifiCorp). Gas 

rates are flat volumetric (Puget 

Sound Electric [PSE]). High export 

value for electricity, especially in 

the summer afternoon. 

http://www.pacificorp.com/Regulat 

ory_Rule_Schedule/Regulatory_ 

Rule_Schedule2205.pdf 

Flat electricity rates per 

kWh with voluntary TOU 

rates for distribution service 

(Massachusetts Electric). 

http://www.nationalgridus. 

com/masselectric/non_html/ 

rates_tariff.pdf 

Increasing tier rates for 

residential (Consolidated 

Edison). 

http://www.coned.com/ 

documents/elec/ 

201-210.pdf 

Resource and 

Load 

Characteristics 

Summer electric peaks. Marginal 

resources are fossil units. High marginal cost for electricity, especially in 

the summer afternoon. Import transfer 

capability can be constrained. Winter 

gas peaks, although electric generation is flattening the difference. 

http://www.ethree.com/CPUC/ 

E3_Avoided_Costs_Final.pdf 

Winter peaking electric loads, but 

summer export opportunities. 

Heavily hydroelectric, so resource 

availability can vary with precipitation. Gas is winter peaking. 

http://www.nwcouncil.org/energy/ 

powersupply/outlook.asp 

http://www.nwcouncil.org/energy/ 

powerplan/plan/Default.htm 

http://www.pse.com/energyEnviron 

ment/supplyPDFs/II--Summary%20 

Charts%20and%20Graphs.pdf 

Part of Indpendant System 

Operator New England 

(ISO-NE), which is summer 

peaking. 

http://www.nepool.com/ 

trans/celt/report/2005/2005 

_celt_report.pdf 

High summer energy costs 

and capacity concerns in 

the summer for the New 

York City area. 

http://www.eia.doe.gov/ 

cneaf/electricity/page/ 

fact_sheets/newyork.html 

7 See http://www.paysamerica.org/. 

To create a sustainable, aggressive national commitment to energy efficiency 5-11
Table 5-3. Conditions That Assist Success (continued) 

California Washington State Massachusetts New York 

Average 

Residential 

Electric Rates 

13.7 cents/kWh 

(EIA, 2006) 

6.7 cents/kWh 

(EIA, 2006) 

17.6 cents/kWh 

(EIA, 2006) 

15.7 cents/kWh 

(EIA, 2006) 

Market and 

Utility 

Structure 

Competitive electric generation and 

gas procurement. Regulated wires 

and pipes. 

http://www.energy.ca.gov/electricity/ 

divestiture.html 

http://www.cpuc.ca.gov/static/ 

energy/electric/ab57_briefing_ 

assembly_may_10.pdf 

Vertically integrated. 

http://www.wutc.wa.gov/ 

webimage.nsf/63517e4423a08d 

e988256576006a80bc/fe15f75d 

7135a7e28825657e00710928! 

OpenDocument 

Competitive generation. 

Regulated wires. 

http://www.eia.doe.gov/ 

cneaf/electricity/page/ 

fact_sheets/mass.html 

Competitive generation. 

Regulated wires. 

http://www.nyserda.org/sep/ 

sepsection2-1.pdf 

Political and 

Administrative 

Actors 

Environmental advocacy in the past 

and desire to avoid another energy 

capacity crisis. Energy efficiency 

focuses on electricity. 

http://www.energy.ca.gov/ 

2005publications/CEC-999-2005­

015/CEC-999-2005-015.PDF 

http://www.energy.ca.gov/ 

2005publications/CEC-999-2005­

011/CEC-999-2005-011.PDF 

http://www.cpuc.ca.gov/PUBLISHED/ 

NEWS_RELEASE/49757.htm 

http://www.cpuc.ca.gov/static/ 

energy/electric/energy+efficiency/ 

about.htm 

Strong environmental commitment and desire to reduce 

susceptibility to market risks. 

http://www.nwenergy.org/news/ 

news/news_conservation.html 

DSM instituted as an 

alternative to new plant 

construction in the late 

1980s and early 1990s 

(integrated resource management). Energy efficiency 

now under the oversight of 

Division of Energy 

Resources. 

http://www.mass.gov/Eoca/ 

docs/doer/pub_info/ 

ee-long.pdf 

PSC established policy goals 

to promote competitive energy 

efficiency service and provide 

direct benefits to the people 

of New York. 

On 1/16/06, Governor George 

E. Pataki unveiled “a comprehensive, multi-faceted plan 

that will help reduce New 

York’s dependence on 

imported energy.” 

http://www.getenergysmart. 

org/AboutNYES.asp 

http://www.ny.gov/governor/p 

ress/06/0116062.html 

Demand-Side 

Management 

(DSM) Funding 

System benefits charge (SBC) and 

procurement payment. 

http://www.cpuc.ca.gov/static/ 

energy/electric/energy+efficiency/ 

ee_funding.htm 

SBC. 

http://www.wutc.wa.gov/ 

webimage.nsf/8d712cfdd4796c8 

888256aaa007e94b4/0b2e3934 

3c0be04a88256a3b007449fe! 

OpenDocument 

SBC. 

http://www.mass.gov/Eoca/ 

docs/doer/pub_info/ 

ee-long.pdf 

SBC. 

http://www.getenergysmart. 

org/AboutNYES.asp 

Part of Washington’s energy efficiency efforts can be 

explained by the high value for power exports to 

California, and partly by the regional focus on promoting 

energy efficiency. Washington and the rest of the Pacific 

Northwest region place a high social value on environmental protection, so Washington might be a case 

where the success of energy efficiency is fostered by 

high public awareness, and the willingness of the public 

to look beyond the short-term out-of-pocket costs and 

consider the longer term impacts on the environment. 

The other three states shown in Table 5-3 share the common characteristics of high residential rates, energy efficiency funded through a system benefits surcharge, and 

competitive electric markets. The formation of competitive electric markets could have also encouraged energy 

efficiency by: (1) establishing secure funding sources or 

energy efficiency agencies to promote energy efficiency, 

(2) increasing awareness of energy issues and risks 

regarding future energy prices, and (3) the entrance of 

new energy agents promoting energy efficiency. 

5-12 National Action Plan for Energy Efficiency 
Key Findings	 — Large Commercial and Industrial. Two-part rates. 

These rates provide bill stability and can be established 

This chapter summarizes the challenges and opportuni- so that the change in consumption through adoption 

ties for employing rate designs to encourage utility of energy efficiency is priced at marginal cost. The 

promotion and customer adoption of energy efficiency. complexity in establishing historical baseline quantities 

Key findings of this chapter include: might limit the application of two-part rates to the 

larger customers on the system. 

• Rate design is a complex process that balances 

numerous regulatory and legislative goals. It is impor- — All Customer Classes. Seasonal price differentials. 

tant to recognize the promotion of energy efficiency in Higher prices during the higher cost peak season 

the balancing of objectives. encourage customer conservation during the peak 

and can reduce peak load growth. For example, 

• Rate design offers opportunities to encourage cus- higher winter rates can encourage the purchase of 

tomers to invest in efficiency where they find it to be more efficient space heating equipment. 

cost-effective, and to participate in new programs that 

provide innovative technologies (e.g., smart meters) to • Energy efficiency can be promoted through non-tariff 

help customers control their energy costs. mechanisms that reach customers through their utility 

bill. Such mechanisms include: 

• Utility rates that are designed to promote sales or maximize stable revenues tend to lower the incentive for — Benefit Sharing Programs. Benefit sharing programs 

customers to adopt energy efficiency. can resolve situations where normal customer bill 

savings are smaller than the cost of energy efficiency 

• Rate forms like declining block rates, or rates with large programs. 

fixed charges reduce the savings that customers can 

attain from adopting energy efficiency. — On-Bill Financing. Financing support can help customers overcome the upfront costs of efficiency 

• Appropriate rate designs should consider the unique devices. 

characteristics of each customer class. Some general 

rate design options by customer class are listed below. — Energy Efficiency Rebate Programs. Programs that 

offer discounts to customers who reduce their 

—	 Residential. Inclining tier block rates. These rates energy consumption, such as the 20/20 rebate procan be quickly implemented for all residential and gram in California, offer clear incentives to cussmall commercial and industrial electric and gas tomers to focus on reducing their energy use. 

customers. At a minimum, eliminate declining tier 

block rates. As metering costs decline, also explore • More effort is needed to communicate the benefits 

dynamic rate options for residential customers. and opportunities for energy efficiency to customers, 

regulators, and utility decision-makers. 

—	 Small Commercial. Time of use rates. While these 

rates might not lead to much change in annual 

usage, the price signals can encourage customers 

to consume less energy when energy is the most 

expensive to produce, procure, and deliver. 

To create a sustainable, aggressive national commitment to energy efficiency 5-13
Recommendations and Options


The National Action Plan for Energy Efficiency Leadership 

Group offers the following recommendations as ways to 

overcome many of the barriers to energy efficiency in 

rate design, and provides a number of options for consideration by utilities, regulators, and stakeholders (as 

presented in the Executive Summary): 

Recommendation: Modify ratemaking practices to 

promote energy efficiency investments. Rate design 

offers opportunities to encourage customers to invest in 

efficiency where they find it to be cost-effective, and to 

participate in new programs that bring them innovative 

technologies (e.g., smart meters) to help them control 

their energy costs. 

Options to Consider: 

• Including the impact on adoption of energy efficiency 

as one of the goals of retail rate design, recognizing 

that it must be balanced with other objectives. 

• Eliminating rate designs that discourage energy efficiency by not increasing costs as customers consume 

more electricity or natural gas. 

• Adopting rate designs that encourage energy efficiency, 

considering the unique characteristics of each customer class, and including partnering tariffs with other 

mechanisms that encourage energy efficiency, such as 

benefit sharing programs and on-bill financing. 

Recommendation: Broadly communicate the benefits 

of, and opportunities for, energy efficiency. Experience 

shows that energy efficiency programs help customers 

save money and contribute to lower cost energy systems. But these impacts are not fully documented nor 

recognized by customers, utilities, regulators and policymakers. More effort is needed to establish the business 

case for energy efficiency for all decision-makers, and to 

show how a well-designed approach to energy efficiency can benefit customers, utilities, and society by (1) 

reducing customers bills over time, (2) fostering financially healthy utilities (return on equity [ROE], earnings 

per share, debt coverage ratios unaffected), and (3) contributing to positive societal net benefits overall. Effort is 

also necessary to educate key stakeholders that, 

although energy efficiency can be an important low-cost 

resource to integrate into the energy mix, it does require 

funding just as a new power plant requires funding. 

Further, education is necessary on the impact that energy 

efficiency programs can have in concert with other energy 

efficiency policies such as building codes, appliance 

standards, and tax incentives. 

Option to Consider: 

• Communicating on the role of energy efficiency in 

lowering customer energy bills and system costs and 

risks over time. 

5-14 National Action Plan for Energy Efficiency 
References


Baskette, C., Horii, B., Kollman, E., & Price, S. (2006). 

Avoided Cost Estimation and Post-Reform Funding 

Allocation for California's Energy Efficiency 

Programs. Energy, 31:6-7, 1084-1099. 

Bonbright, J.C. (1961). Principles of Public Utility Rates. 

New York: Columbia University Press. 

Brown, S.J. and Sibley, D.S. (1986). The Theory of 

Public Utility Pricing. New York: Cambridge 

University Press. 

Horowitz, I. and Woo, C.K. (2006). Designing ParetoSuperior Demand-Response Rate Options. Energy, 

31:6-7, 1040-1051. 

Huntington, S. (1975). The Rapid Emergence of 

Marginal Cost Pricing in the Regulation of Electric 

Utility Rate Structures. Boston University Law 

Review, 55: 689-774. 

Hyman, L.S., Hyman, A.S., & Hyman, R.C. (2000). 

America's Electric Utilities: Past, Present, and 

Future, 7th Edition. Arlington, VA: Public Utilities 

Reports. 

Joskow, P.L. (1976). Contributions to the Theory of 

Marginal Cost Pricing. Bell Journal of Economics, 

7(1): 197-206. 

Joskow, P. (1979). Public Utility Regulatory Policy Act of 

1978: Electric Utility Rate Reform. Natural 

Resources Journal, 19: 787-809. 

Kahn, A. (1970). The Economics of Regulation. New 

York: John Wiley & Sons. 

PacifiCorp (2002, September 30). Oregon Schedule 9— 

Residential Energy Efficiency Rider Optional 

Weatherization Services. P.U.C. OR No. 35, Advice 

No. 02-027. <http://www.pacificorp.com/Regulatory_ 

Rule_Schedule/Regulatory_Rule_Schedule7794.pdf> 

Phillips, C.F. (1988). The Regulation of Public Utilities: 

Theory and Practice. Arlington, VA: Public Utilities 

Reports. 

Public Utility Regulatory Policies Act (PURPA) of 1978, 

Section 114. 

U.S. Energy Information Administration [EIA] (2006). 

Average Retail Price of Electricity to Ultimate 

Customers by End-Use Sector, by State. Electric 

Power Monthly. 

To create a sustainable, aggressive national commitment to energy efficiency 5-15

6:Energy Efficiency 

Program Best Practices 

Energy efficiency programs have been operating successfully in some parts of the country since the late 

1980s. From the experience of these successful programs, a number of best practice strategies have 

evolved for making energy efficiency a resource, developing a cost-effective portfolio of energy efficiency programs for all customer classes, designing and delivering energy efficiency programs that optimize budgets, 

and ensuring that programs deliver results. 

Overview


Cost-effective energy efficiency programs have been 

delivered by large and small utilities and third-party program administrators in some parts of the country since 

the late 1980s. The rationale for utility investment in efficiency programming is that within certain existing markets for energy-efficient products and services, there are 

barriers that can be overcome to ensure that customers 

from all sectors of the economy choose more energyefficient products and practices. Successful programs 

have developed strategies to overcome these barriers, in 

many cases partnering with industry and voluntary 

national and regional programs so that efficiency program spending is used not only to acquire demand-side 

resources, but also to accelerate market-based purchases 

by consumers. 

Leadership Group Recommendations 

Applicable to Energy Efficiency 

Program Best Practices 

• Recognize energy efficiency as a high priority 

energy resource. 

• Make a strong, long-term commitment to 

cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of, and opportunities for, energy efficiency. 

• Provide sufficient and stable program funding to 

deliver energy efficiency where cost-effective. 

A list of options for promoting best practice energy 

efficiency programs is provided at the end of 

this chapter. 

Challenges that limit greater utility 

investment in energy efficiency include 

the following: 

• The majority of utilities recover fixed operating costs 

and earn profits based on the volume of energy they 

sell. Strategies for overcoming this throughput disincentive to greater investment in energy efficiency are 

discussed in Chapter 2: Utility Ratemaking & Revenue 

Requirements. 

• Lack of standard approaches on how to quantify and 

incorporate the benefits of energy efficiency into 

resource planning efforts, and institutional barriers at 

many utilities that stem from the historical business 

model of acquiring generation assets and building 

transmission and distribution systems. Strategies 

for overcoming these challenges are addressed in 

Chapter 3: Incorporating Energy Efficiency in 

Resource Planning. 

• Rate designs that are counterproductive to energy 

efficiency might limit greater efficiency investment by 

large customer groups, where many of the most 

cost-effective opportunities for efficiency programming exist. Strategies for encouraging rate designs 

that are compatible with energy efficiency are discussed in Chapter 5: Rate Design. 

• Efficiency programs need to address multiple customer needs and stakeholder perspectives while 

simultaneously addressing multiple system needs, in 

many cases while competing for internal resources. 

This chapter focuses on strategies for making energy 

efficiency a resource, developing a cost-effective portfolio of energy efficiency programs for all customer 

classes, designing and delivering efficiency programs 

that optimize budgets, and ensuring that those programs deliver results are the focus of this chapter. 

To create a sustainable, aggressive national commitment to energy efficiency 6-1
Programs that have been operating over the past 

decade, and longer, have a history of proven savings in 

megawatts (MW), megawatt-hours (MWh), and therms, 

as well as on customer bills. These programs show that 

energy efficiency can compare very favorably to supplyside options. 

This chapter summarizes key findings from a portfoliolevel1 review of many of the energy efficiency programs 

that have been operating successfully for a number of 

years. It provides an overview of best practices in the 

following areas: 

• Political and human factors that have led to increased 

reliance on energy efficiency as a resource. 

• Key considerations used in identifying target measures2 for 

energy efficiency programming in the near- and long-term. 

• Program design and delivery strategies that can maximize program impacts and increase cost-effectiveness. 

• The role of monitoring and evaluation in ensuring that 

program dollars are optimized and that energy efficiency 

investments deliver results. 

Background 

Best practice strategies for program planning, design 

and implementation, and evaluation were derived from 

a review of energy efficiency programs at the portfolio 

level across a range of policy models (e.g., public benefit 

charge administration, integrated resource planning). 

The box on page 6-3 describes the policy models and 

Table 6-1 provides additional details and examples of 

programs operating under various policy models. This 

chapter is not intended as a comprehensive review of the 

energy efficiency programs operating around the country, 

but does highlight key factors that can help improve and 

accelerate energy efficiency program success. 

Organizations reviewed for this effort have a sustained 

history of successful energy efficiency program implementation (See Tables 6-2 and 6-3 for summaries of 

these programs) and share the following characteristics: 

• Significant investment in energy efficiency as a 

resource within their policy context. 

• Development of cost-effective programs that deliver 

results. 

• Incorporation of program design strategies that work 

to remove near- and long-term market barriers to investment in energy efficiency. 

• Willingness to devote the necessary resources to make 

programs successful. 

Most of the organizations reviewed also have conducted 

full-scale impact evaluations of their portfolio of energy 

efficiency investments within the last few years. 

The best practices gleaned from a review of these organizations can assist utilities, their commissions, state energy 

offices, and other stakeholders in overcoming barriers to 

significant energy efficiency programming, and begin 

tapping into energy efficiency as a valuable and clean 

resource to effectively meet future supply needs. 

1 For the purpose of this chapter, portfolio refers to the collective set of energy efficiency programs offered by a utility or third-party energy efficiency 

program administrator. 

2 Measures refer to the specific technologies (e.g., efficient lighting fixture) and practices (e.g., duct sealing) that are used to achieve energy savings. 

6-2 National Action Plan for Energy Efficiency 
Energy Efficiency Programs Are Delivered Within Many Policy Models 

Systems Benefits Charge (SBC) Model 

In this model, funding for programs comes from an SBC 

that is either determined by legislation or a regulatory 

process. The charge is usually a fixed amount per 

kilowatt-hour (kWh) or million British thermal units 

(MMBtu) and is set for a number of years. Once funds 

are collected by the distribution or integrated utility, 

programs can be administered by the utility, a state 

agency, or a third party. If the utility implements the 

programs, it usually receives current cost recovery and 

a shareholder incentive. Regardless of administrative 

structure, there is usually an opportunity for stakeholder input. 

This model provides stable program design. In some 

cases, funding has become vulnerable to raids by 

state agencies. In areas aggressively pursuing energy 

efficiency as a resource, limits to additional funding 

have created a ceiling on the resource. While predominantly used in the electric sector, this model can, and 

is, being used to fund gas programs. 

Integrated Resource Plan (IRP) Model 

In this model, energy efficiency is part of the utility’s 

IRP. Energy efficiency, along with other demand-side 

options, is treated on an equivalent basis with supply. 

Cost recovery can either be in base rates or through a 

separate charge. The utility might receive a shareholder incentive, recovery of lost revenue (from reduced 

sales volume), or both. Programs are driven more by 

the resource need than in the SBC models. This generally is an electric-only model. The regional planning 

model used by the Pacific Northwest is a variation on 

this model. 

Request For Proposal (RFP) Model 

In this case, a utility or an independent system operator (ISO) puts out a competitive solicitation RFP to 

acquire energy efficiency from a third-party provider 

to meet demand, particularly in areas where there are 

transmission and distribution bottlenecks or a generation need. Most examples of this model to date have 

been electric only. The focus of this type of program 

is typically on saving peak demand. 

Portfolio Standard 

In this model, the program adminstrator is subject to 

a portfolio standard expressed in terms of percentage 

of overall energy or demand. This model can include 

gas as well as electric, and can be used independently or in conjunction with an SBC or IRP requirement. 

Municipal Utility/Electric Cooperative Model 

In this model, programs are administered by a municipal utility or electric cooperative. If the utility/cooperative owns or is responsible for generation, the energy 

efficiency resource can be part of an IRP. Cost recovery 

is most likely in base rates. This model can include gas 

as well as electric. 

To create a sustainable, aggressive national commitment to energy efficiency 6-3
Table 6-1. Overview of Energy Efficiency Programs 

Policy Model/ 

Examples 

Funding 

Type 

Shareholder 

Incentive1 

Lead 

Administrator 

Role in 

Resource 

Acquisition 

Scope of 

Programs 

Political 

Context 

SBC with utility 

implementation: 

● California 

● Rhode Island 

● Connecticut 

● Massachusetts 

Separate charge Usually Utility Depends on 

whether utility 

owns generation 

Programs for all 

customer classes 

Most programs of 

this type came out 

of a restructuring 

settlement in states 

where there was an 

existing infrastructure at the utilities 

SBC with state 

or third-party 

implementation: 

● New York 

● Vermont 

● Wisconsin 

Separate charge No State agency 

Third party 

None or limited Programs for all 

customer classes 

Most programs of 

this type came out 

of a restructuring 

settlement 

IRP or gas 

planning model: 

● Nevada 

● Arizona 

● Minnesota 

● Bonneville Power 

Administration (BPA) 

(regional planning 

model as well) 

● Vermont Gas 

● Keyspan 

Varies: in rates, 

capitalized, or 

separate charge 

In some cases Utility Integrated Program type 

dictated by 

resource need 

Part of IRP 

requirement; 

may be combined 

with other models 

RFP model 

for full-scale 

programs and 

congestion relief 

Varies No Utility buys from 

third party 

Integrated – can 

be T&D only 

Program type 

dictated by 

resource need 

Connecticut and 

Con Edison going 

out to bid to reduce 

congestion 

Portfolio standard 

model (can be 

combined with 

SBC or IRP): 

● Nevada 

● California 

● Connecticut 

● Texas 

Varies Varies Utility may 

implement 

programs or 

buy to meet 

standard 

Standard portfolio Programs for all 

customer classes 

Generally used 

in states with 

existing programs 

to increase program 

activity 

Municipal 

utility & electric 

cooperative: 

● Sacramento 

Municipal Utility 

District (CA) 

● City of Austin (TX) 

● Great River Energy 

(MN) 

In rates No Utility Depends on 

whether utility 

owns generation 

Programs for all 

customer classes 

Based on customer 

and resource needs; 

can be similar to IRP 

model 

1 A shareholder incentive is a financial incentive to a utility (above those that would normally be recovered in a rate case) for achieving set goals for 

energy efficiency program performance. 

6-4 National Action Plan for Energy Efficiency 
Key Findings 

Overviews of the energy efficiency programs reviewed 

for this chapter are provided in Table 6-2 and 6-3. Key 

findings drawn from these programs include: 

• Energy efficiency resources are being acquired on average at about one-half the cost of the typical new 

power sources, and about one-third of the cost of natural gas supply in many cases—and contribute to an 

overall lower cost energy system for rate-payers (EIA, 

2006). 

• Many energy efficiency programs are being delivered at 

a total program cost of about $0.02 to $0.03 per lifetime kilowatt-hour (kWh) saved and $0.30 to $2.00 

per lifetime million British thermal units (MMBtu) 

saved. These costs are less than the avoided costs seen 

in most regions of the country. Funding for the majority 

of programs reviewed ranges from about 1 to 3 percent of electric utility revenue and 0.5 to 1 percent of 

gas utility revenue. 

• Even low energy cost states, such as those in the Pacific 

Northwest, have reason to invest in energy efficiency, 

as energy efficiency provides a low-cost, reliable 

resource that reduces customer utility bills. Energy efficiency also costs less than constructing new generation, and provides a hedge against market, fuel, and 

environmental risks (Northwest Power and Conservation 

Council, 2005). 

• Well-designed programs provide opportunities for customers of all types to adopt energy savings measures 

and reduce their energy bills. These programs can help 

customers make sound energy use decisions, increase 

control over their energy bills, and empower them to 

manage their energy usage. Customers can experience 

significant savings depending on their own habits and 

the program offered. 

• Consistently funded, well-designed efficiency programs 

are cutting electricity and natural gas load—providing 

annual savings for a given program year of 0.15 to 1 

percent of energy sales. These savings typically will 

accrue at this level for 10 to 15 years. These programs 

are helping to offset 20 to 50 percent of expected 

energy growth in some regions without compromising 

end-user activity or economic well being. 

• Research and development enables a continuing source 

of new technologies and methods for improving energy 

efficiency and helping customers control their 

energy bills. 

• Many state and regional studies have found that pursuing economically attractive, but as yet untapped 

energy efficiency could yield more than 20 percent savings in total electricity demand nationwide by 2025. 

These savings could help cut load growth by half or 

more, compared to current forecasts. Savings in direct 

use of natural gas could similarly provide a 50 percent 

or greater reduction in natural gas demand growth. 

Potential varies by customer segment, but there are 

cost-effective opportunities for all customer classes. 

• Energy efficiency programs are being operated successfully across many different contexts: regulated and 

unregulated markets; utility, state, or third-party 

administration; investor-owned, public, and cooperatives; and gas and electric utilities. 

• Energy efficiency resources are being acquired through 

a variety of mechanisms including system benefits 

charges (SBCs), energy efficiency portfolio standards 

(EEPSs), and resource planning (or cost of service) 

efforts. 

• Cost-effective energy efficiency programs for electricity 

and natural gas can be specifically targeted to reduce 

peak load. 

• Effective models are available for delivering gas and 

electric energy efficiency programs to all customer classes. 

Models may vary based on whether a utility is in the initial stages of energy efficiency programming, or has 

been implementing programs for a number of years. 

To create a sustainable, aggressive national commitment to energy efficiency 6-5
Table 6-2. Efficiency Measures of Natural Gas Savings Programs 

Program Administrator 

Keyspan 

(MA) 

Vermont Gas 

(VT) 

SoCal Gas 

(CA) 

Policy Model Gas Gas Gas 

Period 2004 2004 2004 

Program Funding 

Average Annual Budget ($MM) 12 1.1 21 

% of Gas Revenue 1.00% 1.60% 0.53% 

Benefits 

Annual MMBtu Saved 1 (000s MMBtu) 500 60 1,200 

Lifetime MMBtu Saved 2 (000s MMBtu) 6,000 700 15,200 

Cost-Effectiveness 

Cost of Energy Efficiency ($/lifetime MMBtu) 2 2 1 

Retail Gas Prices ($/thousand cubic feet [Mcf]) 11 9 8 

Cost of Energy Efficiency (% Avoided Energy Cost) 19% 18% 18% 

Total Avoided Cost (2005 $/MMBtu) 3 12 11 7 

1 SWEEP, 2006; Southern California Gas Company, 2004. 

2 Lifetime MMBtu calculated as 12 times annual MMBtu saved where not reported (not reported for Keyspan or Vermont Gas). 

3 VT and MA avoided cost (therms) represents all residential (not wholesale) cost considerations (ICF Consulting, 2005). 

• Energy efficiency programs, projects, and policies benefit from established and stable regulations, clear 

goals, and comprehensive evaluation. 

• Energy efficiency programs benefit from committed 

program administrators and oversight authorities, as 

well as strong stakeholder support. 

• Most large-scale programs have improved productivity, 

enabling job growth in the commercial and industrial sectors. 

• Large-scale energy efficiency programs can reduce 

wholesale market prices. 

Lessons learned from the energy efficiency programs 

operated since inception of utility programs in the late 

1980s are presented as follows, and cover key aspects of 

energy efficiency program planning, design, implementation, and evaluation. 

Summary of Best Practices 

In this chapter, best practice strategies are organized and 

explained under four major groupings: 

• Making Energy Efficiency a Resource 

• Developing an Energy Efficiency Plan 

• Designing and Delivering Energy Efficiency Programs 

• Ensuring Energy Efficiency Investments Deliver Results 

For the most part, the best practices are independent of 

the policy model in which the programs operate. Where 

policy context is important, it is discussed in relevant sections of this chapter. 

6-6 National Action Plan for Energy Efficiency 
Making Energy Efficiency a Resource 

Energy efficiency is a resource that can be acquired to 

help utilities meet current and future energy demand. To 

realize this potential requires leadership at multiple levels, 

organizational alignment, and an understanding of the 

nature and extent of the energy efficiency resource. 

• Leadership at multiple levels is needed to establish the 

business case for energy efficiency, educate key stakeholders, and enact policy changes that increase investment in energy efficiency as a resource. Sustained 

leadership is needed from: 

—	 Key individuals in upper management at the utility 

who understand that energy efficiency is a resource 

alternative that can help manage risk, minimize longterm costs, and satisfy customers. 

—	 State agencies, regulatory commissions, local governments and associated legislative bodies, and/or consumer 

advocates that expect to see energy efficiency considered 

as part of comprehensive utility management. 

—	 Businesses that value energy efficiency as a way to 

improve operations, manage energy costs, and contribute to long-term energy price stability and availability, as well as trade associations and businesses, such as 

Energy Service Companies (ESCOs), that help members 

and customers achieve improved energy performance. 

—	 Public interest groups that understand that in order 

to achieve energy efficiency and environmental 

objectives, they must help educate key stakeholders 

and find workable solutions to some of the financial 

challenges that limit acceptance and investment in 

energy efficiency by utilities.3 

• Organizational alignment. With policies in place to support energy efficiency programming, organizations need 

to institutionalize policies to ensure that energy efficiency 

goals are realized. Factors contributing to success include: 

—	 Strong support from upper management and one or 

more internal champions. 

—	 A framework appropriate to the organization that 

supports large-scale implementation of energy efficiency programs. 

—	 Clear, well-communicated program goals that are tied 

to organizational goals and possibly compensation. 

—	 Adequate staff resources to get the job done. 

—	 A commitment to continually improve business 

processes. 

• Understanding of the efficiency resource is necessary 

to create a credible business case for energy efficiency. 

Best practices include the following: 

—	 Conduct a “potential study” prior to starting programs 

to inform and shape program and portfolio design. 

—	 Outline what can be accomplished at what costs. 

—	 Review measures for all customer classes including 

those appropriate for hard-to-reach customers, such 

as low income and very small business customers. 

Developing an Energy Efficiency Plan 

An energy efficiency plan should reflect a long-term perspective that accounts for customer needs, program 

cost-effectiveness, the interaction of programs with 

other policies that increase energy efficiency, the opportunities for new technology, and the importance of 

addressing multiple system needs including peak load 

reduction and congestion relief. Best practices include 

the following: 

• Offer programs for all key customer classes. 

• Align goals with funding. 

3 Public interest groups include environmental organizations such as the National Resources Defense Council (NRDC), Alliance to Save Energy (ASE), and 

American Council for an Energy Efficient Economy (ACEEE) and regional market transformation entities such as the Northeast Energy Efficiency 

Partnerships (NEEP), Southwest Energy Efficiency Project (SWEEP), and Midwest Energy Efficiency Alliance (MEEA). 

To create a sustainable, aggressive national commitment to energy efficiency 6-7
Table 6-3. Efficiency Measures of Electric and Combination Programs 

NYSERDA 

(NY) 

Efficiency 

Vermont 

(VT) 

MA Utilities 

(MA) 

WI Department 

of 

Administration12 

CA Utilities 

(CA) 

Policy Model SBC w/State Admin SBC w/3rd Party Admin SBC w/Utility Admin SBC w/State Admin SBC w/Utility Admin 

& Portfolio Standard 

Period 2005 2004 2002 2005 2004 

Program Funding 

Spending on Electric Energy 

Efficiency ($MM) 1 138 14 123 63 317 

Budget as % of Electric Revenue 2 1.3% 3.3% 3.0% 1.4% 1.5% 

Avg Annual Budget Gas ($MM) NR 10 NA 3 11 NA NA 

% of Gas Revenue NR 10 NA NA NA NA 

Benefits 

Annual MWh Saved / MWh Sales 3,4 0.2% 0.9% 0.4% 0.1% 1.0% 

Lifetime MWh Saved 5 (000s MWh) 6,216 700 3,428 1,170 22,130 

Annual MW Reduction 172 15 48 81 377 

Lifetime MMBtu Saved 5 (000s MMBtu) 17,124 470 850 11,130 43,410 

Annual MMBtu Saved (000s MMBtu) 1,427 40 70 930 3,620 

Non-Energy Benefits $79M bill 

reduction 37,200 CCF of water 

$21M bill 

reduction 

2,090 new jobs 

created 

Value of 

non-energy benefits: 

Residential: $6M 

C/I: $36M 

NR 

Avoided Emissions (tons/yr for 1 

program year) 

(could include benefits from load response, 

renewable, and DG programs) 

NOX: 470 

SO2: 850 

CO2: 400,000 

Unspecified pollutants: 

460,000 over 

lifetime 

NOX: 135 

SO2: 395 

CO2: 161,205 

NOX: 2,167 

SO2: 4,270 

CO2: 977,836 

(annual savings from 5 program years) 

NR 

Cost-Effectiveness 

Cost of Energy Efficiency 

$/lifetime (kWh) 6 0.02 0.02 0.03 0.05 0.01 

$/lifetime (MMBtu) NA NA 0.32 NA NA 

Retail Electricity Prices ($/kWh) 0.13 0.11 0.11 0.07 0.13 

Retail Gas Prices ($/mcf) NA NA NR NA NA 

Avoided Costs (2005$) 7,8 

Energy ($/kWh) 0.03 0.07 0.07 0.02 to 0.06 13 0.06 

Capacity ($/kW)9 28.20 3.62 6.64 

On-Peak Energy ($/kWh) 0.08 

Off-Peak Energy ($/kWh) 0.06 

Cost of Energy Efficiency as % Avoided 

Energy Cost 89% 29% 10% 90% 23% 

C/I = Commercial and Industrial; CO2 = Carbon Dioxide; $MM = Million Dollars; N/A = Not Applicable; NR = Not Reported; NOX = Nitrogen Oxides; 

SO2 = Sulfur Dioxide 

1 NYSERDA 2005 spending derived from subtracting cumulative 2004 spending from cumulative 2005 spending; includes demand response and 

research and development (R&D). 

2 ACEEE, 2004; Seattle City Light, 2005. 

3 Annual MWh Saved averaged over program periods for Wisconsin and California Utilities. NYSERDA 2005 energy efficiency savings derived from 

subtracting cumulative 2004 savings from 2005 cumulative reported savings. 

4 EIA, 2006; Austin Energy, 2004; Seattle City Light, 2005. Total sales for California Utilities in 2003 and SMUD in 2004 were derived based on 

growth in total California retail sales as reported by EIA. 

5 Lifetime MWh savings based on 12 years effective life of installed equipment where not reported for NYSERDA, Wisconsin, Nevada, SMUD, BPA, 

and Minnesota. Lifetime MMBtu savings based on 12 years effective life of installed equipment. 

6-8 National Action Plan for Energy Efficiency 
Table 6-3. Efficiency Measures of Electric and Combination Programs (continued) 

Nevada CT Utilities 

(CT) 

SMUD 

(CA) 

Seattle City 

Light (WA) Austin Energy 

Bonneville Power 

Administration 

(ID, MT, OR, WA) 

MN Electric and 

Gas Investor-Owned 

Utilities (MN) 

IRP with 

Portfolio 

Standard 

SBC w/Utility Admin 

& Portfolio Standard 

Municipal 

Utility Municipal Utility Municipal Utility Regional Planning IRP and Conservation Improvement Program 

2003 2005 2004 2004 2005 2004 2003 

Program Funding 

11 65 30 20 25 78 52 

0.5% 3.1% 1.5% 3.4% 1.9% NR NR 

NA NA NA NA NA NA $14 

NA NA NA NA NA NA 0.50% 

Benefits 

0.1% 1.0% 0.5% 0.7% 0.9% 0.5% 

420 4,400 630 1,000 930 3,080 3,940 

16 135 14 7 50 47.2 129 

NA NA NA NA 10,777 NA 22,010 

NA NA NA NA 1,268 NA 1,830 

NR lifetime savings of 

$550M on bills NR 

lifetime savings of 

$430M on bills 

created 

Potentially over 900 

jobs created 

Residential: $6M 

C/I: $36M 

NR NR 

NR 

NOX: 334 

SO2: 123 

CO2: 198,586 

NOX: 18 

CO2: 353,100 

(cummulative 

annual savings for 

13 years) 

NOX: 640 

SO2: 104 

CO2: 680,000 

over lifetime 

NR NR 

Cost-Effectiveness 

0.03 0.01 0.03 0.02 0.03 0.03 0.01 

NA NA NA NA 2.32 NA 0.06 

0.09 0.10 0.10 0.06 0.12 Wholesaler - NA 0.06 

NA NA NA NA NA NA 5.80 

0.07 NR NR Wholesaler - NA NR 

36.06 20.33 

0.08 

0.06 

Not calculated 21% 63% Not calculated Not calculated Not calculated 

6 Calculated for all cases except SMUD; SMUD data provided by J. Parks, Manager, Energy Efficiency and Customer R&D, Sacramento Municipal 

Utility District (personal communication, May 19, 2006). 

7 Avoided cost reported as a consumption ($/kWh) not a demand (kW) figure. 

8 Total NSTAR avoided cost for 2006. 

9 Avoided capacity reported by NYSERDA as the three-year averaged hourly wholesale bid price per MWh. 

10 NYSERDA does not separately track gas-related project budget, revenue, or benefits. 

11 NSTAR Gas only. 

12 Wisconsin has a portfolio that includes renewable distributed generation; some comparisons might not be appropriate. 

13 Range based on credits given for renewable distributed generation. 

To create a sustainable, aggressive national commitment to energy efficiency 6-9
• Use cost-effectiveness tests that are consistent with 

long-term planning. 

• Consider building codes and appliance standards when 

designing programs. 

• Plan to incorporate new technologies. 

• Consider efficiency investments to alleviate transmission and distribution constraints. 

• Create a roadmap of key program components, 

milestones, and explicit energy use reduction goals. 

Designing and Delivering Energy Efficiency Programs 

Program administrators can reduce the time to market 

and implement programs and increase cost-effectiveness 

by leveraging the wealth of knowledge and experience 

gained by other program administrators throughout the 

nation and working with industry to deliver energy efficiency to market. Best practices include the following: 

• Begin with the market in mind. 

—	 Conduct a market assessment. 

—	 Solicit stakeholder input. 

—	 Listen to customer and trade ally needs. 

—	 Use utility channels and brands. 

—	 Promote both energy and non-energy (e.g., 

improved comfort, improved air quality) benefits of 

energy efficient products and practices to customers. 

—	 Coordinate with other utilities and third-party program administrators. 

—	 Leverage the national ENERGY STAR program. 

—	 Keep participation simple. 

—	 Keep funding (and other program characteristics) as 

consistent as possible. 

—	 Invest in education, training, and outreach. 

—	 Leverage customer contact to sell additional efficiency and conservation. 

• Leverage private sector expertise, external funding, 

and financing. 

—	 Leverage manufacturer and retailer resources 

through cooperative promotions. 

—	 Leverage state and federal tax credits and other tax 

incentives (e.g., accelerated depreciation, first-year 

expensing, sales tax holidays) where available. 

—	 Build on ESCO and other financing program options. 

—	 Consider outsourcing some programs to private and 

not-for-profit organizations that specialize in 

program design and implementation through a 

competitive bidding process. 

• Start with demonstrated program models—build 

infrastructure for the future. 

—	 Start with successful program approaches from 

other utilities and program administrators and adapt 

them to local conditions to accelerate program 

design and effective implementation. 

—	 Determine the right incentives, and if incentives are financial, make sure that they are set at appropriate levels. 

—	 Invest in educating and training the service industry 

(e.g., home performance contractors, heating and cooling technicians) to deliver increasingly sophisticated 

energy efficiency services. 

—	 Evolve to more comprehensive programs. 

6-10 National Action Plan for Energy Efficiency 
—	 Change measures over time to adapt to changing 

markets and new technologies. 

—	 Pilot test new program concepts. 

Ensuring Energy Efficiency Investments Deliver Results 

Program evaluation helps optimize program efficiency 

and ensure that energy efficiency programs deliver 

intended results. Best practices include the following: 

• Budget, plan and initiate evaluation from the 

onset; formalize and document evaluation plans 

and processes. 

• Develop program and project tracking systems that 

support evaluation and program implementation 

needs. 

• Conduct process evaluations to ensure that programs 

are working efficiently. 

• Conduct impact evaluations to ensure that mid- and 

long-term goals are being met. 

• Communicate evaluation results to key stakeholders. 

Include case studies to make success more tangible. 

Making Energy Efficiency a Resource 

Energy efficiency programs are being successfully operated 

across many different contexts including electric and gas 

utilities; regulated and unregulated markets; utility, state, 

and third-party administrators; and investor-owned, public, and cooperatively owned utilities. These programs are 

reducing annual energy use by 0.15 to 1 percent at spending levels between 1 and 3 percent of electric, and 0.5 and 

1.5 percent of gas revenues—and are poised to deliver 

substantially greater reductions over time. These organizations were able to make broader use of the energy 

efficiency resource in their portfolio by having: 

• Leadership at multiple levels to enact policy change. 

• Organizational alignment to ensure that efficiency 

goals are realized. 

• A well-informed understanding of the efficiency 

resource including, the potential for savings and the 

technologies for achieving them. 

Examples of leadership, organizational alignment, and 

the steps that organizations have taken to understand 

the nature and extent of the efficiency resource are 

provided in the next sections. 

Leadership 

Many energy efficiency programs reviewed in this chapter 

began in the integrated resource plan (IRP) era of the 

electric utilities of the 1980s. As restructuring started in 

the late 1990s, some programs were suspended or halted. 

In some cases (such as California, New York, 

Massachusetts, Connecticut, and Rhode Island), however, 

settlement agreements were reached that allowed 

restructuring legislation to move forward if energy efficiency programming was provided through the distribution utility or other third-party providers. In many cases, 

environmental advocates, energy service providers, and 

state agencies played active roles in the settlement 

process to ensure energy efficiency was part of the 

restructured electric utility industry. Other states (such as 

Minnesota, Wisconsin, and Vermont) developed legislation to address the need for stable energy efficiency programming without restructuring their state electricity 

markets. In addition, a few states (including California, 

Minnesota, New Jersey, Oregon, Vermont, and 

Wisconsin) enacted regulatory requirements for utilities 

or other parties to provide gas energy efficiency programs (Kushler, et al., 2003). Over the past few years, 

the mountain states have steadily ramped up energy 

efficiency programs. 

In all cases, to establish energy efficiency as a resource 

required leadership at multiple levels: 

• Leadership is needed to establish the business case for 

energy efficiency, educate key stakeholders, and enact 

policy changes that increase investment in energy 

efficiency as a resource. Sustained leadership is 

needed from: 

To create a sustainable, aggressive national commitment to energy efficiency 6-11
—	 Key individuals in upper management at the utility 

who understand that energy efficiency is a resource 

alternative that can help manage risk, minimize longterm costs, and satisfy customers. 

—	 State agencies, regulatory commissions, local governments and associated legislative bodies, and/or 

consumer advocates that expect to see energy efficiency considered as part of comprehensive utility management. 

—	 Businesses that value energy efficiency as a way to 

improve operations, manage energy costs, and contribute to long-term energy price stability and availability, as well as trade associations and businesses, 

such as ESCOs, that help members and customers 

achieve improved energy performance. 

– Public interest groups that understand that in order to 

achieve energy efficiency and environmental objectives, 

they must help educate key stakeholders and find workable solutions to some of the financial challenges that limit 

acceptance and investment in energy efficiency by utilities. 

The following are examples of how leadership has resulted 

in increased investment in energy efficiency: 

• In Massachusetts, energy efficiency was an early consideration as restructuring legislation was discussed. 

The Massachusetts Department of Public Utilities 

issued an order in D.P.U. 95-30 establishing principles 

to “establish the essential underpinnings of an electric 

industry structure and regulatory framework designed 

to minimize long-term costs to customers while maintaining safe and reliable electric service with minimum 

impact on the environment.” Maintaining demand side 

management (DSM) programs was one of the 

major principles the department identified during 

the transition to a restructured electric industry. 

The Conservation Law Foundation, the Massachusetts 

Energy Efficiency Council, the National Consumer Law 

Center, the Division of Energy Resources, the Union of 

Concerned Scientists, and others took leadership roles 

in ensuring energy efficiency was part of a restructured 

industry (MDTE, 1995). 

• Leadership at multiple levels led to significantly 

expanded programming of Nevada’s energy efficiency 

program, from about $2 million in 2001 to an estimated 

$26 million to $33 million in 2006: 

“There are ‘champions’ for expanded energy efficiency 

efforts in Nevada, either in the state energy office or in 

the consumer advocate’s office. Also, there have been 

very supportive individuals in key positions within the 

Nevada utilities. These individuals are committed to 

developing and implementing effective DSM programs, 

along with a supportive policy framework” 

(SWEEP, 2006). 

Public interest organizations, including SWEEP, also 

played an important role by promoting a supportive policy framework (see box on page 6-13, “Case Study: 

Nevada Efficiency Program Expansion” for additional 

information). 

• Fort Collins City Council (Colorado) provides an example 

of local leadership. The council adopted the Electric 

Energy Supply Policy in March 2003. The Energy Policy 

includes specific goals for city-wide energy consumption reduction (10 percent per capita reduction by 

2012) and peak demand reduction (15 percent per 

capita by 2012). Fort Collins Utilities introduced a variety 

of new demand-side management (DSM) programs 

and services in the last several years in pursuit of the 

energy policy objectives. 

• Governor Huntsman’s comprehensive policy on energy 

efficiency for the state of Utah, which was unveiled in 

April 2006, is one of the most recent examples of leadership. The policy sets a goal of increasing the state’s 

energy efficiency by 20 percent by the year 2015. One 

key strategy of the policy is to collaborate with utilities, 

regulators, and the private sector to expand energy 

efficiency programs, working to identify and remove 

barriers, and assisting the utilities in ensuring that 

efficiency programs are effective, attainable, and feasible 

to implement. 

6-12 National Action Plan for Energy Efficiency 
Organizational Alignment 

Once policies and processes are in place to spearhead 

increased investment in energy efficiency, organizations 

often institutionalize these policies to ensure that goals 

are realized. The most successful energy efficiency programs by utilities or third-party program administrators 

share a number of attributes. They include: 

• Clear support from upper management and one or 

more internal champions. 

• Clear, well-communicated program goals that are tied to 

organizational goals and, in some cases, compensation. 

• A framework appropriate to the organization that supports large-scale implementation of energy efficiency 

programs. 

• Adequate staff resources to get the job done. 

• Strong regulatory support and policies. 

• A commitment to continually improve business processes. 

“Support of upper management is critical to program 

success” (Komor, 2005). In fact, it can make or break a 

program. If the CEO of a company or the lead of an 

agency is an internal champion for energy efficiency, it 

will be truly a part of how a utility or agency does business. Internal champions below the CEO or agency level 

are critical as well. These internal champions motivate 

their fellow employees and embody energy efficiency as 

part of the corporate culture. 

Case Study: Nevada Efficiency Program Expansion


Nevada investor-owned utilities (IOUs), Nevada Power, and 

Sierra Pacific Power Company phased-out DSM programs 

in the mid-1990s. After 2001, when the legislature 

refined the state’s retail electric restructuring law to permit 

only large customers (>1 megawatt [MW]) to purchase 

power competitively, utilities returned to a vertically 

integrated structure and DSM programs were restarted, but 

with a budget of only about $2 million that year. 

As part of a 2001 IRP proceeding, a collaborative process 

was established for developing and analyzing a wider 

range of DSM program options. All parties reached an 

agreement to the IRP proceeding calling for $11.2 million 

per year in utility-funded DSM programs with an emphasis 

on peak load reduction but also significant energy savings. New programs were launched in March 2003. 

In 2004, the Nevada public utilities commission also 

approved a new policy concerning DSM cost recovery, 

allowing the utilities to earn their approved rate of return 

plus 5 percent (e.g., a 15 percent return if the approved 

rate is 10 percent) on the equity-portion of their DSM 

program funding. This step gave the utilities a much 

greater financial incentive to expand their DSM programs. 

In June 2005, legislation enacted in Nevada added energy 

savings from DSM programs to the state’s Renewable 

Portfolio Standard. This innovative policy allows energy 

savings from utility DSM programs and efficiency measures acquired through contract to supply up to 25 percent 

of the requirements under the renamed clean energy 

portfolio standard. The clean energy standard is equal to 

6 percent of electricity supply in 2005 and 2006 and 

increases to 9 percent in 2007 and 2008, 12 percent from 

2009 to 2010, 15 percent in 2011 and 2012, 18 percent 

in 2013 and 2014, and 20 percent in 2015 and thereafter. At least half of the energy savings credits must 

come from electricity savings in the residential sector. 

Within months of passage, the utilities proposed a large 

expansion of DSM programs for 2006. In addition to the 

existing estimated funding of $26 million, the Nevada utilities proposed adding another $7.5 million to 2006 DSM 

programs. If funding is approved, the Nevada utilities estimate the 2006 programs alone will yield gross energy savings of 153 gigawatt-hours/yr and 63 MW (Larry Holmes, 

personal communication, February 28, 2006). 

Source: Geller, 2006. 

To create a sustainable, aggressive national commitment to energy efficiency 6-13
Tying energy efficiency to overall corporate goals and 

compensation is important, particularly when the utility is 

the administrator of energy efficiency programs. Ties to 

corporate goals make energy efficiency an integral part of 

how the organization does business as exemplified below: 

• Bonneville Power Administration (BPA) includes energy 

efficiency as a part of its overall corporate strategy, and 

its executive compensation is designed to reflect how 

well the organization meets its efficiency goals. BPA’s 

strategy map states, “Development of all cost-effective 

energy efficiency in the loads BPA serves facilitates 

development of regional renewable resources, and 

adopts cost-effective non-construction alternatives to 

transmission expansion” (BPA, 2004). 

• National Grid ties energy efficiency goals to staff and 

executive compensation (P. Arons, personnel communication, June 15, 2006). 

• Sacramento Municipal Utility District (SMUD) ties energy 

efficiency to its reliability goal: “To ensure a reliable energy 

supply for customers in 2005, the 2005 budget includes 

sufficient capacity reserves for the peak summer season. 

We have funded all of the District’s commercial and residential load management programs, and on-going efficiency programs in Public Good to continue to contribute 

to peak load reduction” (SMUD, 2004a). 

• Nevada Power’s Conservation Department had a 

“Performance Dashboard” that tracks costs, participating 

customers, kWh savings, kW savings, $/kWh, $/kW, 

customer contribution to savings, and total customer 

costs on a real time basis, both by program and overall. 

• Austin Energy’s Mission Statement is “to deliver clean, 

affordable, reliable energy and excellent customer services” (Austin Energy, 2004). 

• Seattle City Light has actively pursued conservation as 

an alternative to new generation since 1977 and has 

tracked progress toward its goals (Seattle City Light, 

2005). Its longstanding, resolute policy direction establishes energy conservation as the first choice resource. 

In more recent years, the utility has also been guided by 

the city’s policy to meet of all the utility’s future load 

growth with conservation and renewable resources 

(Steve Lush, personal communication, June 2006). 

From Pacific Gas and Electric’s (PG&E’s) 

Second Annual Corporate Responsibility 

Report (2004): 

“One of the areas on which PG&E puts a lot of 

emphasis is helping our customers use energy 

more efficiently.” 

“For example, we plan to invest more than $2 

billion on energy efficiency initiatives over the 

next 10 years. What’s exciting is that the most 

recent regulatory approval we received on this 

was the result of collaboration by a large and 

broad group of parties, including manufacturers, 

customer groups, environmental groups, and the 

state’s utilities.” 

— Beverly Alexander, Vice President, 


Customer Satisfaction, PG&E


Having an appropriate framework within the organization to ensure success is also important. In the case of 

the utility, this would include the regulatory framework 

that supports the programs, including cost recovery and 

potentially shareholder incentives and/or decoupling. For 

a third-party administrator, an appropriate framework 

might include a sound bidding process by a state agency 

to select the vendor or vendors and an appropriate regulatory arrangement with the utilities to manage the 

funding process. 

Adequate resources also are critical to successful implementation of programs. Energy efficiency programs 

need to be understood and supported by departments 

outside those that are immediately responsible for program delivery. If information technology, legal, power 

supply, transmission, distribution, and other departments do not share and support the energy efficiency 

goals and programs, it is difficult for energy efficiency 

programs to succeed. When programs are initiated, the 

need for support from other departments is greatest. 

Support from other departments needs to be considered 

in planning and budgeting processes. 

6-14 National Action Plan for Energy Efficiency 
As noted in the Nevada case study, having a shareholder 

incentive makes it easier for a utility to integrate efficiency goals into its business because the incentive offsets some of the concerns related to financial treatment 

of program expenses and potential lost revenue from 

decreased sales. For third-party program administrators, 

goals might be built into the contract that governs the 

overall implementation of the programs. For example, 

Efficiency Vermont’s contract with the Vermont 

Department of Public Service Board has specific performance targets. An added shareholder return will not 

motivate publicly and cooperatively owned utilities, 

though they might appreciate reduced risks from exposure to wholesale markets, and the value added in 

improved customer service. SMUD, for example, cites 

conservation programs as a way to help customers 

lower their utility bills (SMUD, 2004b). These companies, like IOUs, can link employee compensation to 

achieving energy efficiency targets. 

Business processes for delivering energy efficiency programs and services to customers should be developed 

and treated like other business processes in an organization and reviewed on a regular basis. These processes 

should include documenting clear plans built on explicit 

assumptions, ongoing monitoring of results and plan 

inputs (assumptions), and regular reassessment to 

improve performance (using improved performance 

itself as a metric). 

Understanding the Efficiency Resource 

Energy efficiency potential studies provide the initial justification (the business case) for utilities embarking on or 

expanding energy efficiency programs, by providing 

information on (1) the overall potential for energy efficiency and (2) the technologies, practices, and sectors 

with the greatest or most cost-effective opportunities for 

achieving that potential. Potential studies illuminate the 

nature of energy efficiency resource, and can be used by 

legislators and regulators to inform efficiency policy and 

programs. Potential studies can usually be completed in 

three to eight months, depending on the level of detail, 

availability of data, and complexity. They range in cost 

from $100,000 to $300,000 (exclusive of primary data 

collection). Increasingly, many existing studies can be 

drawn from to limit the extent and cost of such an effort. 

The majority of organizations reviewed in developing this 

chapter have conducted potential studies in the past five 

years. In addition, numerous other studies have been conducted in recent years by a variety of organizations interested in learning more about the efficiency resource in 

their state or region. Table 6-4 summarizes key findings for 

achievable potential (i.e., what can realistically be 

achieved from programs within identified funding parameters), by customer class, from a selection of these studies. 

It also illustrates that this potential is well represented 

across the residential, commercial, and industrial sectors. 

The achievable estimates presented are for a future time 

period, are based on realistic program scenarios, and represent potential program impacts above and beyond naturally occurring conservation. Energy efficiency potential 

studies are based on currently available technologies. New 

technologies such as those discussed in Table 6-9 will continuously and significantly increase potential over time. 

The studies show that achievable potential for reducing 

overall energy consumption ranges from 7 to 32 percent 

for electricity and 5 to 19 percent for gas, and that 

demand for electricity and gas can be reduced by about 

0.5 to 2 percent per year. For context, national electricity 

consumption is projected to grow by 1.6 percent per 

year, and gas consumption is growing 0.7 percent per 

year (EIA, 2006a). 

The box on page 6-17, “Overview of a Well-Designed 

Potential Study” provides information on key elements 

of a potential study. Related best practices for efficiency 

programs administrators include: 

• Conducting a “potential study” prior to starting programs. 

• Outlining what can be accomplished at what cost. 

• Reviewing measures appropriate to all customer classes 

including those appropriate for hard-to-reach customers, 

such as low income and very small business customers. 

To create a sustainable, aggressive national commitment to energy efficiency 6-15
6-16 National Action Plan for Energy Efficiency Table 6-4. Achievable Energy Efficiency Potential From Recent Studies State/Region Study Length (Years) Achievable Demand Reduction (MW) Achievable Gas Consumption Reduction (MMBtu) Achievable GWh Reduction Demand Savings as % of 2004 State Nameplate Capacity 10 Annual % MW Savings Electricity Savings as % of Total 2004 State Usage 11 Annual % GWh Savings Gas Savings as % of Total 2004 State Usage12 Annual % MMBtu Savings Residential Commercial Industrial Residential Commercial Industrial Residential Commercial Industrial Electricity Electricity Gas U.S. (Clean Energy Future) 1 20 n/a n/a n/a 500,000,000 300,000,000 1,400,000,000 392,732 281,360 292,076 n/a n/a 24% 1.2% 10% 0.5% Con Edison 2 10 n/a n/a n/a 11,396,700 10,782,100 231,000 n/a n/a n/a n/a n/a n/a n/a 19% 1.9% Pacific NW 3 20 n/a n/a n/a n/a n/a n/a 11,169 9,715 5,011 n/a n/a 12.5% 0.6% n/a n/a Puget Sound 4 20 133 148 16 n/a n/a n/a 1,169 1,293 139 9.3% 0.5% 9.5% 0.5% n/a n/a 

Connecticut 5 8 240 575 93 n/a n/a n/a 1,655 2,088 723 12.5% 1.6% 13.4% 1.7% n/a n/a California 6 9 1,800 2,600 1,550 27,500,000 20,600,000 - 9,200 11,900 8,800 9.6% 1.1% 11.8% 1.3% 10% 1.1% Southwest 7 17 n/a n/a n/a n/a n/a n/a 24,593 50,291 - n/a n/a 32.8% 1.9% n/a n/a 

New York 8 19 3,584 8,180 602 n/a n/a n/a 15,728 2,948 8,180 23.1% 1.2% 14.3% 0.8% n/a n/a 

Illinois 9 17 n/a n/a n/a n/a n/a n/a - - 67,000 n/a n/a 43.2% 2.5% n/a n/a 

AVERAGE: 1.1% 1.3% 1.2% 

MW = Megawatt; MMBtu = Million British thermal units. 

1 ORNL, 2000.

2 NYSERDA/OE, 2006.

3 NPCC, 2005.4 Puget Sound Energy, 2003.

5 GDS Associates and Quantum Consulting, 2004.

6 KEMA, 2002; KEMA & XENERGY, 2003a; KEMA & XENERGY, 2003b. 

7 SWEEP, 2002.

8 NYSERDA/OE, 2003.

9 ACEEE, 1998. 

10 EIA, 2005a. 

11 EIA, 2005b. 

12 EIA, 2006b. 
Overview of a Well-Designed Potential Study 

Well-designed potential studies assess the following types 

of potential: 

Technical potential assumes the complete penetration of 

all energy-conservation measures that are considered 

technically feasible from an engineering perspective. 

Economic potential refers to the technical potential of 

those measures that are cost-effective, when compared to 

supply-side alternatives. The economic potential is very 

large because it is summing up the potential in existing 

equipment, without accounting for the time period during 

which the potential would be realized. 

Maximum achievable potential describes the economic 

potential that could be achieved over a given time period 

under the most aggressive program scenario. 

Achievable potential refers to energy saved as a result 

of specific program funding levels and incentives. These 

savings are above and beyond those that would occur 

naturally in the absence of any market intervention. 

Naturally occurring potential refers to energy saved as 

a result of normal market forces, that is, in the absence of 

any utility or governmental intervention. 

The output of technical and economic potential is the size 

of the energy efficiency resource in MW, MWh, MMBtu 

and other resources. The potential is built up from savings 

and cost data from hundreds of measures and is typically 

summarized by sector using detailed demographic information about the customer base and the base of appliances, building stock, and other characteristics of the 

relevant service area. 

After technical and economic potential is calculated, typically the next phase of a well-designed potential study is 

to create program scenarios to estimate actual savings 

that could be generated by programs or other forms of 

intervention, such as changing building codes or 

appliance standards. 

Program scenarios developed to calculate achievable 

potential are based on modeling example programs and 

using market models to estimate the penetration of the 

program. Program scenarios require making assumptions 

about rebate or incentive levels, program staffing, and 

marketing efforts. 

Scenarios can also be developed for different price 

assumptions and load growth scenarios, as shown below 

in the figure of a sample benefit/cost output from a 

potential study conducted for the state of California. 

Benefits and Costs of Electric Energy 

Efficiency Savings, 2002-2011 

$0 

$5 

$10 

$15 

$20 

$25 

Present Value in $ Billions

Total Benefits 

Non-Incentive Participant Costs 

Program Incentives 

Program Admin & Marketing 

Business-as-Usual Advanced Efficiency Max Efficiency 

Net Benefits: 

$5.5B 

Net 

Benefits: 

$11.9B 

Net Benefits: 

$8.6B 

Source: KEMA, 2002 

To create a sustainable, aggressive national commitment to energy efficiency 6-17
• Ensuring that potential state and federal codes and standards are modeled and included in evaluation scenarios 

• Developing scenarios for relevant time periods. 

In addition, an emerging best practice is to conduct 

uncertainty analysis on savings estimates, as well as 

other variables such as cost. 

With study results in hand, program administrators are 

well positioned to develop energy efficiency goals, identify program measures and strategies, and determine 

funding requirements to deliver energy efficiency programs to all customers. Information from a detailed 

potential study can also be used as the basis for calculating 

program cost-effectiveness and determining measures 

for inclusion during the program planning and design 

phase. Detailed potential studies can provide information to help determine which technologies are replaced 

most frequently and are therefore candidates to deliver 

early returns (e.g., an efficient light bulb), and how long 

the savings from various technologies persist and therefore will continue to deliver energy savings. For example, 

an energy efficient light bulb might last six years, whereas an efficient residential boiler might last 20 years. 

(Additional information on measure savings and lifetimes can be found in Resources and Expertise, a forthcoming product of the Action Plan Leadership Group.) 

Developing an Energy Efficiency Plan 

The majority of organizations reviewed for this chapter 

are acquiring energy efficiency resources for about 

$0.03/lifetime kWh for electric programs and about 

$1.30 to $2.00 per lifetime MMBtu for gas program (as 

shown previously in Tables 6-1 and 6-2). In many cases, 

energy efficiency is being delivered at a cost that is substantially less than the cost of new supply—on the order 

of half the cost of new supply. In addition, in all cases 

where information is available, the costs of saved energy 

are less than the avoided costs of energy. These organizations operate in diverse locations under different 

administrative and regulatory structures. They do, however, share many similar best practices when it comes to 

program planning, including one or more of the following: 

• Provide programs for all key customer classes. 

• Align goals with funding. 

• Use cost-effectiveness tests that are consistent with 

long-term planning. 

• Consider building codes and appliance standards when 

designing programs. 

• Plan for developing and incorporating new technology. 

• Consider efficiency investments to alleviate transmission and distribution constraints. 

• Create a roadmap that documents key program components, milestones, and explicit energy reduction goals. 

Provide Programs for All Customer Classes 

One concern sometimes raised when funding energy 

efficiency programs is that all customers are required to 

contribute to energy efficiency programming, though 

not all customers will take advantage of programs once 

they are available, raising the issue that non-participants 

subsidize the efficiency upgrades of participants. 

While it is true that program participants receive the 

direct benefits that accrue from energy efficiency 

upgrades, all customer classes benefit from wellmanaged energy efficiency programs, regardless of 

whether or not they participate directly. For example, an 

evaluation of the New York State Energy Research and 

Development Authority’s (NYSERDA’s) program portfolio 

concluded that: “total cost savings for all customers, 

including non participating customers [in the New York 

Energy $mart Programs] is estimated to be $196 million 

for program activities through year-end 2003, increasing 

to $420 to $435 million at full implementation” (NYSERDA, 2004). 

6-18 National Action Plan for Energy Efficiency 
In addition, particularly for programs that aim to accelerate 

market adoption of energy efficiency products or services, 

there is often program “spillover” to non-program 

participants. For example, an evaluation of National 

Grid’s Energy Initiative, Design 2000plus, and other small 

commercial and industrial programs found energy 

efficient measures were installed by non-participants due 

to program influences on design professionals and 

vendors. The analysis indicated that “non-participant 

spillover from the programs amounted to 12,323,174 

kWh in the 2001 program year, which is approximately 

9.2 percent of the total savings produced in 2001 by the 

Design 2000plus and Energy Initiative programs 

combined” (National Grid, 2002). 

Furthermore, energy efficiency programming can help 

contribute to an overall lower cost system for all customers over the longer term by helping avoid the need 

to purchase energy, or the need to build new infrastructure such as generation, transmission and distribution 

lines. For example: 

• The Northwest Power Planning and Conservation 

Council found in its Portfolio Analysis that strategies 

that included more conservation had the least cost and 

the least risk (measured in dollars) relative to strategies 

that included less conservation. The most aggressive 

conservation case had an expected system cost of $1.8 

billion lower and a risk factor of $2.5 billion less than 

the strategy with the least conservation (NPPC, 2005). 

• In its 2005 analysis of energy efficiency and renewable 

energy on natural gas consumption and price, ACEEE 

states, “It is important to note that while the direct 

benefits of energy efficiency investment flow to participating customers, the benefits of falling prices accrue 

to all customers.” Based on their national scenario of 

cost-effective energy efficiency opportunities, ACEEE 

found that total costs for energy efficiency would be 

$8 billion, and would result in consumer benefits of 

$32 billion in 2010 (Elliot & Shipley, 2005). 

• Through cost-effective energy efficiency investments in 

2004, Vermonters reduced their annual electricity use 

by 58 million kWh. These savings, which are expected 

to continue each year for an average of 14 years, met 

44 percent of the growth in the state's energy needs in 

2004 while costing ratepayers just 2.8 cents per kWh. 

That cost is only 37 percent of the cost of generating, 

transmitting, and distributing power to Vermont's 

homes and businesses (Efficiency Vermont, 2004). 

• The Massachusetts Division of Energy noted that 

cumulative impact on demand from energy efficiency 

measures installed from 1998 to 2002 (excluding 

reductions from one-time interruptible programs) was 

significant—reducing demand by 264 megawatt 

(MW). During the summer of 2002, a reduction of this 

magnitude meant avoiding the need to purchase $19.4 

million worth of electricity from the spot market 

(Massachusetts, 2004). 

Despite evidence that both program participants and 

non-participants can benefit from energy efficiency programming, it is a best practice to provide program 

opportunities for all customer classes and income levels. 

This approach is a best practice because, in most cases, 

funding for efficiency programs comes from all customer 

classes, and as mentioned above, program participants 

will receive both the indirect benefits of system-wide 

savings and reliability enhancements and the direct 

benefits of program participation. 

All program portfolios reviewed for this chapter include 

programs for all customer classes. Program administrators 

usually strive to align program funding with spending 

based on customer class contributions to funds. It is not 

uncommon, however, to have limited cross-subsidization 

for (1) low-income, agricultural, and other hard-to-reach 

customers; (2) situations where budgets limit achievable 

potential, and the most cost-effective energy efficiency 

savings are not aligned with customer class contributions 

to energy efficiency funding; and (3) situations where 

energy efficiency savings are targeted geographically 

based on system needs—for example, air conditioner 

To create a sustainable, aggressive national commitment to energy efficiency 6-19
turn-ins or greater new construction incentives that are 

targeted to curtail load growth in an area with a supply 

or transmission and distribution need. For programs targeting low-income or other hard-to-reach customers, it 

is not uncommon for them to be implemented with a 

lower benefit-cost threshold, as long as the overall energy 

efficiency program portfolio for each customer class (i.e., 

residential, commercial, and industrial) meets costeffectiveness criteria. 

NYSERDA‘s program portfolio is a good example of programs for all customer classes and segments (see Table 6-5). 

Table 6-5. NYSERDA 2004 Portfolio 

Sector Program % of Sector 

Budget 

Residential Small Homes 23% 

Keep Cool 19% 

ENERGY STAR Products 20% 

Program Marketing 16% 

Multifamily 10% 

Awareness/Other 12% 

Low Income Assisted Multifamily 59% 

Assisted Home Performance 17% 

Direct Install 8% 

All Other 16% 

Business Performance Contracting 36% 

Peak Load Reduction 12% 

Efficient Products 9% 

New Construction 23% 

Technical Assistance 10% 

All Other 10% 

Nevada Power/Sierra Pacific Power Company’s portfolio 

provides another example with notable expansion of 

program investments in efficient air conditioning, ENERGY 

STAR appliances, refrigerator collection, and renewable 

energy investments within a one-year timeframe (see 

Table 6-6). 

Align Goals With Funding 

Regardless of program administrative structure and policy 

context, it is a best practice for organizations to align 

funding to explicit goals for energy efficiency over the 

near-term and long-term. How quickly an organization is 

able to ramp up programs to capture achievable potential can vary based on organizational history of running 

DSM programs, and the sophistication of the marketplace in which a utility operates (e.g., whether there is a 

network of home energy raters, ESCOs, or certified heating, 

ventilation, and air conditioning [HVAC] contractors). 

Utilities or third-party administrators should set longterm goals for energy efficiency designed to capture a 

significant percentage of the achievable potential energy 

savings identified through an energy efficiency potential 

study. Setting long-term goals is a best practice for 

administrators of energy efficiency program portfolios, 

regardless of policy models and whether they are an 

investor-owned or a municipal or cooperative utility, or a 

third-party program administrator. Examples of how 

long-term goals are set are provided as follows: 

• In states where the utility is responsible for integrated 

resource planning (the IRP Model), energy efficiency must 

be incorporated into the IRP. This process generally 

requires a long-term forecast of both spending and savings for energy efficiency at an aggregated level that is 

consistent with the time horizon of the IRP—generally at 

least 10 years. Five- and ten-year goals can then be developed based on the resource need. In states without an 

SBC, the budget for energy efficiency is usually a revenue 

requirement expense item, but can be a capital investment or a combination of the two. (As discussed in 

Chapter 2: Utility Ratemaking & Revenue Requirements, 

capitalizing efficiency program investments rather than 

expensing them can reduce short-term rate impacts.) 

• Municipal or cooperative utilities that own generation 

typically set efficiency goals as part of a resource planning process. The budget for energy efficiency is usually 

a revenue requirement expense item, a capital expenditure, or a combination of the two. 

6-20 National Action Plan for Energy Efficiency 
Table 6-6. Nevada Resource Planning Programs 

2005 Budget 2006 Budget 

Air Conditioning Load Management $3,450,000 $3,600,000 

High-Efficiency Air Conditioning 2,600,000 15,625,000 

Commercial Incentives 2,300,000 2,800,000 

Low-Income Support 1,361,000 1,216,000 

Energy Education 1,205,000 1,243,000 

ENERGY STAR Appliances 1,200,000 2,050,000 

School Support 850,000 850,000 

Refrigerator Collection 700,000 1,915,000 

Commercial New Construction 600,000 600,000 

Other – Miscellaneous & Technology 225,000 725,000 

Total Nevada Resource Planning Programs $14,491,000 $30,624,000 

SolarGenerations 1,780,075 7,220,000 

Company Renewable – PV 1,000,000 1,750,000 

California Program 370,000 563,000 

Sierra Natural Gas Programs — 820,000 

Total All Programs $17,641,075 $40,977,000 

• A resource portfolio standard is typically set at a percentage of overall energy or demand, with program 

plans and budgets developed to achieve goals at the 

portfolio level. The original standard can be developed 

based on achievable potential from a potential study, 

or as a percentage of growth from a base year. 

• In most SBC models, the funding is determined by a 

small volumetric charge on each customer’s utility bill. 

This charge is then used as a basis for determining the 

overall budget for energy efficiency programming— 

contributions by each customer class are used to inform 

the proportion of funds that should be targeted to each 

customer class. Annual goals are then based on these 

budgets and a given program portfolio. Over time, the 

goal of the program should be to capture a large percentage of achievable potential. 

• In most gas programs, funding can be treated as an 

expense, in a capital budget, or a combination (as is 

the case in some of the electric examples shown previously). Goals are based on the budget developed for 

the time period of the plan. 

Once actual program implementation starts, program 

experience is usually the best basis for developing future 

budgets and goals for individual program years. 

Use Cost-Effectiveness Tests That Are Consistent 

With Long-Term Planning 

All of the organizations reviewed for this chapter use 

cost-effectiveness tests to ensure that measures and programs are consistent with valuing the benefits and costs 

of their efficiency investments relative to long-term 

To create a sustainable, aggressive national commitment to energy efficiency 6-21
supply options. Most of the organizations reviewed use 

either the total resource cost (TRC), societal, or program 

administrator test (utility test) to screen measures. None 

of the organizations reviewed for this chapter used the 

rate impact measure (RIM) test as a primary decisionmaking test.5 The key cost-effectiveness tests are 

described as follows, per Swisher, et al. (1997), with key 

benefits and costs further illustrated in Table 6-7. 

• Total Resource Cost (TRC) Test. Compares the total 

costs and benefits of a program, including costs and 

benefits to the utility and the participant and the avoided 

costs of energy supply. 

• Societal Test. Similar to the TRC Test, but includes the 

effects of other societal benefits and costs such as environmental impacts, water savings, and national security. 

• Utility/Program Administrator Test. Assesses benefits 

and costs from the program administrator’s perspective 

(e.g., benefits of avoided fuel and operating capacity 

costs compared to rebates and administrative costs). 

• Participant Test. Assesses benefits and costs from a participant’s perspective (e.g., the reduction in customers’ 

bills, incentives paid by the utility, and tax credits 

received as compared to out-of-pocket expenses such 

as costs of equipment purchase, operation, and maintenance). 

• Rate Impact Measure (RIM). Assesses the effect of 

changes in revenues and operating costs caused by a 

program on customers’ bills and rates. 

Another metric used for assessing cost-effectiveness is 

the cost of conserved energy, which is calculated in cents 

per kWh or dollars per thousand cubic feet (Mcf). This 

measure does not depend on a future projection of energy 

prices and is easy to calculate; however, it does not fully 

capture the future market price of energy. 

An overall energy efficiency portfolio should pass the 

cost-effectiveness test(s) of the jurisdiction. In an IRP situation, energy efficiency resources are compared to new 

supply-side options–essentially the program administrator or utility test. In cases where utilities have divested 

generation, a calculated avoided cost or a wholesale 

market price projection is used to represent the generation benefits. Cost-effectiveness tests are appropriate to 

screen out poor program design, and to identify programs in markets that have been transformed and might 

need to be redesigned to continue. Cost-effectiveness 

analysis is important but must be supplemented by other 

aspects of the planning process. 

If the TRC or societal tests are used, “other resource benefits” can include environmental benefits, water savings, and 

other fuel savings. Costs include all program costs (administrative, marketing, incentives, and evaluation) as well as 

customer costs. Future benefits from emissions trading (or 

other regulatory approaches that provide payment for emission credits) could be treated as additional benefits in any of 

these models. Other benefits of programs can include job 

impacts, sales generated, gross state product added, 

impacts from wholesale price reductions, and personal 

income (Wisconsin, 2006; Massachusetts, 2004). 

Example of Other Benefits 

The Massachusetts Division of Energy Resources 

estimates that its 2002 DSM programs produced 

2,093 jobs, increased disposable income by $79 

million, and provided savings to all customers of 

$19.4 million due to lower wholesale energy clearing prices (Massachusetts, 2004). 

At a minimum, regulators require programs to be costeffective at the sector level (residential, commercial, and 

industrial) and typically at the program level as well. 

Many program administrators bundle measures under a 

single program umbrella when, in reality, measures are 

delivered to customers through different strategies and 

marketing channels. This process allows program admin5 The RIM test is viewed as less certain than the other tests because it is sensitive to the difference between long-term projections of marginal or market 

costs and long-term projections of rates (CEC, 2001). 

6-22 National Action Plan for Energy Efficiency 
Table 6-7. Overview of Cost-Effectiveness Tests 

Benefits Costs 

Test Externalities 

Energy 

Benefits 

G, T&D 

Demand 

Benefits 

G, T&D 

Non-Energy 

Benefits 

Other 

Resource 

Benefits 

Impact 

On 

Rates 

Program 

Implementation 

Costs 

Program 

Evaluation 

Costs 

Customer 

Costs 

Total Resource 

Cost Test X X X X X X 

Societal Test X X X X X X X X 

Utility Test/ 

Administrator 

Test 

X X X X 

Rate Impact 

Test X X X X X 

Participant Test X X X X 

G, T&D = Generation, Transmission, and Distribution 

istrators to adjust to market realities during program 

implementation. For example, within a customer class or 

segment, if a high-performing and well-subscribed program or measure is out-performing a program or measure that is not meeting program targets, the program 

administrator can redirect resources without seeking 

additional regulatory approval. 

Individual programs should be screened on a regular basis, 

consistent with the regulatory schedule—typically, once a 

year. Individual programs in some customer segments, 

such as low income, are not always required to be costeffective, as they provide other benefits to society that 

might not all be quantified in the cost-effectiveness tests. 

The same is true of education-only programs that have 

hard-to-quantify benefits in terms of energy impacts. (See 

section on conducting impact evaluations for information 

related to evaluating energy education programs.) 

Existing measures should be screened by the program 

administrator at least every two years, and new measures should be screened annually to ensure they are performing as anticipated. Programs should be reevaluated 

and updated from time to time to reflect new methods, 

technologies, and systems. For example, many programs 

today include measures such as T-5 lighting that did not 

exist five to ten years ago. 

Consider Building Codes and Appliance 

Standards When Designing Programs 

Enacting state and federal codes and standards for new 

products and buildings is often a cost-effective opportunity 

for energy savings. Changes to building codes and appliance standards are often considered an intervention that 

could be deployed in a cost-effective way to achieve 

results. Adoption of state codes and standards in many 

states requires an act of legislation beyond the scope of 

utility programming, but utilities and other third-party 

program administrators can and do interact with state 

and federal codes and standards in several ways: 

• In the case of building codes, code compliance and 

actual building performance can lag behind enactment 

of legislation. Some energy efficiency program administrators design programs with a central goal of 

improving code compliance. Efficiency Vermont’s 

ENERGY STAR Homes program (described in the box 

on page 6-24) includes increasing compliance with 

Vermont Building Code as a specific program objective. 

To create a sustainable, aggressive national commitment to energy efficiency 6-23
The California investor owned utilities also are working 

with the national ENERGY STAR program to ensure 

availability of ENERGY STAR/Title 24 Building Codecompliant residential lighting fixtures and to ensure 

overall compliance with their new residential building 

code through their ENERGY STAR Homes program. 

• Some efficiency programs fund activities to advance 

codes and standards. For example, the California IOUs 

are funding a long-term initiative to contribute expertise, 

research, analysis, and other kinds of support to help the 

California Energy Commission (CEC) develop and adopt 

energy efficiency standards. One rationale for utility 

investment in advancing codes and standards is that utilities can lock in a baseline of energy savings and free up 

program funds to work on efficiency opportunities that 

could not otherwise be realized. In California’s case, the 

IOUs also developed a method for estimating savings 

associated with their codes and standards work. The 

method was accepted by the California Public Utilities 

Commission, and is formalized in the California 

Energy Efficiency Evaluation Protocols: Technical, 

Methodological, and Reporting Require-ments for 

Evaluation Professionals (CPUC, 2006). 

Regardless of whether they are a component of an energy 

efficiency program, organizations have found that it is 

essential to coordinate across multiple states and regions 

when pursuing state codes and standards, to ensure that 

retailers and manufacturers can respond appropriately in 

delivering products to market. 

Program administrators must be aware of codes and 

standards. Changes in codes and standards affect the 

baseline against which future program impacts are 

measured. Codes and standards should be explicitly considered in planning to prevent double counting. The 

Northwest Power and Conservation Council (NWPCC) 

explicitly models both state codes and federal standards 

in its long-term plan (NWPCC, 2005). 

Plan for Developing and Incorporating New 

Technology 

Many of the organizations reviewed have a history of 

providing programs that change over time to accommodate changes in the market and the introduction of new 

technologies. The new technologies are covered using 

one or more of the following approaches: 

• They are included in research and development (R&D) 

budgets that do not need to pass cost-effectiveness 

tests, as they are, by definition, addressing new or 

experimental technologies. Sometimes R&D funding 

Efficiency Vermont ENERGY STAR Homes Program


In the residential new construction segment, Efficiency 

Vermont partners with the national ENERGY STAR program to deliver whole house performance to its customers and meet both resource acquisition and 

market transformation goals. Specific objectives of 

Efficiency Vermont’s program are to: 

• Increase market recognition of superior construction 

• Increase compliance with the Vermont Building Code 

• Increase penetration of cost-effective energy 

efficiency measures 

• Improve occupant comfort, health, and safety 

(including improved indoor air quality) 

• Institutionalize Home Energy Rating Systems (HERS) 

Participating homebuilders agree to build to the program's energy efficiency standards and allow homes 

to be inspected by an HERS rater. The home must 

score 86+ on the HERS inspection and include four 

energy efficient light fixtures, power-vented or sealed 

combustion equipment, and an efficient mechanical 

ventilation system with automatic controls. When a 

home passes, builders receive a rebate check, program certificate, an ENERGY STAR Homes certificate, 

and gifts. Efficiency Vermont ENERGY STAR 

Homes Program saved more than 700 MWh 

with program spending of $1.4 million in 2004. 

Source: Efficiency Vermont, 2005 

6-24 National Action Plan for Energy Efficiency 
comes from sources other than the utility or state 

agency. Table 6-8 summarizes R&D activities of several 

organizations reviewed. 

• They are included in pilot programs that are funded as 

part of an overall program portfolio and are not individually subject to cost-effectiveness tests. 

• They are tested in limited quantities under existing programs (such as commercial and industrial custom 

rebate programs). 

Technology innovation in electricity use has been the cornerstone of global economic progress for more than 50 

years. In the future, advanced industrial processes, heating 

and cooling, and metering systems will play very important roles in supporting customers’ needs for efficient 

use of energy. Continued development of new, more 

efficient technologies is critical for future industrial and 

commercial processes. Furthermore, technology innovation 

that targets improved energy efficiency and energy management will enable society to advance and sustain energy efficiency in the absence of government-sponsored or 

regulatory-mandated programs. Robust and competitive 

consumer-driven markets are needed for energy efficient 

devices and energy efficiency service. 

The Electric Power Research Institute (EPRI)/U.S. 

Department of Energy (DOE) Gridwise collaborative and 

the Southern California Edison (SCE) Lighting Energy 

Efficiency Demand Response Program are two examples 

of research and development activities: 

• The EPRI IntelliGrid Consortium is an industry-wide initiative and public/private partnership to develop the 

technical foundation and implementation tools to 

evolve the power delivery grid into an integrated energy 

and communications system on a continental scale. A 

key development by this consortium is the IntelliGrid 

Architecture, an open-standards-based architecture 

Table 6-8. Research & Development (R&D) Activities of Select Organizations 

Program 

Administrator R&D Funding Mechanism(s) R&D as % of Energy Efficiency Budget 

Examples of R&D Technologies/ 

Initiatives Funded 

PG&E 

CEC Public Interest Energy Research (PIER) performs research from 

California SBC funding (PG&E does not have access to their bills' 

SBC funds); other corporate funds support the California Clean 

Energy Fund 

1%a,b California Clean Energy Fund - New 

technologies and demonstration projects 

NYSERDA SBC funding 13%c,d Product development, demonstration 

and evaluation, university research, technology market opportunities studies 

BPA In rates 6%e,f 

PNL / DOE GridWise Collaborative, 

Northwest Energy Efficiency Alliance, 

university research 

SCE 

CEC Public Interest Energy Research (PIER) performs research from 

California SBC funding (SCE does not have access to their bills' 

SBC funds). Procurement proceedings and other corporate funds 

support Emerging Technologies and Innovative Design for Energy 

Efficiency programs. 

5%g,h,i Introduction of emerging technologies 

(second D of RD&D) 

a [Numerator] $4 million in 2005 for Californial Clean Energy Fund (CCEF, 2005). 

b [Denominator] $867 million to be spent 2006-2008 on energy efficiency projects not including evaluation, measurement, and validation (CPUC, 

2005). 1/3 of full budget used for single year budget ($289 million). 

c [Numerator] $17 million for annual energy efficiency R&D budget consists of "residential ($8 M), industrial ($6 M), and transportation ($3 M)" 

(G. Walmet, NYSERDA, personal communication, May 23, 2006). 

d [Denominator] $134 M for New York Energy $mart from 3/2004-3/2005 (NYSERDA, 2005b). 

e [Numerator] BPA funded the Northwest Energy Efficiency Alliance with $10 million in 2003. [Denominator] The total BPA energy efficiency allocation was $138 million (Blumstein, et al., 2005). 

f [Note] BPA overall budgetting for energy efficiency increased in subsequent years (e.g., $170 million in 2004 with higher commitments going to an 

average of $245 million from 2006-2012) (Alliance to Save Energy, 2004). 

g Funding for the statewide Emerging Technologies program will increase in 2006 to $10 million [Numerator] out of a total budget of $581 million 

[Denominator] for utility energy-efficiency programs (Mills and Livingston, 2005). 

h [Note] Data from Mills and Livingston (2005) differs from $675 million 3-yr figure from CPUC (2005). 

i Additional 3% is spent on Innovative Design for Energy Efficiency (InDEE) (D. Arambula, SCE, personal communication, June 8, 2006). 

To create a sustainable, aggressive national commitment to energy efficiency 6-25
for integrating the data communication networks and 

smart equipment on the grid and on consumer premises. Another key development is the consumer portal— 

essentially, a two-way communication link between 

utilities and their customers to facilitate information 

exchange (EPRI, 2006). Several efficiency program administrators are pilot testing GridWise/Intelligrid as 

presented in the box below. 

• The Lighting Energy Efficiency Demand Response 

Program is a program proposed by SCE. It will use 

Westinghouse’s two–way wireless dimmable energy efficiency T-5 fluorescent lighting as a retrofit for existing 

T-12 lamps. SCE will be able to dispatch these lighting 

systems using wireless technology. The technology will be 

piloted in small commercial buildings, the educational 

sector, office buildings, and industrial facilities and could 

give SCE the ability to reduce load by 50 percent on those 

installations. This is an excellent example of combining 

energy efficiency and direct load control technologies. 

Both EPRI and ESource (a for-profit, membership-based 

energy information service) are exploring opportunities 

to expand their efforts in these areas. ESource is also 

Pilot Tests of GridWise/Intelligrid 

GridWise Pacific Northwest Demonstration Projects 

These projects are designed to demonstrate how 

advanced, information-based technologies can be 

used to increase power grid efficiency, flexibility, and 

reliability while reducing the need to build additional 

transmission and distribution infrastructure. These 

pilots are funded by DOE’s Office of Electricity 

Delivery and Energy Reliability. 

Olympic Peninsula Distributed Resources


Demonstration


This project will integrate demand response and distributed resources to reduce congestion on the grid, 

including demand response with automated control 

technology, smart appliances, a virtual real-time 

considering developing a database of new energy 

efficiency and load response technologies. Leveraging 

R&D resources through regional and national partnering 

efforts has been successful in the past with energy efficiency technologies. Examples include compact fluorescent lighting, high-efficiency ballasts and new washing 

machine technologies. Regional and national efforts 

send a consistent signal to manufacturers, which can be 

critical to increasing R&D activities. 

Programs must be able to incorporate new technologies 

over time. As new technologies are considered, the programs must develop strategies to overcome the barriers 

specific to these technologies to increase their acceptance. 

Table 6-9 provides some examples of new technologies, 

challenges, and possible strategies for overcoming these 

challenges. A cross-cutting challenge for many of these 

technologies is that average rate designs do not send a 

price signal during periods of peak demand. A strategy 

for overcoming this barrier would be to investigate timesensitive rates (see Chapter 5: Rate Design for additional 

information). 

market, Internet-based communications, contract 

options for customers, and the use of distributed 

generation. 

Grid-Friendly Appliance Demonstration 

In this project, appliance controllers will be used in 

both clothes dryers and water heaters to detect fluctuations in frequency that indicate there is stress in 

the grid, and will respond by reducing the load on 

that appliance. 

These pilots include: Pacific Northwest National 

Laboratory, Bonneville Power Administration, 

PacificCorp, Portland General Electric, Mason County 

PUD #3, Clallam County PUD, and the city of Port 

Angeles. 

6-26 National Action Plan for Energy Efficiency 
Table 6-9. Emerging Technologies for Programs 

Technology/ 

Program Description Availability Key Challenges 

Key 

Strategies Examples 

Smart Grid/ 

GridWise 

technologies 

Smart grid technologies include both customer-side 

and grid-side technologies that allow for more 

efficient operation of the grid. 

Available in pilot 

situations 

Cost 

Customer 

Acceptance 

Communication 

Protocols 

Pilot programs 

R&D programs 

GridWise pilot 

in Pacific NW 

Smart 

appliances/ 

Smart Homes 

Homes with gateways that would allow for control 

of appliances and other end-uses via the Internet. 

Available Cost 

Customer 

Acceptance 

Communication 

Protocols 

Pilot programs 

Customer education 

GridWise pilot 

in Pacific NW 

Load control of 

A/C via smart 

thermostat 

A/C controlled via smart thermostat. 

Communication can be via wireless, power line 

carrier (PLC) or Internet. 

Widely available Cost 

Customer 

acceptance 

Used to control 

loads in congested 

situation 

Pilot and full-scale 

programs 

Customer education 

Long Island Power 

Authority (LIPA), 

Austin Energy, 

Utah Power and 

Light, ISO New 

England 

Dynamic 

pricing/critical 

peak pricing/ 

thermostat 

control with 

enhanced 

metering 

Providing customers with either real time or critical 

peak pricing via a communication technology. 

Communication can be via wireless, PLC, or 

Internet. Customers can also be provided with 

educational materials. 

Available Cost 

Customer 

acceptance 

Split incentives in 

deregulated markets 

Regulatory barriers 

Pilot and full-scale 

Programs 

Used in 

congested areas 

Customer 

education 

Georgia (large 

users) Niagara 

Mohawk, California 

Peak Pricing 

Experiment, Gulf 

Power 

Control of 

lighting via 

wireless, power 

line carrier 

or other 

communication 

technologies 

Using direct control to control commercial lighting 

during high price periods. 

Recently available Cost 

Customer 

acceptance 

Contractor 

acceptance 

R&D programs 

Pilot programs 

SCE pilot using 

wireless 

NYSERDA pilot 

with power line 

carrier control 

T-5s Relatively new lighting technology for certain 

applications. 

Widely available Cost 

Customer 

acceptance 

Contractor 

acceptance 

Add to existing 

programs as a 

new measure 

Included in 

most large-scale 

programs 

New generation 

tankless water 

heaters 

Tankless water heaters do not have storage tanks 

and do not have standby losses. They can save 

energy relative to conventional water heaters in 

some applications. Peak demand implications are 

not yet known. 

Widely available Cost 

Customer 

acceptance 

Contractor 

acceptance 

Add to existing 

programs as a 

new measure 

More common 

in the EU 

Some load control technologies will require more than • Interactive communications. Interactive communicaR&D activities to become widespread. To fully capture tions that allow for two-way flow of price information 

and utilize some of these technologies, the following and decisions would add new functionality to the 

four building blocks are needed: electricity system. 

To create a sustainable, aggressive national commitment to energy efficiency 6-27
• Innovative rates and regulation. Regulations are needed 

to provide adequate incentives for energy efficiency 

investments to both suppliers and customers. 

• Innovative markets. Market design must ensure that 

energy efficiency and load response measures that are 

advanced by regulation become self-sustaining in the 

marketplace. 

• Smart end-use devices. Smart devices are needed to 

respond to price signals and facilitate the management of 

the energy use of individual and networked appliances. 

In addition, the use of open architecture systems is the 

only long-term way to take existing non-communicating 

equipment into an energy-efficient future that can use 

two-way communications to monitor and diagnose 

appliances and equipment. 

Consider Efficiency Investments to Alleviate 

Transmission and Distribution Constraints 

Energy efficiency has a history of providing value by reducing generation investments. It should also be considered 

with other demand-side resources, such as demand 

response, as a potential resource to defer or avoid investments in transmission and distribution systems. Pacific Gas 

and Electric’s (PG&E) Model Energy Communities Project (the 

Delta Project) provides one of the first examples of this 

approach. This project was conceived to test whether 

demand resources could be used as a least cost resource to 

defer the capital expansion of the transmission and distribution system in a constrained area. In this case, efforts were 

focused on the constrained area, and customers were 

offered versions of existing programs and additional measures to achieve a significant reduction in the constrained 

area (PG&E, 1993). A recently approved settlement at the 

Federal Energy Regulatory Commission (FERC) allows energy 

efficiency along with load response and distributed generation to participate in the Independent System Operator New 

England (ISO-NE) Forward Capacity Market (FERC, 2006; 

FERC, 2005). In addition, Consolidated Edison has successfully used a Request For Proposals (RFP) approach to defer 

distribution upgrades in four substation areas with contracts 

totaling 45 MW. Con Ed is currently in a second round of 

solicitations for 150 MW (NAESCO, 2005). Recent pilots 

using demand response, energy efficiency, and intelligent 

grid are proving promising as shown in the BPA example in 

the box on page 6-29. 

To evaluate strategies for deferring transmission and distribution investments, the benefits and costs of energy efficiency 

and other demand resources are compared to the cost of 

deferring or avoiding a distribution or transmission upgrade 

(such as a substation upgrade) in a constrained area. This 

cost balance is influenced by location-specific transmission 

and distribution costs, which can vary greatly. 

Create a Roadmap of Key Program Components, 

Milestones, and Explicit Energy Use Reduction 

Goals 

Decisions regarding the key considerations discussed 

throughout this section are used to inform the development of an energy efficiency plan, which serves as a 

roadmap with key program components, milestones, 

and explicit energy reduction goals. 

A well-designed plan includes many of the elements discussed in this section including: 

• Budgets (see section titled “Leverage Private-Sector 

Expertise, External Funding, and Financing” for information on the budgeting processes for the most 

common policy models) 

— Overall 

— By program 

• Kilowatt , kWh, and Mcf savings goals overall and by 

program 

— Annual savings 

— Lifetime savings 

• Benefits and costs overall and by program 

• Description of any shareholder incentive mechanisms 

6-28 National Action Plan for Energy Efficiency 
Bonneville Power Administration (BPA) Transmission Planning


BPA has embarked on a new era in transmission 

planning. As plans take shape to address load 

growth, constraints, and congestion on the transmission system, BPA is considering measures other than 

building new lines, while maintaining its commitment to provide reliable transmission service. The 

agency, along with others in the region, is exploring 

“non-wires solutions” as a way to defer large 

construction projects. 

BPA defines non-wires solutions as the broad array 

of alternatives including, but not limited to, demand 

response, distributed generation, conservation measures, generation siting, and pricing strategies that 

individually, or in combination, delay or eliminate the 

For each program, the plan should include the following: 

• Program design description 

• Objectives 

• Target market 

• Eligible measures 

• Marketing plan 

• Implementation strategy 

• Incentive strategy 

• Evaluation plan 

• Benefit/cost outputs 

• Metrics for program success 

• Milestones 

The plan serves as a road-map for programs. Most program plans, however, are modified over time based on 

need for upgrades to the transmission system. The 

industry also refers to non-wires solutions as nonconstruction alternatives or options. 

BPA has reconfigured its transmission planning 

process to include an initial screening of projects to 

assess their potential for a non-wires solution. BPA is 

now committed to using non-wires solutions screening 

criteria for all capital transmission projects greater 

than $2 million, so that it becomes an institutionalized part of planning. BPA is currently sponsoring a 

number of pilot projects to test technologies, resolve 

institutional barriers, and build confidence in using 

non-wires solution. 

changing conditions (e.g., utility supply or market changes) 

and program experience. Changes from the original 

roadmap should be both documented and justified. A plan 

that includes all of these elements is an appropriate starting point for a regulatory filing. A well-documented plan is 

also a good communications vehicle for informing and 

educating stakeholders. The plan should also include a 

description of any pilot programs and R&D activities. 

Energy Efficiency Program Design 

and Delivery 

The organizations reviewed for this chapter have learned 

that program success is built over time by understanding 

the markets in which efficient products and services are 

delivered, by addressing the wants and needs of their 

customers, by establishing relationships with customers 

and suppliers, and by designing and delivering programs 

accordingly. 

• They have learned that it is essential to program success to coordinate with private market actors and other 

influential stakeholders, to ensure that they are well 

informed about program offerings and share this 

information with their customers/constituents. 

To create a sustainable, aggressive national commitment to energy efficiency 6-29
• Many of the organizations reviewed go well beyond 

merely informing businesses and organizations, by 

actually partnering with them in the design and delivery 

of one or more of their efficiency programs. 

• Recognizing that markets are not defined by utility 

service territory, many utilities and other third-party 

program administrators actively cooperate with one 

another and with national programs, such as ENERGY 

STAR, in the design and delivery of their programs. 

This section discusses key best practices that emerge 

from a decade or more of experience designing and 

implementing energy efficiency programs. 

Begin With the Market in Mind 

Energy efficiency programs should complement, rather 

than compete with, private and other existing markets 

for energy efficient products and services. The rationale 

for utility or third-party investment in efficiency programming is usually based on the concept that within these 

markets, there are barriers that need to be overcome to 

ensure that an efficient product or service is chosen over 

a less efficient product or standard practice. Barriers 

might include higher initial cost to the consumer, lack of 

knowledge on the part of the supplier or the customer, 

split incentives between the tenant who pays the utility 

bills and the landlord who owns the building, lack of 

supply for a product or service, or lack of time (e.g., to 

research efficient options, seek multiple bids—particularly 

during emergency replacements). 

Conduct a Market Assessment 

Understanding how markets function is a key to successful 

program implementation, regardless of whether a program 

is designed for resource acquisition, market transformation, or a hybrid approach. A market assessment can be a 

valuable investment to inform program design and implementation. It helps establish who is part of the market 

(e.g., manufacturers, distributors, retailers, consumers), 

what the key barriers are to greater energy efficiency from 

the producer or consumer perspectives, who are the key 

trend-setters in the business and the key influencers in 

consumer decision-making, and what approaches might 

work best to overcome barriers to greater supply and 

investment in energy efficient options, and/or uptake of a 

program. A critical part of completing a market assessment 

is a baseline measurement of the goods and services 

involved and the practices, attitudes, behaviors, factors, 

and conditions of the marketplace (Feldman, 1994). In 

addition to informing program design and implementation, the baseline assessment also helps inform program 

evaluation metrics, and serves as a basis for which future 

program impacts are measured. As such, market assessments are usually conducted by independent third-party 

evaluation professionals. The extent and needs of a market 

assessment can vary greatly. For well-established program 

models, market assessments are somewhat less involved, 

and can rely on existing program experience and literature, 

with the goal of understanding local differences and establishing the local or regional baseline for the targeted energy 

efficiency product or service. 

Table 6-10 illustrates some of the key stakeholders, barriers to energy efficiency, and program strategies that are 

explored in a market assessment, and are useful for 

considering when designing programs. 

Solicit Stakeholder Input 

Convening stakeholder advisory groups from the onset 

as part of the design process is valuable for obtaining 

multiple perspectives on the need and nature of planned 

programs. This process also serves to improve the program design, and provides a base of program support 

within the community. 

Once programs have been operational for a while, stakeholder groups should be reconvened to provide program 

feedback. Stakeholders that have had an ongoing relationship with one or more of the programs can provide insight 

on how the programs are operating and perceived in the 

community, and can recommend program modifications. 

They are also useful resources for tapping into extended 

networks beyond those easily accessible to the program 

providers. For example, contractors, building owners, and 

building operators can be helpful in providing access to 

their specific trade or business organizations. 

6-30 National Action Plan for Energy Efficiency 
Table 6-10. Key Stakeholders, Barriers, and Program Strategies 

by Customer Segment 

Customer 

Segment Key Stakeholders Key Program Barriers Key Program Strategies 

Large 

Commercial 

& Industrial 

Retrofit 

● Contractors 

● Building owners and operators 

● Distributors: lighting, HVAC, motors, other ● Product manufacturers 

● Engineers 

● Energy services companies 

● Access to capital 

● Competing priorities 

● Lack of information 

● Short-term payback (<2 yr) mentality 

● Financial incentives (rebates) ● Performance contracting ● Performance benchmarking ● Partnership with ENERGY STAR ● Low interest financing 

● Information from unbiased sources 

● Technical assistance ● Operations and maintenance training 

Small 

Commercial 

● Distributors: lighting, HVAC, other ● Building owners 

● Business owners 

● Local independent trades 

● Access to capital 

● Competing priorities 

● Lack of information 

● Financial incentives (rebates) ● Information from unbiased sources 

● Direct installation 

● Partnership with ENERGY STAR 

Commercial & 

Industrial New 

Construction 

● Architects 

● Engineers 

● Building and energy code officials 

● Building owners 

● Potential occupants 

● Project/program timing 

● Competing priorities 

● Split incentives (for rental property) 

● Lack of information 

● Higher initial cost 

● Early intervention (ID requests for hook-up) 

● Design assistance 

● Performance targeting/benchmarking ● Partnership with ENERGY STAR ● Training of architects and engineers ● Visible and ongoing presence in design 

community 

● Education on life cycle costs 

Residential 

Existing Homes 

● Distributors: appliances, HVAC, lighting ● Retailers: appliance, lighting, windows ● Contractors: HVAC, insulation, remodeling ● Homeowners ● Higher initial cost 

● Lack of information 

● Competing priorities 

● Inexperience or prior negative experience 

w/technology (e.g., early compact 

florescent lighting) 

● Emergency replacements 

● Financial incentives ● Partnership with ENERGY STAR ● Information on utility Web sites, bill inserts, 

and at retailers 

● Coordination with retailers and contractors 

Residential 

New Homes 

● Contractors: general and HVAC ● Architects 

● Code officials 

● Builders 

● Home buyers 

● Real estate agents 

● Financial institutions 

● Higher initial cost 

● Split incentives: builder is not the 

occupant 

● Partnership with ENERGY STAR ● Linking efficiency to quality 

● Working with builders ● Building code education & compliance 

● Energy efficient mortgages 

Multifamily ● Owners and operators 

● Contractors 

● Code officials 

● Tenants 

● Split incentives 

● Lack of awareness 

● Financial incentives ● Marketing through owner and operator 

associations 

Low Income ● Service providers: Weatherization 

Assistance Program (WAP), Low-Income 

Home Energy Assistance Program (LIHEAP) ● Social service providers: state and local 

agencies 

● NGOs and advocacy groups 

● Credit counseling organizations 

● Tenants 

● Program funding 

● Program awareness ● Bureaucratic challenges 

● Consistent eligibility requirements with 

existing programs 

● Direct installation 

● Leveraging existing customer channels for 

promotion and delivery 

● Fuel blind approach 

To be successful, stakeholder groups should focus on the 

big picture, be well organized, and be representative. 

Stakeholder groups usually provide input on budgets, 

allocation of budgets, sectors to address, program 

design, evaluation, and incentives. 

Listen to Customer and Trade Ally Needs 

Successful energy efficiency programs do not exist without 

customer and trade ally participation and acceptance of 

these technologies. Program designs should be tested 

with customer market research before finalizing offerings. 

Customer research could include surveys, focus groups, 

To create a sustainable, aggressive national commitment to energy efficiency 6-31
Best Practice: Solicit Stakeholder Input 

Minnesota's Energy Efficiency Stakeholder Process 

exemplifies the best practice of engaging stakeholders in program design. The Minnesota Public 

Utility Commission hosted a roundtable with the 

commission, utilities, and other stakeholders to 

review programs. Rate implications and changes to 

the programs are worked out through this collaborative and drive program design (MPUC, 2005). 

Successful stakeholder processes generally have the 

following attributes: 

• Neutral facilitation of meetings. 

• Clear objectives for the group overall and for each 

meeting. 

• Explicit definition of stakeholder group's role in 

program planning (usually advisory only). 

• Explicit and fair processes for providing input. 

• A timeline for the stakeholder process. 

forums, and in-depth interviews. Testing of incentive levels 

and existing market conditions by surveying trade allies 

is critical for good program design. 

Use Utility Channels and Brand 

Utilities have existing channels for providing information 

and service offerings to their customers. These include 

Web sites, call centers, bill stuffers, targeted newsletters, 

as well as public media. Using these channels takes 

advantage of existing infrastructure and expertise, and 

provides customers with energy information in the way 

that they are accustomed to obtaining it. These methods 

reduce the time and expense of bringing information to 

customers. In cases where efficiency programming is 

delivered by a third party, gaining access to customer 

data and leveraging existing utility channels has been 

highly valuable for program design and implementation. 

In cases such as Vermont (where the utilities are not 

responsible for running programs), it has been helpful to 

have linkages from the utility Web sites to Efficiency 

Vermont’s programs, and to establish Efficiency Vermont 

as a brand that the utilities leverage to deliver information 

about efficiency to their customers. 

Promote the Other Benefits of Energy Efficiency 

and Energy Efficient Equipment 

Most customers are interested in reducing energy consumption to save money. Many, however, have other 

motivations for replacing equipment or renovating space 

that are consistent with energy efficiency improvements. 

For example, homeowners might replace their heating 

system to improve the comfort of their home. A furnace 

with a variable speed drive fan will further increase comfort (while saving energy) by providing better distribution 

of both heating and cooling throughout the home and 

reducing fan motor noise. It is a best practice for program administrators to highlight these features where 

non-energy claims can be substantiated. 

Coordinate With Other Utilities and Third-Party 

Program Administrators 

Coordination with other utilities and third-party program 

administrators is also important. Both program allies and 

customers prefer programs that are consistent across 

states and regions. This approach reduces transaction 

costs for customers and trade allies and provides consistent messages that avoid confusing the market. Some 

programs can be coordinated at the regional level by 

entities such as Northeast Energy Efficiency Partnership 

(NEEP), the Northwest Energy Efficiency Alliance, and the 

Midwest Energy Efficiency Alliance. Figure 6-1 illustrates 

the significant impact that initiative sponsors of the 

Northeast Lighting and Appliance Initiative (coordinated 

regionally by NEEP) have been able to have on the market for energy-efficient clothes washers by working in 

coordination over a long time period. NEEP estimates 

the program is saving an estimated 36 million kWh 

per year, equivalent to the annual electricity needs 

of 5,000 homes (NEEP, undated). 

Similarly, low-income programs benefit from coordination with and use of the same eligibility criteria as the 

federal Low-Income Home Energy Assistance Program 

(LIHEAP) or Weatherization Assistance Program (WAP). 

These programs have existing delivery channels that can 

6-32 National Action Plan for Energy Efficiency 
Figure 6-1. Impacts of the Northeast Lighting and Appliance Initiative 

Percent of E

NERG

Y S

T

AR Clothes Washer Sales

1 

0.9 

0.8 

0.7 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

0 

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 

Sponsor states with initiative Standard takes effect 

2007: Federal Minimum Efficiency 

National average 

Sponsor states absent initiative Sponsor states 

(with initiative) 

2003: National clothes washers 

campaign kicks off 

2004: More stringent ENERGY 

STAR spec takes effect 

1998: 6 manufacturers, 2002: 18 manufacturers, 

15 qualified products 99 qualified products 

National 

Average 

2001: Whirlpool enters 

market 

1998: Regional 

initiative begins 

Sponsor states 

(absent initiative) 

be used to keep program costs down while providing 

substantial benefit to customers. On average, weatherization reduces heating bills by 31 percent and overall 

energy bills by $274 per year for an average cost per 

home of $2,672 per year. Since 1999, DOE has been 

encouraging the network of weatherization providers to 

adopt a whole-house approach whereby they approach 

residential energy efficiency as a system rather than as a 

collection of unrelated pieces of equipment (DOE, 2006). 

The Long Island Power Authority’s (LIPA) program shown 

at right provides an example. 

Leverage the National ENERGY STAR Program 

Nationally, ENERGY STAR provides a platform for program implementation across customer classes and 

defines voluntary efficiency levels for homes, buildings, 

and products. ENERGY STAR is a voluntary, public-private 

partnership designed to reduce energy use and related 

greenhouse gas emissions. The program, administered 

by the U.S. Environmental Protection Agency (EPA) and 

the DOE, has an extensive network of partners including 

equipment manufacturers, retailers, builders, ESCOs, private businesses, and public sector organizations. 

Since the late 1990s, EPA and DOE have worked with 

utilities, state energy offices, and regional nonprofit 

organizations to help leverage ENERGY STAR messaging, 

tools, and strategies to enhance local energy efficiency 

programs. Today more than 450 utilities (and other efficiency program administrators), servicing 65 

percent of U.S. households, participate in the ENERGY 

STAR program. (See box on page 6-34 for additional 

information.) New Jersey and Minnesota provide examples 

of states that have leveraged ENERGY STAR. 

Long Island Power Authority (LIPA):


Residential Energy Affordability


Partnership Program (REAP)


This program provides installation of comprehensive electric energy efficiency measures and energy 

education and counseling. The program targets 

customers who qualify for DOE’s Low-Income 

Weatherization Assistance Program (WAP), as well 

as electric space heating and cooling customers 

who do not qualify for WAP and have an income 

of no more than 60 percent of the median household income level. LIPA’s REAP program has saved 

2.5 MW and 21,520 MWh 1999 to 2004 with 

spending of $12.4 million. 

Source: LIPA, 2004 

To create a sustainable, aggressive national commitment to energy efficiency 6-33
• New Jersey's Clean Energy Program. The New Jersey 

Board of Public Utilities, Office of Clean Energy has incorporated ENERGY STAR tools and strategies since the 

inception of its residential products and Warm Advantage 

(gas) programs. Both programs encourage customers to 

purchase qualified lighting, appliances, windows, programmable thermostats, furnaces, and boilers. The New 

ENERGY STAR Program Investments 

In support of the ENERGY STAR program, EPA and 

DOE invest in a portfolio of energy efficiency efforts 

that utilities and third-party program administrators 

can leverage to further their local programs including: 

• Education and Awareness Building. ENERGY STAR 

sponsors broad-based public campaigns to educate 

consumers on the link between energy use and air 

emissions, and to raise awareness about how products 

and services carrying the ENERGY STAR label can 

protect the environment while saving money. 

• Establishing Performance Specifications and 

Performing Outreach on Efficient Products. More 

than 40 product categories include ENERGY STARqualifying models, which ENERGY STAR promotes 

through education campaigns, information 

exchanges on utility-retailer program models, and 

extensive online resources. Online resources include 

qualifying product lists, a store locator, and information 

on product features. 

• Establishing Energy Efficiency Delivery Models to 

Existing Homes. ENERGY STAR assistance includes 

an emphasis on home diagnostics and evaluation, 

improvements by trained technicians/building professionals, and sales training. It features online 

consumer tools including the Home Energy Yardstick 

and Home Energy Advisor. 

Jersey Clean Energy Program also educates consumers, 

retailers, builders, contractors, and manufacturers about 

ENERGY STAR. In 2005, New Jersey's Clean Energy 

Program saved an estimated 60 million kWh of electricity, 1.6 million therms of gas, and 45,000 tons of 

carbon dioxide (CO2). 

• Establishing Performance Specifications and 

Performing Outreach for New Homes. ENERGY 

STAR offers builder recruitment materials, sales 

toolkits, consumer messaging, and outreach that 

help support builder training, consumer education, 

and verification of home performance. 

• Improving the Performance of New and Existing 

Commercial Buildings. EPA has designed an Energy 

Performance Rating System to measure the energy 

performance at the whole-building level, to help go 

beyond a component-by-component approach that 

misses impacts of design, sizing, installation, 

controls, operation, and maintenance. EPA uses this 

tool and other guidance to help building owners 

and utility programs maximize energy savings. 

Additional information on strategies, tools, and 

resources by customer segment is provided in the fact 

sheet “ENERGY STAR—A Powerful Resource for 

Saving Energy,” which can be downloaded from 

www.epa.gov/cleanenergy/pdf/napee_energystarfactsheet.pdf. 

6-34 National Action Plan for Energy Efficiency 
• Great River Energy, Minnesota. In 2005, Great River 

Energy emphasized cost-effective energy conservation by 

offering appliance rebates to cooperative members who 

purchase ENERGY STAR qualifying refrigerators, clothes 

washers, and dishwashers. Great River provided its member cooperatives with nearly $2 million for energy conservation rebates and grants, including the ENERGY STAR 

rebates, as a low-cost resource alternative to building new 

peaking generation. In addition to several off-peak programs, Great River Energy's residential DSM/conservation program consists of: 

— Cycled air conditioning 

— Interruptible commercial load response/management 

— Interruptible irrigation 

— Air and ground source heat pumps 

— ENERGY STAR high-efficiency air conditioning rebate 

— ENERGY STAR appliance rebates 

— ENERGY STAR compact fluorescent lamp rebate 

— Low-income air conditioning tune-ups 

— Residential and commercial energy audits 

Keep Participation Simple 

Successful programs keep participation simple for both 

customers and trade allies. Onerous or confusing participation rules, procedures, and paperwork can be a major 

deterrent to participation from trade allies and customers. Applications and other forms should be clear 

and require the minimum information (equipment and 

customer) to confirm eligibility and track participation by 

customer for measurement and verification (M&V) purposes. Given that most energy efficiency improvements 

are made at the time of either equipment failure or 

retrofit, timing can be critical. A program that potentially delays equipment installation or requires customer or 

contractor time for participation will have fewer 

A Seattle City Light Example of a


Simple Program


Seattle City Light’s $mart Business program offers 

a “per-fixture” rebate for specific fixtures in existing 

small businesses. Customers can use their own 

licensed electrical contractor or select from a preapproved contractor list. Seattle City Light provides 

the rebate to either the installer or participating 

customer upon completion of the work. Completed 

work is subject to onsite verification. 

Since 1986, Seattle City Light’s $mart Business 

program has cumulative savings (for all measures) of 70,382 MWh and 2.124 MW. 

Source: Seattle City Light, 2005 

participants (and less support from trade allies). Seattle 

City Light’s program shown above has two paths for easy 

participation. 

Keep Funding (and Other Program Characteristics) 

as Consistent as Possible 

Over time, both customers and trade allies become 

increasingly aware and comfortable with programs. 

Disruptions to program funding frustrate trade allies 

who cannot stock appropriately or are uncomfortable 

making promises to customers regarding program offerings for fear that efficiency program administrators will 

be unable to deliver on services or financial incentives. 

Invest in Education, Training, and Outreach 

Some of the key barriers to investment in energy 

efficiency are informational. Education, outreach, and 

training should be provided to trade allies as well as 

customers. Some programs are information-only programs; 

some programs have educational components integrated 

into the program design and budget; and in some 

cases, education is budgeted and delivered somewhat 

independently of specific programs. In general, standalone education programs do not comprise more than 

To create a sustainable, aggressive national commitment to energy efficiency 6-35
10 percent of the overall energy efficiency budget, but 

information, training, and outreach might comprise a 

larger portion of some programs that are designed to 

affect long-term markets, when such activities are tied to 

explicit uptake of efficiency measures and practices. This 

approach might be particularly applicable in the early 

years of implementation, when information and training 

are most critical for building supply and demand for 

products and services over the longer term. KeySpan and 

Flex Your Power are examples of coordinating education, 

training, and outreach activities with programs. 

Leverage Customer Contact to Sell Additional Efficiency 

and Conservation Measures 

Program providers can take advantage of program contact 

with customers to provide information on other program 

KeySpan Example 

KeySpan uses training and certification as critical parts 

of its energy efficiency programs. KeySpan provides 

building operator certification training, provides 

training on the Massachusetts state building code, 

and trains more than 1,000 trade allies per year. 

Source: Johnson, 2006 

California: Flex Your Power Campaign 

The California Flex Your Power Campaign was initiated in 2001 in the wake of California’s rolling 

black-outs. While initially focused on immediate 

conservation measures, the campaign has transitioned to promoting energy efficiency and longterm behavior change. The program coordinates 

with the national ENERGY STAR program as well as 

the California investor-owned utilities to ensure 

that consumers are aware of energy efficiency 

options and the incentives available to them 

through their utilities. 

offerings, as well as on no or low-cost opportunities to 

reduce energy costs. Information might include proper use 

or maintenance of newly purchased or installed equipment 

or general practices around the home or workplace for 

efficiency improvements. Education is often included in 

low-income programs, which generally include direct 

installation of equipment, and thus already include in-home 

interaction between the program provider and customer. 

The box below provides some additional considerations for 

low-income programs. 

Leverage Private-Sector Expertise, External Funding, 

and Financing 

Well-designed energy efficiency programs leverage 

external funding and financing to stretch available dollars 

and to take advantage of transactions as they occur in 

Low-Income Programs 

Most utilities offer energy efficiency programs targeted 

to low-income customers for multiple reasons: 

• Low-income customers are less likely to take 

advantage of rebate and other programs, 

because they are less likely to be purchasing 

appliances or making home improvements. 

• The “energy burden” (percent of income spent 

on energy) is substantially higher for low-income 

customers, making it more difficult to pay bills. 

Programs that help reduce energy costs reduce 

the burden, making it easier to maintain regular 

payments. 

• Energy efficiency improvements often increase 

the comfort and safety of these homes. 

• Utilities have the opportunity to leverage federal 

programs, such as LIHEAP and WAP, to provide 

comprehensive services to customers. 

• Low-income customers often live in less efficient 

housing and have older, less efficient appliances. 

• Low-income customers often comprise a substantial percentage (up to one-third) of utility 

residential customers and represent a large 

potential for efficiency and demand reduction. 

• Using efficiency education and incentives in 

conjunction with credit counseling can be very 

effective in this sector. 

6-36 National Action Plan for Energy Efficiency 
the marketplace. This approach offers greater financial 

incentives to the consumer without substantially increasing program costs. It also has some of the best practice 

attributes discussed previously, including use of existing 

channels and infrastructure to reach customers. The following are a few opportunities for leveraging external 

funding and financing: 

• Leverage Manufacturer and Retailer Resources Through 

Cooperative Promotions. For example, for mass market 

lighting and appliance promotions, many program 

administrators issue RFPs to retailers and manufacturers 

asking them to submit promotional ideas. These RFPs 

usually require cost sharing or in-kind advertising and 

promotion, as well as requirements that sales data be 

provided as a condition of the contract. This approach 

allows competitors to differentiate themselves and 

market energy efficiency in a way that is compatible 

with their business model. 

• Leverage State and Federal Tax Credits Where Available. 

Many energy efficiency program administrators are 

now pointing consumers and businesses to the new 

federal tax credits and incorporating them in their programs. In addition, program administrators can educate their customers on existing tax strategies, such as 

accelerated depreciation and investment tax strategies, 

to help them recoup the costs of their investments 

faster. Some states offer additional tax credits, and/or 

offer sales tax “holidays,” where sales tax is waived at 

point of sale for a specified period of time ranging from 

one day to a year. The North Carolina Solar Center 

maintains a database of efficiency incentives, including 

state and local tax incentives, at www.dsireusa.org. 

• Build on ESCO and Other Financing Program Options. 

This is especially useful for large commercial and 

industrial projects. 

The NYSERDA and California programs presented at 

right and on the following page are both good examples 

of leveraging the energy services market and increasing 

ESCO presence in the state. 

New York Energy $mart Commercial/ 

Industrial Performance Program 

The New York Energy $mart Commercial/Industrial 

Performance Program, which is administered by 

NYSERDA, is designed to promote energy savings 

and demand reduction through capital improvement projects and to support growth of the energy 

service industry in New York state. Through the 

program, ESCOs and other energy service 

providers receive cash incentives for completion of 

capital projects yielding verifiable energy and 

demand savings. By providing $111 million in performance-based financial incentives, this nationally 

recognized program has leveraged more than 

$550 million in private capital investments. M&V 

ensures that electrical energy savings are achieved. 

Since January 1999, more than 860 projects 

were completed in New York with an estimated savings of 790 million kWh/yr. 

Sources: Thorne-Amann and Mendelsohn, 2005; 

AESP, 2006 

• Leverage Organizations and Outside Education and 

Training Opportunities. Many organizations provide 

education and training to their members, sometimes 

on energy efficiency. Working with these organizations 

provides access to their members, and the opportunity 

to leverage funding or marketing opportunities provided 

by these organizations. 

In addition, the energy efficiency contracting industry 

has matured to the level that many proven programs 

have been “commoditized.” A number of private firms 

and not-for-profit entities deliver energy efficiency programs throughout the United States or in specific 

regions of the country. “The energy efficiency industry is 

now a $5 billion to $25 billion industry (depending on 

how expansive one’s definition) with a 30-year history of 

developing and implementing all types of programs for 

To create a sustainable, aggressive national commitment to energy efficiency 6-37
California Non-Residential Standard 

Performance Contract (NSPC) Program 

The California NSPC program is targeted at customer efficiency projects and is managed on a 

statewide basis by PG&E, SCE, and San Diego Gas 

& Electric. Program administrators offer fixed-price 

incentives (by end use) to project sponsors for 

measured kilowatt-hour energy savings achieved 

by the installation of energy efficiency measures. 

The fixed price per kWh, performance measurement 

protocols, payment terms, and other operating 

rules of the program are specified in a standard 

contract. This program has helped to stimulate the 

energy services market in the state. In program 

year 2003, the California NSPC served 540 customers and saved 336 gigawatt-hours and 

6.54 million therms. 

Source: Quantum Consulting Inc., 2004 

utilities and projects for all types of customers across the 

country” (NAESCO, 2005). These firms can quickly get a 

program up and running, as they have the expertise, 

processes, and infrastructure to handle program activities. New program administrators can contract with 

these organizations to deliver energy efficiency program 

design, delivery, and/or implementation support in their 

service territory. 

Fort Collins Utilities was able to achieve early returns for 

its Lighting with a Twist program (discussed on page 6­

39) by hiring an experienced implementation contractor 

through a competitive solicitation process and negotiating 

cooperative marketing agreements with national retail chains 

and manufacturers, as well as local hardware stores. 

The Building Owners & Managers 

Association (BOMA) Energy Efficiency 

Program 

The BOMA Foundation, in partnership with the 

ENERGY STAR program, has created an innovative 

operational excellence program to teach property 

owners and managers how to reduce energy consumption and costs with proven no- and low-cost 

strategies for optimizing equipment, people and 

practices. The BOMA Energy Efficiency Program 

consists of six Web-assisted audio seminars (as well 

as live offerings at the BOMA International 

Convention). The courses are taught primarily by 

real estate professionals who speak in business 

vernacular about the process of improving 

performance. The courses are as follows: 

• Introduction to Energy Performance 

• How to Benchmark Energy Performance 

• Energy-Efficient Audit Concepts & Economic 

Benefits 

• No- and Low-Cost Operational Adjustments to 

Improve Energy Performance 

• Valuing Energy Enhancement Projects & Financial 

Returns 

• Building an Energy Awareness Program 

The commercial real estate industry spends 

approximately $24 billion annually on energy and 

contributes 18 percent of the U.S. CO2 emissions. 

According to EPA and ENERGY STAR Partner 

observations, a 30 percent reduction is readily 

achievable simply by improving operating standards. 

6-38 National Action Plan for Energy Efficiency 
Fort Collins Utilities Lighting 


With a Twist


Fort Collins Utilities estimates annual savings 

of 2,023 MWh of electricity with significant 

winter peak demand savings of 1,850 kW at a 

total resource cost of $0.018/kWh from its 

Lighting with a Twist program, which uses 

ENERGY STAR as a platform. The program was 

able to get off to quick and successful start by hiring 

an experienced implementation contractor and 

negotiating cooperative marketing agreements 

with retailers and manufacturers—facilitating the 

sale of 78,000 compact fluorescent light bulbs 

through six retail outlets from October to 

December 2005 (Fort Collins Utilities, et al., 2005). 

Start Simply With Demonstrated Program Models: 

Build Infrastructure for the Future 

Utilities starting out or expanding programs should look to 

other programs in their region and throughout the country 

to leverage existing and emerging best programs. After 

more than a decade of experience running energy efficiency 

programs, many successful program models have emerged 

and are constantly being refined to achieve even more costeffective results. 

While programs must be adapted to local realities, utilities 

and state utility commissions can dramatically reduce their 

learning curve by taking advantage of the wealth of data 

and experience from other organizations around the 

country. The energy efficiency and services community has 

numerous resources and venues for sharing information 

and formally recognizing best practice programs. The 

Association of Energy Service Professionals (www.aesp.org), 

the Association of Energy Engineers (www.aeecenter.org), 

and the American Council for an Energy Efficient Economy 

(www.aceee.org) are a few of these resources. 

Opportunities for education and information sharing are 

also provided via national federal programs such as ENERGY 

STAR (www.energystar.gov) and the Federal Energy 

Management Program (www.eere.energy.gov/femp). 

Additional resources will be provided in Energy Efficiency 

Best Practices Resources and Expertise (a forthcoming 

product of the Leadership Group). Leveraging these 

resources will reduce the time and expense of going to 

market with new efficiency programs. This will also increase 

the quality and value of the programs implemented. 

Start With Demonstrated Program Approaches That Can 

Easily Be Adapted to New Localities 

Particularly for organizations that are new to energy efficiency programming or have not had substantial energy 

efficiency programming for many years, it is best to start 

with tried and true programs that can easily be transferred 

to new localities, and be up and running quickly to achieve 

near term results. ENERGY STAR lighting and appliance programs that are coordinated and delivered through retail 

sales channels are a good example of this approach on the 

residential side. On the commercial side, prescriptive incentives for technologies such as lighting, packaged unitary 

heating and cooling equipment, commercial food service 

equipment, and motors are good early targets. While issues 

related to installation can emerge, such as design issues for 

lighting, and proper sizing issues for packaged unitary heating and cooling equipment, these technologies can deliver 

savings independent from how well the building’s overall 

energy system is managed and controlled. In the early 

phase of a program, offering prescriptive rebates is simple 

and can garner supplier interest in programs, but as 

programs progress, rebates might need to be reduced or 

transitioned to other types of incentives (e.g., cooperative 

marketing approaches, customer referrals) or to more 

comprehensive approaches to achieving energy savings. If 

the utility or state is in a tight supply situation, it might make 

sense to start with proven larger scale programs that 

address critical load growth drivers such as increased air 

conditioning load from both increased central air 

conditioning in new construction and increased use of 

room air conditioners. 

Determine the Right Incentives and Levels 

There are many types of incentives that can be used to 

spur increased investment in energy-efficient products 

and services. With the exception of education and 

To create a sustainable, aggressive national commitment to energy efficiency 6-39
Table 6-11. Types of Financial Incentives 

Financial Incentives Description 

Prescriptive Rebate Usually a predetermined incentive payment per item or per kW or kWh saved. Can be 

provided to the customer or a trade ally. 

Custom Rebate A rebate that is customized by the type of measures installed. Can be tied to a specific 

payback criteria or energy savings. Typically given to the customer. 

Performance Contracting Incentive A program administrator provides an incentive to reduce the risk premium to the ESCO 

installing the measures. 

Low Interest Financing A reduced interest rate loan for efficiency projects. Typically provided to the customer. 

Cooperative Advertising Involves providing co-funding for advertising or promoting a program or product. Often 

involves a written agreement. 

Retailer Buy Down A payment to the retailer per item that reduces the price of the product. 

MW Auction A program administrator pays a third party per MW and/or per MWh for savings. 

training programs, most programs offer some type of 

financial incentive. Table 6-11 shows some of the most 

commonly used financial incentives. Getting incentives 

right, and at the right levels, ensures program success and 

efficient use of resources by ensuring that programs do 

not “overpay” to achieve results. The market assessment 

and stakeholder input process can help inform initial 

incentives and levels. Ongoing process and impact 

evaluation (discussed below) and reassessment of costeffectiveness can help inform when incentives need to be 

changed, reduced, or eliminated. 

Invest in the Service Industry Infrastructure 

Ultimately, energy efficiency is implemented by people— 

home performance contractors, plumbers, electricians, 

architects, ESCOs, product manufacturers, and others— 

who know how to plan for, and deliver, energy efficiency 

to market. 

While it is a best practice to incorporate whole house 

and building performance into programs, these programs cannot occur unless the program administrator 

has a skilled, supportive community of energy service 

professionals to call upon to deliver these services to 

market. In areas of the country lacking these talents, 

development of these markets is a key goal and critical 

part of the program design. 

In many markets—even those with well established efficiency programs—it is often this lack of infrastructure or 

supply of qualified workers that prevents wider deployment of otherwise cost-effective energy efficiency 

programs. Energy efficiency program administrators 

often try to address this lack of infrastructure through 

various program strategies, including pilot testing 

programs that foster demand for these services and help 

create the business case for private sector infrastructure 

development, and vocational training and outreach to 

universities, with incentives or business referrals to spur 

technician training and certification. 

Examples of programs that have leveraged the ESCO 

industry were provided previously. One program with an 

explicit goal of encouraging technical training for the 

residential marketplace is Home Performance with 

ENERGY STAR, which is an emerging program model 

being implemented in a number of states including 

Wisconsin, New York, and Texas (see box on page 6-41 

for an example). The program can be applied in the gas 

or electric context, and is effective at reducing peak 

load, because the program captures improvements in 

heating and cooling performance. 

6-40 National Action Plan for Energy Efficiency 
Austin Energy: Home Performance 


with ENERGY STAR


In Texas, Austin Energy’s Home Performance with 

ENERGY STAR program focuses on educating customers, and providing advanced technical training 

for professional home performance contractors to 

identify energy efficiency opportunities, with an 

emphasis on safety, customer comfort, and energy 

savings. Participating Home Performance contractors are given the opportunity to receive technical 

accreditation through the Building Performance 

Institute. 

Qualified contractors perform a top-to-bottom 

energy inspection of the home and make customized recommendations for improvements. 

These improvements might include measures such 

as air-sealing, duct sealing, adding insulation, 

installing energy efficient lighting, and installing 

new HVAC equipment or windows, if needed. In 

2005, Austin Energy served more than 1,400 

homeowners, with an average savings per customer of $290 per year. Collectively, Austin 

Energy customers saved an estimated 

$410,000 and more than 3 MW through the 

Home Performance with ENERGY STAR program. 

Source: Austin Energy, 2006 

Evolve to More Comprehensive Programs 

A sample of how program approaches might evolve over 

time is presented in Table 6-12. As this table illustrates, 

programs typically start with proven models and often 

simpler approaches, such as providing prescriptive 

rebates for multiple technologies in commercial/industrial 

existing building programs. In addition, early program 

options are offered for all customer classes, and all of the 

programs deliver capacity benefits in addition to energy 

efficiency. Ultimately, the initial approach taken by a 

program administrator will depend on how quickly the 

program needs to ramp up, and on the availability of 

service industry professionals who know how to plan for, 

and deliver, energy efficiency to market. 

As program administrators gain internal experience and 

a greater understanding of local market conditions, and 

regulators and stakeholders gain greater confidence in 

the value of the energy efficiency programs being 

offered, program administrators can add complexity to 

the programs provided and technologies addressed. The 

early and simpler programs will help establish internal 

relationships (across utility or program provider departments) and external relationships (between program 

providers, trade allies and other stakeholders). Both the 

program provider and trade allies will better understand 

roles and relationships, and trade allies will develop 

familiarity with program processes and develop trust in 

the programs. Additional complexity can include alternative 

financing approaches (e.g., performance contracting), 

the inclusion of custom measures, bidding programs, 

whole buildings and whole home approaches, or additional cutting edge technologies. In addition, once 

programs are proven within one subsector, they can 

often be offered with slight modification to other sectors; 

for example, some proven residential program offerings 

might be appropriate for multi-family or low-income customers, and some large commercial and industrial offerings 

might be appropriate for smaller customers or multifamily 

applications. Many of the current ENERGY STAR marketbased lighting and appliance programs that exist in 

many parts of the country evolved from customer-based 

lighting rebates with some in-store promotion. Many of 

the more complex commercial and industrial programs, 

such at NSTAR and National Grid’s Energy Initiative program 

evolved from lighting, HVAC, and motor rebate programs. 

The Wisconsin and Xcel Energy programs discussed on 

page 6-43 are also good examples of programs that 

have become more complex over time. 

Change Measures Over Time 

Program success, changing market conditions, changes 

in codes, and changes in technology require reassessing 

the measures included in a program. High saturations in 

the market, lower incremental costs, more rigid codes, or 

To create a sustainable, aggressive national commitment to energy efficiency 6-41
Table 6-12. Sample Progression of Program Designs 

Sector Program Ramp Up Energy & Environmental Co-Benefits 

(In Addition to kWh) 

Early 

(6 Months -2 YRS) 

Midterm 

(2-3 YRS) 

Longer Term 

(3 To 7 YRS) Other Fuels 

Peak 

(S = Summer, 

W = Winter) 

Water 

Savings Other 

Residential: 

Existing Homes 

Market-based 

lighting & appliance 

program 

Home performance 

with ENERGY STAR 

pilot 

Home performance 

with ENERGY STAR 

HVAC rebate Add HVAC practices 

X 

X 

X 

S, W 

S, W 

S 

X Bill savings and 

reduced emissions 

Residential: 

New 

Construction 

ENERGY STAR 

Homes pilot (in areas 

without existing 

infrastructure) 

ENERGY STAR 

Homes 

Add ENERGY STAR 

Advanced Lighting 

Package 

X S, W 

S, W 

X Bill savings and 

reduced emissions 

Low-Income Education and 

coordination with 

weatherization 

programs 

Direct install 

Add home repair 

X 

X 

W 

S, W X 

Bill savings and 

reduced emissions 

Improved bill 

payment 

Improved comfort 

Multifamily Lighting, audits 

Direct install X 

S, W 

S, W 

Bill savings and 

reduced emissions 

Commercial: 

Existing 

Buildings 

Lighting, motors, 

HVAC, pumps, 

refrigeration, food 

service equipment 

prescriptive rebates 

ESCO-type program 

Custom measures 

Comprehensive 

approach 

S, W 

S, W X 

Bill savings and 

reduced emissions 

Commercial: 

New 

Construction 

Lighting, motors, 

HVAC, pumps, 

refrigeration, food 

service equipment 

prescriptive rebates Custom measures 

and design 

assistance 

S, W 

S, W X 

Bill savings and 

reduced emissions 

Small Business Lighting and 

HVAC rebates 

Direct install 

S, W 

S, W 

Bill savings and 

reduced emissions 

the availability of newer, more efficient technologies are specific applications. As barriers hindering customer 

all reasons to reassess what measures are included in a investment in a measure are reduced, it might be approprogram. Changes can be incremental, such as limiting priate to lower or eliminate financial incentives altogether. 

incentives for a specific measure to specific markets or It is not uncommon, however, for programs to continue 

6-42 National Action Plan for Energy Efficiency 
Wisconsin Focus on Energy: 

Comprehensive Commercial Retrofit 

Program 

Wisconsin Focus on Energy’s Feasibility Study Grants 

and Custom Incentive Program encourages commercial customers to implement comprehensive, multimeasure retrofit projects resulting in the long-term, 

in-depth energy savings. Customers implementing 

multi-measure projects designed to improve the whole 

building might be eligible for an additional 30 percent 

payment as a comprehensive bonus incentive. The 

Comprehensive Commercial Retrofit Program 

saved 70,414,701 kWh, 16.4 MW, and 2 million 

therms from 2001 through 2005. 

Sources: Thorne-Amann and Mendelsohn, 2005; 

Wisconsin, 2006. 

Xcel Energy Design Assistance 

Energy Design Assistance offered by Xcel, targets 

new construction and major renovation projects. The 

program goal is to improve the energy efficiency of 

new construction projects by encouraging the design 

team to implement an integrated package of energy 

efficient strategies. The target markets for the program are commercial customers and small business 

customers, along with architectural and engineering 

firms. The program targets primarily big box retail, 

public government facilities, grocery stores, healthcare, education, and institutional customers. The 

program offers three levels of support depending on 

project size. For projects greater than 50,000 square 

feet, the program offers custom consulting. For projects between 24,000 and 50,000 square feet, the 

program offers plan review. Smaller projects get a 

standard offering. The program covers multiple 

HVAC, lighting, and building envelope measures. 

The program also addresses industrial process 

motors and variable speed drives. Statewide, the 

Energy Design Assistance program saved 54.3 

GWh and 15.3 MW at a cost of $5.3 million in 2003. 

Source: Minnesota Office of Legislative Auditor, 

2005; Quantum Consulting Inc., 2004 

monitoring product and measure uptake after programs 

have ceased or to support other activities, such as continued education, to ensure that market share for products 

and services are not adversely affected once financial 

incentives are eliminated. 

Pilot New Program Concepts 

New program ideas and delivery approaches should be initially offered on a pilot basis. Pilot programs are often very 

limited in duration, geographic area, sector or technology, 

depending upon what is being tested. There should be a 

specific set of questions and objectives that the pilot program is designed to address. After the pilot period, a quick 

assessment of the program should be conducted to determine successful aspects of the program and any problem 

areas for improvement, which can then be addressed in a 

more full-scale program. The NSTAR program shown 

below is a recent example of an emerging program type 

that was originally started as a pilot. 

Table 6-13 provides a summary of the examples provided in this section. 

NSTAR Electric’s ENERGY STAR


Benchmarking Initiative


NSTAR is using the ENERGY STAR benchmarking 

and portfolio manager to help its commercial customers identify and prioritize energy efficiency 

upgrades. NSTAR staff assist the customer in using 

the ENERGY STAR tools to rate their building relative 

to other buildings of the same type, and identify 

energy efficiency upgrades. Additional support is 

provided through walk-through energy audits and 

assistance in applying for NSTAR financial incentive 

programs to implement efficiency measures. 

Ongoing support is available as participants monitor 

the impact of the energy efficiency improvements 

on the building’s performance. 

To create a sustainable, aggressive national commitment to energy efficiency 6-43
Table 6-13. Program Examples for Key Customer Segments 

Customer Program Program Program Description/ Program Model Key Best 

Segment Administrator Strategies Practices Proven Emerging 

All Training and 

certification 

components 

KeySpan KeySpan’s programs include a significant certification and training component. This includes building operator 

certification, building code training and 

training for HVAC installers. Strategies 

include training and certification. 

X Don’t underinvest in 

education, training, and 

outreach. Solicit stakeholder input. Use utilities 

channels and brand. 

Commercial, 

Industrial 

Non-residential 

performance 

contracting 

program 

California Utilities This program uses a standard contract 

approach to provide incentives for 

measured energy savings. The key 

strategy is the provision of financial 

incentives. 

X Build upon ESCO and 

other financing program 

options. Add program 

complexity over time. 

Keep participation 

simple. 

Commercial, 

Industrial, 

New 

Construction 

Energy design 

assistance 

XCEL This program targets new construction 

and major renovation projects. Key 

strategies are incentives and design 

assistance for electric saving end uses. 

X Keep participation simple. 

Add complexity over 

time. 

Commercial, 

Industrial 

Custom incentive 

program 

Wisconsin Focus on 

Energy 

This program allows commercial and 

industrial customers to implement a 

wide array of measures. Strategies 

include financial assistance and 

technical assistance. 

X Keep participation simple. 

Add complexity over 

time. 

Large 

Commercial, 

Industrial 

NY Performance 

Contracting 

Program 

NYSERDA Comprehensive Performance 

Contracting Program provides incentives for measures and leverages the 

energy services sector. The predominant strategies are providing incentives and using the existing energy 

services infrastructure. 

X Does allow for 

technologies 

to be added 

over time 

Leverage customer contact to sell additional 

measures. Add program 

complexity over time. 

Keep participation simple. 

Build upon ESCO and 

other financing options. 

Large 

Commercial, 

Industrial 

ENERGY STAR 

Benchmarking 

NSTAR NSTAR uses EPA’s ENERGY STAR 

benchmarking and Portfolio Manager 

to assist customers in rating their 

buildings. 

X Coordinate with other 

programs. Keep participation simple. Use utility 

channels and brand. 

Leverage ENERGY STAR. 

Small 

Commercial 

Smart business Seattle City Light This program has per unit incentives 

for fixtures and is simple to participate 

in. It also provides a list of prequalified contractors. 

X Use utility channels and 

brand. Leverage customer contact to sell 

additional measures. 

Keep funding consistent. 

Residential Flex Your Power California IOU’s This is an example of the CA utilities 

working together on a coordinated campaign to promote ENERGY STAR products. Lighting and appliances were 

among the measures promoted. 

Strategies include incentives and 

advertising. 

X Don’t underinvest in education, training, and outreach. Solicit stakeholder 

input. Use utilities channels and brand. 

Coordinate with other 

programs. Leverage manufacturer and retailer 

resources. Keep participation simple. Leverage 

ENERGY STAR. 

Residential ­

Low Income 

Residential 

affordability 

program 

LIPA Comprehensive low-income program 

that installs energy saving measures and 

also provides education. Strategies are 

incentives and education. 

X Coordinate with other 

programs. Keep participation simple. Leverage 

customer contact to sell 

additional measures. 

6-44 National Action Plan for Energy Efficiency 
Table 6-13. Program Examples for Key Customer Segments (continued) 

Customer 

Segment 

Program Program 

Administrator 

Program Description/ 

Strategies 

Program Model Key Best 

Practices Proven Emerging 

Residential 

Existing 

Homes 

Home 

Performance with 

ENERGY STAR 

Austin Energy Whole house approach to existing 

homes. Measures include: air sealing, 

insulation, lighting, duct-sealing, and 

replacing HVAC. 

X Start with proven models. Use utilities channels 

and brand. Coordinate 

with other programs. 

Residential 

New 

Construction 

ENERGY STAR 

Homes 

Efficiency Vermont Comprehensive new construction program based on a HERS rating system. 

Measures include HVAC, insulation 

lighting, windows, and appliances. 

X Don’t underinvest in 

education, training, and 

outreach. Solicit stakeholder input. Leverage 

state and federal tax 

credits. Leverage 

ENERGY STAR. 

Residential 

Existing 

Homes 

Residential 

program 

Great River Coop Provides rebates to qualifying appliances and technologies. Also provides 

training and education to customers 

and trade allies. Is a true dual-fuel 

program. 

X Start with proven models. Use utilities channels and brand. 

Coordinate with other 

programs. 

Residential 

Existing 

Homes 

New Jersey 

Clean Energy 

Program 

New Jersey BPU Provides rebates to qualifying appliances and technologies. Also provides 

training and education to customers 

and trade allies. Is a true dual-fuel 

program. 

X Start with proven models. Coordinate with 

other programs. 

Commercial 

Existing 

Education and 

training 

BOMA Designed to teach members how to 

reduce energy consumption and costs 

through no- and low-cost strategies. 

X Leverage organizations 

and outside education 

and training opportunities. Leverage ENERGY 

STAR. 

Ensuring Energy Efficiency


Investments Deliver Results 


Program evaluation informs ongoing decision-making, 

improves program delivery, verifies energy savings claims, 

and justifies future investment in energy efficiency as a 

reliable energy resource. Engaging in evaluation during 

the early stages of program development can save time 

and money by identifying program inefficiencies, and suggesting how program funding can be optimized. It also 

helps ensure that critical data are not lost. 

The majority of organizations reviewed for this paper have 

formal evaluation plans that address both program 

processes and impacts. The evaluation plans, in general, 

are developed consistent with the evaluation budget cycle 

and allocate evaluation dollars to specific programs and 

activities. Process and impact evaluations are performed 

for each program early in program cycles. As programs 

and portfolios mature, process evaluations are less 

frequent than impact evaluations. Over the maturation 

period, impact evaluations tend to focus on larger 

programs (or program components), and address more 

complex impact issues. 

Most programs have an evaluation reporting cycle that is 

consistent with the program funding (or budgeting) cycle. 

In general, savings are reported individually by sector and 

totaled for the portfolio. Organizations use evaluation 

results from both process and impact evaluations to 

improve programs moving forward, and adjust their portfolio of energy efficiency offerings based on evaluation 

findings and other factors. Several organizations have 

adopted the International Performance Measurement and 

Verification Protocol (IPMVP) to provide guidelines for 

evaluation approaches. California has its own set of formal protocols that address specific program types. Key 

methods used by organizations vary based on program 

type and can include billing analysis, engineering analysis, 

metering, sales data tracking, and market effects studies. 

Table 6-14 summarizes the evaluation practices of a 

subset of the organizations reviewed for this study. 

To create a sustainable, aggressive national commitment to energy efficiency 6-45
6-46 National Action Plan for Energy Efficiency Table 6-14. Evaluation Approaches NYSERDA (NY) Efficiency Vermont (VT) Electric Utilities NSTAR (MA) WI Department of Administration (WI) CA Utilities (CA) MN Electric and Gas Investor- Owned Utilities (MN) Bonneville Power Administration (ID, MT, OR , WA) Policy Model SBC w/state administration SBC w/3rd party administration SBC w/utility administration SBC w/state administration SBC w/utility administration IRP and Conservation Improvement Program Regional Planning Model Program Funding Source Annual appropriation. 8-year renewable portfolio standard program. 5-year public benefit programs. Not available SBC SBC – electric ratepayers Not available Utilities, by order of state legislature, to spend a percent of revenues on efficiency programs. Not available Program Budgeting Cycle Annual 3 years Annual from SBC Annual Current funding cycle is 3 years. Previous periods were only 2

years. 

Currently a 2-year cycle,but a 4-year cycle is recommended. Natural gassubmits plans 1 year;electricity the next. 

Dependent upon rate case, canbe every 2 to 5 years. Generallyamortized annually. 

Evaluation Funding Cycle Annual Not available Annual; evaluation is a

line item in budgetingprocess. 

Annual Ongoing, every year.

Upcoming contractswill be 3 year evaluationwith annual reporting. 

Funded as needed Evaluation funded periodically

when necessary. Starting to domore frequent evaluations thanin previous years. 

Evaluation ReportingCycle 

Quarterly andannually 

Annually and asneeded 

Annually but not everyprogram every year 

Twice per year Annual Annual status reports Not available 

Role of Deemed Savings(i.e., pre-determined savings) 

Estimate savings.Program planningand goals. 

Estimate savings. DOER for report to

legislature. Programplanning and design. 

Estimate savings. Programplanning and goals. 

Planning. Inputs forTRC analysis. Adjusted regularly based onevaluation results. 

Not available Determine payment schedule

for efficiency measures withestablished savings records. 

Report Gross Savings(usually kWh, kW) 

No No Yes Yes Yes Not available Yes. Gross savings forms basis

for regional power plans.

Report Net Savings(usually kWh, kW) 

Yes Yes Yes Yes Yes Not available Yes. Used to evaluate the efficiency of measures and finetune programs. Savings netted

out depends upon program.

Net Savings ComponentsInstallation Verification Yes Yes Yes Yes Not available Engineering Review Yes Yes Yes Yes Not available Free Ridership Yes Yes Yes Yes Yes Yes Not available Spillover or Market Effects Yes Yes Yes Yes Yes Not available Retention Yes Yes Yes Yes Not available Non-Energy Benefits Yes Yes Not available Other Not Specified Yes 
Table 6-14. Evaluation Approaches (continued) 

NYSERD

A

(NY) 

Efficiency

Vermont

(VT) 

Electric Utilities

NSTAR (MA) 

WI Department of

Administration

(WI) 

CA Utilities

(CA) 

MN Electric and

Gas InvestorOwned Utilities

(MN) 

Bonneville Power

Administration 

(ID, M

T, OR , 

WA) 

Education and Training inEE Budget 

Yes Not available Yes Not available Yes Not available Yes 

Education and TrainingEvaluated 

Yes Not available Depends on program Initial years only Yes Not available No 

Evaluation Funding asPercent of ProgramBudget 

Not available <1% 2% 8% increase from 4.25% No more than 3% of

minimum efficiencyspending requirement. 

<1% 

Evaluation Budget Not available Not available Varies annually dependent

upon project portfolio andother demands. 

Not Available $160MM over 3 years. Not available $1MM 

Financial Evaluation Internal

State ComptrollerCPA 

CPA Internal CPA CPA Not avaiable Internal. Reviewed by

Department of Commerce.Reviewed by Legislature. 

Internal 

Cost-EffectivenessAnalysis 

Yes Yes Yes Yes Yes Yes Yes 

Timing Annually Triennially Varies annually dependent

upon project portfolio andother demands. 

Periodically (less frequentthan funding cycle) 

Not available 2 years Periodically 

Test Used (RIM, TRC, Utility,Other) 

TRC; Other Utility Cost Test and

Societal CostBenefit Test 

TRC Societal; also includes 

economic impacts 

TRCPAC (programadministrator test) 

Societal; Utility; Participant;Ratepayer 

TRC 

Who Evaluates Independent

evaluators 

Independentexperts under contract to DPS 

Utilities manage independent evaluatorsthrough RFP process 

One independent team ofevaluators 

Independent evaluators hired for each program via RFP process Department of Commerce Legislature Audit Commission, if deemed 

necessary 

Independent evaluators 

Oversight of evaluation NYSERDA 

provides ongoingoversight.Public UtilitiesCommission finalaudience. 

Department ofPublic Service 

Evaluations are reviewedin collaborative and filedwith the MassachusettsDepartment ofTelecommunications andEnergy 

WI Department ofAdministration 

California PublicUtilities Commissionand CEC 

Department of Commerce Power Council 

Protocols IPMVP Not available Not available None Has had statewide protocols for many years.

New protocols wererecently adopted. 

Not available IPMVP as reference 

To create a sustainable, aggressive national commitment to energy efficiency 6-47
Best practices for program evaluation that emerge from 

review of these organizations include the following: 

• Budget, plan, and initiate evaluation from the onset. 

• Formalize and document evaluation plans. 

• Develop program tracking systems that are compatible 

with needs identified in evaluation plans. 

• Conduct process evaluations to ensure that programs 

are working efficiently. 

• Conduct impact evaluations to ensure that mid- and 

long-term goals are being met. 

• Communicate evaluation results. 

Budget, Plan, and Initiate Evaluation From 

the Onset 

A well-designed evaluation plan addresses program 

process and impact issues. Process evaluations address 

issues associated with program delivery such as marketing, 

staffing, paperwork flow, and customer interactions, to 

understand how they can be improved to better meet 

program objectives. Impact evaluations are designed to 

determine the energy or peak savings from the program. 

Sometimes evaluations address other program benefits 

such as non-energy benefits to consumers, water savings, 

economic impacts, or emission reductions. Market research 

is often included in evaluation budgets to assist in 

assessing program delivery options, and for establishing 

baselines. An evaluation budget of 3 to 6 percent of program budget is a reasonable spending range. Often evaluation spending is higher in the second or third year of 

“We should measure the performance of DSM 

programs in much the same way and with the 

same competence and diligence that we monitor 

the performance of power plants.” 

—Eric Hirst (1990), Independent Consultant 

and Former Corporate Fellow, Oak Ridge 

National Laboratory 

a program. Certain evaluation activities such as establishing baselines are critical to undertake from the onset 

to ensure that valuable data are not lost. 

Develop Program and Project Tracking Systems 

That Support Evaluation Needs 

A well-designed tracking system should collect sufficiently 

detailed information needed for program evaluation and 

implementation. Data collection can vary by program 

type, technologies addressed, and customer segment; 

however, all program tracking systems should include: 

• Participating customer information. At a minimum, 

create an unique customer identifier that can be linked 

to the utility’s Customer Information System (CIS). 

Other customer or site specific information might be 

valuable. 

• Measure specific information. Record equipment type, 

equipment size or quantity, efficiency level and estimated 

savings. 

• Program tracking information. Track rebates or other 

program services provided (for each participant) and 

key program dates. 

• All program cost information. Include internal staffing 

and marketing costs, subcontractor and vendor costs, 

and program incentives. 

Efficiency Vermont’s tracking system incorporates all of 

these features in a comprehensive, easy-to-use relational 

database that includes all program contacts including, 

program allies and customers, tracks all project savings 

and costs, shows the underlying engineering estimates 

for all measures, and includes billing data from all of the 

Vermont utilities. 

6-48 National Action Plan for Energy Efficiency 
Conduct Process Evaluations to Ensure Programs 

Are Working Efficiently 

Process evaluations are a tool to improve the design and 

delivery of the program and are especially important for 

newer programs. Often they can identify improvements 

to program delivery that reduce program costs, expedite 

program delivery, improve customer satisfaction, and 

better focus program objectives. Process evaluation can 

also address what technologies get rebates or determine 

rebate levels. Process evaluations use a variety of qualitative and quantitative approaches including review of program documents, in-depth interviews, focus groups, and 

surveys. Customer research in general, such as regular 

customer and vendor surveys, provides program administrators with continual feedback on how the program is 

working and being received by the market. 

Conduct Impact Evaluations to Ensure Goals 

Are Being Met 

Impact evaluations measure the change in energy usage 

(kWh, kW, and therms) attributable to the program. 

They use a variety of approaches to quantify energy savings including statistical comparisons, engineering estimation, modeling, metering, and billing analysis. The 

impact evaluation approach used is a function of the 

budget available, the technology(ies) addressed, the 

certainty of the original program estimates, and the level 

of estimated savings. The appliance recycling example 

shown at right is an example of how process and impact 

evaluations have improved a program over time. 

Measurement and Verification (M&V) 

The term “measurement and verification” is often 

used in regard to evaluating energy efficiency 

programs. Sometimes this term refers to ongoing 

M&V that is incorporated into program operations, 

such as telephone confirmation of installations by 

third-party installers or measurement of savings for 

selected projects. Other times, it refers to external 

(program operations) evaluations to document savings. 

California Residential Appliance


Recycling Program (RARP)


The California RARP was initially designed to 

remove older, inefficient second refrigerators from 

participant households. As the program matured, 

evaluations showed that the potential for removing 

old second refrigerators from households had 

decreased substantially as a result of the program. 

The program now focuses on pick-up of older 

refrigerators that are being replaced, to keep these 

refrigerators out of the secondary refrigerator market. 

Organizations are beginning to explore the use of the EPA 

Energy Performance Rating System to measure the energy 

performance at the whole-building level, complement 

traditional M&V measures, and go beyond componentby-component approaches that miss the interactive impacts 

of design, sizing, installation, controls, and operation and 

maintenance. 

While most energy professionals see inherent value in 

providing energy education and training (lack of information is often identified as a barrier to customer and 

market actor adoption of energy efficiency products and 

practices), few programs estimate savings directly as a 

result of education efforts. Until 2004, California 

assigned a savings estimate to the Statewide Education 

and Training Services program based on expenditures. 

Capturing the energy impacts of energy education programs has proven to be a challenge for evaluators for 

several reasons. First, education and training efforts are 

often integral to specific program offerings. For example, 

training of HVAC contractors on sizing air conditioners 

might be integrated into a residential appliance rebate 

program. Second, education and training are often a 

small part of a program in terms of budget and estimated 

savings. Third, impact evaluation efforts might be expensive 

compared to the education and training budget and 

anticipated savings. Fourth, education and training 

efforts are not always designed to achieve direct benefits. 

They are often designed to inform participants or market 

actors of program opportunities, simply to familiarize 

them with energy efficiency options. Most evaluations of 

To create a sustainable, aggressive national commitment to energy efficiency 6-49
Best Practices in Evaluation 

• Incorporating an overall evaluation plan and budget 

into the program plan. 

• Adopting a more in-depth evaluation plan each 

program year. 

• Prioritizing evaluation resources where the risks are 

highest. This includes focusing impact evaluation 

activities on the most uncertain outcomes and highest 

potential savings. New and pilot programs have the 

most uncertain outcomes, as do newer technologies. 

• Allowing evaluation criteria to vary across some 

program types to allow for education, outreach, 

and innovation. 

• Conducting ongoing verification as part of the 

program process. 

energy education and training initiatives have focused 

on process issues. Recently, there have been impact evaluations of training programs, especially those designed 

to produce direct energy savings, such as Building 

Operator Certification. 

In the future, energy efficiency will be part of emissions 

trading initiatives (such as the Regional Greenhouse Gas 

Initiative [RGGI]) and is likely to be eligible for payments for 

reducing congestion and providing capacity value such as 

in the ISO-NE capacity market settlement. These emerging 

opportunities will require that evaluation methods become 

more consistent across states and regions, which might 

necessitate adopting consistent protocols for project-level 

verification for large projects, and standardizing sampling 

approaches for residential measures such as compact fluorescent lighting. This is an emerging need and should be a 

future area of collaboration across states. 

Communicate Evaluation Results to Key 

Stakeholders 

Communicating the evaluation results to program 

administrators and stakeholders is essential to enhancing 

program effectiveness. Program administrators need to 

understand evaluation approaches, findings, and especially recommendations to improve program processes 

• Establishing a program tracking system that 

includes necessary information for evaluation. 

• Matching evaluation techniques to the situation in 

regards to the costs to evaluate, the level of precision 

required, and feasibility. 

• Maintaining separate staff for evaluation and for 

program implementation. Having outside review of 

evaluations (e.g., state utility commission), especially 

if conducted by internal utility staff. 

• Evaluating regularly to refine programs as needed 

(changing market conditions often require program 

changes). 

and increase (or maintain) program savings levels. 

Stakeholders need to see that savings from energy efficiency programs are realized and have been verified 

independently. 

Evaluation reports need to be geared toward the audiences reviewing them. Program staff and regulators 

often prefer reports that clearly describe methodologies, 

limitations, and findings on a detailed and program level. 

Outside stakeholders are more likely to read shorter evaluation reports that highlight key findings at the customer segment or portfolio level. These reports must be 

written in a less technical manner and highlight the 

impacts of the program beyond energy or demand savings. 

For example, summary reports of the Wisconsin Focus 

on Energy programs highlight energy, demand, and 

therm savings by sector, but also discuss the environmental benefits of the program and the impacts of energy 

savings on the Wisconsin economy. Because the public 

benefits budget goes through the state legislature, the 

summary reports include maps of Wisconsin showing 

where Focus on Energy projects were completed. 

Examples of particularly successful investments, with the 

customer’s permission, should be part of the evaluation. 

These case studies can be used to make the success 

more tangible to stakeholders. 

6-50 National Action Plan for Energy Efficiency 
Recommendations and Options


The National Action Plan for Energy Efficiency Leadership 

Group offers the following recommendations as ways to 

promote best practice energy efficiency programs, and 

provides a number of options for consideration by utilities, regulators, and stakeholders. 

Recommendation: Recognize energy efficiency as a highpriority energy resource. Energy efficiency has not been 

consistently viewed as a meaningful or dependable 

resource compared to new supply options, regardless of 

its demonstrated contributions to meeting load growth. 

Recognizing energy efficiency as a high priority energy 

resource is an important step in efforts to capture the 

benefits it offers and lower the overall cost of energy 

services to customers. Based on jurisdictional objectives, 

energy efficiency can be incorporated into resource plans 

to account for the long-term benefits from energy savings, capacity savings, potential reductions of air pollutants and greenhouse gases, as well as other benefits. 

The explicit integration of energy efficiency resources 

into the formalized resource planning processes that 

exist at regional, state, and utility levels can help establish the rationale for energy efficiency funding levels and 

for properly valuing and balancing the benefits. In some 

jurisdictions, existing planning processes might need to 

be adapted or new planning processes might need to be 

created to meaningfully incorporate energy efficiency 

resources into resource planning. Some states have recognized energy efficiency as the resource of first priority 

due to its broad benefits. 

Option to Consider: 

• Quantifying and establishing the value of energy efficiency, considering energy savings, capacity savings, 

and environmental benefits, as appropriate. 

Recommendation: Make a strong, long-term commitment to cost-effective energy efficiency as a resource. 

Energy efficiency programs are most successful and provide 

the greatest benefits to stakeholders when appropriate 

policies are established and maintained over the longterm. Confidence in long-term stability of the program 

will help maintain energy efficiency as a dependable 

resource compared to supply-side resources, deferring or 

even avoiding the need for other infrastructure investments, and maintains customer awareness and support. 

Some steps might include assessing the long-term 

potential for cost-effective energy efficiency within a 

region (i.e., the energy efficiency that can be delivered 

cost-effectively through proven programs for each 

customer class within a planning horizon); examining the 

role for cutting-edge initiatives and technologies; establishing the cost of supply-side options versus energy 

efficiency; establishing robust M&V procedures; and 

providing for routine updates to information on energy 

efficiency potential and key costs. 

Options to Consider: 

• Establishing appropriate cost-effectiveness tests for a 

portfolio of programs to reflect the long-term benefits 

of energy efficiency. 

• Establishing the potential for long-term, cost-effective 

energy efficiency savings by customer class through 

proven programs, innovative initiatives, and cuttingedge technologies. 

• Establishing funding requirements for delivering longterm, cost-effective energy efficiency. 

• Developing long-term energy saving goals as part of 

energy planning processes. 

• Developing robust M&V procedures. 

• Designating which organization(s) is responsible for 

administering the energy efficiency programs. 

• Providing for frequent updates to energy resource plans 

to accommodate new information and technology. 

Recommendation: Broadly communicate the benefits of, 

and opportunities for, energy efficiency. Experience 

shows that energy efficiency programs help customers 

save money and contribute to lower cost energy 

systems. But these impacts are not fully documented nor 

To create a sustainable, aggressive national commitment to energy efficiency 6-51
recognized by customers, utilities, regulators, and policymakers. More effort is needed to establish the business 

case for energy efficiency for all decision-makers, and to 

show how a well-designed approach to energy efficiency 

can benefit customers, utilities, and society by (1) reducing 

customers bills over time, (2) fostering financially healthy 

utilities (return on equity [ROE], earnings per share, debt 

coverage ratios), and (3) contributing to positive societal 

net benefits overall. Effort is also necessary to educate 

key stakeholders that, although energy efficiency can be 

an important low-cost resource to integrate into the 

energy mix, it does require funding, just as a new power 

plan requires funding. Further, education is necessary on 

the impact that energy efficiency programs can have in 

concert with other energy efficiency policies such as 

building codes, appliance standards, and tax incentives. 

Options to Consider: 

• Communicating the role of energy efficiency in lowering 

customer energy bills and system costs and risks over time. 

• Communicating the role of building codes, appliance 

standards, tax and other incentives. 

Recommendation: Provide sufficient and stable program 

funding to deliver energy efficiency where costeffective. Energy efficiency programs require consistent 

and long-term funding to effectively compete with energy 

supply options. Efforts are necessary to establish this 

consistent long-term funding. A variety of mechanisms 

have been, and can be, used based on state, utility, and 

other stakeholder interests. It is important to ensure that 

the efficiency programs providers have sufficient program funding to recover energy efficiency program costs 

and implement the energy efficiency that has been 

demonstrated to be available and cost-effective. A number 

of states are now linking program funding to the 

achievement of energy savings. 

Option to Consider: 

• Establishing funding for multi-year periods. 

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Net Summer Capacity by State. Electric Power 

Annual. <http://www.eia.doe.gov/cneaf/ 

electricity/epa/existing_capacity_state.xls> 

U.S. Energy Information Administration [EIA] (2005b, 

December). Sales to Bundled and Unbundled 

Consumers by Sector, Census Division, and State. 

Electricity Sales, 2004—Electric Sales, Revenue, and 

Price. <http://www.eia.doe.gov/cneaf/electricity/ 

esr/table2.xls> 

U.S. Energy Information Administration [EIA] (2004). 

Sales to Bundled and Unbundled Consumers. 

<http://www.eia.doe.gov/cneaf/electricity/esr/ 

table2.xls> 

Wisconsin Department of Administration, Division of 

Energy Focus Evaluation Team. [Wisconsin] (2006, 

March 3). Semiannual Report (FY 06) Midyear: 

Focus on Energy Public Benefits Evaluation. 

To create a sustainable, aggressive national commitment to energy efficiency 6-55

7:Report Summary 

This report presents a variety of policy, planning, and program approaches that can be used to help natural gas and electric utilities, utility regulators, and partner organizations pursue the National Action Plan 

for Energy Efficiency recommendations and meet their commitments to energy efficiency. This chapter 

summarizes these recommendations and the energy efficiency key findings discussed in this report. 

Overview


This National Action Plan for Energy Efficiency (Action 

Plan) is a call to action to bring diverse stakeholders 

together at the national, regional, state, or utility level, 

as appropriate, to foster the discussions, decisionmaking, and commitments necessary to take investment 

in energy efficiency to a new level. The overall goal is to 

create a sustainable, aggressive national commitment to 

energy efficiency through gas and electric utilities, utility 

regulators, and partner organizations. 

Based on the policies, practices, and efforts of many 

organizations previously discussed in this report, the 

Leadership Group offers five recommendations as ways 

to overcome many of the barriers that have limited 

greater investment in programs to deliver energy efficiency to customers of electric and gas utilities (Figure 7-1). 

These recommendations may be pursued through a 

number of different options, depending on state and 

utility circumstances. 

As part of the Action Plan, leading organizations are 

committing to aggressively pursue energy efficiency 

opportunities in their organizations and to assist others 

who want to increase the use of energy efficiency in their 

regions. The commitments pursued under the Action Plan 

have the potential to save Americans many billions of dollars 

on energy bills over the next 10 to 15 years, contribute to 

energy security, and improve the environment. 

Recommendations and Options 

to Consider 

The Action Plan Report provides information on the barriers that limit greater investment in programs to deliver 

energy efficiency to customers of electric and gas utilities. Figure 7-2 illustrates the key barriers and how they 

relate to policy structure, utility resource planning, and 

program implementation. 

Figure 7-1. National Action Plan for Energy Efficiency Recommendations 

• Recognize energy efficiency as a high-priority energy resource. 

• Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. 

• Broadly communicate the benefits of and opportunities for energy efficiency. 

• Promote sufficient, timely, and stable program funding to deliver energy efficiency where cost-effective. 

• Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and 

modify ratemaking practices to promote energy efficiency investments. 

To create a sustainable, aggressive national commitment to energy efficiency 7-1
Several options exist for utilities, regulators, and partner 

organizations to overcome these barriers and pursue the 

Action Plan recommendations. Different state and utility 

circumstances affect which options are pursued. Table 7-1 

provides a list of the Leadership Group recommendations 

along with sample options to consider. The table also 

provides a cross reference to supporting discussions in 

Chapters 2 through 6 of this report. 

Key Findings 

The key finding of the Action Plan Report is that energy 

efficiency can be a cost-effective resource and can provide multiple benefits to utilities, customers, and society. 

These benefits, also discussed in more detail in Chapter 

1: Introduction and Background,1 include: 

• Lower energy bills, greater customer control, and 

greater customer satisfaction. 

• Lower cost than only supplying new generation from 

new power plants. 

• Advantages from being modular and quick to deploy. 

• Significant energy savings. 

• Environmental benefits. 

• Economic development opportunities. 

• Energy security. 

Figure 7-2: National Action Plan for Energy Efficiency Report Addresses Actions to Encourage Greater Energy Efficiency 

Timeline: Actions to Encourage Greater Energy Efficiency 

Utility Resource Program 

Policy Structure Planning Implementation 

Develop Utility Incentives 

for Energy Efficiency 

Develop Rate Designs to 

Encourage Energy Efficiency 

Include Energy Efficiency

 in Utility Resource Mix 

Measurement & Evaluation 

Program Roll-out 

Develop Effective Energy 

Efficiency Programs 

Revise Plans and Policies Based on Results 

Action Plan Report Chapter Areas and Key Barriers 

Utility Ratemaking

 & Revenue 

Requirements 

Energy efficiency reduces 

utility earnings 

Planning 

Processes 

Planning does not 

incorporate demandside resources 

Rate Design


Rates do not 

encourage energy 

efficiency investments 

Model 

Program 

Documentation 

Limited information on 

existing best practices 

1 Chapter 6: Energy Efficiency Program Best Practices also provides more information on these benefits. 

7-2 National Action Plan for Energy Efficiency 
Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter 

Leadership Group 

Recommendations 

(With Options To Consider) 

Chapter 2: 

Utility 

Ratemaking & 

Revenue 

Requirements 

Chapter 3: 

Energy 

Resource 

Planning 

Processes 

Chapter 4: 

Business Case 

for Energy 

Efficiency 

Chapter 5: 

Rate Design 

Chapter 6: 

Energy 

Efficiency 

Program Best 

Practices 

Recognize energy efficiency as a high 

priority energy resource. 

X X 

Establishing policies to establish energy 

efficiency as a priority resource. 

X 

Integrating energy efficiency into utility, state, 

and regional resource planning activities. 

X 

Quantifying and establishing the value of energy 

efficiency, considering energy savings, capacity 

savings, and environmental benefits, as 

appropriate. 

X X 

Make a strong, long-term commitment 

to cost effective energy efficiency as a 

resource. 

X X X 

Establishing appropriate cost-effectiveness 

tests for a portfolio of programs to reflect the 

long-term benefits of energy efficiency. 

X X 

Establishing the potential for long-term, cost 

effective energy efficiency savings by customer 

class through proven programs, innovative 

initiatives, and cutting-edge technologies. 

X X 

Establishing funding requirements for delivering 

long-term, cost-effective energy efficiency. 

X X X 

Developing long-term energy saving goals as 

part of energy planning processes. 

X X 

Developing robust measurement and 

verification (M&V) procedures. 

X X 

Designating which organization(s) is responsible for administering the energy efficiency 

programs. 

X X X 

Providing for frequent updates to energy 

resource plans to accommodate new 

information and technology. 

X X 

Broadly communicate the benefits of, 

and opportunities for, energy efficiency. 

X X X X X 

Establishing and educating stakeholders on the 

business case for energy efficiency at the state, 

utility, and other appropriate level addressing relevant customer, utility, and societal perspectives. 

X X X 

Communicating the role of energy efficiency 

in lowering customer energy bills and system 

costs and risks over time. 

X X X X X 

Communicating the role of building codes, 

appliance standards, and tax and other 

incentives. 

X 

To create a sustainable, aggressive national commitment to energy efficiency 7-3
Table 7-1. Leadership Group Recommendations and Options to Consider, by Chapter (continued) 

Leadership Group 

Recommendations 

(With Options To Consider) 

Chapter 2: 

Utility 

Ratemaking & 

Revenue 

Requirements 

Chapter 3: 

Energy 

Resource 

Planning 

Processes 

Chapter 4: 

Business Case 

for Energy 

Efficiency 

Chapter 5: 

Rate Design 

Chapter 6: 

Energy 

Efficiency 

Program Best 

Practices 

Provide sufficient, timely, and stable 

program funding to deliver energy 

efficiency where cost-effective. 

X X X 

Deciding on and committing to a consistent 

way for program administrators to recover 

energy efficiency costs in a timely manner. 

X X 

Establishing funding mechanisms for energy 

efficiency from among the available options 

such as revenue requirement or resource 

procurement funding, system benefits charges, 

rate-basing, shared-savings, incentive 

mechanisms, etc. 

X X 

Establishing funding for multi-year periods. X X X 

Modify policies to align utility incentives 

with the delivery of cost-effective energy 

efficiency and modify ratemaking 

practices to promote energy efficiency 

investments. 

X X 

Addressing the typical utility throughput 

incentive and removing other regulatory and 

management disincentives to energy efficiency. 

X 

Providing utility incentives for the successful 

management of energy efficiency programs. 

X 

Including the impact on adoption of energy 

efficiency as one of the goals of retail rate 

design, recognizing that it must be balanced 

with other objectives. 

X 

Eliminating rate designs that discourage energy 

efficiency by not increasing costs as customers 

consume more electricity or natural gas. 

X 

Adopting rate designs that encourage energy 

efficiency by considering the unique characteristics of each customer class and including 

partnering tariffs with other mechanisms that 

encourage energy efficiency, such as benefit 

sharing programs and on-bill financing. 

X 

7-4 National Action Plan for Energy Efficiency 
As discussed in Chapter 2: Utility Ratemaking & Revenue 

Requirements, financial disincentives exist that hinder utilities 

from pursuing energy efficiency, even when cost-effective. 

Many states have experience in addressing utility financial 

disincentives in the following areas: 

•Overcoming the throughput incentive. 

• Providing reliable means for utilities to recover energy 

efficiency costs. 

• Providing a return on investment for efficiency programs 

that is competitive with the return utilities earn on new 

generation. 

• Addressing the risk of program costs being disallowed, 

along with other risks. 

• Recognizing the full value of energy efficiency to the 

utility system. 

Chapter 3: Energy Resource Planning Processes found that 

there are many approaches to navigate and overcome the 

barriers to incorporating energy efficiency in planning 

processes. Common themes across approaches include: 

• Cost and savings data for energy efficiency measures 

are readily available. 

• Energy, capacity, and non-energy benefits can justify 

robust energy efficiency programs. 

• A clear path to funding is needed to establish a budget for energy efficiency resources. 

• Parties should integrate energy efficiency early in the 

resource planning process. 

Based on the eight cases examined using the Energy 

Efficiency Benefits Calculator in Chapter 4: Business 

Case for Energy Efficiency, energy efficiency investments 

were found to provide consistently lower costs over time 

for both utilities and customers, while providing positive 

net benefits to society. Key findings include: 

• Ratemaking policies to address utility financial barriers 

to energy efficiency maintain utility health while comprehensive, cost-effective energy efficiency programs 

are implemented. 

• The costs of energy efficiency and the reduction in utility 

sales volume initially raise gas or electricity bills due to 

slightly higher rates, but efficiency gains will reduce average customer bills by 2 to 9 percent over a 10-year period. 

• Energy efficiency investments yielded net societal benefits 

on the order of hundreds of millions of dollars for each of 

the eight small- to medium-sized utility cases examined. 

Chapter 5: Rate Design found that recognizing the 

promotion of energy efficiency is an important factor to 

balance along with the numerous regulatory and legislative 

goals addressed during the complex rate design process. 

Additional key findings include: 

• Several rate design options exist to encourage customers 

to invest in efficiency and to participate in new programs 

that provide innovative technologies (e.g., smart meters). 

• Utility rates that are designed to promote sales or maximize stable revenues tend to lower customer incentives 

to adopt energy efficiency. 

• Some rate forms, like declining block rates or rates with 

large fixed charges, reduce the savings that customers 

can attain from adopting energy efficiency. 

• Appropriate rate designs should consider the unique 

characteristics of each customer class. 

• Energy efficiency can be promoted through non-tariff 

mechanisms that reach customers through their utility bill. 

• More effort is needed to communicate the benefits 

and opportunities for energy efficiency to customers, 

regulators, and utility decision-makers. 

Chapter 6: Energy Efficiency Program Best Practices 

provided a summary of best practices, as well as general 

program key findings. The best practice strategies for 

program planning, design, implementation, and evaluation are found to be independent of the policy model in 

which the program operates. These best practices, 

organized by four major groupings, are provided below: 

• Making Energy Efficiency A Resource 

— Require leadership at multiple levels. 

To create a sustainable, aggressive national commitment to energy efficiency 7-5
—	 Align organizational goals. 

—	 Understand the efficiency resource. 

• Developing An Energy Efficiency Plan 

—	 Offer programs for all key customer classes. 

—	 Align goals with funding. 

—	 Use cost-effectiveness tests that are consistent with 

long-term planning. 

—	 Consider building codes and appliance standards 

when designing programs. 

—	 Plan to incorporate new technologies. 

—	 Consider efficiency investments to alleviate transmission and distribution constraints. 

—	 Create a roadmap of key program components, 

milestones, and explicit energy use reduction goals. 

• Designing and Delivering Energy Efficiency Programs 

—	 Begin with the market in mind. 

—	 Leverage private sector expertise, external funding, 

and financing. 

—	 Start with demonstrated program models—build 

infrastructure for the future. 

• Ensuring Energy Efficiency Investments Deliver Results 

—	 Budget, plan, and initiate evaluation. 

—	 Develop program and project tracking systems. 

—	 Conduct process evaluations. 

—	 Conduct impact evaluations. 

—	 Communicate evaluation results to key stakeholders. 

The key program findings in Chapter 6 are drawn from the 

programs reviewed for this report.2 These findings include: 

• Energy efficiency resources are being acquired on average 

at about one-half the cost of typical new power 

sources and about one-third of the cost of natural gas 

supply in many cases—contributing to an overall 

lower-cost energy system for rate-payers (EIA, 2006). 

• Many energy efficiency programs are being delivered at a 

total program cost of about $0.02 to $0.03 per lifetime 

kilowatt-hour (kWh) saved and $1.30 to $2.00 per lifetime million British thermal units (MMBtu) saved. These 

costs are less than the avoided costs seen in most regions 

of the country. Funding for the majority of programs 

reviewed ranges from about 1 to 3 percent of electric 

utility revenue and 0.5 to 1 percent of gas utility revenue. 

• Even low energy cost states, such as those in the Pacific 

Northwest, have reason to invest in energy efficiency 

because energy efficiency provides a low-cost, reliable 

resource that reduces customer utility bills. Energy efficiency also costs less than constructing new generation and 

provides a hedge against market, fuel, and environmental 

risks (NWPCC, 2005). 

• Well-designed energy efficiency programs provide 

opportunities for customers of all types to adopt energy 

saving measures and reduce their energy bills. These 

programs can help customers make sound energy-use 

decisions, increase control over their energy bills, and 

empower them to manage their energy usage. 

Customers can experience significant savings depending 

on their own habits and the program offered. 

• Consistently funded, well-designed efficiency programs 

are cutting electricity and natural gas load—providing 

annual savings for a given program year of 0.15 to 1 

percent of energy sales. These savings typically will 

2 See Chapter 6: Energy Efficiency Program Best Practices, Tables 6-2 and 6-3, for more information on energy efficiency programs reviewed. 

7-6 National Action Plan for Energy Efficiency 
accrue at this level for 10 to 15 years. These programs 

are helping to offset 20 to 50 percent of expected 

energy growth in some regions without compromising 

end-user activity or economic well being. 

• Research and development enables a continuing source of 

new technologies and methods for improving energy 

efficiency and helping customers control their energy bills. 

• Many state and regional studies have found that pursuing 

economically attractive, but as yet untapped, energy 

efficiency could yield more than 20 percent savings in total 

electricity demand nationwide by 2025. These savings 

could help cut load growth by half or more compared to 

current forecasts. Savings in direct use of natural gas could 

similarly provide a 50 percent or greater reduction in 

natural gas demand growth. Energy savings potential 

varies by customer segment, but there are cost-effective 

opportunities for all customer classes. 

• Energy efficiency programs are being operated successfully 

across many different contexts: regulated and unregulated 

markets; utility, state, or third-party administration; 

investor-, publicly-, and cooperatively-owned utilities; and 

gas and electric utilities. 

• Energy efficiency resources are being acquired through a 

variety of mechanisms including system benefits charges 

(SBC), energy efficiency portfolio standards (EEPS), and 

resource planning (or cost-of-service) efforts. 

• Cost-effective energy efficiency programs exist for 

electricity and natural gas, including programs that can 

be specifically targeted to reduce peak load. 

• Effective models exist for delivering gas and electric energy 

efficiency programs to all customer classes. Models might 

vary for some programs based on whether a utility is in the 

initial stages of energy efficiency programming or has been 

implementing programs for years. 

• Energy efficiency programs, projects, and policies benefit 

from established and stable regulations, clear goals, and 

comprehensive evaluation. 

• Energy efficiency programs benefit from committed 

program administrators and oversight authorities, as 

well as strong stakeholder support. 

• Most large-scale energy efficiency programs have 

improved productivity, enabling job growth in the 

commercial and industrial sectors. 

• Large-scale energy efficiency programs can reduce 

wholesale market prices. 

References 

Northwest Power and Conservation Council [NWPCC] 

(2005, May). The 5th Northwest Electric Power and 

Conservation Plan. <http://www.nwcouncil.org/energy/ 

powerplan/default.htm>. 

U.S. Energy Information Administration [EIA] (2006). 

Annual Energy Outlook 2006. Washington, DC. 

To create a sustainable, aggressive national commitment to energy efficiency 7-7

Additional Guidance

on Removing the

Throughput Incentive

Overview

In order to eliminate the conflict between the public

service objectives of least-cost service on the one hand,

and a utility’s profitability objectives on the other hand,

it is necessary to remove the throughput incentive. Some

options for removing the throughput incentive are generally called decoupling because these options "decouple"

profits from sales volume. In its simplest form, decoupling is accomplished by periodically adjusting tariff

prices so that the utility’s revenues (and hence its profits)

are, on a total company basis, held relatively constant in

the face of changes in customer consumption. 

This appendix explains options to address the throughput

incentive by changing regulations and the way utilities

make money, to ensure that utility net income and coverage of fixed costs are not affected solely by sales volume. 

Types of Decoupling

Utilities and regulators have implemented a variety of

different approaches to remove the throughput incentive. Regardless of which approach is used, a frame of

reference is created, and used to compare with actual

results. Periodic tariff price adjustments true up actual

results to the expected results and are critical to the

decoupling approach.

•Average revenue-per-customer. This approach is often

considered for utilities, where their underlying costs

during the period between rate adjustments do not

vary with consumption. Such can be the case for a

wires-only distribution company, where the majority of

investments are in the wires and transformers used to

deliver the commodity. 

• Forecast revenues over a period of time and use a balancing account. This approach is often considered for

utilities where a significant portion of the costs (primarily

fuel) vary with consumption. For these cases, it might

be best to use a price-based decoupling mechanism for

the commodity portion of electric service (which gives

the utility the incentive to reduce fuel and other variable costs), while using a revenue-per-customer

approach for the “wires” costs. Alternatively, regulators can use traditional tariffs for the commodity portion and apply decoupling only to the wires portion of

the business.

Sample Approach to Removing the

Throughput Incentive1

Implementing decoupling normally begins with a traditional revenue requirement rate case. Decoupling can

also be overlaid on existing tariffs where there is a high

confidence that those tariffs continue to represent the

utility’s underlying revenue requirements. 

Under traditional rate of return regulation:

Price (Rates) = Revenue Requirement/Sales 

(test year or forecasted)

The National Action Plan for Energy Efficiency provides policy recommendations and options to support a

strong commitment to cost-effective energy efficiency in the United States. One policy that receives a

great deal of attention is reducing or eliminating the financial incentive for a utility to sell more 

energy—the throughput incentive. Options exist to address the throughput incentive, as discussed in more

detail in this appendix.

To create a sustainable, aggressive national commitment to energy efficiency Appendix A-1

Appendix

A:

1 In this section, the revenue per customer approach is discussed, but can be easily adapted to a revenue forecast approach.
The revenue requirement as found in the rate case will not

change again until the next rate case. Note that the revenue requirement contains an allowance for profit and

debt coverage. Despite all the effort in the rate case to calculate the revenue requirement, what really matters after

the rate case is the price the consumer pays for electricity. 

After the rate case:

Actual revenues = Price * Actual Sales

And

Actual Profit = Actual Revenue – Actual Costs

Based on the rate case “test year” data, an average revenueper-customer value can then be calculated for each 

rate class. 

Revenue Requirement t0 /number of customers t0 = 

revenue per customer (RPC)

Thus, at time “zero”(t0), the company’s revenues equal

its number of customers multiplied by the revenues per

customer, while the prices paid by customers equal the

revenues to be collected divided by customers’ consumption units (usually expressed as $/kW for metered

demand and $/kWh for metered energy). Looking forward, as the number of customers changes, the revenue

to be collected changes. 

Revenue Requirement tn = RPC * number of customers tn

For each future period (t1, t2..., tn ), the new revenue to

be collected is then divided by the expected consumption to periodically derive a new price, the true-up. 

Price (Rates) tn = Revenue Requirement tn / Sales tn

True up = Price tn – Price t0

Prices can also be trued-up based on deviations between

revenue and cost forecasts and actual results, where a

forecast approach is used. Note that no redesign of rates

is necessary as part of decoupling. Rate redesign might

be desirable for other reasons (for more information on

changes that promote energy efficiency, see Chapter 5:

Rate Design), and decoupling does not interfere with

those reasons.

The process can be augmented by various features that,

for example, explicitly factor in utility productivity,

exogenous events (events of financial significance, out

of control of the utility), or factors that might change

RPC over time.

Timing of Adjustments

Rates can be adjusted monthly, quarterly, or annually

(magnitude of any tn). By making the adjustments more

often, the magnitude of any price change is minimized.

However, frequent adjustments will impose some additional administrative expense. A plan that distinguishes

commodity cost from other costs could have more frequent adjustments for more volatile commodities (if

these are not already being dealt with by an adjustment

clause). Because the inputs used for these adjustments

are relatively straight-forward, coming directly from the

utility’s billing information, each filing should be largely

administrative and not subject to a significant controversy

or litigation. This process can be further streamlined

through the use of “deadbands,” which allow for small

changes in either direction in revenue or profits with no

adjustment in rates. 

Changes to Utility Incentives 

With decoupling in place, a prudently managed utility will

receive revenue from customers that will cover its fixed

costs, including profits. If routine costs go up, the utility will

absorb those costs. A reduction in costs produces the

opportunity for additional earnings. The primary driver for

profitability growth, however, will be the addition of new

customers, and the greatest contribution to profits will be

from customers who are more efficient—that is, whose

incremental costs are the lowest.

Appendix A-2 National Action Plan for Energy Efficiency
An effective decoupling plan should lower utility risk to

some degree. Reduced risk should be reflected in the

cost of capital and, for investor-owned utilities, can be

realized through either an increase in the debt/equity

ratio, or a decrease in the return on equity investment.

For all utilities, these changes will flow through to debt

ratings and credit requirements.

In addition, decoupling can be combined with performance indicators to ensure that service quality is maintained, and that cost reductions are the result of gains in

efficiency and not a decline in the level of service. Other

exogenous factors, such as inflation, taxes, and economic

conditions, can also be combined with decoupling; however, these factors do not address the primary purpose of

removing the disincentive to efficiency. Also, if there is a

distinct productivity for the electric utility as compared

with the general economy, a factor accounting for it can

be woven into the revenue per customer calculations

over time.

Allocation of Weather Risk

One specific factor that is implicit in any regulatory

approach (whether it be traditional regulation or decoupling) is the allocation of weather risk between utilities

and their customers. Depending on the policy position of

the regulatory agency, the risk of weather changes can

be allocated to either customers or the utility. This decision is inherent to the rate structure, even if the regulatory body makes no cognizant choice. 

Under traditional regulation, weather risk is usually

largely borne by the utility, which means that the utility

can suffer shortfalls if the weather is milder than normal.

At the same time, it can enjoy windfalls if the weather is

more extreme than normal. These scenarios result

because, while revenues will change with weather, the

underlying cost structure typically does not. These situations translate directly into greater earnings variability,

which implies a higher required cost of capital. In order

to allocate the weather risk to the utility, the “test year”

information used to compute the base revenue-per-customer values should be weather normalized. Thereafter,

with each adjustment to prices, the consumption data

would weather normalize as well.

Potential Triggers and 

Special Considerations in 

Decoupling Mechanisms

Because decoupling is a different way of doing business

for regulators and utilities, it is prudent to consider offramps or triggers that can avoid unpleasant surprises.

The following are some of the approaches that might be

appropriate to consider:

• Banding of rate adjustments. To minimize the magnitude of adjustments, the decoupling mechanism could

be premised on a “dead band” within which no adjustment would be made. The effect would be to reduce

the number of tariff changes and possibly, but not 

necessarily, the associated periodic filings. 

The plan can also cap the amount of any single rate

adjustment. To the extent it is based on reasonable

costs otherwise recoverable under the plan, the excess

could be set aside in a regulatory account for later

recovery.

• Banding of earnings. To control the profit level of the

regulated entity within some bounds, earnings greater

and/or less than certain limits can be shared with customers. For example, consider a scenario in which the

earnings band is 1 percent on return on equity (either

way) compared to the allowed return found in the most

recent rate case. If the plan would share results outside

the band 50-50, then if the utility earns +1.5 percent of

the target, an amount equal to 0.25 percent of earnings

(half the excess) is returned to consumers through a price

adjustment. If the utility earns -1.3 percent of the target,

however, an amount equal 0.15 percent of earnings (half

the deficiency) is added to the price. Designing this band

To create a sustainable, aggressive national commitment to energy efficiency Appendix A-3
should leave the utility with ample incentive to make

and benefit from process engineering improvements

during the plan, recognizing that a subsequent rate

case might result in the benefits accruing in the long

run to consumers. While the illustration is “symmetrical,” in practice, the band can be asymmetrical in size

and sharing proportion to assure the proper balance

between consumer and utility interests.

• Course corrections for customer count changes, major

changes for unique major customers, and large

changes in revenues-per-customer. Industrial consumers might experience more volatility in average use

per customer calculations because there are typically a

small number of these customers and they can be quite

varied. For example, the addition or deletion of one

large customer (or of a work shift for a large customer)

might make a significant difference in the revenue per

customer values for that class, or result in appropriate

shifting of revenues among customers. To address this

problem, some trigger or off-ramp might be appropriate

to review such unexpected and significant changes,

and to modify the decoupling calculation to account

for them. In some cases, a new rate case might be 

warranted from such a change.

•Accounting for utilities whose marginal revenues per

customer are significantly different than their embedded

average revenue per customer. If a utility’s revenue per

customer has been changing rapidly over time, imposition of a revenue-per-customer decoupling mechanism

will have the effect of changing its profit growth path.

For example, if incremental revenues per customer are

growing rapidly, decoupling will have the effect of lowering future earnings, although not necessarily below

the company’s allowed rate of return. On the other

hand, if incremental revenues per customer are declining, decoupling will have the effect of increasing future

earnings. Where these trends are strong and there is a

desire to make decoupling “earnings neutral,” vis-à-vis

the status quo earning path, the revenue-per-customer

value can be tied to an upward or downward growth

rate. This type of adjustment is more oriented toward

maintaining neutrality than reflecting any underlying

economic principle. Care should be taken to exclude

recent growth in revenues per customer that are driven

by inefficient consumption (usually tied to the utility

having a pro-consumption marketing program).

Appendix A-4 National Action Plan for Energy Efficiency
Business Case 

Details

A business case is an analysis that shows the benefits of

energy efficiency to the utility, customers, and society

within an approach that can lead to actions by utilities,

regulators, and other stakeholders. Making the business

case for energy efficiency programs requires a different

type of analysis than that required for traditional supplyside resources. Because adoption of energy efficiency

reduces utility sales and utility size, traditional metrics

such as impact on rates and total earnings do not 

measure the benefits of energy efficiency. However, by

examining other metrics, such as customer bills and utility

earnings per share, the benefits to all stakeholders of

adopting energy efficiency can be demonstrated. These

benefits include reduced customer bills, decreased cost

per unit of energy provided, increased net resource savings, decreased emissions, and decreased reliance on

energy supplies.

This appendix provides more detailed summary and interpretation of results for the eight cases discussed in

Chapter 4: Business Case for Energy Efficiency. All 

results are from the Energy Efficiency Benefits Calculator’s

interpretation tab.

To help natural gas and electric utilities, utility regulators, and partner organizations communicate the

business case for energy efficiency, the National Action Plan for Energy Efficiency provides an Energy

Efficiency Benefits Calculator (Calculator available at www.epa.gov/cleanenergy/eeactionplan.htm). This

Calculator examines the financial impact of energy efficiency on major stakeholders, and was used to

develop the eight cases discussed in Chapter 4: Business Case for Energy Efficiency. Additional details on

these eight cases are described in this appendix.

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-1

Appendix

B:

Overview
Case 1: Low-Growth Electric and Gas Utility


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or not there are decoupling mechanisms in place, if there are shareholder incentives in place (for investor-owned utilities), the frequency of rate adjustments, and other factors. Depending on 

the type of utility, the measure of financial health changes. Investor-owned utility health is measured by return on equity 

(ROE), while publicly or cooperatively owned utility health is measured by cash position or debt coverage ratio. 

Electric Gas 

Investor-Owned Utility Comparison of 

Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Investor-Owned Utility Comparison of 

Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, frequency of rate adjustments, and other factors. If energy 

efficient (EE) reduces capital investment, the earnings will be lower in the EE case, unless shareholder incentives for EE are 

introduced. However, utility return (ROE or earnings per share) may not be affected. 

Utility Earnings 

Year 

Earnings ($MM) 

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings 

Year 

Earnings ($MM) 

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

Appendix B-2 National Action Plan for Energy Efficiency 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the cost of the EE program has not yet produced savings. Total customer bills decline over time, usually within the first three years, indicating customer savings resulting from lower energy 

consumption. 

Electric Gas 

Percent Change in Customer Bills 

Year 

Change in Bills (%) 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 

1 2 3 4 5 6 7 8 9 10 

Percent Change in Customer Bills 

Year 

Change in Bills (%)

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-10% 

-8% 

-6% 

-4% 

-2% 

0% 

2% 

4% 

1 2 3 4 5 6 7 8 9 10 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh, $/therm) increase when avoided costs are less than retail rates, which is typically the case 

for most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Comparison of Average Rate 

Year 

Average Rate ($/therm) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.80 

$0.85 

$0.90 

$0.95 

$1.00 

$1.05 

$1.10 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-3 
Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, including EE program costs, with EE and without EE. In the first year, 

the cost of the EE program is a cost to society. Over time, cumulative EE savings lead to a utility production cost savings 

that is greater than the EE program cost. The graph shape is therefore upward sloping. Total Societal Net Savings is the 

same with and without decoupling; therefore, only one line is shown. 

Electric Gas 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

-$15 

-$10 

-$5 

$0 

$5 

$10 

$15 

$20 

$25 

1 2 3 4 5 6 7 8 9 10 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M)

Total Societal Net Savings ($M) 

-$15 

-$10 

-$5 

$0 

$5 

$10 

$15 

$20 

$25 

1 2 3 4 5 6 7 8 9 10 

Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh, therm) declines over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs during peak periods. Well-designed EE programs can deliver 

energy at an average cost less than that of new power sources. When the two lines cross, the annual cost of EE equals the 

annual savings resulting from EE. The Societal Cost and Societal Savings are the same with and without decoupling. 

Delivered Costs and Benefits of EE 

Year 

$/MWh 

Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

$0 

$100 

$200 

$300 

$400 

1 2 3 4 5 6 7 8 9 10 

$1 

$3 

$5 

Delivered Costs and Benefits of EE 

Year 

$/therm 

Societal Cost ($/therm saved) 

Societal Savings ($/therm saved) 

$0 

$2 

$4 

$6 

1 2 3 4 5 6 7 8 9 10 

Appendix B-4 National Action Plan for Energy Efficiency 
Emissions and Cost Savings – Increase 

Annual tons of emissions saved increases. Emissions cost savings increases when emissions cost is monetized. Emissions 

costs and savings are the same with and without decoupling. 

Electric Gas 

Annual Emissions Savings Tons Saved 

0 

10 

20 

30 

40 

50 

60 

70 

1 2 3 4 5 6 7 8 9 10 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

1000 Tons CO2 saved 

Year 

Annual Emissions Savings Tons Saved 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Tons NO x Saved 

Tons PM-10 Saved 

Tons SO2 Saved 

Tons CO Saved 

1000 Tons CO2 Saved 

1 2 3 4 5 6 7 8 9 10 

Year 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. This comparison shows the growth with and without EE, and illustrates the amount of EE relative to load growth. Load growth and energy savings are not impacted by decoupling. With 

load growth assumed at zero, no load or percent growth offset shown. 

Percent Growth Offset by Energy Efficiency GWh 

Energy Savings - EE (GWh) 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) 

Year 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1 2 3 4 5 6 7 8 9 10 

0% 

20% 

40% 

60% 

80% 

100% 

120% 

140% 

160% 

Percent Growth Offset by Energy Efficiency Mcf 

Year 

Energy Savings - EE (Mcf) 

Load Growth - No EE (Mcf) 

Growth Offset by EE (%) 

0 

1,000 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

1 2 3 4 5 6 7 8 9 10 

0% 

5% 

10% 

15% 

20% 

25% 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-5 
Peak Load Growth – Decrease 

Peak load requirements decrease because peak capacity savings are captured due to EE measures. Peak load is not impacted 

by decoupling. 

Electric Gas 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Appendix B-6 National Action Plan for Energy Efficiency 
Case 2: High-Growth Electric and Gas Utility 


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or not there are decoupling mechanisms in place, if there are shareholder incentives in place (for investor-owned utilities), the frequency of rate adjustments, and other factors. Depending on 

the type of utility, the measure of financial health changes. Investor-owned utility health is measured by ROE, while publicly 

or cooperatively owned utility health is measured by cash position or debt coverage ratio. 

Electric Gas 

Investor-Owned Utility Comparison of 

Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Investor-Owned Utility Comparison of 

Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, frequency of rate adjustments, and other factors. If EE reduces 

capital investment, the earnings will be lower in the EE case, unless shareholder incentives for EE are introduced. However, 

utility return (ROE or earnings per share) may not be affected. 

Utility Earnings 

Year 

Earnings ($MM) 

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings 

Year 

Earnings ($MM) 

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-7 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the cost of the EE program has not yet produced savings. Total customer bills decline over time, usually within the first three years, indicating customer savings resulting from lower energy 

consumption. 

Electric Gas 

Percent Change in Customer Bills 

Year 

Change in Bills (%) 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 

1 2 3 4 5 6 7 8 9 10 

Percent Change in Customer Bills 

Year 

Change in Bills (%)

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-10% 

-8% 

-6% 

-4% 

-2% 

0% 

2% 

4% 

1 2 3 4 5 6 7 8 9 10 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh, $/therm) increase when avoided costs are less than retail rates, which is typically the case 

for most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Comparison of Average Rate 

Year 

Average Rate ($/therm) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.80 

$0.85 

$0.90 

$0.95 

$1.00 

$1.05 

$1.10 

1 2 3 4 5 6 7 8 9 10 

Appendix B-8 National Action Plan for Energy Efficiency 
Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, including EE program costs, with EE and without EE. In the first year, 

the cost of the EE program is a cost to society. Over time, cumulative EE savings lead to a utility production cost savings 

that is greater than the EE program cost. The graph shape is therefore upward sloping. Total Societal Net Savings is the 

same with and without decoupling; therefore, only one line is shown. 

Electric Gas 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

-$15 

-$10 

-$5 

$0 

$5 

$10 

$15 

$20 

$25 

1 2 3 4 5 6 7 8 9 10 

Annual Total Societal Net Savings Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

Year

$-15

$-10

$-5

$0

$5

$10

$15

$20

$25

1 2 3 4 5 6 7 8 9 10

Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh, therm) declines over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs during peak periods. Well-designed EE programs can deliver energy 

at an average cost less than that of new power sources. When the two lines cross, the annual cost of EE equals the annual 

savings resulting from EE. The Societal Cost and Societal Savings are the same with and without decoupling. 

Delivered Costs and Benefits of EE 

Year 

$/MWh 

$0 

$100 

$200 

$300 

$400 

1 2 3 4 5 6 7 8 9 10 

Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

Delivered Costs and Benefits of EE 

Year 

$/therm 

Societal Cost ($/therm saved) 

Societal Savings ($/therm saved) 

$0 

$1 

$2 

$3 

$4 

$5 

$6 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-9 
Emissions and Cost Savings – Increase 

Annual tons of emissions saved increases. Emissions cost savings increases when emissions cost is monetized. Emissions 

costs and savings are the same with and without decoupling. 

Electric Gas 

Annual Emissions Savings Tons Saved 

0 

10 

20 

30 

40 

50 

60 

70 

1 2 3 4 5 6 7 8 9 10 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

1000 Tons CO2 saved 

Year 

7 8 9 

Annual Emissions Savings Tons Saved 

Tons SO2 Saved 

Tons CO Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

0 

10 

20 

30 

40 

50 

60 

70 

80 

90 

1 2 3 4 5 6 10 

Year 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. This comparison shows the growth with and without EE, and illustrates the amount of EE relative to load growth. Load growth and energy savings are not impacted by decoupling. With 

load growth assumed at zero, no load or percent growth offset shown. 

Percent Growth Offset by Energy Efficiency 

Energy Savings - EE (GWh) 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) 

GWh 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1 2 3 4 5 6 7 8 9 10 

0% 

20% 

40% 

60% 

80% 

100% 

120% 

140% 

160% 

Year 

Percent Growth Offset by Energy Efficiency 

Energy Savings - EE (Mcf) 

Load Growth - No EE (Mcf) 

Growth Offset by EE (%) 

Mcf 

0 

1,000 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

1 2 3 4 5 6 7 8 9 10 

0% 

5% 

10% 

15% 

20% 

25% 

Year 

Appendix B-10 National Action Plan for Energy Efficiency 
Peak Load Growth – Decrease 

Peak load requirements decrease because peak capacity savings are captured due to EE measures. Peak load is not impacted 

by decoupling. 

Electric Gas 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-11 
Case 3: Low-Growth with Power Plant Deferral


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or 

not there are decoupling mechanisms in place, if there are 

shareholder incentives in place (for investor-owned utilities), 

the frequency of rate adjustments, and other factors. 

Depending on the type of utility, the measure of financial 

health changes. Investor-owned utility health is measured by 

ROE, while publicly or cooperatively owned utility health is 

measured by cash position or debt coverage ratio. 

Investor-Owned Utility Comparison of 

Return on Equity After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

Year 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, 

frequency of rate adjustments, and other factors. If EE reduces 

capital investment, the earnings will be lower in the EE case, 

unless shareholder incentives for EE are introduced. However, 

utility return (ROE or earnings per share) may not be affected. 

Utility Earnings 

Year 

Earnings ($MM)

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

Appendix B-12 National Action Plan for Energy Efficiency 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the 

cost of the EE program has not yet produced savings. Total 

customer bills decline over time, usually within the first 

three years, indicating customer savings resulting from 

lower energy consumption. 

Percent Change in Customer Bills 

6% 

Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, 

including EE program costs, with EE and without EE. In the 

first year, the cost of the EE program is a cost to society. 

Over time, cumulative EE savings lead to a utility production 

cost savings that is greater than the EE program cost. The 

graph shape is therefore upward sloping. Total Societal Net 

Savings is the same with and without decoupling; therefore, only one line is shown. 

Change in Bills (%) 

3% 

0% 

-3% 

-6% 

-9% 

-12% 

-15% 

-18% 

-21% 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

-$600 

-$400 

-$200 

$0 

$200 

$400 

$600 

1 2 3 4 5 6 7 8 9 10 

1 2 3 4 5 6 7 8 9 10 

Year 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh) increase when avoided 

costs are less than retail rates, which is typically the case for 

most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-13 
Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh) declines 

over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs 

during peak periods. Well-designed EE programs can 

deliver energy at an average cost less than that of new 

power sources. Societal savings increase when an infrastructure project is delayed and then decrease when built. 

When the two lines cross, the annual cost of EE equals the 

annual savings resulting from EE. 

Delivered Costs and Benefits of EE 

Year 

$/MWh 

Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

-$5,000 

-$2,500 

$0 

$2,500 

$5,000 

$7,500 

$10,000 

1 2 3 4 5 6 7 8 9 10 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. 

This comparison shows the growth with and without EE, 

and illustrates the amount of EE relative to load growth. 

Load growth and energy savings are not impacted by 

decoupling. With load growth assumed at zero, no load or 

percent growth offset shown. 

Percent Growth Offset by Energy Efficiency GWh 

Energy Savings - EE (GWh) 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1 2 3 4 5 6 7 8 9 10 

0% 

20% 

40% 

60% 

80% 

100% 

120% 

140% 

160% 

Year 

Emissions and Cost Savings - Increase Peak Load Growth – Decrease 

Annual tons of emissions saved increases. Emissions cost
 Peak load requirements decrease because peak capacity


savings increases when emissions cost is monetized. savings are captured due to EE measures. Peak load is not


Emissions costs and savings are the same with and with- impacted by decoupling.


out decoupling.


90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

Annual Emissions Savings Tons Saved 

0 

10 

20 

30 

40 

50 

60 

70 

1 2 3 4 5 6 7 8 9 10 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

1000 Tons CO2 saved 

Year 

Appendix B-14 National Action Plan for Energy Efficiency 
Case 4: High-Growth With Power Plant Deferral


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or 

not there are decoupling mechanisms in place, if there are 

shareholder incentives in place (for investor-owned utilities), 

the frequency of rate adjustments, and other factors. 

Depending on the type of utility, the measure of financial 

health changes. Investor-owned utility health is measured by 

ROE, while publicly or cooperatively owned utility health is 

measured by cash position or debt coverage ratio. 

Investor-Owned Utility Comparison of 

Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, 

frequency of rate adjustments, and other factors. If EE 

reduces capital intvestment, the earnings will be lower in 

the EE case, unless shareholder incentives for EE are introduced. However, utility return (ROE or earnings per share) 

may not be affected. 

Utility Earnings 

Year

Earnings ($MM) 

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-15 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the 

cost of the EE program has not yet produced savings. Total 

customer bills decline over time, usually within the first 

three years, indicating customer savings resulting from 

lower energy consumption. 

Percent Change in Customer Bills 

Year 

Change in Bills (%) 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 

1 2 3 4 5 6 7 8 9 10 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh) increase when avoided 

costs are less than retail rates, which is typically the case for 

most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, 

including EE program costs, with EE and without EE. In the 

first year, the cost of the EE program is a cost to society. 

Over time, cumulative EE savings lead to a utility production 

cost savings that is greater than the EE program cost. The 

graph shape is therefore upward sloping. Total Societal Net 

Savings is the same with and without decoupling; therefore, only one line is shown. 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M)

Total Societal Net Savings ($M) 

$200 

$400 

$600 

1 2 3 4 5 6 7 8 9 10 

$0 

-$200 

-$400 

-$600 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Appendix B-16 National Action Plan for Energy Efficiency 
Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh) declines 

over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs 

during peak periods. Well-designed EE programs can 

deliver energy at an average cost less than that of new 

power sources. Societal savings increase when an infrastructure project is delayed and then decrease when built. 

When the two lines cross, the annual cost of EE equals the 

annual savings resulting from EE. 

Delivered Costs and Benefits of EE $/

M

Wh 

Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

Year 

-$5,000 

-$2,500 

$0 

$2,500 

$5,000 

$7,500 

$10,000 

1 2 3 4 5 6 7 8 9 10 

Emissions and Cost Savings – Increase 

Annual tons of emissions saved increases. Emissions cost 

savings increases when emissions cost is monetized. 

Emissions costs and savings are the same with and without 

decoupling. 

Annual Emissions Savings Tons Saved 

0 

10 

20 

30 

40 

50 

60 

70 

1 2 3 4 5 6 7 8 9 10 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

1000 Tons CO2 saved 

Year 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. This 

comparison shows the growth with and without EE, and 

illustrates the amount of EE relative to load growth. Load 

growth and energy savings are not impacted by decoupling. 

With load growth assumed at zero, no load or percent 

growth offset shown. 

Percent Growth Offset by Energy Efficiency GWh 

Energy Savings - EE (GWh) 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1 2 3 4 5 6 7 8 9 10 

0% 

20% 

40% 

60% 

80% 

100% 

120% 

140% 

160% 

Year 

Peak Load Growth – Decrease 

Peak load requirements decrease because peak capacity savings are captured due to EE measures. Peak load is not 

impacted by decoupling. 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-17 
Case 5: Vertically Integrated Utility


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or 

not there are decoupling mechanisms in place, if there are 

shareholder incentives in place (for investor-owned utilities), 

the frequency of rate adjustments, and other factors. 

Depending on the type of utility, the measure of financial 

health changes. Investor-owned utility health is measured by 

ROE, while publicly or cooperatively owned utility health is 

measured by cash position or debt coverage ratio. 

Investor-Owned Utility Comparison of 

Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, 

frequency of rate adjustments, and other factors. If EE 

reduces capital investment, the earnings will be lower in the 

EE case, unless shareholder incentives for EE are introduced. 

However, utility return (ROE or earnings per share) may not 

be affected. 

Utility Earnings 

Year 

Earnings ($MM)

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

Appendix B-18 National Action Plan for Energy Efficiency 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the 

cost of the EE program has not yet produced savings. Total 

customer bills decline over time, usually within the first 

three years, indicating customer savings resulting from 

lower energy consumption. 

Percent Change in Customer Bills 

6% 

3% 

Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, 

including EE program costs, with EE and without EE. In the 

first year, the cost of the EE program is a cost to society. 

Over time, cumulative EE savings lead to a utility production 

cost savings that is greater than the EE program cost. The 

graph shape is therefore upward sloping. Total Societal Net 

Savings is the same with and without decoupling; therefore, only one line is shown. 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

-$15 

-$10 

-$5 

$0 

$5 

$10 

$15 

$20 

$25 

1 2 3 4 5 6 7 8 9 10 

1 2 3 4 5 6 7 8 9 10 

Change in Bills (%)

0% 

-3% 

-6% 

-9% 

-12% 

-15% 

-18% 

-21% 

Year 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh) increase when avoided 

costs are less than retail rates, which is typically the case for 

most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-19 
Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh) declines 

over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs 

during peak periods. Well-designed EE programs can 

deliver energy at an average cost less than that of new 

power sources. When the two lines cross, the annual cost 

of EE equals the annual savings resulting from EE. The 

Societal Cost and Societal Savings are the same with and 

without decoupling. 

Delivered Costs and Benefits of EE 

Year 

$/MWh 

Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

$0 

$100 

$200 

$300 

$400 

1 2 3 4 5 6 7 8 9 10 

1,200 140%

120% 1,000 

100% 

800 

80% 

600 

60% 

400 40% 

200 20% 

0% 

1 2 3 4 5 6 7 8 9 10 

0 

Year 

Energy Savings - EE (GWh) 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) 

Peak Load Growth – Decrease 

Peak load requirements decrease because peak capacity 

savings are captured due to EE measures. Peak load is not 

impacted by decoupling. 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. 

This comparison shows the growth with and without EE, 

and illustrates the amount of EE relative to load growth. 

Load growth and energy savings are not impacted by 

decoupling. With load growth assumed at zero, no load or 

percent growth offset shown. 

Percent Growth Offset by Energy Efficiency 

1,400 160%

GWh 

Emissions and Cost Savings – Increase 

Annual tons of emissions saved increases. Emissions cost 

savings increases when emissions cost is monetized. 

Emissions costs and savings are the same with and without decoupling.


Annual Emissions Savings Tons Saved 

0 

10 

20 

30 

40 

50 

60 

70 

1 2 3 4 5 6 7 8 9 10 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

1000 Tons CO2 saved 

Year 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

Appendix B-20 National Action Plan for Energy Efficiency 
Case 6: Restructured Delivery-Only Utility


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or 

not there are decoupling mechanisms in place, if there are 

shareholder incentives in place (for investor-owned utilities), 

the frequency of rate adjustments, and other factors. 

Depending on the type of utility, the measure of financial 

health changes. Investor-owned utility health is measured by 

ROE, while publicly or cooperatively owned utility health is 

measured by cash position or debt coverage ratio. 

Investor-Owned Utility Comparison of 

Return on Equity 

Year 

After Tax ROE (%) 

ROE% - No EE 

ROE% - EE no Decoupling 

ROE% - EE and Decoupling 

Target ROE% 

3% 

6% 

9% 

12% 

15% 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, 

frequency of rate adjustments, and other factors. If EE 

reduces capital investment, the earnings will be lower in the 

EE case, unless shareholder incentives for EE are introduced. 

However, utility return (ROE or earnings per share) may not 

be affected. 

Utility Earnings Earnings ($MM) 

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

Year 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-21 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the 

cost of the EE program has not yet produced savings. Total 

customer bills decline over time, usually within the first 

three years, indicating customer savings resulting from 

lower energy consumption. 

Percent Change in Customer Bills 

Year 

Change in Bills (%) 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 

1 2 3 4 5 6 7 8 9 10 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh) increase when avoided 

costs are less than retail rates, which is typically the case for 

most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, 

including EE program costs, with EE and without EE. In the 

first year, the cost of the EE program is a cost to society. 

Over time, cumulative EE savings lead to a utility production 

cost savings that is greater than the EE program cost. The 

graph shape is therefore upward sloping. Total Societal Net 

Savings is the same with and without decoupling; therefore, only one line is shown. 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

-$15 

-$10 

-$5 

$0 

$5 

$10 

$15 

$20 

$25 

1 2 3 4 5 6 7 8 9 10 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Appendix B-22 National Action Plan for Energy Efficiency 
Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh) declines 

over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs 

during peak periods. Well-designed EE programs can 

deliver energy at an average cost less than that of new 

power sources. When the two lines cross, the annual cost 

of EE equals the annual savings resulting from EE. The 

Societal Cost and Societal Savings are the same with and 

without decoupling. 

Delivered Costs and Benefits of EE 

$400 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. 

This comparison shows the growth with and without EE, 

and illustrates the amount of EE relative to load growth. 

Load growth and energy savings are not impacted by 

decoupling. With load growth assumed at zero, no load or 

percent growth offset shown. 

Percent Growth Offset by Energy Efficiency 

160% 

140% 

1,400 

1,200 

120% 1,000 

100% 

800 

80% 

Peak Load Growth – Decrease 

Peak load requirements decrease because peak capacity 

savings are captured due to EE measures. Peak load is not 

impacted by decoupling. 

$300 

Emissions and Cost Savings – Increase 

Annual tons of emissions saved increases. Emissions cost 

savings increases when emissions cost is monetized. 

$200 

200 

GWh

600 

60% 

400 40%

$/MWh

20% 

$100 0% 

1 2 3 4 5 6 7 8 9 10 

$0 

0 

Year 

1 2 3 4 5 6 7 8 9 10 

Energy Savings - EE (GWh) Year 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Emissions costs and savings are the same with and without decoupling. 

Annual Emissions Savings Tons Saved 

0 

10 

20 

30 

40 

50 

60 

70 

1 2 3 4 5 6 7 8 9 10 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

1000 Tons CO2 saved 

Year 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-23 
Case 7: Electric Publicly and Cooperatively Owned Debt Coverage Ratio


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or 

not there are decoupling mechanisms in place, if there are 

shareholder incentives in place (for investor-owned utilities), 

the frequency of rate adjustments, and other factors. 

Depending on the type of utility, the measure of financial 

health changes. Investor-owned utility health is measured by 

ROE, while publicly or cooperatively owned utility health is 

measured by cash position or debt coverage ratio. 

Public Power/Cooperative 

Debt Coverage Ratio 

Year 

Debt Coverage Ratio 

Debt Coverage Ratio - No EE 

Debt Coverage Ratio - EE no Decoupling 

Debt Coverage Ratio - EE and Decoupling 

1.00 

1.50 

2.00 

2.50 

1 2 3 4 5 6 7 8 9 10 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, 

frequency of rate adjustments, and other factors. If EE 

reduces capital investment, the earnings will be lower in the 

EE case, unless shareholder incentives for EE are introduced. 

However, utility return (ROE or earnings per share) may not 

be affected. 

Utility Earnings Earnings ($MM)

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

Year 

Appendix B-24 National Action Plan for Energy Efficiency 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the 

cost of the EE program has not yet produced savings. Total 

customer bills decline over time, usually within the first 

three years, indicating customer savings resulting from 

lower energy consumption. 

Percent Change in Customer Bills 

Year 

Change in Bills (%) 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 

1 2 3 4 5 6 7 8 9 10 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh) increase when avoided 

costs are less than retail rates, which is typically the case for 

most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, 

including EE program costs, with EE and without EE. In the 

first year, the cost of the EE program is a cost to society. 

Over time, cumulative EE savings lead to a utility production 

cost savings that is greater than the EE program cost. The 

graph shape is therefore upward sloping. Total Societal Net 

Savings is the same with and without decoupling; therefore, only one line is shown. 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

-$15 

-$10 

-$5 

$0 

$15 

$20 

$25 

1 2 3 4 5 6 7 8 9 10 

$5 

$10 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-25 
Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh) declines 

over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs 

during peak periods. Well-designed EE programs can deliver 

energy at an average cost less than that of new power 

sources. When the two lines cross, the annual cost of EE 

equals the annual savings resulting from EE. The Societal 

Cost and Societal Savings are the same with and without 

decoupling. 

Delivered Costs and Benefits of EE 

Year 

$/MWh 

Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

$0 

$100 

$200 

$300 

$400 

1 2 3 4 5 6 7 8 9 10 

140% 1,200 

120% 1,000 

100% 

800 

80% 

600 60% 

400 40% 

200 20% 

0 0%

1 2 3 4 5 6 7 8 9 10 

Year 

Energy Savings - EE (GWh) 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) 

Peak Load Growth – Decrease 

Peak load requirements decrease because peak capacity 

savings are captured due to EE measures. Peak load is not 

impacted by decoupling. 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. 

This comparison shows the growth with and without EE, 

and illustrates the amount of EE relative to load growth. 

Load growth and energy savings are not impacted by 

decoupling. With load growth assumed at zero, no load or 

percent growth offset shown. 

Percent Growth Offset by Energy Efficiency 

1,400 160%

GWh 

Emissions and Cost Savings – Increase 

Annual tons of emissions saved increases. Emissions cost 

savings increases when emissions cost is monetized. 

Emissions costs and savings are the same with and without decoupling.


Annual Emissions Savings Tons Saved 

0 

10 

20 

30 

40 

50 

60 

70 

1 2 3 4 5 6 7 8 9 10 

0 

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 

1000 Tons CO2 saved 

Year 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

Appendix B-26 National Action Plan for Energy Efficiency 
Case 8: Electric Publicly and Cooperatively Owned Cash Position


Utility Perspective 

Utility Financial Health – Small Changes 

The change in utility financial health depends on whether or 

not there are decoupling mechanisms in place, if there are 

shareholder incentives in place (for investor-owned utilities), 

the frequency of rate adjustments, and other factors. 

Depending on the type of utility, the measure of financial 

health changes. Investor-owned utility health is measured by 

ROE, while publicly or cooperatively owned utility health is 

measured by cash position or debt coverage ratio. 

Cash Position at End of Year 

Year 

End of Year Cash ($MM) 

$40 

$50 

$60 

$70 

$80 

1 2 3 4 5 6 7 8 9 10 

Cash Position - No EE 

Cash Position - EE no Decoupling 

Cash Position - EE and Decoupling 

Utility Earnings – Results Vary 

Utility earnings depend on growth rate, capital investment, 

frequency of rate adjustments, and other factors. If EE 

reduces capital investment, the earnings will be lower in the 

EE case, unless shareholder incentives for EE are introduced. 

However, utility return (ROE or earnings per share) may not 

be affected. 

Utility Earnings Earnings ($MM) 

Earnings $MM - No EE 

Earnings $MM - EE no Decoupling 

Earnings $MM - EE and Decoupling 

$0 

$20 

$40 

$60 

$80 

$100 

1 2 3 4 5 6 7 8 9 10 

Year 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-27 
Customer Perspective 

Customer Bills – Decrease 

In the first year, customer utility bills increase because the 

cost of the EE program has not yet produced savings. Total 

customer bills decline over time, usually within the first 

three years, indicating customer savings resulting from 

lower energy consumption. 

Percent Change in Customer Bills 

Year 

Change in Bills (%) 

Change in Customer Bills (%) - EE no Decoupling 

Change in Customer Bills (%) - EE and Decoupling 

-21% 

-18% 

-15% 

-12% 

-9% 

-6% 

-3% 

0% 

3% 

6% 

1 2 3 4 5 6 7 8 9 10 

Utility Rates – Mild Increase 

The rates customers pay ($/kWh) increase when avoided 

costs are less than retail rates, which is typically the case for 

most EE programs. Rates increase because revenue requirements increase more quickly than sales. 

Societal Perspective 

Societal Net Savings – Increase 

The net savings are the difference of total utility costs, 

including EE program costs, with EE and without EE. In the 

first year, the cost of the EE program is a cost to society. 

Over time, cumulative EE savings lead to a utility production 

cost savings that is greater than the EE program cost. The 

graph shape is therefore upward sloping. Total Societal Net 

Savings is the same with and without decoupling; therefore, only one line is shown. 

Annual Total Societal Net Savings 

Year 

Net Societal Benefit ($M) 

Total Societal Net Savings ($M) 

-$15 

-$10 

-$5 

$0 

$15 

$20 

$25 

1 2 3 4 5 6 7 8 9 10 

$5 

$10 

Comparison of Average Rate 

Year 

Average Rate ($/kWh) 

Utility Average Rate - No EE 

Utility Average Rate - EE no Decoupling 

Utility Average Rate - EE and Decoupling 

$0.10 

$0.15 

$0.20 

$0.25 

$0.30 

1 2 3 4 5 6 7 8 9 10 

Appendix B-28 National Action Plan for Energy Efficiency 
Total Societal Cost Per Unit – Declines 

Total cost of providing each unit of energy (MWh) declines 

over time because of the impacts of energy savings, 

decreased peak load requirements, and decreased costs 

during peak periods. Well-designed EE programs can 

deliver energy at an average cost less than that of new 

power sources. When the two lines cross, the annual cost 

of EE equals the annual savings resulting from EE. The 

Societal Cost and Societal Savings are the same with and 

without decoupling. 

Growth Offset by EE – Increase 

As EE programs ramp up, energy consumption declines. 

This comparison shows the growth with and without EE, 

and illustrates the amount of EE relative to load growth. 

Load growth and energy savings are not impacted by 

decoupling. With load growth assumed at zero, no load or 

percent growth offset shown. 

Percent Growth Offset by Energy Efficiency GWh 

Energy Savings - EE (GWh) 

Load Growth - No EE (GWh) 

Growth Offset by EE (%) 

Year 

0 

200 

400 

600 

800 

1,000 

1,200 

1,400 

1 2 3 4 5 6 7 8 9 10 

0% 

20% 

40% 

60% 

80% 

100% 

120% 

140% 

160% 

Delivered Costs and Benefits of EE 

Year 

$/MWh 

Societal Cost ($/MWh saved) 

Societal Savings ($/MWh saved) 

$0 

$100 

$200 

$300 

$400 

1 2 3 4 5 6 7 8 9 10 

Peak Load Growth – Decrease 

Peak load requirements decrease because peak capacity 

Emissions and Cost Savings – Increase savings are captured due to EE measures. Peak load is not 

Annual tons of emissions saved increases. Emissions cost sav- impacted by decoupling. 

ings increases when emissions cost is monetized. Emissions 

costs and savings are the same with and without decoupling. 

Annual Emissions Savings 

70 

Tons SO2 Saved 

Tons CO Saved 

Tons VOC Saved 

1000 Tons CO2 Saved 

Tons NO x Saved 

Tons PM-10 Saved 200 

180 

60 

Comparison of Peak Load Growth 

Year 

Peak Load % of First Yr 

Forecasted Growth - No EE 

Forecasted Growth - EE and Decoupling 

90% 

100% 

110% 

120% 

130% 

140% 

150% 

160% 

1 2 3 4 5 6 7 8 9 10 

160 

50 140 

120 40 

100 

30 80 

60 

40 

20 

10 

20 

0 0 

1 2 3 4 5 6 7 8 9 10 

Year 

1000 Tons CO saved 2

Tons Saved 

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-29 
Funding and printing for this report was provided by the U.S. Department of Energy and U.S. Environmental 

Protection Agency in their capacity as co-sponsors for the National Action Plan for Energy Efficiency. 

Recycled/Recyclable—Printed with Vegetable Oil Based Inks on 100% (Minimum 50% postconsumer) Recycled Paper