# A PLAN DEVELOPED BY MORE THAN 50 LEADING ORGANIZATIONS IN PURSUIT OF ENERGY SA VINGS AND ENVIRONMENT AL BENEFITS THROUGH ELECTRIC AND NATURAL GAS ENERGY EFFICIENCY

JUL Y 2006

# T he goal is to cr eate a sustainable, aggr essiv e national commitment to energy e fficiency through gas and electr ic utilities, utility r egulators, and partner organizations.

Improving energy efficiency in our homes, businesses, schools, gov er nments, and industr ies—which consume more than 70 per cent of the natur al gas and electr icity used in the country—is one of the most constr uctiv e, cost-effectiv e wa ys to address the challenges of high energy pr ices, energy secur ity and independence, air pollution, and global climate change.

T he U .S. Department of Energy and U .S. Envir onmental Pr otection 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 pr ogram issues based on a formal work plan developed dur ing the December 2005 and Mar ch 2006 Leadership Gr oup meetings. The Leadership Gr oup is led by co-chairs Diane Munns (Member of the Iowa Utilities Boar d and Pr esident of the National Association of Regulatory Utility Commissioners) and Jim Rogers (Pr esident and Chief Executive Officer of Duke Energy). A full list of Leadership Gr oup members is pr ovided in both the Executive Summary (T able ES-1) and Chapter 1 (T able 1-2) of this r eport. Rich Scheer of Energetics Inc. facilitated the Leadership Gr oup discussions dur ing both Leadership Gr oup meetings. Expert consultants, funded by the U.S. Department of Energy (DOE) and the U.S. Envir onmental Pr otection Agency (EP A), drafted many chapters of the Action Plan Report. These consultants included:

• Regulatory Assistance Pr oject: Chapter 2 and Appendix A

• Energy and Envir onmental Economics, Inc.: Chapters 3 thr ough 5, Energy Ef ficiency Benefits Calculator , and Appendix B

• KEMA: Chapter 6 In addition, Rich Sedano of the Regulatory Assistance Pr oject and Alison Silverstein of Alison Silverstein Consulting pr ovided their expertise dur ing r eview and editing of the overall r eport.
DOE and EP A facilitated the work of the Leadership Gr oup and this r eport, including Larry Mansueti with DOE’ s Of fice of Electr icity Delivery and Energy Reliability , Mark Ginsberg with DOE’ s Of fice of Energy Ef ficiency and Renewable Energy , and Kathleen Hogan, Stacy Angel, Maur een McNamara, Katr ina Pielli, and T om Kerr with EP A

’ s Climate Pr otection Partnership Division.

Easter n Resear ch Gr oup, Inc. pr ovided technical r eview, copyediting, graphics, and pr oduction services.

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

# List of Figur es

Figur e ES-1. National Action Plan for Energy Ef ficiency Recommendations

....................................... ES-2 Figur e ES-2. National Action Plan for Energy Ef ficiency Recommendations & Options

....................... ES-8 Figur e 1-1. Energy Ef ficiency Spending Has Declined

...................................................................... 1-5 Figur e 1-2. Energy Ef ficiency Has Been a Resour ce in the Pacific Northwest for the Past T wo Decades

.... 1-7 Figur e 1-3. National Action Plan for Energy Ef ficiency Report Addr esses Actions to Encourage Gr eater Energy Ef ficiency

........................................................................................... 1-11 Figur e 3-1. Energy-Ef ficiency Supply Curve – Potential in 2011

....................................................... 3-2 Figur e 3-2. Califor nia Ef ficiency Structur e Overview

...................................................................... 3-10 Figur e 3-3. Califor nia Investor -Owned Utility Pr ocess

.................................................................... 3-11 Figur e 3-4. BP A T ransmission Planning Pr ocess

............................................................................. 3-12 Figur e 3-5. New Y ork Ef ficiency Structur e Overview

......................................................................... 3-13 Figur e 4-1. Compar ison of Deferral Length with Low- and High-Gr owth

....................................... 4-10 Figur e 6-1. Impacts of the Northeast Lighting and Appliance Initiative

.......................................... 6-33 Figur e 7-1. National Action Plan for Energy Ef ficiency Recommendations

........................................ 7-1 Figur e 7-2. National Action Plan for Energy Ef ficiency Report Addr esses Actions to Encourage Gr eater Energy Ef ficiency

............................................................................................. 7-2

National Action Plan for Energy Efficiency ii

# List of T ables

T

able ES-1. Members of the National Action Plan for Energy Ef ficiency

.......................................... ES-10 T

able 1-1. Summary of Benefits for National Energy Ef ficiency Ef forts

............................................. 1-8 T

able 1-2. Members of the National Action Plan for Energy Ef ficiency

........................................... 1-16 T

able 2-1. Options to Mitigate the Thr oughput Incentive: Pr os and Cons

............................................. 2-6 T

able 2-2. Examples of Decoupling

............................................................................................... 2-12 T

able 2-3. Examples of Incentives for Energy Ef ficiency Investments

.............................................. 2-15 T

able 3-1. Levelized Costs and Benefits Fr om Four Regions

............................................................. 3-9 T

able 3-2. Incorporation of Energy Ef ficiency in Califor nia’ s Investor -Owned Utilities’ Planning Pr ocesses

....................................................................................................... 3-11 T

able 3-3. Incorporation of Energy Ef ficiency in BP A ’ s Planning Pr ocesses

....................................... 3-13 T

able 3-4. Incorporation of Energy Ef ficiency in NYSERDA ’ s Planning Pr ocesses

................................... 3-14 T

able 3-5. Incorporation of Energy Ef ficiency in Minnesota’ s Planning Pr ocesses

............................ 3-15 T

able 3-6. Incorporation of Energy Ef ficiency in T exas’ Planning Pr ocesses

..................................... 3-16 T

able 3-7. Incorporation of Energy Ef ficiency in PacifiCorp’ s Planning Pr ocesses

............................. 3-17 T

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

.................. 4-3 T

able 4-2. High- and Low-Gr owth Results: Electr ic Utility

................................................................ 4-6 T

able 4-3. High- and Low-Gr owth Results: Natural Gas Utility

......................................................... 4-8 T

able 4-4. Power Plant Deferral Results

........................................................................................ 4-11 T

able 4-5. V ertically Integrated and Delivery Company Results

.......................................................... 4-13 T

able 4-6. Publicly- and Cooperatively-Owned Utility Results

......................................................... 4-15 T

able 5-1. Partial List of Utilities W ith Inclining T ier Residential Rates

.............................................. 5-6 T

able 5-2. Pr os and Cons of Rate Design Forms

.............................................................................. 5-9 T

able 5-3. Conditions That Assist Success

..................................................................................... 5-11 T

able 6-1. Overview of Energy Ef ficiency Pr ograms

......................................................................... 6-4 T

able 6-2. Ef ficiency Measur es of Natural Gas Savings Pr ograms

......................................................... 6-6 T

able 6-3. Ef ficiency Measur es of Electr ic and Combination Pr ograms

............................................. 6-8 T

able 6-4. Achievable Energy Ef ficiency Potential Fr om Recent Studies

.......................................... 6-16 T

able 6-5. NYSERDA 2004 Portfolio

............................................................................................. 6-20

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

# List of T ables (continued)

T

able 6-6. Nevada Resour ce Planning Pr ograms

............................................................................ 6-21 T

able 6-7. Overview of Cost-Ef fectiveness T ests

............................................................................ 6-23 T

able 6-8. Resear ch & Development (R&D) Activities of Select Organizations

................................. 6-25 T

able 6-9. Emerging T echnologies for Pr ograms

............................................................................ 6-27 T

able 6-10. Key Stakeholders, Barr iers, and Pr ogram Strategies by Customer Segment

..................... 6-31 T

able 6-11. T ypes of Financial Incentives

......................................................................................... 6-40 T

able 6-12. Sample Pr ogr ession of Pr ogram Designs

........................................................................ 6-42 T

able 6-13. Pr ogram Examples for Key Customer Segments

............................................................ 6-44 T

able 6-14. Evaluation Appr oaches

................................................................................................. 6-46 T

able 7-1. Leadership Gr oup Recommendations and Options to Consider, by Chapter

..................... 7-3

iv National Action Plan for Energy Efficiency

# List of Acr onyms
A

aMW average megawatts 

# B
Bcf billion cubic feet BOMA Building Owners & Managers Association BP A Bonneville Power Administration 

# C

C/I commer cial and industr ial CEC Califor nia Energy Commission CO 2 carbon dioxide CPP cr itical peak pr icing CPUC Califor nia Public Utility Commission 

# D

DEER Database for Energy Ef ficiency Resour ces DOE U.S. Department of Energy DSM demand-side management 

# E

EE energy ef ficiency EEPS energy ef ficiency portfolio standar d EERS energy ef ficiency r esour ce standar d EP A U.S. Envir onmental Pr otection Agency EPRI Electr ic Power Resear ch Institute ESCO energy services company ETO Energy T rust of Or egon 

# F

FERC Federal Energy Regulatory Commission 

# G

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

# H

HERS Home Energy Rating System HV AC heating, ventilation, and air conditioning 

# I

IOU investor -owned utility IPMVP Inter national Performance Measur ement and V e r ification Pr otocol IRP integrated r esour ce plan ISO independent system operator ISO-NE ISO New England 

# K

kWh kilowatt-hour (3,412 Br itish thermal units) 

# L

LIHEAP Low-Income Home Energy Assistance Pr ogram LIP A Long Island Power Author ity

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

# List of Acr onyms (continued)



# M

M&V measur ement and ver ification Mcf one thousand cubic feet MMBtu million Br itish thermal units MW megawatt (1,000,000 watts) MWh megawatt-hour (1,000 kWh) 

# N

NEEP Northeast Energy Ef ficiency Partnerships NERC North Amer ican Electr ic Reliability Council NO X 

### nitr ogen oxides NPV net pr esent value NSPC Non-Residential Standar d Performance Contract NWPCC Northwest Power and Conservation Council NYSERDA New Y ork State Energy Resear ch and Development Author ity 

# P

PBL Power Business Line PG&E Pacific Gas & Electr ic PIER Public Inter est Energy Resear ch PSE Puget Sound Energy PUCT Public Utility Commission of T e xas PURP A Public Utility Regulatory Policies Act 

# R

R&D r esear ch and development RARP Residential Appliance Recycling Pr ogram REAP Residential Energy Af for dability Partnership Pr ogram RFP r equest for pr oposals RGGI Regional Gr eenhouse Gas Initiative RIM rate impact measur e ROE r etur n on equity RPC r evenue per customer RT O r egional transmission organization RT P r eal-time pr icing 

# S

SBC system benefits charge SCE Souther n Califor nia Edison SMUD Sacramento Municipal Utility Distr ict SO 2 

### sulfur dioxide 

# T

TOU time of use TRC total r esour ce cost 

# V

VOLL value of lost load VOS value of service 

# W

WA P W eather ization Assistance Pr ogram

vi National Action Plan for Energy Efficiency

# T able of Contents

Acknowledgements

........................................................................................................................... i List of Figur es

............................................................................................................................... ..... ii List of T ables

............................................................................................................................... ...... iii List of Acr onyms

............................................................................................................................... v Executive Summary

...................................................................................................................... ES-1 Chapter 1 : Intr oduction and Backgr ound

.......................................................................................... 1-1 Chapter 2 : Utility Ratemaking & Revenue Requir ements

.................................................................... 2-1 Chapter 3 : Energy Resour ce Planning Pr ocesses

................................................................................ 3-1 Chapter 4 : Business Case for Energy Ef ficiency

................................................................................. 4-1 Chapter 5 : Rate Design

.................................................................................................................... 5-1 Chapter 6 : Energy Ef ficiency Pr ogram Best Practices

......................................................................... 6-1 Chapter 7 : Report Summary

............................................................................................................ 7-1 Appendix A : Additional Guidance on Removing the Thr oughput Incentive

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

................................................................................................... B-1

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

# Executiv e Summary

This National Action Plan for Energy Ef ficiency (Action Plan) pr esents policy r ecommendations for cr eating a sustainable, aggr essive national commitment to energy ef ficiency thr ough gas and electr ic utilities, utility r egulators, and partner organizations. Such a commitment could save Amer icans many billions of dollars on energy bills over the next 10 to 15 years, contr ibute to energy secur ity , and impr ove our envir onment. The Action Plan was developed by mor e than 50 leading organizations r epr esenting key stakeholder perspectives. These organizations pledge to take specific actions to make the Action Plan a r eality

. 

# A National Action Plan for Energy Ef ficiency

W e curr ently face a set of ser ious challenges with r egar d to the U.S. energy system. Energy demand continues to gr ow despite histor ically high energy pr ices and mounting concer ns over energy secur ity and independence aswell as air pollution and global climate change. The decisions we make now r egar ding our energy supply and demand can either help us deal with these challenges mor e ef fectively or complicate our ability to secur e a mor e stable, economical energy futur e. Impr oving the energy ef ficiency 1 of our homes, businesses, schools, gover nments, and industr ies—which consume mor e than 70 per cent of the natural gas and electr icity used in the country—is one of the most constructive, cost-ef fective ways to addr ess these challenges. 2 Incr eased investment in energy ef ficiency in our homes, buildings, and industr ies can lower energy bills, r educe demand for fossil fuels, help stabilize energy pr ices, enhance electr ic and natural gas system r eliability

, and help r educe air pollutants and gr eenhouse gases. Despite these benefits and the success of energy ef ficiency pr ograms in some r egions of the country , energy ef ficiency r emains cr itically underutilized in the nation’ s energy portfolio. 3 Now we simultaneously face the challenges of high pr ices, the need for large investments in new energy infrastructur e, envir onmental concer ns, and secur ity issues. It is time to take advantage of mor e than two decades of exper ience with successful energy ef ficiency pr ograms, br oaden and expand these ef forts, and captur e the savings that energy ef ficiency of fers. Much mor e can be achieved in concert with ongoing ef forts to advance building codes and appliance standar ds, pr ovide tax incentives for ef ficient pr oducts and buildings, and pr omote savings opportunities thr ough pr ograms such as ENERGY ST AR ® . Ef ficiency of new buildings and those alr eady in place ar e both important. Many homeowners, businesses, and others in buildings and facilities alr eady standing today—which will r epr esent the vast major ity of the nation’ s buildings and facilities for years to come—can r ealize significant savings fr om pr oven energy ef ficiency pr ograms.
Br inging mor e energy ef ficiency into the nation’ s energy mix to slow demand gr owth in a wise, cost-ef fective manner—one that balances energy ef ficiency with new generation and supply options—will take concerted ef forts by all energy market participants: customers, utilities, r egulators, states, consumer advocates, energy service companies (ESCOs), and others. It will r equir e education on the opportunities, r eview of existing policies, identification of barr iers and their solutions, assessment of new technologies, and modification and adoption of policies, as appr opr iate. Utilities, 4 r egulators, and partner organizations need to impr ove customer access to energy ef ficiency pr ograms to help them contr ol their own energy costs, pr ovide the funding necessary to

To create a sustainable, aggressive national commitment to energy efficiency ES-1deliver these pr ograms, and examine policies gover ning energy companies to ensur e that these policies facilitate—not impede—cost-ef fective pr ograms for energy ef ficiency . Histor ically , the r egulatory structur e has r ewar ded utilities for building infrastructur e (e.g., power plants, transmission lines, pipelines) and selling energy , while discouraging energy ef ficiency , even when the energy-saving measur es cost less than constructing new infrastructur e. 5 And, it has been dif ficult to establish the funding necessary to captur e the potential benefits that cost-ef fective energy ef ficiency of fers. This National Action Plan for Energy Efficiency is a call to action to br ing diverse stakeholders together at the national, r egional, state, or utility level, as appr opr iate,and foster the discussions, decision-making, and commitments necessary to take investment in energy efficiency to a new level. The overall goal is to cr eate a sustainable, aggr essive national commitment to energy ef ficiency thr ough gas and electr ic utilities, utility r egulators, and partner organizations. The Action Plan was developed by a Leadership Gr oup composed of mor e than 50 leading organizations r epr esenting diverse stakeholder perspectives. Based upon the policies, practices, and ef forts of many organizations acr oss the country , the Leadership Gr oup of fers five r ecommendations as ways to over come many of the barr iers that have limited gr eater investment in pr ograms to deliver energy ef ficiency to customers of electr ic and gas utilities (Figur e ES-1). These r ecommendations may be pursued thr ough a number of dif fer ent options, depending upon state and utility cir cumstances. As part of the Action Plan, leading organizations ar e committing to aggr essively pursue energy efficiency opportunities in their organizations and assist others who want to incr ease the use of energy ef ficiency in their r egions. Because gr eater investment in energy efficiency cannothappen based on the work of one individual or organization alone, the Action Plan is a commitment to br ing the appr opr iate 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 r ole.
The r easons behind the National Action Plan for Energy Ef ficiency , the pr ocess for developing the Action Plan, and the final r ecommendations ar e summar ized in gr eater detail as follows.



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

• Recognize energy ef ficiency as a high-pr ior ity energy r esour ce.

• Make a str ong, long-term commitment to implement cost-ef fective energy ef ficiency as a r esour ce.

• Br oadly communicate the benefits of and opportunities for energy ef ficiency

.

• Pr omote suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective

.

• Modify policies to align utility incentives with the delivery of cost-ef fective energy ef ficiency and

modify ratemaking practices to pr omote energy ef ficiency investments.

ES-2 National Action Plan for Energy Efficiency

# T he United States F aces Large and Complex Energy Challenges Our expanding economy , gr owing population, and r ising standar d of living all depend on energy services. Curr ent pr ojections anticipate U.S. energy demands to incr ease by mor e than one-thir d by 2030, with electr icity demand alone r ising by mor e than 40 per cent (EIA, 2006). At work and at home, we continue to r e ly on mor e and mor e energy-consuming devices. At the same time, the country has enter ed a per iod of higher energy costs and limited supplies of natural gas, heating oil, and other fuels. These issues pr esent many challenges:

Gr owing energy demand str esses curr ent systems, dr ives up energy costs, and r equir es new investments. Events such as the Northeast electr icity blackout of August 2003 and Hurr icanes Katr ina and Rita in 2005 incr eased focus on energy r eliability and its economic and human impacts. T ransmission and pipeline systems ar e becoming overbur dened in places. Overbur dened systems limit the availability of low-cost electr icity and fossil fuels, raise energy pr ices in or near congested ar eas, and potentially compr omise energy system r e liability . High fuel pr ices also contr ibute to higher electr icity pr ices. In addition, our demand for natural gas to heat our homes, for industr ial and business use, and for power generation is straining the available gas supply in North Amer ica and putting upwar d pr essur e on natural gas pr ices. Addr essing these issues will r equir e billions of dollars in investments in energy ef ficiency , new power plants, gas r igs, transmission lines, pipelines, and other infrastructur e, notwithstanding the dif ficulty of building new energy infrastructur e in dense urban and suburban ar eas. In the absence of investments in new or expanded capacity , existing facilities ar e being str etched to the point wher e system r eliability is steadily er oding, and the ability to import lower cost energy into high-gr owth load ar eas is inhibited, potentially limiting economic expansion. High fuel pr ices incr ease financial bur dens on households and businesses and slow our economy

. Many household budgets ar e being strained by higher energy costs, leaving less money available for other household pur chases and needs. This bur den is particularly harmful for low-income households. Higher energy bills for industry can r educe the nation’s economic competitiveness and place U.S. jobs at r isk.

Gr owing energy demand challenges attainment of clean air and other public health and envir onmental goals. Energy demand continues to gr ow at the same time that national and state r egulations ar e being implemented to limit the emission of air pollutants, such as sulfur dioxide (SO 2 ), nitr ogen oxides (NO x ), and mer cury , to pr otect public health and the envir onment. In addition, emissions of gr eenhouse gases continue to incr ease.
Uncertainties in futur e pr ices and r egulations raise questions about new investments. New infrastructur e is being planned in the face of uncertainties about futur e energy pr ices. For example, high natural gas pr ices and uncertainty about gr eenhouse gas and other envir onmental r egulations, 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 hurr icanes of 2005 exposed the vulnerability of the U.S. energy system to major disruptions, which have significant impacts on energy pr ices and service r eliability . In r esponse, national secur ity concer ns suggest that we should use fossil fuel energy mor e ef ficiently , incr ease supply diversity , and decr ease the vulnerability of domestic infrastructur e to natural disasters. 

# Energy Ef ficiency Can Be a Beneficial Resour ce in Our Energy Systems
Gr eater investment in energy ef ficiency can help us tackle these challenges. Energy ef ficiency is alr eady a key component in the nation’ s energy r esour ce mix in many parts of the country

. Utilities, states, and others acr oss the United States have decades of exper ience in delivering energy ef ficiency to their customers. These pr ograms can pr ovide valuable models, upon which mor e states,

To create a sustainable, aggressive national commitment to energy efficiency ES-3

# Benefits of Energy Ef ficiency

Lower energy bills, gr eater customer contr ol, and gr eater customer satisfaction. W ell-designed energy ef ficiency pr ograms can pr ovide opportunities for customers of all types to adopt energy savings measur es that can impr ove their comfort and level of service, while r educing their energy bills. 6 These pr ograms can help customers make sound energy use decisions, incr ease contr ol over their energy bills, and empower them to manage their energy usage. Customers ar e exper iencing savings of 5, 10, 20, or 30 per cent, depending upon the customer , pr ogram, and average bill. Of fer ing these pr ograms can also lead to gr eater customer satisfaction with the service pr ovider

. Lower cost than supplying new generation only fr om new power plants. In some states, welldesigned energy ef ficiency pr ograms ar e saving energy at an average cost of about one-half of the typical cost of new power sour ces and about one-thir d of the cost of natural gas supply (EIA, 2006). 7 When integrated into a long-term energy r esour ce plan, energy ef ficiency pr ograms could help defer investments in new plants and lower the total cost of deliver ing electr icity

. Modular and quick to deploy

. Energy ef ficiency pr ograms can be ramped up over a per iod of one to thr ee years to deliver sizable savings. These pr ograms can also be targeted to congested ar eas with high pr ices to br ing r elief wher e it might be dif ficult to deliver new supply in the near term. Significant energy savings. W ell-designed energy ef ficiency pr ograms ar e deliver ing annual energy savings on the or der of 1 per cent of electr icity and natural gas sales. 8 These pr ograms ar e helping to of fset 20 to 50 per cent of expected gr owth in energy demand in some ar eas without compr omising the end users’ activities and economic well-being (Nadel et al., 2004; EIA, 2006). Envir onmental benefits. While r educing customers’ energy bills, cost-ef fective energy ef ficiency of fers envir onmental benefits r elated to r educed demand such as lower air pollution, r educed gr eenhouse gas emissions, lower water use, and less envir onmental damage fr om fossil fuel extraction. Energy ef ficiency can be an attractive option for utilities in advance of r equir ements to r educe gr eenhouse gas emissions.
Economic development. Gr eater investment in energy ef ficiency helps build jobs and impr ove state economies. Energy ef ficiency users often r edir ect their bill savings towar d other activities that incr ease local and national employment, with a higher employment impact than if the money had been spent to pur chase energy (Kushler et al., 2005; NYSERDA, 2004). Many energy ef ficiency pr ograms cr eate construction andinstallation jobs, with multiplier impacts on employment and local economies. Local investments in energy ef ficiency can of fset imports fr om out-of-state, impr oving the state balance of trade. Lastly , energy ef ficiency investments usually cr eate long-lasting infrastructur e changes to building, equipment and appliance stocks, cr eating long-term pr operty impr ovements that deliver long-term economic value (Innovest, 2002).
Energy secur ity

. Energy ef ficiency r educes the level of U.S. per capita energy consumption, thus decr easingthe vulnerability of the economy and individual consumers to energy pr ice disruptions fr om natural disasters and attacks on domestic and inter national energy supplies and infrastructur e. In addition, energy ef ficiency can be used to r educe the overall system peak demand or the peak demand in targeted load ar eas with limited generating or transport capability

. Reducing peak demand impr oves system r eliability and r educes the potential for unplanned br ownouts or black-outs, which can have large adverse economic consequences.

ES-4 National Action Plan for Energy Efficiencyutilities, and other organizations can build. Exper ience shows that energy ef ficiency pr ograms can lower customer energy bills; cost less than, and help defer , new energy infrastructur e; pr ovide energy savings to consumers; impr ove the envir onment; and spur local economic development (see box on Benefits of Energy Ef ficiency). Significant opportunities for energy ef ficiency ar e likely to continue to be available at low costs in the futur e. State and r egional studies have found that adoption of economically attractive, but as yet untapped, energy ef ficiency could yield mor e than 20 per cent savings in total electr icity demand nationwide by 2025. Depending on the underlying load gr owth, these savings could help cut load gr owth by half or mor e compar ed to curr ent for ecasts (Nadel et al., 2004; SWEEP , 2002; NEEP , 2005; NWPCC, 2005; WGA, 2006). Similarly , savings fr om dir ect use of natural gas could pr ovide a 50 per cent or gr eater r eduction in natural gas demand gr owth (Nadel et al., 2004). Captur ing this energy ef ficiency r esour ce would of fer substantial economic and envir onmental benefits acr oss the country . W idespr ead application of energy ef ficiency pr ograms that alr eady exist in some r egions could deliver a large part of these potential savings. 9 Extrapolating the r e sults fr om existing pr ograms to the entir e countrywould yield annual energy bill savings of nearly $20 billion, with net societal benefits of mor e than $250 billion over the next 10 to 15 years. This scenar io could defer the need for 20,000 megawatts (MW), or 40 new 500­ MW power plants, as well as r educe U.S. emissions fr om energy pr oduction and use by mor e than 200 million tons of carbon dioxide (CO 2 ), 50,000 tons of SO 2 , and 40,000 tons of NO x annually

. 10 These significant economic and envir onmental benefits can be achieved r elatively quickly because energy ef ficiency pr ograms can be developed and implemented within several years. Additional policies and pr ograms ar e r equir ed to help captur e these potential benefits and addr ess our substantial under investment in energy ef ficiency as a nation. An important indicator of this under investment is that the level of funding acr oss the country for organized ef ficiency pr ograms is curr ently less than $2 billion per year while it would r equir e about 4 times today’s funding levels to achieve the economic and envir onment benefits pr esented above. 11, 12
The curr ent under investment in energy ef ficiency is due to a number of well-r ecognized barr iers, including some of the r egulatory policies that gover n electr ic and natural gas utilities. These barr iers include:

• Market barriers, such as the well-known “splitincentive” barr ier , which limits home builders’ and commer cial developers’ motivation to invest in energy ef ficiency for new buildings because they do not pay the energy bill; and the transaction cost barr ier , which chr onically af fects individual consumer and small business decision-making.

• Customer barriers, such as lack of information on

energy saving opportunities, lack of awar eness of how energy ef ficiency pr ograms make investments easier , and lack of funding to invest in energy ef ficiency

.

• Public policy barriers, which can pr esent pr ohibitive

disincentives for utility support and investment in energy ef ficiency in many cases.

• Utility , state, and regional planning barriers, which do not allow energy ef ficiency to compete with supply-side r esour ces in energy planning.

• Energy efficiency program barriers, which limit

investment due to lack of knowledge about the most ef fective and cost-ef fective energy ef ficiency pr ogram portfolios, pr ograms for over coming common marketplace barr iers to energy ef ficiency , or available technologies. While a number of energy ef ficiency policies and pr ograms contr ibute to addr essing these barr iers, such as building codes, appliance standar ds, and state gover nment leadership pr ograms, organized energy ef ficiency pr ograms

To create a sustainable, aggressive national commitment to energy efficiency ES-5pr ovide an important opportunity to deliver gr eater energy ef ficiency in the homes, buildings, and facilities that alr eady exist today and that will consume the majority of the energy used in these sectors for years to come. 

# T he Leadership Gr oup and National Action Plan for Energy Ef ficiency Recognizing that energy ef ficiency r emains a cr itically underutilized r esour ce in the nation’ s energy portfolio, mor e than 50 leading electr ic and gas utilities, state utility commissioners, state air and energy agencies, energy service pr oviders, energy consumers, and energy ef ficiency and consumer advocates have formed a Leadership Gr oup, together with the U.S. Department of Energy (DOE) and the U.S. Envir onmental Pr otection Agency (EP A), to addr ess the issue. The goal of this gr oup is to cr eate a sustainable, aggr essive national commitment to energy ef ficiency thr ough gas and electr ic utilities, utility r egulators, and partner organizations. The Leadership Gr oup r ecognizes that utilities and r egulators play cr itical r oles in br inging energy ef ficiency pr ograms to their communities and that success r equir es the joint ef forts of customers, utilities, r egulators, states, and other partner organizations. Under co-chairs Diane Munns (Member of the Iowa Utilities Boar d and Pr esident of the National Association of Regulatory Utility Commissioners) and Jim Rogers (Pr esident and Chief Executive Of ficer of Duke Energy), the Leadership Gr oup members (see T able ES-1) have devel oped the National Action Plan for Energy Ef ficiency Report, which:

• Identifies key barr iers limiting gr eater investment in

energy ef ficiency

.

• Reviews sound business practices for r emoving these

barr iers and impr oving the acceptance and use of energy ef ficiency r elative to energy supply options.

• Outlines r ecommendations and options for

over coming these barr iers. The members of the Leadership Gr oup have agr eed to pursue these r ecommendations and consider these options thr ough their own actions, wher e appr opr iate, and to support energy ef ficiency initiatives by other industry members and stakeholders. 

# Recommendations The National Action Plan for Energy Ef ficiency is a call to action to utilities, state utility r egulators, consumer advocates, consumers, businesses, other state of ficials, and other stakeholders to cr eate an aggr essive, sustainable national commitment to energy ef ficiency

. 1 The Action Plan of fers the following r ecommendations as ways to over come barr iers that have limited gr eater investment in energy ef ficiency for customers of electr ic and gas utilities in many parts of the country

. The following r ecommendations ar e based on the policies, practices, and ef forts of leading organizations acr oss the country . For each r ecommendation, a number of options ar e available to be pursued based on r egional, state, and utility cir cumstances (see also Figur e ES-2). Recognize energy ef ficiency as a high-pr ior ity energy
r esour ce. Energy ef ficiency has not been consistently viewed as a meaningful or dependable r esour ce compar ed to new supply options, r egar dless of its demonstrated contr ibutions to meeting load gr owth. 13 Recognizing energy ef ficiency as a high-pr ior ity energy r esour ce is an important step in ef forts to captur e the benefits it of fers and lower the overall cost of energy services to customers. Based on jur isdictional objectives, energy ef ficiency can be incorporated into r esour ce plans to account for the long-term benefits fr om energy savings, capacity savings, potential r eductions of air pollutants and gr eenhouse gases, as well as other benefits. The explicit integration of energy ef ficiency r esour ces into the formalized r esour ce planning pr ocesses that exist at r egional, state, and utility levels can help establish the rationale for energy ef ficiency funding levels and for pr operly valuing and balancing the benefits. In some jur isdictions, these existing planning pr ocesses might need to be adapted or even cr eated to meaningfully

ES-6 National Action Plan for Energy Efficiencyincorporate energy ef ficiency r esour ces into r esour ce planning. Some states have r ecognized energy ef ficiency as the r esour ce of first pr ior ity due to its br oad benefits.

Make a str ong, long-term commitment to implement cost-ef fective energy ef ficiency as a r esour ce. Energy ef ficiency pr ograms ar e most successful and pr ovide the gr eatest benefits to stakeholders when appr opr iate policies ar e established and maintained over the long-term. Confidence in long-term stability of the pr ogram will help maintain energy ef ficiency as a dependable r esour ce compar ed to supply-side r esour ces, deferr ing or even avoiding the need for other infrastructur e investments, and maintain customer awar eness and support. Some steps might include assessing the long-term potential for cost-ef fective energy ef ficiency within a r egion (i.e., the energy ef ficiency that can be deliver ed cost-ef fectively thr ough pr oven pr ograms for each customer class within a planning hor izon); examining the r ole for cutting-edge initiatives and technologies; establishing the cost of supply-side options versus energy ef ficiency; establishing r obust measur ement and ver ification (M&V) pr ocedur es; and pr oviding for r outine updates to information on energy ef ficiency potential and key costs.

Br oadly communicate the benefits of and opportunities for energy ef ficiency

. Exper ience shows that energy ef ficiency pr ograms help customers save money and contr ibute to lower cost energy systems. But these benefits ar e not fully documented nor r ecognized by customers, utilities, r egulators, or policy-makers. Mor e ef fort is needed to establish the business case for energy ef ficiency for all decision-makers and to show how a well-designed appr oach to energy ef ficiency can benefit customers, utilities, and society by (1) r educing customers’ bills over time, (2) foster ing financially healthy utilities (e.g., r etur n on equity , ear nings per shar e, and debt coverage ratios unaf fected), and (3) contr ibuting to positive societal net benefits overall. Ef fort is also necessary to educate key stakeholders that although energy ef ficiency can be an important low-cost r esour ce to integrate into the energy mix, it does r equir e funding just as a new power plant r equir es funding. Further , education is necessary on the impact that energy ef ficiency pr ograms can have in concert with other energy ef ficiency policies such as building codes, appliance standar ds, and tax incentives.

Pr omote suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective. Energy ef ficiency pr ograms r equir e consistent and longterm funding to ef fectively compete with energy supply options. Ef forts ar e necessary to establish this consistent long-term funding. A var iety of mechanisms have been, and can be, used based on state, utility, and other stakeholder inter ests. It is important to ensur e that the ef ficiency pr ograms’ pr oviders have suf ficient long-term funding to r ecover pr ogram costs and implement the energy ef ficiency measur es that have been demonstrated to be available and cost ef fective. A number of states ar e now linking pr ogram funding to the achievement of energy savings. Modify policies to align utility incentives with the delivery of cost-ef fective energy ef ficiency and modify ratemaking practices to pr omote energy ef ficiency investments. Successful energy ef ficiency pr ograms would be pr omoted by aligning utility incentives in a manner that encourages the delivery of energy ef ficiency as part of a balanced portfolio of supply , demand, and transmission investments. Histor ically , r egulatory policies gover ning utilities have mor e commonly compensated utilities for building infrastructur e (e.g., power plants, transmission lines, pipelines) and selling energy , while discouraging energy ef ficiency, even when the energysaving measur es might cost less. W ithin the existing r e gulatory pr ocesses, utilities, r egulators, and stakeholders have a number of opportunities to cr eate the incentives for energy ef ficiency investments by utilities and customers. A var iety of mechanisms have alr eady been used. For example, parties can decide to pr ovide incentives for energy ef ficiency similar to utility incentives for new infrastructur e investments, pr ovide r ewar ds for prudent management of energy ef ficiency pr ograms, and incorporate energy ef ficiency as an important ar ea of consideration within rate design. Rate design of fers

To create a sustainable, aggressive national commitment to energy efficiency ES-7

# Figur e ES-2. National Action Plan for Energy Ef ficiency Recommendations & Options

Recognize energy ef ficiency as a high pr ior ity energy r esour ce. Options to consider: • Establishing policies to establish energy ef ficiency as

a pr ior ity r esour ce. • Integrating energy ef ficiency into utility , state, and r egional r esour ce planning activities. • Quantifying and establishing the value of energy

ef ficiency , consider ing energy savings, capacity savings, and envir onmental benefits, as appr opr iate.

Make a str ong, long-term commitment to implement cost-ef fective energy ef ficiency as a r esour ce. Options to consider: • Establishing appr opr iate cost-ef fectiveness tests for

a portfolio of pr ograms to r eflect the long-term benefits of energy ef ficiency

. • Establishing the potential for long-term, costef fective energy ef ficiency savings by customer class thr ough pr oven pr ograms, innovative initiatives, and cutting-edge technologies. • Establishing funding r equir ements for deliver ing

long-term, cost-ef fective energy ef ficiency

. • Developing long-term energy saving goals as part

of energy planning pr ocesses. • Developing r obust measur ement and ver ification

(M&V) pr ocedur es. • Designating which organization(s) is r esponsible

for administer ing the energy ef ficiency pr ograms. • Pr oviding for fr equent updates to energy

r esour ce plans to accommodate new information and technology

.
Br oadly communicate the benefits of and opportunities for energy ef ficiency

. Options to consider: • Establishing and educating stakeholders on the

business case for energy ef ficiency at the state, utility

, and other appr opr iate level addr essing r elevant customer , utility , and societal perspectives. • Communicating the r ole of energy ef ficiency in lower ing customer energy bills and system costs and r isks over time. • Communicating the r ole of building codes, appliance standar ds, and tax and other incentives.

Pr ovide suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective. Options to consider: • Deciding on and committing to a consistent

way for pr ogram administrators to r ecover energy ef ficiency costs in a timely manner

. • Establishing funding mechanisms for energy

ef ficiency fr om among the available options such as r evenue r equir ement or r esour ce pr ocur ement funding, system benefits charges, rate-basing, shar ed-savings, incentive mechanisms, etc. • Establishing funding for multi-year per iods. Modify policies to align utility incentives with the delivery of cost-ef fective energy ef ficiency and modify ratemaking practices to pr omote energy ef ficiency investments. Options to consider: • Addr essing the typical utility thr oughput incentive

and r emoving other r egulatory and management disincentives to energy ef ficiency

. • Pr oviding utility incentives for the successful

management of energy ef ficiency pr ograms. • Including the impact on adoption of energy

ef ficiency as one of the goals of r etail rate design, r ecognizing that it must be balanced with other objectives. • Eliminating rate designs that discourage energy

ef ficiency by not incr easing costs as customers consume mor e electr icity or natural gas. • Adopting rate designs that encourage energy

ef ficiency by consider ing the unique character istics of each customer class and including partner ing tar if fs with other mechanisms that encourage energy ef ficiency , such as benefit shar ing pr ograms and on-bill financing.

ES-8 National Action Plan for Energy Efficiencyopportunities to encourage customers to invest in ef ficiency wher e they find it to be cost ef fective and participate in new pr ograms that pr ovide innovative technologies (e.g., smart meters) to help customers contr ol their energy costs. 

# National Action Plan for Energy Ef ficiency: Next Steps In summer 2006, members of the Leadership Gr oup of the National Action Plan on Energy Ef ficiency ar e announcing a number of specific activities and initiatives to formalize and r e infor ce their commitments to energy ef ficiency as a r esour ce. T o assist the Leadership Gr oup and others in making and fulfilling their commitments, a number of tools and r esour ces have been developed: National Action Plan for Energy Ef ficiency Report. This r eport details the key barr iers to energy ef ficiency in r esour ce planning, utility incentive mechanisms, rate design, and the design and implementation of energy ef ficiency pr ograms. It also r eviews and pr esents a var iety of policy and pr ogram solutions that have been used to over come these barr iers as well as the pr os and cons for many of these appr oaches. Energy Ef ficiency Benefits Calculator

. This calculator can be used to help educate stakeholders on the br oad benefits of energy ef ficiency . It pr ovides a simplified framework to demonstrate the business case for energy ef ficiency fr om the perspective of the consumer, the utility

, and society . It has been used to explor e the benefits of energy ef ficiency pr ogram investments under a range of utility structur es, policy mechanisms, and energy gr owth scenar ios. The calculator can be adapted and applied to other scenar ios.
Experts and Resour ce Mater ials on Energy Ef ficiency

. A number of educational pr esentations on the potential for energy ef ficiency and var ious policies available for pursuing the r ecommendations of the Action Plan will be developed. In addition, lists of policy and pr ogram experts in energy ef ficiency and the var ious policies available for pursuing the r ecommendations of the Action Plan will be developed. These lists will be drawn fr om utilities, state utility r egulators, state energy of fices, thir d-party energy ef ficiency pr ogram administrators, consumer advocacy organizations, ESCOs, and others. These r esour ces will be available in fall 2006.
DOE and EP A ar e continuing to facilitate the work of the Leadership Gr oup and the National Action Plan for Energy Ef ficiency . Dur ing winter 2006–2007, the Leadership Gr oup plans to r eport on its pr ogr ess and identify next steps for the Action Plan.

To create a sustainable, aggressive national commitment to energy efficiency ES-9

# T able ES-1. Members of the National Action Plan for Energy Ef ficiency

Co-Chairs Diane Munns Member Iowa Utilities Boar d Pr esident National Association of Regulatory Utility Commissioners Jim Rogers Pr esident and Chief Executive Of ficer Duke Energy
Leadership Gr oup Barry Abramson Senior V ice Pr esident Servidyne Systems, LLC Angela S. Beehler Dir ector of Energy Regulation W al-Mart Stor es, Inc. Bruce Braine V ice Pr esident, Strategic Policy Analysis Amer ican Electr ic Power Jef f Burks Dir e ctor of Envir onmental Sustainability PNM Resour ces Kater i Callahan Pr esident Alliance to Save Energy Glenn Cannon General Manager W averly Light and Power Jorge Carrasco Super intendent Seattle City Light Lonnie Carter Pr esident and Chief Executive Of ficer Santee Cooper Mark Case V ice Pr esident for Business Performance Baltimor e Gas and Electr ic Gary Connett Manager of Resour ce Planning and Gr eat River Energy Member Services Larry Downes Chairman and Chief Executive Of ficer New Jersey Natural Gas (New Jersey Resour ces Corporation) Roger Duncan Deputy General Manager , Distr ibuted Energy Services Austin Energy Angelo Esposito Senior V ice Pr esident, Energy Services and T echnology New Y ork Power Author ity W illiam Flynn Chairman New Y ork State Public Service Commission Jeanne Fox Pr esident New Jersey Boar d of Public Utilities Anne George Commissioner Connecticut Department of Public Utility Contr ol Dian Grueneich Commissioner Califor nia Public Utilities Commission Blair Hamilton Policy Dir ector V ermont Energy Investment Corporation Leonar d Haynes Executive V ice Pr esident, Supply T echnologies, Souther n Company Renewables, and Demand Side Planning Mary Healey Consumer Counsel for the State of Connecticut Connecticut Consumer Counsel Helen Howes V ice Pr esident, Envir onment, Health and Safety Exelon Chr is James Air Dir ector Connecticut Department of Envir onmental Pr otection Ruth Kinzey Dir ector of Corporate Communications Food Lion Peter Lendrum V ice Pr esident, Sales and Marketing Entergy Corporation Rick Leuthauser Manager of Energy Ef ficiency MidAmer ican Energy Company Mark McGahey Manager T r istate Generation and T ransmission Association, Inc. Janine Migden- Consumers’ Counsel Of fice of the Ohio Consumers’ Counsel Ostrander Richar d Morgan Commissioner Distr ict of Columbia Public Service Commission Br ock Nicholson Deputy Dir ector , Division of Air Quality North Car olina Air Of fice Pat Oshie Commissioner W ashington Utilities and T ransportation Commission Douglas Petitt V ice Pr esident, Gover nment Af fairs V ectr en Corporation

ES-10 National Action Plan for Energy EfficiencyBill Pr indle Deputy Dir ector Amer ican Council for an Energy-Ef ficient Economy Phyllis Reha Commissioner Minnesota Public Utilities Commission Roland Risser Dir ector , Customer Energy Ef ficiency Pacific Gas and Electr ic Gene Rodr igues Dir ector , Energy Ef ficiency Souther n Califor nia Edison Art Rosenfeld Commissioner Califor nia Energy Commission Jan Schor i General Manager Sacramento Municipal Utility Distr ict Larry Shirley Division Dir ector North Car olina Energy Of fice Michael Shor e Senior Air Policy Analyst Envir onmental Defense Gor don Slack Energy Business Dir ector The Dow Chemical Company Deb Sundin Dir ector , Business Pr oduct Marketing Xcel Energy Dub T aylor Dir ector T exas State Energy Conservation Of fice Paul von Dir ector , Energy and Envir onmental Af fairs Johnson Contr ols Paumgartten Br enna W alraven Executive Dir ector , National Pr operty Management USAA Realty Company Devra W ang Dir ector , Califor nia Energy Pr ogram Natural Resour ces Defense Council Steve W a r d Public Advocate State of Maine Mike W eedall V ice Pr esident, Energy Ef ficiency Bonneville Power Administration T om W elch V ice Pr esident, Exter nal Af fairs PJM Inter connection Jim W est Manager of energy right & Gr een Power Switch T ennessee V alley Author ity Henry Y oshimura Manager , Demand Response ISO New England Inc.

Observers James W

. (Jay) Counsel Steel Manufactur ers Association Br ew Roger Cooper Executive V ice Pr esident, Policy and Planning Amer ican Gas Association Dan Delur ey Executive Dir ector Demand Response Coor dinating Committee Roger Fragua Deputy Dir ector Council of Energy Resour ce T r ibes Jef f Genzer General Counsel National Association of State Energy Of ficials Donald Gilligan Pr esident National Association of Energy Service Companies Chuck Gray Executive Dir ector National Association of Regulatory Utility Commissioners John Holt Senior Manager of Generation and Fuel National Rural Electr ic Cooperative Association Joseph Mattingly V ice Pr esident, Secr etary and General Counsel Gas Appliance Manufactur ers Association Kenneth Mentzer Pr esident and Chief Executive Of ficer North Amer ican Insulation Manufactur ers Association Chr istina Mudd Executive Dir ector National Council on Electr icity Policy Ellen Petr ill Dir ector , Public/Pr ivate Partnerships Electr ic Power Resear ch Institute Alan Richar dson Pr esident and Chief Executive Of ficer Amer ican Public Power Association Steve Rosenstock Manager , Energy Solutions Edison Electr ic Institute Diane Shea Executive Dir ector National Association of State Energy Of ficials Rick T empchin Dir ector , Retail Distr ibution Policy Edison Electr ic Institute Mark W olfe Executive Dir ector Energy Pr ograms Consortium

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

# Notes

1 Energy ef ficiency r efers to using less energy to pr o- See highlights of some of these pr ograms in Chapter vide the same or impr oved level of service to the 6: Energy Ef ficiency Pr ogram Best Practices, T ables energy consumer in an economically ef ficient way

. 6-1 and 6-2. The term energy ef ficiency as used her e includes 10 These economic and envir onmental savings estiusing less energy at any time, including at times of mates ar e extrapolations of the r e sults fr om r egionpeak demand thr ough demand r esponse and peak al pr ogram to a national scope. Actual savings at the shaving ef forts. r egional level vary based on a number of factors. For 2 Addr essing transportation-r elated energy use is also these estimates, avoided capacity value is based on an important challenge as energy demand in this peak load r eductions de-rated for r eductions that do sector continues to incr ease and oil pr ices hit histor­ not r esult in savings of capital investments. ical highs. However , transportation issues ar e out- Emissions savings ar e based on a marginal on-peak side the scope of this ef fort, which is focused only generation fuel of natural gas and marginal of fon electr icity and natural gas systems. peak fuel of coal; with the on-peak per iod capacity 3 This ef fort is focused on energy ef ficiency for r egu­ r equir ement double that of the annual average. lated energy forms. Energy ef ficiency for unr egulat- These assumptions vary by r egion based upon situaed energy forms, such as fuel oil for example, is tion-specific var iables. Reductions in capped emisclosely r elated in terms of actions in buildings, but is sions might r educe the cost of compliance. quite dif fer ent in terms of how policy can pr omote 11 This estimate of the funding r equir ed assumes 2 investments. per cent of r evenues acr oss electr ic utilities and 0.5 4 A utility is br oadly defined as an organization that per cent acr oss gas utilities. The estimate also delivers electr ic and gas utility services to end users, assumes that energy ef ficiency is deliver ed 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 thir d-party $3 per million Br itish thermal units (MMBtu), which energy ef ficiency utilities. ar e higher than the costs of many of today’ s pr ograms. 5 Many energy ef ficiency pr ograms have an average 12 This estimate is pr ovided as an indicator of under inlife cycle cost of $0.03/kilowatt-hour (kWh) saved, vestment and is not intended to establish a national which is 50 to 75 per cent of the typical cost of new funding target. Appr opr iate funding levels for pr opower sour ces (ACEEE, 2004; EIA, 2006). The cost grams should be established at the r egional, state, of energy ef ficiency pr ograms var ies by pr ogram and or utility level. In addition, energy ef ficiency investcan include higher cost pr ograms and options with ments by customers, businesses, industry, and govlower costs to a utility such as modifying rate designs. er nment also contr ibute to the larger economic and 6 See Chapter 6: Energy Ef ficiency Pr ogram Best envir onment benefits of energy ef ficiency

. Practices for mor e information on leading pr ograms. 13 One example of energy ef ficiency’ s ability to meet 7 Data r efer to EIA 2006 new power costs and gas load gr owth is the Northwest Power Planning pr ices in 2015 compar ed to electr ic and gas pr o- Council’s Fifth Power Plan which uses energy congram costs based on leading energy ef ficiency pr o­ servation and ef ficiency to meet a targeted 700 MW grams, many of which ar e discussed in Chapter 6: of for ecasted capacity between 2005 and 2009 Energy Ef ficiency Pr ogram Best Practices. (NWPCC, 2005). 8 Based on leading energy ef ficiency pr ograms, many of which ar e discussed in Chapter 6: Energy Ef ficiency Pr ogram Best Practices. 9 These estimates ar e based on assumptions of average pr ogram spending levels by utilities or other pr ogram administrators, with conservatively high numbers for the cost of energy ef ficiency pr ograms.

ES-12 National Action Plan for Energy Efficiency

# Refer ences F or Mor e Information

Amer ican Council for an Energy-Ef ficient Economy [ACEEE] (2004). A Federal System Benefits Fund: Assisting States to Establish Energy Efficiency and Other System Benefit Programs . W ashington, DC. Innovest Strategic V alue Advisors [Innovest] (2002, October). Energy Management & Investor Returns: The Real Estate Sector

. Kushler , M., Ph.D., Y ork, D., Ph.D., and W i tte, P ., M.A. (2005, January). Examining the Potential for Energy Efficiency to Help Address the Natural Gas Crisis in the Midwest . W ashington, DC: Amer ican Council for an Energy-Ef ficient Economy [ACEEE]. Nadel, S., Shipley , A., and Elliott, R.N. (2004). The T echnical, Economic and Achievable Potential for Energy Efficiency in the U.S.—A Meta-Analysis of Recent Studies . W ashington, DC: Amer ican Council for an Energy-Ef ficient Economy [ACEEE]. New Y ork State Energy Resear ch and Development Author ity [NYSERDA] (2004, May). New Y ork Energy $mart SM Program Evaluation and Status Report, Report to the System Benefits Charge Advisor y Group, Final Report . Albany

. Northeast Energy Ef ficiency 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 Conser vation Plan . <http://www .nwcouncil.org/ energy/powerplan/default.htm> Southwest Energy Ef ficiency Pr oject [SWEEP] (2002, November). The New Mother Lode: The Potential for More Efficient Electricity Use in the Southwest

. Report for the Hewlett Foundation Energy Ser ies. U.S. Energy Information Administration [EIA] (2006). Annual Energy Outlook 2006 . W ashington, DC. W ester n Gover nors’ 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. Envir onmental Pr otection Agency Of fice of Air and Radiation Climate Pr otection Partnerships Division T

el: (202) 343-9606 E-mail: angel.stacy@epa.gov
Larry Mansueti U.S. Department of Energy Of fice of Electr icity Delivery and Energy Reliability T

el: (202) 586-2588 E-mail: lawr ence.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

Ov erview
W e curr ently face a number of challenges in secur ing af for dable, r eliable, secur e, and clean energy to meet our nation’ s gr owing energy demand. Demand is outpacing supply , costs ar e r ising, and concer ns for the envir onment ar e gr owing. Impr oving the energy ef ficiency 1 of our homes, businesses, schools, gover nments, and industr ies – which consume mor e than 70 per cent of the energy used in the country—is one of the most constructive, cost-ef fective ways to addr ess these challenges. Gr eater investment in energy ef ficiency pr ograms acr oss the country could help meet our gr owing electr icity and natural gas demand, save customers billions of dollars on their energy bills, r educe emissions of air pollutants and gr eenhouse gases, and contr ibute to a mor e secur e, r eliable, and low-cost energy system. Despite this opportunity , energy ef ficiency r emains an under-utilized r esour ce in the nation’ s energy portfolio.
Ther e ar e many ways to incr ease investment in costef fective energy ef ficiency including developing building codes and appliance standar ds, implementing gover nment leadership ef forts, and educating the public thr ough pr ograms such as ENERGY ST AR ®

. 2 Another important ar ea is gr eater investment in organized energy ef ficiency pr ograms that ar e managed by electr ic and natural gas pr oviders, states, or thir d-party administrators. Energy ef ficiency pr ograms alr eady contr ibute to the energy mix in many parts of the country and have deliver ed significant savings and other benefits. Despite the benefits, these pr ograms face hur dles in many ar eas of the country . Identifying and r emoving these barr iers is a focus of this ef fort. 

### October 2005 Excerpt fr om Letter Fr om Co-Chairs to the National Action Plan for Energy Ef ficiency Leadership Gr oup Energy ef ficiency is a cr itically under-utilized r esour ce in the nation’ s energy portfolio. Those states and utilities that have made significant investments in energy ef ficiency have lower ed the gr owth for energy demand and moderated their energy costs. However , many hur dles r emain that block br oader investments in cost-ef fective energy ef ficiency

. That is why we have agr eed to chair the Energy Ef ficiency Action Plan. It is our hope that with the help of leading organizations like yours, we will identify and over come these hur dles. Thr ough this Action Plan, we intend to identify the major barr iers curr ently limiting gr eater investment by utilities in energy ef ficiency . W e will develop a ser ies of business cases that will demonstrate the value and contr ibutions of energy ef ficiency and explain how to r emove these barr iers (including r egulatory and market challenges). These business cases, along with descr iptions of leading energy ef ficiency pr ograms, will build upon practices alr eady in place acr oss the country

. Diane Munns Jim Rogers President,NARUC President and CEO Member , Iowa Utilities Board Duke Energy

T

o dr ive a sustainable, aggr essive national commitment to energy ef ficiency thr ough gas and electr ic utilities, utility r egulators, and partner organizations, mor e than 50 leading organizations joined together to develop this National Action Plan for Energy Ef ficiency . The Action Plan is co-chair ed by Diane Munns, Member of the Iowa

1 Energy ef ficiency r efers to using less energy to pr ovide the same or impr oved level of service to the energy consumer in an eco nomically ef ficient way

.

The term energy ef ficiency as used her e includes using less energy at any time, including at times of peak demand thr ough deman d r esponse and peak shaving ef forts. 2 See EP A 2006 for a descr iption of a br oad set of policies being used at the state level to advance energy ef ficiency

. To create a sustainable, aggressive national commitment to energy efficiency 1-1Utilities Boar d and Pr esident of the National Association o f Regulatory Utility Commissioners, and Jim Rogers, Pr esident and Chief Executive Of ficer of Duke Energy

. The Leadership Gr oup includes r epr esentatives fr om a br oad set of stakeholders, including electr ic and gas utilities, state utility commissioners, state air and energy agencies, energy service pr oviders, energy consumers, and energy ef ficiency and consumer advocates. This ef fort is facilitated by the U.S. Department of Energy (DOE) and the U.S. Envir onmental Pr otection Agency (EP A). The National Action Plan for Energy Ef ficiency:

• Identifies key barr iers limiting gr eater investment in

energy ef ficiency ,

• Reviews sound business practices for r emoving these

barr iers and impr oving the acceptance and use of energy ef ficiency r elative to energy supply options, and

• Outlines r ecommendations and options for over coming

these barr iers. In addition, members of the Leadership Gr oup ar e committing to act within their own organizations and spher es of influence to incr ease attention and investment in energy ef ficiency . Gr eater investment in energy ef ficiency cannot happen based on the work of one individual or organization alone. The Leadership Gr oup r ecognizes that the joint ef forts of the customer , utility , r egulator , and partner organizations ar e needed to r einvigorate and incr ease the use of energy ef ficiency in Amer ica. As energy experts, utilities may be in a unique position to play a leadership r ole.
The r e st of this intr oduction chapter establishes why now is the time to incr ease our investment in energy ef ficiency , outlines the appr oach taken in the National Action Plan for Energy Ef ficiency, and explains the structur e of this r eport. 

# W hy F ocus on Energy Ef ficiency?

Energy Challenges

W e curr ently face multiple challenges in pr oviding af for dable, clean, and r eliable energy in today’ s complex energy markets:

• Electricity demand continues to r ise. Given curr ent

energy consumption and demographic tr ends, DOE pr ojects that U.S. energy consumption will incr ease by mor e than one-thir d by the year 2025. Electr ic power consumption is expected to incr ease by almost 40 per cent, and total fossil fuel use is pr ojected to incr ease similarly (EIA, 2005). At work and at home, we continue to r ely on mor e energy-consuming devices. This gr owth in demand str esses curr ent systems and r equir es substantial new investments in system expansions.

• High energy prices. Our demand for natural gas to

heat our homes, for industr ial and business uses, and for power plants is straining the available gas supply in North Amer ica and putting upwar d pr essur e on natural gas pr ices. Many household budgets ar e being strained by higher energy costs, leaving less money available for other household pur chases and needs; this situation is particularly harmful for low-income households. Consumers ar e looking for ways to manage their energy bills. Higher energy bills for industry ar e r educing the nation’s economic competitiveness and placing U.S. jobs at r isk. Higher energy pr ices also raise the financial r i sk associated with the development of new natural gas-fir ed power plants, which had been expected to make up mor e than 60 per cent of capacity additions over the next 20 years (EIA, 2005). Coal pr ices ar e also incr easing and contr ibuting to higher electr icity costs.

• Energy system reliability

. Events such as the Northeast electr icity blackout of August 2003 and Hurr icanes Katr ina and Rita in 2005 highlighted the vulnerability of our energy system to disruptions. This led to an

1-2 National Action Plan for Energy Efficiencyincr eased focus on energy r eliability and its economic and human impacts, as well as national secur ity concer ns using fossil fuel mor e ef ficiently and incr easing energy supply diversity

.

• T ransmission systems ar e overbur dened in some places, limiting the flow of economical generation and, in some cases, shr inking r eserve margins of the electr icity gr id to inappr opr iately small levels. This situation can cause r eliability pr oblems and high electr icity pr ices in or near congested ar eas.

• Environmental concerns. Energy demand continues to

gr ow as national and state r egulations ar e being implemented to significantly limit the emissions of air pollutants, such as sulfur dioxide (SO 2 ), nitr ogen oxides (NO x ), and mer cury , to pr otect public health and the envir onment. Many existing base load generation plants ar e aging and significant r etr ofits ar e needed to ensur e old generating units meet these emissions r egulations. In addition, emissions of gr eenhouse gases continue to incr ease.
Addr essing these issues will r equir e billions of dollars in investments in new power plants, gas r igs, transmission lines, pipelines, and other infrastructur e, notwithstanding the dif ficulty of building new energy infrastructur e in dense urban and suburban locations even with curr ent energy ef ficiency investment. The decisions we make now r egar ding our energy supply and demand can either help us deal with these challenges mor e ef fectively or complicate our ability to secur e a mor e stable, economical energy futur e. 

### Benefits of Energy Ef ficiency

Gr eater investment in energy efficiency can help us tackle these challenges. Energy efficiency is alr eady a key component in the nation’ s energy r esour ce mix in many parts of the country , and exper ience shows that energy efficiency pr ograms can lower customer energy bills; cost less than, and help defer , new energy pr oduction; pr ovide envir onmental benefits; and spur local economic development. Some of the major benefits of energy ef ficiency include:

• Lower energy bills, greater customer control, and

greater customer satisfaction. W ell-designed pr ograms can pr ovide opportunities for all customer classes to adopt energy savings measur es and r educe their energy bills. 3 These pr ograms can help customers make sound energy use decisions, incr ease contr ol over their energy bills with savings of 5 to 30 per cent, and empower them to manage their energy usage. Customers often expr ess gr eater satisfaction with electr icity and natural gas pr oviders wher e energy ef ficiency is of fer ed.

• Lower cost than supplying new generation only from

new power plants. W ell-designed energy ef ficiency pr ograms ar e saving energy at an average cost of onehalf of the typical cost of new power sour ces and about one-thir d of the cost of pr oviding natural gas. 4 When integrated into a long-term energy r esour ce plan, energy ef ficiency could help defer investments in new plants and lower the total energy system cost.

• Modular and quick to deploy

. Energy ef ficiency pr ograms can be ramped up over a per iod of one to thr ee years to deliver sizable savings. These pr ograms can also be targeted to congested ar eas with high pr ices to br ing r elief wher e it might be dif ficult to deliver new supply in the near term.

• Significant energy savings

. W ell-designed energy ef ficiency pr ograms ar e deliver ing energy savings each year on the or der of 1 per cent of total electr ic and natural gas sales. 5 These pr ograms ar e helping to of fset 20 to 50 per cent of expected gr owth in energy

3 See Chapter 6: Energy Ef ficiency Pr ogram Best Practices for mor e information on leading pr ograms. 4 Based on new power costs and gas pr ices in 2015 (EIA, 2006) compar ed to electr ic and gas pr ogram costs based on leading energy pr ograms, many of

which ar e discussed in Chapter 6: Energy Ef ficiency Pr ogram Best Practices. 5 Based on leading energy ef ficiency pr ograms, many of which ar e discussed in Chapter 6: Energy Ef ficiency Pr ogram Best Practices

.

To create a sustainable, aggressive national commitment to energy efficiency 1-3demand in some ar eas without compr omising the end users’ activities and economic well-being (Nadel, et al., 2004; EIA, 2006).

• Environmental benefits. Cost-ef fective energy ef ficiency of fers envir onmental benefits r elated to r educed demand, such as r educed air pollution and gr eenhouse gas emissions, lower water use, and less envir onmental damage fr om fossil fuel extraction. Energy ef ficiency is an attractive option for generation owners in advance of r equir ements to r educe gr eenhouse gas emissions.

• Economic development. Gr eater investment in energy

ef ficiency helps build jobs and impr ove state economies. Energy ef ficiency users often r edir ect their bill savings towar d other activities that incr ease local and national employment, with a higher employment impact than if the money had been spent to pur chase energy (Y ork and Kushler , 2005; NYSERDA, 2004). Many energy ef ficiency pr ograms cr eate construction and installation jobs, with multiplier impacts on other employment andlocal economies (Sedano et al., 2005). Local investments in energy ef ficiency can of fset energy imports fr om out-of-state, impr oving the state balance of trade. Lastly , energy ef ficiency investments usually cr eate longlasting infrastructur e changes to building, equipment and appliance stocks, cr eating long-term pr operty impr ovements that deliver long-term economic value (Innovest, 2002).

• Energy security

. Energy ef ficiency r educes the level of U.S. per capita energy consumption, thus decr easingthe vulnerability of the economy and individual consumers to energy pr ice disruptions fr om natural disasters and attacks upon domestic and inter national energy supplies and infrastructur e. 

# Decades of Exper ience With Energy Ef ficiency
Utilities and their r egulators began r ecognizing the potential benefits of impr oving ef ficiency and r educing demand in the 1970s and 1980s. These “demand-side 

### Long Island Power Author ity’ s (LIP A) Clean Energy Pr ogram Dr ives Economic Development, Customer Savings, and Envir onmental Quality Enhancements LIP A started its Clean Energy Initiative in 1999 and has invested $229 million over the past 6 years. LIP A

’ s portfolio of energy ef ficiency pr ograms fr om 1999 to 2005 pr oduced significant energy savings, emissions r eductions and stimulated economic gr owth on Long Island:

• 296 megawatts (MW) peak demand savings
• 1,348 gigawatt-hours (GWh) cumulative savings
• Emissions r eductions of:
• Gr eater than 937,402 tons of

carbon dioxide (CO 2 )
• Gr eater than 1,334 tons of NO X • Gr eater than 4,298 tons of SO 2 • $275 million in customer bill savings and r ebates
• $234 million incr ease in net economic output on

Long Island
• 4,500 secondary jobs cr eated

Sour ce: LIP A, 2006 management” (DSM) appr oaches meet incr eased demands for electr icity or natural gas by managing the demand on the customer’ s side of the meter rather than incr easing or acquir ing mor e supplies. Planning pr ocesses, such as “least-cost planning” or “integrated r esour ce planning,” have been used to evaluate DSM pr ograms on par with supply options and allow investment in DSM pr ograms when they cost less than new supply options. DSM pr ogram spending exceeded $2 billion a year (in 2005 dollars) in 1993 and 1994 (Y ork and Kushler , 2005). In the late 1990s, funding for utility-sponsor ed energy ef ficiency was r educed in about half of the states due to changed r egulatory structur es and incr eased political and r egulatory pr essur es to hold down electr icity pr ices. This funding has partially r ecover ed with new

1-4 National Action Plan for Energy Efficiencypolicies and funding mechanisms (see Figur e 1-1) implemented to ensur e that some level of cost-ef fective energy ef ficiency was pursued. Notwithstanding the policy and r egulatory changes that have af fected energy ef ficiency pr ogram funding, wide scale, organized energy ef ficiency pr ograms have nowbeen operating for decades in certain parts of the country . These ef forts have demonstrated the following:

• Energy efficiency programs deliver significant savings.

In the mid-1990s, based on the high pr ogram funding levels of the early 1990s, electr ic utilities estimated pr ogram savings of 30 gigawatts (the output of about 100 medium-sized power plants) and mor e 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 r egion has met 40 per cent of its gr owth over the past two decades thr ough energy ef ficiency pr ograms (see Figur e 1-2).

— Califor nia’ s energy ef ficiency goals, adopted in 2004 by the Public Utilities Commission, ar e to 

### Connecticut’ s Energy Ef ficiency Pr ograms Generate Savings of $550 Million in 2005 In 2005, the Connecticut Energy Ef ficiency Fund, managed by the Energy Conservation Management Boar d, invested $80 million in energy ef ficiency . This investment is expected to pr oduce $550 million of bill savings to Connecticut electr icity consumers. In addition, the 2005 pr ograms, administer ed by Northeast Utilities and United Illuminating, r esulted in:

• 126 MW peak demand r eduction
• 4,398 GWh lifetime savings
• Emissions r eductions of:

— Gr eater than 2.7 million tons of CO 2

— Gr eater than 1,702 tons of NO X

— Gr eater than 4,616 tons of SO 2 • 1,000 non-utility jobs in the energy ef ficiency

industry Sour ce: CECMB, 2006

Figur e 1-1: Energy Ef ficiency Spending Has Declined

$2.5 

### Puget Sound Energy’ s (PSE) Resour ce Plan Includes Accelerated Conservation to Minimize Risks and Costs PSE’ s 2002 and 2005 Integrated Resour ce Plans (IRPs) found that the accelerated development of energy ef ficiency minimizes both costs and r isks. As a r esult, PSE significantly expanded its energy ef ficiency ef forts. PSE is now on track to save 279 average MW (aMW) between 2006 and 2015, mor e than the company had saved between 1980 and 2004. The 279 aMW of energy ef ficiency r e p­ r esents nearly 10 per cent of its for ecasted 2015Investment in billions real 2005 dollars

$0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2 001 2 002 2 003 $2.0

$1.5

$1.0

$0.5

Ye a r sales. Sour ce: D a t a der iv ed fr om A CEEE 2005 Scor ecar d (Y or k and K ushler , Sour ce: Puget Sound Energy , 2005 2005) adjust ed f or inf lation using U

. S

. Depar tment of Labor Bur eau of Labor St atistics Inf lation C alculat or To create a sustainable, aggressive national commitment to energy efficiency 1-5use energy ef ficiency to displace mor e than half of futur e electr icity load gr owth and avoid the need to build thr ee large (500 MW) power plants.

• Energy efficiency is being delivered cost-competitively

with new supply

. Pr ograms acr oss the country ar e demonstrating that energy ef ficiency can be deliver ed at a cost of 2 to 4 cents per kilowatt-hour (kWh) and a cost of $1.30 to $2.00 per lifetime million Br itish thermal units (MMBtu) saved.

• Energy efficiency can be targeted to reduce peak

demand. A var iety of pr ograms addr ess the peak demand of dif fer ent customer classes, lower ing the strain on existing supply assets (e.g., pipeline capacity , transmission and distr ibution capacity , and power plantcapability), allowing energy delivery companies to better utilize existing assets and deferr ing new capital investments.

• Proven, cost-effective program models are available to

build upon. These pr ogram models ar e available for almost every customer class, both gas and electr ic.



### Souther n Califor nia Edison’ s (SCE) Energy Ef ficiency Investments Pr ovide Economic and Envir onmental Savings
SCE’ s compr ehensive portfolio of energy ef ficiency pr ograms for 2006 thr ough 2008 will pr oduce:

• 3 per cent average bill r eduction by 2010

• 3.5 billion kWh of energy savings

• 888 MW of demand savings

• 20.5 million tons of CO 2 emission r eductions

• 5.5 million tons of NO X emission r eductions

• Energy saved at a cost of less than 4.1 cents/kWh Sour ce: Southern California Edison, 2006 

### New Y ork State’ s Aggr essive Energy Ef ficiency Pr ograms Help Power the Economy As W e ll As Reduce Energy Costs New Y ork State Energy Resear ch and Development Author ity’ s (NYSERDA ’ s ) portfolio of energy efficiency pr ograms for the per iod fr om 1999 to 2005 pr oduced significant energy savings, as well as stimulated economic gr owth and jobs, and r educed energy pr ices in the state:

• 19 billion kWh/year of energy savings
• 4,166 added jobs/year (cr eated/r etained) fr om

1999 to 2017
• $244 million/year in added total economic gr owth

fr om 1999 to 2017
• $94.5 million in energy pr ice savings over thr ee

years Sour ce: NYSERDA, 2006 

# National Case for Energy Ef ficiency
Impr oving the energy ef ficiency of homes, businesses, schools, gover nments, and industr ies—which consume mor e than 70 per cent of the energy used in the country — is one of the most constructive, cost-ef fective ways to addr ess the nation’ s energy challenges. Many of these buildings and facilities ar e decades old and will consume the major ity of the energy to be used in these sectors for years to come. State and r egional studies have found that adoption of economically attractive, but as yet untapped, energy ef

ficiency could yield mor e than 20 per cent savings in total electr icity demand nationwide by 2025. Depending on the underlying load gr owth, these savings could help cut load gr owth by half or mor e compar ed to curr ent for ecasts (Nadel et al., 2004; SWEEP , 2002; NEEP , 2005; NWPCC, 2005; WGA, 2006). Similarly , energy ef ficiency targeted at dir ect natural gas use could lower natural gas demand gr owth by 50 per cent (Nadel et al., 2004). Furthermor e, studies also show that significant r eductions 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 Efficiency0 500 Figur e 1-2: Energy Ef ficiency Has Been a Resour ce in the Pacific Northwest for the Past T wo 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 ConservationAverage Megawatts (aMW)

1978 1982 1986 1990 1994 1998 2002 BPA and Utility Programs Alliance Programs State Codes Federal Standards

Sour ce: Ec kman, 2005
Captur ing this energy ef ficiency r esour ce would of fer • A voided annual air emissions of mor e than 200 million substantial economic and envir onmental benefits acr oss tons of CO 2 , 50,000 tons of SO 2 , and 40,000 tons of NO X . the country . W idespr ead application of energy ef ficiency pr ograms that alr eady exist in some r egions 6 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 ar e estimated the r e sults fr om existing pr ograms to the entir e country based on (1) assumptions of average pr ogram spending would yield over the next 10 to 15 years 7 : levels by utilities or other pr ogram administrators that curr ently sponsor energy ef ficiency pr ograms and • Energy bill savings of nearly $20 billion annually

. (2) conservatively high estimates for the cost of the energy ef ficiency pr ograms themselves (see T able 1-1). 9 They ar e • Net societal benefits of mor e than $250 billion. 8 not meant as a pr escr iption; ther e ar e dif fer ences in opportunities and costs for energy ef ficiency that need • Avoided need for 20,000 MW (40 new 500 MW- to be addr essed at the r egional, state, and utility level to

power plants). design and operate ef fective pr ograms.

6 See highlights of some of these pr ograms in Chapter 6: Energy Ef ficiency Pr ogram Best Practices, T ables 6-1 and 6-2. 7 These economic and envir onmental savings estimates extrapolate the r esults fr om r egional pr ograms to a national scope. Actual s avings at the r egional level vary based on a number of factors. For these estimates, avoided capacity value is based on peak load r eductions de-rat ed for r eductions that do not r esult in savings of capital investments. Emission savings ar e based on a marginal on-peak generation fuel of natural ga s and marginal of f-peak fuel of coal; with the on-peak per iod capacity r equir ement double that of the annual average. These assumptions vary by r egion based upon situationspecific var iables. Reductions in capped emissions might r educe the cost of compliance. 8 Net pr esent value (NPV) assuming 5 per cent discount rate. 9 This estimate of the funding r equir ed assumes 2 per cent of r evenues acr oss electr ic utilities and 0.5 per cent acr oss gas utilit ies. The estimate also assumes that energy ef ficiency is deliver ed at a total cost (utility and participant) of $0.04 per kWh and $3 per MMBtu, which ar e higher than the costs of many of today’ s pr ograms. To create a sustainable, aggressive national commitment to energy efficiency 1-7

# T able 1-1. Summary of Benefits for National Energy Ef ficiency Ef forts
Pr ogr am Cost Electr ic Natur al Gas Total Utility Program Spending (% of utility revenue) 2.0% 0.5% T otal 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
T otal 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 Electr ic Natur al 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 Ener gy Savings Electr ic Natur al Gas Total P ercent of Growth Saved, Y ear 15 61% 52% P ercent of Consumption Saved, Y ear 15 12% 5% P eak Load Reduction, Y ear 15 (De-rated) 1 34,000 MW Energy Saved, Y ear 15 588,000 GWh 1,200 BcF Energy Saved (cumulative) 9,400,000 GWh 19,000 BcF Emission Reductions Electr ic Natur al Gas Total CO2 Emission Reduction (1,000 T ons), Y ear 15 338,000 72,000 410,000 NOx Emission Reduction (T ons), Y ear 15 67,000 61,000 128,000 Other Assumptions Electr ic Natur al Gas Load Growth (%) 2% 1% Utility NPV Discount Rate 5% 5% Customer NPV Discount Rate 5% 5% EE Project Life T erm (years) 15 15

Sour ce: Energy Ef ficiency Benefits Calculator developed for the National Action Plan for Energy Ef ficiency , 2006. NPV = net pr esent value; $MM = million dollars 1 De-rated peak load r eduction based on the coincident peak load r educed multiplied by the per cent of gr owth-r elated capital expe nditur es that ar e saved.

Peak load r eductions in unconstrained ar eas ar e not counted.

1-8 National Action Plan for Energy EfficiencyAs a nation we ar e passing up these savings by substantially under investing in energy ef ficiency . One indicator of this under investment is the level of energy ef ficiency pr ogram funding acr oss the country . Based on the ef fectiveness of curr ent energy ef ficiency pr ograms operated in certain parts of the country , the funding necessary to yield the economic and envir onmental benefits pr esented above is appr oximately four times the funding levels for organized ef ficiency pr ograms today (less than $2 billion per year). Again, this is one indicator of under investment and not meant to be a national funding target. Appr opr iate funding levels need to be established at the r egional, state, or utility level based on the cost-ef fective potential for energy ef ficiency as well as other factors.
The curr ent under investment in energy ef ficiency is due to a number of well-r ecognized barr iers. Some key barr iers ar ise fr om choices concer ning r egulation of electr ic and natural gas utilities. These barr iers include:

• Market barriers , such as the well-known “split-incentive” barr ier, which limits home builders’ and commercial developers’ motivation to invest in new building energy ef ficiency because they do not pay the energy bill, and the transaction cost barr ier , which chr onically af fects individual consumer and small business decision-making.

• Customer barriers , such as lack of information on energy saving opportunities, lack of awar eness of how energy ef ficiency pr ograms make investments easier thr ough low-inter est loans, r ebates, etc., lack of time and attention to implementing ef ficiency measur es, and lack of availability of necessary funding to invest in energy ef ficiency

. • Public policy barriers , which often discourage ef ficiency investments by electr ic and natural gas utilities, transmission and distr ibution companies, power pr oducers and r etail electr ic pr oviders. Histor ically these organizations have been r ewar ded mor e for building infrastructur e (e.g., power plants, transmission lines, pipelines) and incr easing energy sales than for helpingtheir customers use energy wisely even when the energysaving measur es might cost less. 10

• Utility , state, and region planning barriers , which do not allow energy ef ficiency to compete with supplyside r esour ces in energy planning.

• Energy efficiency program barriers , which limit investment due to lack of knowledge about the most ef fective and cost-ef fective energy ef ficiency pr ogram portfolios, pr ograms for over coming common market barr iers to energy ef ficiency , or available technologies.

W hile a number of energy ef ficiency policies and pr ograms contr ibute to addr essing these barr iers such as building codes, appliance standar ds, and state gover nment leadership pr ograms, energy ef ficiency pr ograms organized thr ough electr icity and gas pr oviders also encourage gr eater energy ef ficiency in the homes,buildings, and facilities that exist today that will consume the major ity of the energy used in these sectors for years to come.

10 Many energy ef ficiency pr ograms have an average lifecycle cost of $0.03/kWh saved, which is 50-75% of the typical cost of new p ower sour ces (ACEEE, 2004; EIA, 2006). To create a sustainable, aggressive national commitment to energy efficiency 1-9

# T he National Action Plan for Energy Ef ficiency

T

o dr ive a sustainable, aggr essive national commitment to energy ef ficiency thr ough gas and electr ic utilities, utility r egulators, and partner organizations, mor e than 50 leading organizations joined together to develop this National Action Plan for Energy Ef ficiency

. The Leadership Gr oup members (T able 1-2) have developed this National Action Plan for Energy Efficiency Report, which:

• Reviews the barr iers limiting gr eater investment in

energy ef ficiency by gas and electr ic utilities and partner organizations.

• Pr esents sound business strategies that ar e available to

over come these barr iers.

• Documents a set of business cases showing the

impacts on key stakeholders as utilities under dif fer ent cir cumstances incr ease energy ef ficiency pr ograms.

• Pr esents best practices for energy ef ficiency pr ogram

design and operation.

• Pr esents policy r ecommendations and options for

spurr ing gr eater investment in energy ef ficiency by utilities and energy consumers.
The r eport chapters addr ess four main policy and pr ogram ar eas (see Figur e 1-3):

• Utility Ratemaking and Revenue Requirements. Lost

sales fr om the expanded use of energy ef ficiency have a negative ef fect on the financial performance of electr ic and natural gas utilities, particularly those that ar e investor-owned under conventional r egulation. Costr ecovery strategies have been designed and implemented to successfully “decouple” utility financial health fr om electr icity sales volumes to r emove financial disincentives to energy ef ficiency , and incentiveshave been developed and implemented to make energy ef ficiency investments as financially r ewar ding as capital investments. 

### The goal of the National Action Plan for Energy Ef ficiency is to cr eate a sustainable, aggr essive national commitment to energy ef ficiency thr ough gas and electr ic utilities, utility r egulators, and partner organizations. The Leadership Gr oup: • Recognizes that utilities and r egulators have cr itical r oles in cr eating and deliver ing energy ef ficiency pr ograms to their communities.

• Recognizes that success r equir es the joint ef forts

of the customer , utility , r egulator , and partner organizations.

• W ill work acr oss their spher es of influence to

r emove barr iers to energy ef ficiency

.

• Commits to take action within their own organization to incr ease attention and investment in energy ef ficiency

. 

### Leadership Gr oup Recommendations:
• Recognize energy ef ficiency as a high-pr ior ity

energy r esour ce.

• Make a str ong, long-term commitment to implement cost-effective energy efficiency as a r esour ce.

• Br oadly communicate the benefits of and opportunities for energy ef ficiency

.

• Pr omote suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e costef fective.

• Modify policies to align utility incentives with the

delivery of cost-ef fective energy ef ficiency and modify ratemaking practices to pr omote energy ef ficiency investments.

1-10 National Action Plan for Energy Efficiency• Planning Processes. Energy ef ficiency , along with other customer-side r esour ces, ar e not fully integrated into state and utility planning pr ocesses that identify the need to acquir e new electr icity and natural gas r esour ces.

• Rate Design. Some r egions ar e successfully using rate

designs such as time-of-use (TOU) or seasonal rates to mor e accurately r eflect the cost of pr oviding electr icity and to encourage customers to consume less energy

.

• Energy Efficiency Program Best Practices Documentation.

One r eason given for slow adoption of energy ef ficiency is a lack of knowledge about the most ef fective and cost-ef fective energy ef ficiency pr ogram options. However , many states and electr icity and gas pr oviders ar e successfully operating energy ef ficiency pr ograms acr oss end-use sectors and customer classes, including r esidential, commer cial, industr ial, low-income, and small business. These pr ograms employ a var iety of appr oaches, including pr oviding public information and training, of fer ing financing and financial incentives, allowing energy savings bidding, and of fer ing performance contracting.

Figur e 1-3: National Action Plan for Energy Ef ficiency Report Addr esses Actions to Encourage Gr eater Energy Ef ficiency

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 notincorporate 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 1-11Business Cases for Energy Ef ficiency A key element of the National Action Plan for Energy Ef ficiency is explor ing the benefits of energy ef ficiency and the mechanisms and policies that might need to bemodified so that each of the key stakeholders can benefit fr om energy ef ficiency investments. A key issue is that adoption of energy ef ficiency saves r esour ces and utility costs, but also r educes utility sales. Ther efor e, the ef fect on utility financial health must be car efully evaluated. T o that end, the Leadership Gr oup of fers an Energy Ef ficiency Benefits Calculator (Calculator) that evaluates the financial impact of energy ef ficiency on its major stakeholders—utilities, customers, and society . The Calculator allows stakeholders to examine dif fer ent ef ficiency and utility cases with transpar ent input assumptions. The business cases pr esented in Chapter 4 of this r eport show the impact of energy ef ficiency investments upon sample utility’s financial health and ear nings, upon customer energy bills, and upon social r esour ces such as net ef ficiency costs and pollutant emissions. In general, the impacts of of fer ing energy ef ficiency pr ograms versus not of fer ing ef ficiency follow the tr ends and findings illustrated below fr om the customer , utility and society perspectives. Utility Perspective. Energy ef ficiency af fects utility r evenues, shar eholder ear nings, and costs associated with capital investments. The utility can be financially neutral to investments in energy ef ficiency , at a minimum, or encourage gr eater investment thr ough the implementation of a var iety of decoupling, ratemaking, and incentives policies. These policies can ensur e that shar eholder r etur ns and ear nings could be the same or incr eased. Utility investment in infrastructur e and contractual obligations for energy pr ocur ement could be r educed, pr oviding a favorable balance sheet impact.

Utility Retur ns – No Change or Incr ease Utility ear nings r emain stable or incr ease if decoupling or the use of shar eholder incentives accompanies an energy ef ficiency pr ogram. W ithout incentives, ear nings might be lower because ef fective energy ef ficiency will r educe the utility’ s sales volume and r educe the utility’ s rate base, and thus the scope of its ear nings.
Change in Utility Ear nings – Results V ary Depending on the inclusion of decoupling and/or shar eholder incentives, utility ear nings vary . Utility ear nings incr ease if decoupling or shar eholder incentives ar e included. If no incentives, ear nings might be lower due to r educed utility investment.

Peak Load Gr owth and Associated Capital Investment – Decr eases Capital investments in new r esour ces and energy delivery infrastructur e ar e r educed because peak capacity savings ar e captur ed due to energy ef ficiency measur es.
Customer Perspective. Customers’ overall bills will decr ease with energy ef ficiency because lower energy usage of fsets potential rate incr eases to cover the cost of of fer ing the ef ficiency pr ogram. Customer Bills – Decr ease T

otal customer bills decline over time as a r esult of investment in cost-ef fective energy ef ficiency pr ograms as customers save due to lower energy consumption. This decline follows an initial r ise in customer bills r eflecting the cost of energy ef ficiency pr ograms, which will then r educe costs over many years.

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

Customer Rates – Mild Incr ease 12 Rates might incr ease slightly to cover the cost of the energy ef ficiency pr ogram.

Community or Society Perspective. Fr om a br oad community/society perspective, energy ef ficiency pr oduces r eal savings over time. While initially , energy ef ficiency can raise energy costs slightly to finance the new energy ef ficiency investment, the r educed bills (as well as pr ice moderation ef fects) pr ovide a rapid payback on these investments, especially compar ed to the ongoing costs to cover the investments in new energy pr oduction and delivery infrastructur e costs. Mor eover , the envir onmental benefits of energy ef ficiency continue to gr ow . The Calculator evaluates the net societal savings, utility savings, emissions r eductions, and the avoided gr owth in energy demand associated with energy ef ficiency

.

Net Resour ces Savings – Incr eases Over time, as energy ef ficiency pr ograms ramp up, cumulative energy ef ficiency savings lead to cost savings that exceed the energy ef ficiency pr ogram cost.

T

otal Resour ce Cost (TRC) per Unit - Declines T

otal cost of pr oviding each unit of energy (MWh, MMBtu gas) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed energy ef ficiency pr ograms can deliver energy at an average cost less than that of new power sour ces. Emissions and Cost Savings – Incr eases Ef ficiency pr events or avoids pr oducing many annual tons of emissions and emission contr ol costs.

Gr owth Of fset by EE – Incr eases As energy ef ficiency pr ograms ramp up, the per cent of gr owth that is of fset by energy ef ficiency climbs and then levels as cumulative savings as a per cent of demand gr owth stabilizes.

12 The changes shown in the business cases indicate a change fr om what would have otherwise occurr ed. This change does not include a one-time infrastructur e investment in the assumptions, but it does include smooth capital expenditur es. Energy ef ficiency will moderate pr ice s of fossil fuels. The fuel pr ice r eductions fr om an aggr essive energy ef ficiency pr ogram upon fuel pr ices have not been included and could r esult in an ov erall rate r eduction.
To create a sustainable, aggressive national commitment to energy efficiency 1-13

# About T his Report
The National Action Plan for Energy Ef ficiency is structur ed as follows:
Chapter 2: Utility Ratemaking & Revenue Requirements

• Reviews mechanisms for r emoving disincentives for

utilities to consider energy ef ficiency

.

• Reviews the pr os and cons for dif fer ent strategies to

r ewar d utility energy ef ficiency performance, including the use of energy ef ficiency targets, shar ed savings appr oaches, and shar eholder/company performance incentives.

• Reviews var ious funding options for energy ef ficiency

pr ograms.

• Pr esents r ecommendations and options for modifying

policies to align utility incentives with the delivery of cost-ef fective energy ef ficiency and pr oviding for suf ficient and stable pr ogram funding to deliver energy ef ficiency wher e cost ef fective.
Chapter 3: Energy Resource Planning Processes

• Reviews state and r egional planning appr oaches,

including Portfolio Management and Integrated Resour ce Planning, which ar e being used to evaluate a br oad array of supply and demand options on a level playing field in terms of their ability to meet pr ojected energy demand.

• Reviews methods to quantify and simplify the value

str eams that ar ise fr om energy efficiency investments— including r eliability enhancement/congestion r elief, peak demand r eductions, and gr eenhouse gas emissions r eductions—for dir ect compar ison to supply-side options.

• Pr esents r ecommendations and options for making a

str ong, long-term commitment to cost-ef fective energy ef ficiency as a r esour ce. Chapter 4: Business Case for Energy Efficiency

• Outlines the business case appr oach used to examine

the financial implications of enhanced energy ef ficiency investment on utilities, consumers, and society

.

• Pr esents case studies for eight dif fer ent electr ic and

natural gas utility situations, including dif fer ent ownership structur es, gas and electr ic utilities, and dif fer ent demand gr owth rates.
Chapter 5: Rate Design

• Reviews a var iety of rate design structur es and their

ef fect in pr omoting gr eater investment in energy ef ficiency by the end-user

.

• Pr esents r ecommended strategies that encourage

gr eater use of energy ef ficiency thr ough rate design.
Chapter 6: Energy Efficiency Program Best Practices

• Reviews and pr esents best practices for operating successful energy ef ficiency pr ograms at a portfolio level, addr essing issues such as assessing energy ef ficiency potential, scr eening energy ef ficiency pr ograms for cost-ef fectiveness, and developing a portfolio of appr oaches.

• Pr ovides best practices for successful energy ef ficiency

pr ograms acr oss end-use sectors, customer classes, and a br oad set of appr oaches.

• Documents the political and administrative factors that

lead to pr ogram success. Chapter 7: Report Summar y

• Summar izes the policy and pr ogram r ecommendations

and options.

1-14 National Action Plan for Energy Efficiency

# F or Mor e Information

V isit the National Action Plan for Energy Ef ficiency W eb site: www .epa.gov/cleanenergy/eeactionplan.htm or contact: Stacy Angel U.S. Envir onmental Pr otection Agency Of fice of Air and Radiation Climate Pr otection Partnerships Division Angel.Stacy@epa.gov
Larry Mansueti U.S. Department of Energy Of fice of Electr icity Delivery and Energy Reliability Lawr ence.Mansueti@hq.doe.gov

To create a sustainable, aggressive national commitment to energy efficiency 1-15

# T able 1-2. Members of the National Action Plan for Energy Ef ficiency

Co-Chairs Diane Munns Member Iowa Utilities Boar d Pr esident N ational Association of Regulatory Utility Commissioners Jim Rogers Pr esident and Chief Executive Of ficer Duke Energy
Leadership Gr oup Barry Abramson Senior V ice Pr esident Servidyne Systems, LLC Angela S. Beehler Dir ector of Energy Regulation W al-Mart Stor es, Inc. Bruce Braine V ice Pr esident, Strategic Policy Analysis Amer ican Electr ic Power Jef f Burks Dir ector of Envir onmental Sustainability PNM Resour ces Kater i Callahan Pr esident Alliance to Save Energy Glenn Cannon General Manager W averly Light and Power Jorge Carrasco Super intendent Seattle City Light Lonnie Carter Pr esident and Chief Executive Of ficer Santee Cooper Mark Case V ice Pr esident for Business Performance Baltimor e Gas and Electr ic Gary Connett Manager of Resour ce Planning and Gr eat River Energy Member Services Larry Downes Chairman and Chief Executive Of ficer New Jersey Natural Gas (New Jersey Resour ces Corporation) Roger Duncan Deputy General Manager , Distr ibuted Energy Services Austin Energy Angelo Esposito Senior V ice Pr esident, Energy Services and T echnology New Y ork Power Author ity W illiam Flynn Chairman New Y ork State Public Service Commission Jeanne Fox Pr esident New Jersey Boar d of Public Utilities Anne George Commissioner Connecticut Department of Public Utility Contr ol Dian Grueneich Commissioner Califor nia Public Utilities Commission Blair Hamilton Policy Dir ector V ermont Energy Investment Corporation Leonar d Haynes Executive V ice Pr esident, Supply T echnologies, Souther n Company Renewables, and Demand Side Planning Mary Healey Consumer Counsel for the State of Connecticut Connecticut Consumer Counsel Helen Howes V ice Pr esident, Envir onment, Health and Safety Exelon Chr is James Air Dir ector Connecticut Department of Envir onmental Pr otection Ruth Kinzey Dir ector of Corporate Communications Food Lion Peter Lendrum V ice Pr esident, Sales and Marketing Entergy Corporation Rick Leuthauser Manager of Energy Ef ficiency MidAmer ican Energy Company Mark McGahey Manager T r istate Generation and T ransmission Association, Inc. Janine Migden- Consumers’ Counsel Of fice of the Ohio Consumers’ Counsel Ostrander Richar d Morgan Commissioner Distr ict of Columbia Public Service Commission Br ock Nicholson Deputy Dir ector , Division of Air Quality North Car olina Air Of fice Pat Oshie Commissioner W ashington Utilities and T ransportation Commission Douglas Petitt V ice Pr esident, Gover nment Af fairs V ectr en Corporation

1-16 National Action Plan for Energy EfficiencyBill Pr indle Deputy Dir ector Amer ican Council for an Energy-Ef ficient Economy Phyllis Reha Commissioner Minnesota Public Utilities Commission Roland Risser Dir ector , Customer Energy Ef ficiency Pacific Gas and Electr ic Gene Rodr igues Dir ector , Energy Ef ficiency Souther n Califor nia Edison Art Rosenfeld Commissioner Califor nia Energy Commission Jan Schor i General Manager Sacramento Municipal Utility Distr ict Larry Shirley Division Dir ector North Car olina Energy Of fice Michael Shor e Senior Air Policy Analyst Envir onmental Defense Gor don Slack Energy Business Dir ector The Dow Chemical Company Deb Sundin Dir ector , Business Pr oduct Marketing Xcel Energy Dub T aylor Dir ector T exas State Energy Conservation Of fice Paul von Dir ector , Energy and Envir onmental Af fairs Johnson Contr ols Paumgartten Br enna W alraven Executive Dir ector , National Pr operty Management USAA Realty Company Devra W ang Dir ector , Califor nia Energy Pr ogram Natural Resour ces Defense Council Steve W a r d Public Advocate State of Maine Mike W eedall V ice Pr esident, Energy Ef ficiency Bonneville Power Administration T om W elch V ice Pr esident, Exter nal Af fairs PJM Inter connection Jim W est Manager of energy right & Gr een Power Switch T ennessee V alley Author ity Henry Y oshimura Manager , Demand Response ISO New England Inc.

Observers James W

. (Jay) Counsel Steel Manufactur ers Association Br ew Roger Cooper Executive V ice Pr esident, Policy and Planning Amer ican Gas Association Dan Delur ey Executive Dir ector Demand Response Coor dinating Committee Roger Fragua Deputy Dir ector Council of Energy Resour ce T r ibes Jef f Genzer General Counsel National Association of State Energy Of ficials Donald Gilligan Pr esident National Association of Energy Service Companies Chuck Gray Executive Dir ector National Association of Regulatory Utility Commissioners John Holt Senior Manager of Generation and Fuel National Rural Electr ic Cooperative Association Joseph Mattingly V ice Pr esident, Secr etary and General Counsel Gas Appliance Manufactur ers Association Kenneth Mentzer Pr esident and Chief Executive Of ficer North Amer ican Insulation Manufactur ers Association Chr istina Mudd Executive Dir ector National Council on Electr icity Policy Ellen Petr ill Dir ector , Public/Pr ivate Partnerships Electr ic Power Resear ch Institute Alan Richar dson Pr esident and Chief Executive Of ficer Amer ican Public Power Association Steve Rosenstock Manager , Energy Solutions Edison Electr ic Institute Diane Shea Executive Dir ector National Association of State Energy Of ficials Rick T empchin Dir ector , Retail Distr ibution Policy Edison Electr ic Institute Mark W olfe Executive Dir ector Energy Pr ograms Consortium

To create a sustainable, aggressive national commitment to energy efficiency 1-17

# Refer ences
Amer ican Council for an Energy-Ef ficient Economy [ACEEE] (2004). A Federal System Benefits Fund: Assisting States to Establish Energy Efficiency and Other System Benefit Programs. W ashington, DC. Callahan, K. Alliance to Save Energy (2006, January 17). Energy Efficiency As a Cornerstone of National Energy Policy

. Pr esented to United States Energy Association, W ashington, DC. Connecticut Energy Conservation Management Boar d [CECMB] (2006, Mar ch) Energy Ef ficiency: Investing in Connecticut’ s Futur e: Report of The Energy Conservation Management Boar d Y ear 2005 Pr ograms and Operations. <http://www .dpuc.state.ct.us/Electric.nsf/cafda4284 95eb61485256e97005e054b/5abe828f8be753568 525713900520270/$FILE/FINAL%20ECMB%20200 5%20Report.pdf> Eckman, T

. (2005, September 26). The Northwest Forecast: Energy Efficiency Dominates Resource Development. Paper pr esented at the ACEEE Energy Ef ficiency As a Resour ce Confer ence. <http://www .nwcouncil.org/energy/present/default.htm> Innovest Strategic V alue Advisors [Innovest] (2002, October). Energy Management & Investor Returns: The Real Estate Sector

. Long Island Power Author ity [LIP A] (2006). Clean Energy Initiative Annual Report 2005

. Nadel, S., Shipley , A., and Elliott, R.N. (2004). The T echnical, Economic and Achievable Potential for Energy Efficiency in the U.S.—A Meta-Analysis of Recent Studies. W ashington, DC: Amer ican Council for an Energy-Ef ficient Economy [ACEEE]. New Y ork State Energy Resear ch and Development Author ity [NYSERDA] (2006, May) New Y ork Energy $mart SM Program Evaluation and Status Report. Report to the System Benefits Charge Advisory Gr oup, Draft Report. New Y ork State Energy Resear ch and Development Author ity [NYSERDA] (2004, May). New Y ork Energy $mart SM Program Evaluation and Status Report , Report to the System Benefits Charge Advisory Gr oup, Final Report. Albany

. Northeast Energy Ef ficiency Partnerships [NEEP] (2005, May). Economically Achievable Energy Efficiency Potential in New England . Optimal Energy

. Northwest Power and Conservation Council [NWPCC] (2005, May). The 5 th Northwest Electric Power and Conser vation Plan

. <http://www .nwcouncil.org/ energy/ powerplan/default.htm> Puget Sound Energy (2005, Apr il). Least Cost Plan

. <http://www .pse.com/energyEnvironment/ electricSupplyResPlanning.aspx> Sedano R., Murray , C., and Steinhurst, W

. R. (2005, May). Electric Energy Efficiency and Renewable Energy in New England: An Assessment of Existing Policies and Prospects for the Future. Montpelier , VT : The Regulatory Assistance Pr oject. Souther n Califor nia Edison (2006, January 6) Advice Letter (1955-e) to the Califor nia Energy Commission. Southwest Energy Ef ficiency Pr oject [SWEEP] (2002, November). The New Mother Lode: The Potential for More Efficient Electricity Use in the Southwest

. Report for the Hewlett Foundation Energy Ser ies. U.S. Energy Information Administration [EIA] (2006). Annual Energy Outlook 2006 . W ashington, DC). U.S. Energy Information Administration [EIA] (2005, January). Annual Energy Outlook 2005

. W ashington, DC). <http://www .eia.doe.gov/oiaf/ archive/aeo05/index.html> U.S. Envir onmental Pr otection Agency [EP A] (2006). Clean Energy-Environment Guide to Action: Policies, Best Practices, and Action Steps for States

. W ashington, DC. W ester n Gover nors’ Association [WGA] (2006, June). Clean Energy , a Strong Economy and a Healthy Environment . A Report of the Clean and Diversified Energy Advisory Committee. Y

ork, D. and Kushler , M. (2005, October). ACEEE’ s 3 rd National Scor ecar d on Utility and Public Benefits Energy Ef ficiency Pr ograms: 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 & Re v enue Requir ements

While some utilities manage aggr essive energy ef ficiency pr ograms as a strategy to diversify their portfolio, lower costs, and meet customer demand, many still face important financial disincentives to implementing such pr ograms. Regulators working with utilities and other stakeholders, as well as boar ds working with publicly owned utilities, can establish or r einfor ce several policies to help addr ess these disincentives, including over coming the thr oughput incentive, ensur ing pr ogram cost r ecovery , and defining shar eholder performance incentives. 

# Ov erview
The practice of utility r egulation is, in part, a choice about how utilities make money and manage r isk. These r egulatory choices can guide utilities towar d or away fr om investing in energy ef ficiency , demand r esponse, and distr ibuted generation (DG). T raditional ratemaking appr oaches have str ongly linked a utility’ s financial health to the volume of electr icity or gas sold via the ratemaking structur e, cr eating a disincentive to investment in cost-ef fective demand-side r esour ces that r educe sales. The ratemaking structur e and pr ocess establishes the rates that generate the r evenues that gas and electr ic utilities, both public and pr ivate, can r ecover based on the just and r easonable costs they incur to operate the system and to pr ocur e and deliver energy r esour ces to serve their customers.
Alter nate financial incentive structur es can be designed to encourage utilities to actively pr omote implementation of energy ef ficiency when it is cost ef fective to do so. Aligning utility and public inter est aims by disconnecting pr ofits and fixed cost r ecovery fr om sales volumes, ensur ing pr ogram cost r ecovery , and r ewar ding shar eholders can “level the playing field” to allow for a fair , economically based compar ison between supplyand demand-side r esour ce alter natives and can yield a lower cost, cleaner , and r eliable energy system. This chapter explor es the utility r egulatory appr oaches that limit gr eater deployment of energy ef ficiency as a r esour ce in U.S. electr icity and natural gas systems. Generally , it is within the power of utility commissions and utilities to r emove these barr iers. 1 Eliminating the thr oughput incentive is one way to r emove a disincentive to invest in ef ficiency . Of fer ing shar eholder incentiveswill further encourage utility investment. Other disincen

# Leadership Gr oup Recommendations Applicable to Utility Ratemaking and Re v enue Requir ements

• Modify policies to align utility incentives with the delivery of cost-ef fective energy ef ficiency and modify ratemaking practices to pr omote energy ef ficiency investments.

• Make a str ong, long-term commitment to implement

cost-ef fective energy ef ficiency as a r esour ce.
• Br oadly communicate the benefits of and opportunities

for energy ef ficiency

. • Pr ovide suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective. 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 ear nings flexibility . Removing barr iers to energy ef ficiency in these

states faces the added challenge of amending statutes. To create a sustainable, aggressive national commitment to energy efficiency 2-1tives for energy ef ficiency include a short-term r esour ce acquisition hor izon and wholesale market rules that do not captur e the system value of energy ef ficiency . After an intr oduction to these barr iers and solutions, this chapter will r eport on successful ef forts in states to implement these solutions. The chapter closes with a set of r ecommendations for pursuing the r emoval of these barr iers. This chapter r efers to utilities as integrated energy companies selling electr icity as well as deliver ing it. Many of these concepts, however , also apply to states that r emoved r etail electr icity sales r esponsibilities fr om utilities—tur ning the utility into an electr ic transmission and distr ibution company without a r etail sales function.


# Barr iers and Solutions to Ef fectiv e Energy Ef ficiency Deployment
Common disincentives for utilities to invest mor e in costef fective energy ef ficiency pr ograms include the “thr oughput incentive,” the lack of a mechanism for utilities to r ecover the costs of and pr ovide funding for energy ef ficiency pr ograms, and a lack of shar eholder and other performance incentives to compete with those for investments in new generation.


### T raditional Regulation Motivates Utilities to Sell Mor e: The Thr oughput IncentiveRates 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 incr ease r etail sales of electr icity (r elative to for ecast or histor ic levels, which set “base” rates) and to maximize the “thr oughput” of electr icity acr oss their wir es. This incentive exists because ther e is often a significant incr emental pr ofit margin on incr emental sales. When rates ar e r eset, the thr oughput incentive r esumes with the new base. In jur isdictions wher e pr ices ar e capped for an extended time, the utility might be particularly anxious to gr ow sales to add r evenue to cover cost incr eases that might occur dur ing the fr eeze.
W ith traditional ratemaking, ther e ar e few mechanisms to pr event “over-r ecovery” of costs, which occurs if sales ar e higher than pr ojected, and no way to pr event “under-r ecovery ,” which can happen if for ecast sales ar e too optimistic (such as when weather or r egional economic conditions deviate fr om for ecasted or “normal” conditions). 3 This dynamic cr eates an automatic disincentive for utilities to pr omote energy ef ficiency , because those actions will r educe the utility’ s net income—even if energy ef ficiency is clearly established and agr eed-upon as a less expensive means to meet customer needs as a least-cost r esour ce and is valuable to the utility for r isk management, congestion r eduction, and other r easons (EP A, 2006). The ef fect of this disincentive is exacerbated in the case of distr ibution-only utilities, because the r e venue impact of electr icity sales r eduction is dispr oportionately larger for utilities without generation r esour ces. While some states have or der ed utilities to implement energy ef ficiency , others have questioned the practicality of asking a utility to implement cost-ef fective energy ef ficiency when their financial self-inter est is to have gr eater sales. Several options exist to help r emove this financial barr ier to gr eater investment in energy ef ficiency:
Decouple Sales fr om Pr ofits and Fixed Cost Recovery Utilities can be r egulated or managed in a manner that allows them to r eceive their r evenue r equir ement with less linkage to sales volume. The point is to r egulate utilities such that r eductions in sales fr om consumer -funded energy

2 Public power utilities and cooperative utilities have their own pr ocesses to adjust rates that do not r equir e state involvement

. 3 Over-r ecovery means that mor e money is collected fr om consumers in rates than is needed to pay for allowed costs, including r e t ur n on investment. This

happens because average rates tend to collect mor e for sales in excess of pr ojected demand than the marginal cost to pr oduce an d deliver the electr icity for those incr eased sales. Likewise, under-r ecovery happens if sales ar e less than the amount used to set rates (Moskovitz, 2000).

2-2 National Action Plan for Energy Efficiency

# Utility and Industry Str uctur e and Energy Ef ficiency Publicly and Cooperatively Owned Utilities Compar ed With Investor -Owned Utilities The thr oughput incentive af fects municipal and cooperative utilities in a distinctive way . Public power and co-ops and their lenders ar e concer ned with ensur ing that income covers debt costs, while they ar e not concer ned about “pr ofits.” Available low-cost financing for co-ops sometimes comes with r estr ictions that limit its use to power lines and generation, further diminishing inter est in energy ef ficiency investments.

Natural Gas vs. Electr ic Utilities Natural gas and electr ic utilities both exper ience the thr oughput incentive under traditional ratemaking. Natural gas utilities operate in a mor e competitive envir onment than do electr ic utilities because of the non-r egulated alter native fuels, but this situation can cut either way for energy ef ficiency . For some gas utilities, energy ef ficiency 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 ef ficiencies in gas end uses, a phenomenon not seen by electr ic companies. Y et cost-ef fective ef ficiency opportunities for local gas distr ibution companies r emain available.

ef

ficiency , building codes, appliance standar ds, and distr ibuted generation ar e welcomed, and not discouraged. For example, if utility r evenues wer e connected to the number of customers, instead of sales, the utility would exper ience differ ent incentives and might behave quite differ ently . Under this appr oach, at the conclusion of a conventional r evenue r equir ement pr oceeding, a utility’ s r e venues per customer could be fixed. An automatic adjustment to the r evenue r equir ement would occur to account for new or departing customers (a mor e r eliable dr iver of Restructur ed vs. T raditional Markets The transition to r etail electr ic competition thr ew open for r econsideration all assumptions about utility structur e. The ef fects on energy ef ficiency have been str ongly positive and negative. The thr oughput incentive is str onger for distr ibution-only companies with no generation and transmission rate base. Pr ice caps, which typically ar e imposed in a transition to r etail competition, diminish utility incentive to r educe sales because added r evenue helps cope with new costs. Pr ice caps also discourage utilities fr om adding near

term costs that can pr oduce a long-term benefit, such as energy ef ficiency . As a r esult, energy ef ficiency is often disconnected fr om utility planning. On the other hand, several states have pr ovided stable funding for energy ef ficiency as part of the r estructur ing pr ocess. High-Cost vs. Low-Cost States Energy ef ficiency has been mor e popular in high-cost states. Low-cost states tend to see energy ef ficiency as mor e expensive than their supplies fr om hydr oelectr ic and coal sour ces, though ther e ar e exceptions wher e ef ficiency is seen as a low-cost incr emental r esour ce and a way to meet envir onmental goals. Looking forwar d, all states face similar , higher cost options for new generation, suggesting that the curr ent r esour ce mix will be less important than futur e r esour ce options in consider ing the value of new energy ef ficiency investments.
costs than sales). An alter native to the r evenue per customer appr oach is to use a simple escalation formula to for ecast the fixed cost r evenue r equir ement over time. Under this type of rate structur e, a utility that is mor e efficient and r educes its costs over time thr ough energy efficiency will be able to incr ease pr ofits. Furthermor e, if sales ar e r educed by any means (e.g., efficiency , weather, or economic swings) r evenues and pr ofits will not be affected.

To create a sustainable, aggressive national commitment to energy efficiency 2-3This appr oach eliminates the thr oughput disincentive and does not r equir e a commission r esolution of the amount of lost r evenues associated with energy ef ficiency (see T

able 2-1). A cr itical element of r evenue decoupling is a true-up of actual r esults to for ecasted r esults. Rates would vary up or down r eflecting a balancing account for total author ized r evenue r equir ements and actual r e venues fr om electr icity or gas consumed by customers. The true-up is fundamental to accomplish decoupling pr ofits and fixed cost r evenues fr om sales volumes. Annual adjustments have been typical and can be modeled in the Energy Ef ficiency Benefits Calculator (see Chapter 4: Business Case for Energy Ef ficiency), but a quarterly or monthly adjustment might be pr eferr ed. The plan mayalso include a deadband, meaning that modest deviations fr om the for ecast would pr oduce no change in rates, while larger deviations will r esult in a rate change. The plan might also shar e 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 r egulators agr ee to defer the balance of exceptional changes to be r esolved later . Prudence r eviews should be unaf fected by a decoupling plan. A decoupling plan would typically last a few years and could be changed to r eflect new cir cumstances and lessons lear ned. Decoupling has the potential to lower the r isk of the utility

, and this featur e should lead to consumer benefits thr ough an overall lower cost of capital to the utility

. 4 Decoupling thr ough a r evenue per customer cap is pr esently mor e pr evalent in natural gas companies, but can be a sound tool for electr ic companies also. Rate design need not be af fected by decoupling (see Chapter 5: Rate Design for rate design initiatives that pr omote energy ef ficiency), and a shift of r evenues fr om the var iable portion of rates to the fixed portion does not addr ess the thr oughput incentive. The initial r evenue r equir ement would be determined in a r outine rate case, the r evenue per customer calculation would flow fr om the same billing determinants used to set rates. Service performance measur es can be added to assur e that cost r eductions r esult fr om ef ficiency rather than service r eductions. 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 r egulators, the utility, or other parties and the value of a br oad stakeholder pr ocess leading up to a decoupling system (Kantor , 2006). As the text box addr essing lessons lear ned suggests, it is important to establish the pr ior ities that the system is being cr eated to addr ess so it can be as simple as possible while avoiding unintended consequences. Additionally , it is important to evaluate any decoupling system to ensur e it is performing as expected. 5 Shifting Mor e Utility Fixed Costs Into Fixed Customer Charges T

raditionally , rates r ecover a portion of the utility’ s fixed costs thr ough volumetr ic rates, which helps service r emain af for dable. T o better assur e r ecovery of capital asset costs with r educed dependence on sales, state utility commissions could r educe var iable rates and incr ease the fixed rate component, often r eferr ed to as the fixedcharge or customer charge. This option might be particularly r elevant in r etail competition states because wir esonly electr ic utilities have r elatively high pr oportions of fixed costs. This shift is attractive to some natural gas systems exper iencing sales volume attr ition due to impr oved fur nace ef ficiency and other tr ends. This shift r educes the thr oughput incentive for distr ibution companies and is an alter native to decoupling. Ther e ar e some limiting concer ns, including the ef fect a r eduction in the var iable charge might have on consumption and consumers' motivation to practice energy ef ficiency , and the potential for high using consumers to benefit fr om the change while low-using customers pay mor e.

4 The lower ing of a gas utility’ s cost of capital because of the r educed r isk intr oduced by a r evenue decoupling mechanism was r e cently af firmed by Bar one (2006). 5 T

wo r ecent papers discuss decoupling in some detail: Costello, 2006 and NERA, 2006.

2-4 National Action Plan for Energy Efficiency

# T he First W a v e of Decoupling and Lessons Lear nedIn the early 1990s, several state commissions and utilities r esponded to the thr oughput incentive by cr eating decoupling systems. In all cases, decoupling was discontinued by the end of the decade. The r easons for discontinuation pr ovide guidance to those consider ing decoupling today and indicate that the initial idea was good, but that the execution left important issues unaddr essed.
In the case of Califor nia, decoupling was functioning well, using for ecasted r evenues and true-ups to actuals, but the move to r etail competition pr ecipitated its end in 1996 (CPUC, 1996). Following the energy cr isis of 2000-2001, Califor nia r ecognized the importance of long-term energy ef ficiency investments and r einstated mechanisms to eliminate the thr oughput incentive. Puget Sound Energy in W ashington adopted a decoupling plan in 1990. Ther e wer e several pr oblems. The split between var iable power costs (r ecover ed via a true-up based on actual exper ience) and fixed costs (r ecover ed based on a r evenue-per-customer calculation) was wr ong. While customer numbers (and r evenue) wer e incr easing, new investments in transmission wer e not needed so the fixed cost part of the plan over -r ecover ed. Meanwhile, new generation fr om independent generators was too expensive, andthis added power cost (minus a prudence disallowance, which further complicated the scene) was passed to ratepayers. Unlike the curr ent Califor nia decoupling method, ther e was no r easonable for ecast over time for power costs. Risk of power cost incr eases was insuf ficiently shar ed. The r esults wer e a big rate incr ease and anger among customers. In r etr ospect, r isk allocation and the split of fixed and var iable costs wer e incompatible to the events that followed and of fer a useful lesson to futur e attempts. The true-up pr ocess and the weather normalization pr ocess worked well. The power costs that ignited the contr oversy over the decoupling plan would have been r ecoverable in rates under the traditional system. A r ecent ef fort to r estor e decoupling with Puget founder ed over a dispute about whether the allowed r etur n on equity dur ing a pr ior rate case should be changed if decoupling was r einstated (Jim Lazar, personal communication, October 21, 2005). Central Maine Power also adopted a decoupling planat the beginning of the 1990s. The plan was illequipped, however , to account for an ensuing steep economic downtur n that r educed sales by several percentage points. Unfortunately , this ef fect far outweighed any benefits fr om energy ef ficiency . The true-ups called for in the plan wer e oner ous due to the dip in sales, and author ities decided to delay them in hopes that the economy would tur n ar ound. When that did not happen, the rate change was quite large and was attr ibuted to the decoupling plan, even though most of the rate incr ease was due to r educed sales and would have occurr ed anyway . A lesson fr om this exper ience is to not let the per iod between trueups go on too long and to consider mor e car efully what happens if market pr ices, the economy , the weather , or other significant dr ivers ar e well outside expected ranges. In both the Puget and Central Maine cases, r esponsibility for large rate incr eases was misassigned to the decoupling plan, when high power costs fr om independent power pr oducers (Puget) or general economic conditions (Central Maine) wer e pr imar ily r esponsible. That said, ser ious but corr ectable flaws in the decoupling plans left consumers exposed to mor e r isk than was necessary

.

To create a sustainable, aggressive national commitment to energy efficiency 2-5Pr ovide Utilities the Pr ofit Lost Thr ough Ef ficiency Another way to addr ess the thr oughput incentive is to calculate the pr ofits for egone to successful energy ef ficiency . Lost Revenue Adjustment Mechanisms (LRAM) allow a utility to dir ectly r ecoup the “lost” pr ofits and contr ibutions to fixed costs associated with not selling additional units of energy because of the success of energy ef ficiency pr ograms in r educing electr icity consumption. The amount of lost pr ofit can be estimated by multiplying the fixed portion of the utility’ s pr ices by the energy savings fr om energy ef ficiency pr ograms or the energy generated fr om DG, based on pr ojected savings or ex post impact evaluation studies. The amount of lost estimated pr ofits is then dir ectly r etur ned to the utility’ s shar eholders. Some states have adopted these mechanisms either thr ough rate cases or add-ons to the fuel adjustment clause calculations. Exper ience has shown that LRAM can allow utilities to r ecover mor e pr ofits than the energy ef ficiency pr ogram 

# T

able 2-1. Options to Mitigate the T h r oughput Incentiv e: Pr os and Cons

P olicy Pr os Cons

Traditional cost of service plus return regulation • F amiliar 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 rew ard 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 rew ards 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

. • F requent 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. P ast

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. P otentially rew ards 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 Efficiencyactually saved because the lost pr ofit is based on pr ojected, rather than actual, energy savings. Resolving LRAM in rate cases has been contentious in some states. Furthermor e, because utilities still ear n incr eased pr ofits on additional sales, this appr oach still discourages utilities fr om implementing additional energy ef ficiency or supporting independent energy ef ficiency activities. A compar ison of decoupling and the LRAM appr oach is pr ovided in T able 2-1.

A var iation is to r oughly estimate the amount of lost pr ofits and make a specified portion (50 to 100 per cent) available to the utility to collect based on its performance at achieving certain pr ogram goals. This appr oach is simpler and mor e constructive than a commission docket to calculate lost r evenue. It pr ovides a visible way for the utility to ear n back lost pr ofits with pr ogram performance and achievements consistent with the public inter est. This system translates well into employee mer it pay systems, and the goals can fit nicely into management objectives r eported to shar eholders, a utility’ s boar d of dir ectors, or Gover nors. Public inter est gr oups appr eciate the connection to performance.
Non-Utility Administration Several states, such as Or egon, V ermont and New Y ork, have elected to r elieve utilities fr om the task of managing energy ef ficiency pr ograms. In some cases, state gover nment has taken on this r esponsibility , and in others, a thir d party was cr eated or hir ed for this purpose. The utility still has the thr oughput incentive, so while ef ficiency administration might be without conflict, the utility may still engage in load-building ef forts contrary to the messages fr om the ef ficiency pr ograms. Addr essing the thr oughput incentive r emains desirable even wher e non-utility administration is in place. Non-utility energy ef ficiency administration can apply to either electr icity or natural gas. Wher e non-utility energy ef ficiency administration is in place, cooperation with the utility r emains important to ensur e that the customer r eceives good service (Harr ington, 2003). Wholesale Power Markets and the Thr oughput Incentive In r ecent years, wholesale electr ic power pr ices have incr eased, dr iven by incr eases in commodity fuel costs. In many parts of the country , these incr eases have cr eated a situation in which utilities with generation or firm power contracts that cost less than clear ing pr ices might make a pr ofit if they can sell excess energy into the wholesale market. Some have questioned whether or not the situation of utilities seeing wholesale pr ofits fr om r educed r etail sales diminishes or r emoves the thr oughput incentive. Empir ically , these conditions do not appear to have moved utilities to accelerate energy ef ficiency pr ogram deployment. In states in which generation is divested fr om the local utility , the companies serving r etail customers see no change to the thr oughput incentive. Ther e is little to suggest how these market conditions will persist or change. In the absence of a mor e definitive course change, evidence suggests that the r ecent tr end should not dissuade policymakers and market participants fr om addr essing the thr oughput incentive.


### Recover ing Costs / Pr oviding Funding for Energy Ef ficiency Pr ograms Removing the thr oughput incentive is a necessary step in addr essing the barr iers many utilities face to investing mor e in energy efficiency . It is unlikely to be sufficient by itself in pr omoting gr eater investment, however , because under traditional ratemaking, utilities might be unable to cover the costs of running energy efficiency pr ograms. 6 To ensur e funds ar e available for energy efficiency, policymakers can utilize and establish the following mechanisms with cooperation fr om stakeholders:
Revenue Requir ement or Pr ocur ement Funding Policy-makers and r egulators can set clear expectations that utilities should consider energy ef ficiency as a r esour ce in their r esour ce planning pr ocesses, and it should spend money to pr ocur e that r esour ce as it would

6 See Chapter 3: Energy Resour ce Planning Pr ocesses for discussion of utility r esour ce planning budgets being used to fund energy ef ficiency

. To create a sustainable, aggressive national commitment to energy efficiency 2-7for other r esour ces. This spending would be part of the utility r evenue r equir ement and would likely appear as part of the r esour ce pr ocur ement spending for all r esour ces needed to meet consumer demand in all hours. In r etail competition states, the default service pr ovider , the distr ibution company , or a thir d party can handle the r esponsibility of acquir ing ef ficiency r esour ces. Spending Budgets T

o r educe r egulatory disputes and cr eate an atmospher eof stability among utility managers, trade allies, and customers, the legislatur e or r egulator can determine a budget level for energy ef ficiency spending—generally a per centage of utility r evenue. This budget level would be set to achieve some amount of the potentially available, cost-ef fective, pr ogram opportunities. The spending budget allows administrator staf f, trade allies, and consumers to count on a baseline level of ef fort and r educes the likelihood of spending disruptions that er ode customer expectations and destr oy har d-to-r eplace market infrastructur e needed to deliver energy ef ficiency

. Unfortunately , spending budgets ar e sometimes tr eated as a maximum spending level even if mor e cost-ef fective ef ficiency can be gained. Alter natively, a spending budget can be tr eated as a minimum if policymakers also declar e ef ficiency to be a r esour ce. In that event, additional cost-ef fective investments would be r ecover ed as part of the utility r evenue r equir ement. Savings T arget An alter native to minimum spending levels is a minimum energy savings target. This alter native could be policy-dr iven (designed for consistency to obtain a certain per centage of existing sales or for ecasted gr owth, or as an Energy Ef ficiency Portfolio Standar d [EEPS]) or r esour ce-dr iven (changing as system needs dictate). Ef ficiency budgets can be devised annually to achieve the targets. The use of savings targets does not addr ess how money is collected fr om customers, or how pr ogram administration is organized. For mor e information on how investments ar e selected, see Chapter 3: Energy Resour ce Planning Pr ocesses. Clear , Reliable, and Timely Energy Ef ficiency Cost Recovery System Utilities value a clear and timely path to cost r ecovery , and a well-functioning r egulatory pr ocess should pr ovide that. Such a pr ocess contr ibutes to a stable r egulatory atmospher e that supports energy ef ficiency pr ograms. Cost r ecovery can be linked to pr ogram performance (as discussed in the next section) so that utilities would be r esponsible for prudent spending of ef ficiency funds. The energy ef ficiency pr ogram cost r ecovery issue is eliminated fr om the utility perspective if a non-utility administrative structur e is used; however , this appr oach does not eliminate the thr oughput incentive. Furthermor e, funding still needs to be established for the non-utility administrator

.
T

a r i f f Rider for Energy Ef ficiency A tar if f r ider for energy ef ficiency allows for a per iodic rate adjustment to account for the dif fer ence between planned costs (included in rates) and actual costs. System Benefits Charge In implementing r etail competition, several states added a separate charge to customer bills to collect funds for energy ef ficiency pr ograms; several other states have adopted this idea as well. A system benefits charge (SBC) is designed to pr ovide a stable str eam of funds for public purposes, like energy ef ficiency . SBCs do have disadvantages. If the funds enter the purview of state gover nment, they can be vulnerable to decisions to use the funds for general gover nment purposes. Also, the charge appears to be an add-on to bills, which can irr itate some consumers. This distinct funding str eam can lead to a disconnection in r esour ce planning between energy ef ficiency and other r esour ces. Regulators and utilities might need to take steps to ensur e a compr ehensive planning pr ocess when dealing with this type of funding. 7

7 This device might also pool funds for other public benefit purposes, such as r enewable energy system deployment and bill assist ance for low-income

consumers. 2-8 National Action Plan for Energy Efficiency

### Pr oviding Incentives for Energy Ef ficiency Investment Some suggest that if energy efficiency is a cost-effective r esour ce, utilities should invest in it for that r eason, with no r eason for added incentives. Others say that for effective r esults, incentives should be consider ed because utilities ar e not r ewar ded financially for energy efficiency r esour ces as they ar e for supply-side r esour ces. This section r eviews options for utility incentives to pr omote energy efficiency

. When utilities invest in har d assets, they depr eciate these costs over the useful lives of the assets. Consumers pay a r etur n on investment for the un-depr eciated balance of costs not yet r ecover ed, which spr eads the rate ef fect of the asset over time. Utilities often do not have any opportunity to ear n a r etur n on energy efficiency spending, as they do with har d assets. This lack of opportunity f o r pr ofit can intr oduce a bias against ef ficiency investment. Incentives for energy ef ficiency should be linked to achieving performance objectives to avoid unnecessary expenditur es, and be evaluated by r egulators based on their ability to pr oduce cost-ef fective pr ogram performance. Performance objectives can also form the basis of penalties for infer ior pr ogram performance. Financial incentives for utilities should r epr esent r evenues above those that would normally be r ecover ed in a r evenue r equir ement fr om a rate case. Energy Ef ficiency Costs: Capitalize or Expense? In most jur isdictions, energy ef ficiency costs ar e expensed, which means all costs incurr ed for energy ef ficiency ar e placed into rates dur ing the year of the expense. When a utility intr oduces an energy ef ficiency pr ogram, or makes a significant incr ease or decr ease in energy ef ficiency spending, rates must change to collect all annual costs. An incr ease in rates might be opposed by consumer advocates and other stakeholders, especially if parties disagr ee on whether the energy ef ficiency pr ograms ar e cost-ef fective. T o moderate the rate ef fect of ef ficiency , r egulators could capitalize ef ficiency costs, at least in part. 8 Capitalizing helps the utility by allowing for cost r ecovery over time but can cost consumers mor e than expensing in the long run. Some ef ficiency pr ograms can meet short term rate-or iented cost-ef fectiveness tests if costs ar e capitalized. However, if the choice is made to capitalize, the r egulator still has to decide the appr opr iate amortization per iod for pr ogram costs, balancing concer n for immediate rate impacts and long term costs. 9 Capitalizing energy ef ficiency investments may be limited by the magnitude of “r egulatory assets” that is appr opr iate for a utility . Bond ratings might decline if the utility asset account has too many assets that ar e not backed by physical capital. The limit on capitalized ef ficiency investment var ies depending on the r est of the utility balance sheet. Some argue that capitalizing energy efficiency is too costly and that rate effects fr om expensing ar e modest. Others note that in some places, capitalizing energy efficiency is the only way to deal with transitional rate effects and can pr ovide 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 appr opr iate to consider encouraging unr egulated utility af filiates to invest in and benefit fr om energy ef ficiency and other distr ibuted r esour ces.

Bonus Retur n, Shar ed Savings T

o encourage energy ef ficiency investments over supply investments, r egulators can author ize a r etur n on investment that is slightly higher (e.g., 5 per cent) for energy ef ficiency investments or of fer a bonus r etur n on equity investment for super ior performance. Another appr oach is to shar e a per centage of the energy savings value, perhaps 5 to 20 per cent, with the utility . A shar ed savings system has the virtue of linking the magnitude of the

8 Capitalizing energy ef ficiency also r einfor ces the idea of ef ficiency as a substitute to supply and transmission. 9 Iowa and V ermont initially capitalized energy ef ficiency spending, but transitioned to expense in the late 1990s. To create a sustainable, aggressive national commitment to energy efficiency 2-9r ewar d with the level of pr ogram performance. A var iation is to hold back some of the funds allocated to energy ef ficiency for awar d to shar eholders for achieving energy ef ficiency targets. Wher e this incentive is used, the holdback can run between 3 and 8 per cent of the pr ogram budget. Some of these funds can be channeled to employees to r ewar d their ef forts (Arthur Rosenfeld, personal communication, February 20, 2006; Plunkett, 2005).

Bonus r etur ns, shar ed savings, and other incentives can raise the total cost of energy ef ficiency . However , if the incentives ar e well-designed and ef fective, they will encourage the utility to become pr oficient at achieving energy ef ficiency savings. The utility might be motivated to pr ovide gr eater savings for consumers thr ough mor e cost-ef fective energy ef ficiency

. Energy Ef ficiency Lowers Risk Energy ef ficiency can help the financial ratings of utilities if it r educes the r isks associated with r egulatory uncertainty , long-term investments in gas supply and transport and electr ic power and transmission, and the r isks associated with fossil fuel market pr ices that ar e subject to volatility and unpr edicted pr ice incr eases. By contr olling usage and demand, utilities can also contr ol the need for new infrastructur e and exposur e to commodity markets, pr oviding r isk management benefits. T o the extent that a r etur n on ef ficiency investments is likely and the chance of a disallowance of associated costs is minimized, investors will be satisfied. Decoupling tends to stabilize actual utility r evenues, pr oviding a better match to actual cost, which should further benefit utility bond ratings. 

### Reversing a Short-T erm Resour ce Acquisition Focus: Focus on Bills, Not Just Rates Policy-makers tend to focus on electr ic rates because they can be easily compar ed acr oss states. They become a measur e for business-fr iendliness, and companies consider rate levels in manufactur ing siting and expansion decisions. But rates ar e not the only measur e of service. A short-term focus on low rates can lead to costly missed investment opportunities and higher overall costs of electr icity service over the long run. Over the long term, energy ef ficiency benefits can extend to all consumers. Eventually , r educed capital commitments and lower energy costs r esulting fr om cost-ef fective energy ef ficiency pr ograms benefit all consumers and lower overall costs to the economy , fr eeing customer income for mor e pr oductive purposes, like pr ivate investment, savings, and consumption. Impr oved rate stability and r isk management fr om limited sales gr owth tends to impr ove the r eputation of the utility . Incentives and r emoving the thr oughput incentive make it easier for utilities to embrace stable or declining sales. A commitment to energy ef ficiency means accepting a new cost in rates over the short-term to gain gr eater system benefits and lower long-term costs, as is the case with other utility investments. State and local political support with a measur e of public education might be needed to maintain stable pr ograms in the face of persistent immediate pr essur e to lower rates.


### Related Issues With Wholesale Markets and Long-T erm Planning Regulatory factors can hinder gr eater investment in costef fective energy ef ficiency pr ograms. These factors include the demand-side of the wholesale market not r eacting to supply events like shortages or wholesale pr ice spikes, and, for the electr ic sector , a short-term generation planning hor izon, especially in r etail competition states. In addition, transmission system planning by r egional transmission organizations (R TOs) and utilities tends to focus on wir es and supply solutions, not demand r esour ces like ef ficiency . The value of sustained usage r eductions thr ough energy ef ficiency , demand r esponse and distr ibuted generation is not generally consider ed, nor compensated for in wholesale tar if fs. These ar e r egulatory choices and ar e discussed further in Chapter 3: Energy Resour ce Planning Pr ocesses. 10

10 Planning and rate design implications ar e mor e thor oughly discussed in Chapters 3: Energy Resour ce Planning Pr ocesses and Chapt er 5: Rate Design.
2-10 National Action Plan for Energy EfficiencyEnergy Ef ficiency Makes Wholesale Energy Markets W ork Better In the wholesale market venue, the value of energy ef ficiency would be r evealed by a planning pr ocess that tr eats customer load as a manageable r esour ce like supply and transmission, with investment in demand-side solutions in a way that is equivalent to (not necessar ily the same as) supply and transmission solutions. Demand r esponse and ef ficiency can be called forth that specifically r educes demand at peak times or in other strategic ways, or that r educes demand year-r ound.

Declar e Energy Ef ficiency a Resour ce T

o underscor e the importance of energy ef ficiency , states can declar e in statute or r egulatory policy that energy ef ficiency is a r esour ce and that utilities should factor energy ef ficiency into r esour ce planning and acquisition. States concer ned with r isks on the supply side can also go one step further and designate that energy ef ficiency is the pr eferr ed r esour ce. Link Energy and Envir onmental Regulation Envir onmental policy-makers have observed that energy ef ficiency is an ef fective and comparatively inexpensive way to meet tightening envir onmental limits to electr ic power generation, yet this attr ibute rar ely factors into decisions by utility r egulators about deployment of energy ef ficiency . This issue is discussed further in Chapter 3: Energy Resour ce Planning Pr ocesses. 

# State and Regional Examples of Successful Solutions to Energy Ef ficiency Deployment

Numer ous states have pr eviously addr essed or ar e curr ently explor ing energy ef ficiency electr ic and gas incentive mechanisms. Exper iments in incentive r egulation occurr ed thr ough the mid-1990s but generally wer e overtaken by events leading to var ious forms of r estructur ing. States ar e expr essing r enewed inter est in incentive r egulation due to escalating energy costs and a r ecognition that barr iers to energy ef ficiency still exist. Many state exper iences ar e highlighted in the following text and T able 2-2.


### Addr essing the Thr oughput Disincentive
Dir ection Thr ough Legislation New Mexico of fers a bold statutory statement dir ecting r egulation to r emove barr iers to energy ef ficiency: “It serves the public inter est to support public utility investments in cost-ef fective energy ef ficiency and load management by r emoving any r egulatory disincentives that might exist and allowing r e covery of costs for r easonable and prudently incurr ed expenses of energy ef ficiency and load management pr ograms” (New Mexico Ef ficient Use of Energy Act of 2005).
Decoupling Net Income Fr om Sales Califor nia adopted decoupling for its investor -owned companies as it r estor ed utility r esponsibility for acquiring all cost-ef fective r esour ces. The state has also r equir ed these companies to pursue all cost-ef fective energy ef ficiency at or near the highest levels in the United States. A balancing account collects for ecasted r e venues, and rates ar e r eset per iodically to adjust for the dif fer ence between actual r evenues and for ecasts. Because some utility cost changes ar e factor ed into most decoupling systems, rate cases can become less fr equent, because r evenues and costs track mor e closely over time. 11

11 See, for example, or ders in Califor nia PUC docket A02-12-027. http://www .cpuc.ca.gov/pr oceedings/A0212027.htm. Or egon had used this method

successfully for PacifiCorp, but when the utility was acquir ed by Scottish Power , the utility elected to r etur n to the mor e fam iliar r egulatory form. To create a sustainable, aggressive national commitment to energy efficiency 2-11Maryland and Or egon have decoupling mechanisms in place for natural gas. In Maryland , Baltimor e Gas and Electr ic has operated with decoupling for mor e than seven years, and W ashington Gas r ecently adopted decoupling, indicating that r egulators view decoupling as a success. 12 In Or egon , Northwest Natural Gas has a similar decoupling mechanism in place. 13
The inher ently cooperative natur e of decoupling is demonstrated by utilities and public inter est advocates agr eeing on a system that addr esses public and pr ivate inter ests. In all these instances, no rate design shift was needed to implement decoupling—the change is invisible to customers. A new pr oposal for New Jersey Natural Gas would adopt a system similar to those in use in Or egon and Maryland.
See T able 2-2 for additional examples of decoupling. Reducing Cost Recovery Thr ough V olumetr ic Charges After New Y ork moved to r etail competition and separated energy commodity sales fr om the electr icity delivery utility , the distr ibution utilities’ rates wer e modified to incr ease fixed cost r ecovery thr ough per -customer charges, and to decr ease the magnitude of var iable, volumetr ic rates. Removing fixed generation costs, as these 

# T

able 2-2. Examples of Decoupling

State T y pe of Utility K ey F eatur es Related Rate Design Shifts? P olitical/Administr ative F actor s

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/F inal_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/F iles/Rates%20and%20T ariffs/Gas%20Service%20T ariff/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.
Or egon http://www.raponline .org/Pubs/General/OregonP aper .pdf http://www.advisorinsight.com/pub/indexes/600_mi/nwn_ir .htm http://www.nwnatural.com/CMS300/uploadedF iles/24190ai.pdf http://apps .puc.state .or .us/orders/2002ords/02-633.pdf

New J e r sey 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?Y ear=2005 (see 12/05/05)

V

ermont Investor-owned electric (proposed) F orecast 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” tar if f r ider is downloadable at http://www .bge.com/portal/site/bge/menuitem.6b0b25553d65180159 c031e0da 6176a0/. 13 The full agr eement can be found in Appendix A of Or der 02-634, available at http://apps.puc.state.or .us/or ders/2002or ds/02-634. pdf. See also Hansen

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

2-12 National Action Plan for Energy Efficiencyassets wer e divested, dampened the ef fects on consumers. In combination with tracking and deferral mechanisms to pr otect the utility fr om unanticipated costs and savings, the utilities have little incentive to incr ease electr ic sales.
Using a Lost Revenue Adjustment Minnesota pr ovided Xcel Energy with lost r evenue adjustments for energy ef ficiency thr ough 1999, and then moved to a performance-based incentive. Iowa curr ently pr ovides utilities with lost r evenue adjustments for energy ef ficiency

. Connecticut allows lost r evenue r ecovery for all electr ic energy ef ficiency

. Massachusetts allows lost r evenue r ecovery for all gas energy ef ficiency , r equir ing the accumulated lost r evenues to be r ecover ed within thr ee years to pr event large accumulated balances. Or egon allows lost r evenue r ecovery for utility ef ficiency pr ograms. Lost r evenue adjustments have been r emoved in many states because of their cost to consumers. New Jersey is in the midst of a transition to a state-run administrator and pr ovides lost r evenue for utility-run pr ograms in the meantime.
Non-Utility Administration Several states have taken over the administration of energy ef ficiency , including Wisconsin (Focus on Energy), Maine (Ef ficiency Maine), New Jersey , and Ohio . In other states, a thir d party has been set up to administer pr ograms, including V ermont (Ef ficiency V

ermont) and Or egon (Energy T rust of Or egon). The New Y ork State Energy Resear ch and Development Author ity (NYSERDA), a public author ity , fits into both categor ies. Ther e is no r etail competition in V ermont or W isconsin; this change was based entir ely on an expectation of ef fectiveness. Or egon combines natural gas and electr ic ef ficiency pr ograms, but only for the larger companies in each sector . Statewide branding of energy ef ficiency pr ograms is a dividend of non-utility administration. Connecticut intr oduced an aspect of non-utility administration by vesting its Energy Conservation Management Boar d, a state boar d including state of ficials, utility managers, and others, with r esponsibility to appr ove energy ef ficiency plans and budgets. 

### Recover ing Costs / Pr oviding Funding for Energy Ef ficiency Pr ograms Revenue Requir ement When energy ef ficiency pr ograms first began, they wer e funded as part of a utility r evenue r e quir ement. In many states, like Iowa, this practice has continued uninterrupted. In Califor nia, r etail competition interrupted this method of acquir ing energy ef ficiency , but since 2003, Califor nia is again funding energy ef ficiency along with other r esour ces thr ough the r evenue r equir ement, a practice known ther e as “pr ocur ement funding.” Califor nia also funds energy ef

ficiency thr ough SBC funding. Capitalizing Energy Ef ficiency Costs Or egon allows capitalization of costs, and the small electr ics do so. W ashington, Vermont, and Iowa capitalized energy ef ficiency costs when pr ograms began in the 1980s to moderate rate ef fects. V ermont , for example, amortized pr ogram costs over five years. In the late 1990s, however , as pr ogram spending declined, these states ended the practice of capitalizing energy ef ficiency costs, electing to expense all costs. Curr ently , V

ermont stakeholders ar e discussing how to further incr ease efficiency spending beyond the amount collected by the SBC, and they ar e r econsider ing moderating new rate effects thr ough capitalizing costs.
Spending Budgets, T a r i f f Riders, and System Benefits Charges Several states have specified per centages of net utility r evenue or a specific charge per energy unit to be spent for energy ef ficiency r esour ces. Massachusetts , for example, specifies 2.5 mills per kilowatt-hour (kWh) (while spending for natural gas energy ef ficiency is determined case by case). In Minnesota , ther e is a separate per centage designated for electr ic (1.5 per cent of gr oss operating r evenues) and for natural gas (0.5 per cent) utilities. V

ermont adopted a statewide SBC for its vertically integrated electr ic sector , while its gas energy ef ficiency costs r emain embedded in the utility r evenue r equir ement. Str ong statutory pr otections guar d funds fr om gover nment appr opr iation. W isconsin r equir es a charge, but leaves the commission to determine the appr opr iate level for each
To create a sustainable, aggressive national commitment to energy efficiency 2-13utility . Ther e is a history of SBC funds being used for general gover nment within the state; 2005 legislation appar ently intended to make funding mor e secur e (W isconsin Act 141 of 2005).
The New Y ork commission chose to establish an annual spending budget for its statewide ef fort (exclusive of the public author ities and utilities), incr easing it to $150 million in 2001 and to $175 million in 2006. W ashington tar if fs include a r ider that allows adjustment of rates to r ecover energy ef ficiency costs that diverge fr om amounts included in rates, with annual true-ups.


### Pr oviding Incentives for Energy Ef ficiency Investment Performance Incentives In Connecticut , the two electr ic utilities managing energy ef ficiency pr ograms ar e eligible for “performance management fees” tied to performance goals appr oved by the r e gulators, including lifetime energy savings, demand savings, and other measur es. Incentives ar e available for a range of outcomes fr om 70 to 130 per cent of pr e-determined goals. In 2004, the two utilities collectively r eached 130 per cent of their energy savings goals and 124 per cent of their demand savings goals. They r eceived 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 electr ic and natural gas investor

owned utilities that began at 90 per cent of performance targets and ar e awar ded for up to 150 per cent of targetlevels. Performance targets for Minnesota utilities spending mor e than the minimum spending r equir ement ar e adjusted to the minimum spending level for purposes of calculating the performance incentive.
Rhode Island and Massachusetts of fer similarly structur ed incentives. Rhode Island sets aside r oughly 5 percent of the ef ficiency budget for performance incentives. This amount is less than the amount that would pr obably be justified if a lost r evenue adjustment wer e used. A collaborative gr oup of stakeholders r ecommends performance indicators and levels to qualify for incentives. In Massachusetts , utilities achieving performance targets ear n 5 per cent on money spent for ef ficiency (in addition to being able to expense ef ficiency costs).
Ef ficiency V ermont operates under a contract with the V

ermont Public Service Boar d. The or iginal contract called for r oughly 3 per cent of the budget for ef ficiency pr ograms to be held back and paid if Ef ficiency V ermont meets a var iety of performance objectives.

Shar ed Savings Befor e r etail competition, Califor nia used a shar ed savings appr oach, in which the utilities r eceived r evenue equal to a portion of the savings value pr oduced by the energy ef ficiency pr ograms. A similar mechanism might be r einstated in 2006 (Arthur Rosenfeld, personal communication, February 20, 2006).

Bonus Rate of Retur n Nevada allows a bonus rate of r etur n for demand-side management that is 5 per cent higher than author ized rates of r etur n for supply investments. Regulations specify pr ograms that qualify and the pr ocess to account for qualifying investments (Nevada Regulation of Public Utilities Generally , 2004).

Lower Risk of Disallowance Thr ough MultiStakeholder Collaborative Califor nia , Rhode Island , and other states employ stakeholder collaboratives to r esolve important pr ogram and administrative issues and to pr ovide settlements to the r egulator

. See T able 2-3 for additional examples of incentives for energy ef ficiency investments.

2-14 National Action Plan for Energy Efficiency

# T able 2-3. Examples of Incentiv es for Energy Ef ficiency Inv estments
State T y pe of Utility K ey F eatur es P olitical/Administr ative F actor s California Investor-owned electric Shared savings Encouraged by energy commission and utilities

. Incentive proportionate to v alue of savings; no cap
. http://www.raponline .org/Conferences/Minnesota/Presentations/PrusnekCAEEMinnesota.pdf Connecticut Investor-owned electric P erformance incentives P art 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 P erformance incentives P art 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 P erformance incentives Utility-specific plan arising to resolve other regulatory issues; incentive aw arded on a sliding scale of performance compared with goals; decoupling not authorized by statute

. http://www.raponline .org/Pubs/RateP ayerFundedEE/RateP ayerFundedMN .pdf Nevada Investor-owned electric Bonus rate of return on equity Process to establish bonus is statutory

. See http://www.leg.state .nv.us/NA C/NA C-704.html#NA C704Sec9523 V

ermont Efficiency utility P erformance 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 Dr ivers for Ef ficiency in Resour ce Planning and Energy Markets Declar e Energy Ef ficiency a Resour ce In New Mexico , the legislatur e has declar ed a goal of “decr easing electr icity demand by incr easing energy efficiency and demand r esponse, and meeting new generation needs first with r enewable and distr ibuted generation r esour ces, and second with clean fossil-fueled generation.” (New Mexico Efficient Use of Energy Act of 2005)

In Califor nia , the state has made it very clear that energy ef ficiency is the most important r esour ce (Califor nia SB 1037, 2005). After the cr ises of 2000 and 2001, state leaders used energy ef ficiency to dampen demand gr owth and market volatility . An Energy Action Plan, adopted in 2003 by the Califor nia Public Utilities Commission (CPUC), the Califor nia Energy Commission (CEC), and the power author ity , developed a “loading or der” for new electr ic r esour ces; the Energy Action Plan has been r evised but the energy efficiency pr efer ence r emains firm. The intent of the loading or der is to “decr eas(e) electr icity demand by incr easing energy efficiency and demand r esponse, and meeting new generation needs first with r enewable and distr ibuted generation r esour ces, and second with clean fossil-fueled generation” (CEC, 2005). As a r esult, utilities ar e acquir ing energy efficiency in amounts well in excess of those that would be pr ocur ed with the SBC alone. Further , the utilities ar e integrating efficiency into their r esour ce plans and using efficiency to solve r esour ce pr oblems.

Clar ifying the pr imary r egulatory status of ef ficiency makes it clear that sympathetic r egulation and cost r ecovery policies ar e important. Califor nia has adopted decoupling of net income and sales for its investor

owned utilities to r emove r egulatory barr iers to a full financial commitment to energy ef ficiency

.

To create a sustainable, aggressive national commitment to energy efficiency 2-15One device for implementing this policy is an energy efficiency supply curve. The CEC cr eated such a curve based on an assessment of energy efficiency potential to pr ovide guidance as it r eintr oduced energy efficiency pr ocur ement expectations for the utilities in 2003. Furthermor e, the CPUC cooperated with the CEC to set energy savings targets for each of the Califor nia investor -owned utilities based on an assessment of cost-effectiveness potential.
A dif fer ent appr oach to declar ing energy ef ficiency a r esour ce is to establish a portfolio or performance standar d for energy ef ficiency . In 2005, Pennsylvania and Connecticut included energy ef ficiency in their r esour ce portfolio standar ds. Requir ing all r etail sellers to acquir e suf ficient certificates of energy savings will allocate r e venue to ef ficiency pr oviders in an economically ef ficient way (Pennsylvania Alter native Energy Portfolio Standar ds Act of 2004; Connecticut Act Concer ning Energy Independence of 2005).
As an outcome of its electr ic r estructur ing law, T exas is using energy ef ficiency as a r esour ce to r educe demand. T

exas’ spending for energy ef ficiency is intended to pr oduce savings to meet 10% of for ecasted electr ic demand gr owth. Performance is exceeding this level. Consider Energy Ef ficiency As a System Reliability Solution In New England, Independent System Operator New England (ISO-NE) faced a r eliability pr oblem in southwest Connecticut . A transmission line to solve the pr oblem was under development, but would not be r eady in time. New central station generation could not be sited in this congested ar ea. Because the marketplace was not pr oviding a solution, ISO-NE issued a Request for Pr oposal (RFP) for any r esour ces that would addr ess the r eliability pr oblem and be committed for four years. One energy efficiency bid was selected—a commer cial office building lighting pr oject worth r oughly 5 megawatts (MW). Conditions of the awar d wer e very str ict about availability of the capacity savings. This pr oject will help to demonstrate how energy efficiency does deliver capacity. While ISO-NE deemed the RFP an emergency step that it would not undertake r outinely , this pr ocess demonstrates that energy efficiency can be important to meeting r eliability goals and can be paid for thr ough federal jur isdictional tar iffs. Other states, including Indiana , V ermont , and Minnesota dir ect that energy ef ficiency be consider ed as an alter native when utilities ar e pr oposing a power line pr oject (Indiana Resour ce Assessment, 1995; V

ermont Section 248; Minnesota Certificate of need for large energy facility , 2005.) 

# Key Findings
This chapter r eviews opportunities to make energy ef ficiency an attractive business pr ospect by modifying electr ic and gas utility r egulation, and by the way that utilities collect r evenue and make a pr ofit. Key findings of this chapter indicate:

• Ther e ar e r eal financial disincentives that hinder all utilities in their pursuit of energy ef ficiency as a r esour ce, even when it is cost-ef fective and would lead to a lower cost energy system. Regulation, which is a key sour ce of these disincentives, can be modified to r emove these barr iers.

• Many states have exper ience in addr essing financial

disincentives in the following ar eas:

— Over coming the thr oughput incentive.

— Pr oviding r eliable means for utilities to r ecover energy efficiency costs.

— Pr oviding a r etur n on investment for ef ficiency pr ograms that is competitive with the r etur n utilities ear n on new generation.

— Addr essing the r isk of pr ogram costs being disallowed and other r isks.

— Recognizing the full value of energy ef ficiency to the utility system.

2-16 National Action Plan for Energy Efficiency

# Recommendations and Options
The National Action Plan for Energy Efficiency Leadership Gr oup offers the following r ecommendations as ways to over come many of the barr iers to energy efficiency in utility ratemaking and r evenue r equir ements, and pr ovides a number of options for consideration by utilities, r egulators, and stakeholders (as presented in the Executive Summar y): Recommendation: Modify policies to align utility incentives with the delivery of cost-ef fective energy ef ficiency and modify ratemaking practices to pr omote energy ef ficiency investments. Successful energy efficiency pr ograms would be pr omoted 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. Histor ically , r e gulatory policies gover ning utilities have mor e commonly compensated utilities for building infrastructur e (e.g., power plants, transmission lines, pipelines) and selling energy , while discouraging energy ef ficiency , even when the energy-saving measur es might cost less. W ithin the existing r egulatory pr ocesses, utilities, r egu lators, and stakeholders have a number of opportunities to cr eate the incentives for energy efficiency investments by utilities and customers. A var iety of mechanisms have alr eady been used. For example, parties can decide to pr ovide incentives for energy efficiency similar to utility incentives for new infrastructur e investments, and pr ovide r ewar ds for prudent management of energy efficiency pr ograms. Options to Consider:
• Addr essing the typical utility thr oughput incentive and

r emoving other r egulatory and management disincentives to energy ef ficiency

.

• Pr oviding utility incentives for the successful management of energy ef ficiency pr ograms.
Recommendation: Make a str ong, long-term commitment to implement cost-ef fective energy ef ficiency as
a r esour ce. Energy ef ficiency pr ograms ar e most successful and pr ovide the g r eatest benefits to stakeholders when appr opr iate policies ar e established and maintained over the long-term. Confidence in long-term stability of the pr ogram will help maintain energy efficiency as a dependable r esour ce compar ed to supply-side r esour ces, deferr ing or even avoiding the need for other infrastructur e investments, and maintain customer awar eness and support. Options to Consider:
• Establishing funding r equir ements for deliver ing longterm, cost-ef fective energy ef ficiency

.

• Designating which organization(s) is r esponsible for

administer ing the energy ef ficiency pr ograms.
Recommendation: Br oadly communicate the benefits of and opportunities for energy ef ficiency

. Exper ience shows that energy efficiency pr ograms help customers save money and contr ibute to lower cost energy systems. But these benefits ar e not fully documented nor r ecognized by customers, utilities, r egulators, or policymakers. Mor e effort is needed to establish the business case for energy efficiency for all decision-makers and to show how a well-designed appr oach to energy efficiency can benefit customers, utilities, and society by (1) r educing customers’ bills over time, (2) foster ing financially healthy utilities (e.g., r etur n on equity , ear nings per shar e, and debt coverage ratios unaffected), and (3) contr ibuting to positive societal net benefits overall. Effort is also necessary to educate key stakeholders that although energy efficiency can be an important low-cost r esour ce to integrate into the energy mix, it does r equir e funding, just as a new power plant r equir es funding. Options to Consider:
• Establishing and educating stakeholders on the business case for energy ef ficiency at the state, utility , other appr opr iate level addr essing customer , utility , and societal perspectives.

• Communicating the r ole of energy efficiency in lower ing

customer energy bills, and system costs and r isks over time.

To create a sustainable, aggressive national commitment to energy efficiency 2-17Recommendation: Pr ovide suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective. Energy ef ficiency pr ograms r equir e consistent and long-term funding to ef fectively compete with energy supply options. Ef forts ar e necessary to establish this consistent long-term funding. A var iety of mechanisms have been, and can be used, based on state, utility , and other stakeholder inter ests. It is important to ensur e that the ef ficiency pr ogram pr oviders have suf ficient long-term funding to r ecover pr ogram costs, and implement the energy ef ficiency measur es that have been demonstrated to be available and cost-effective. A number of states ar e now linking pr ogram funding to the achievement of energy savings. Options to Consider:
• Deciding on, and committing to, a consistent way for

pr ogram administrators to r ecover energy ef ficiency costs in a timely manner

.

• Establishing funding mechanisms for energy ef ficiency

fr om among the available options, such as r evenue r equir ement or r esour ce pr ocur ement funding, SBCs, rate-basing, shar ed-savings, incentive mechanisms, etc.

• Establishing funding for multi-year per iods.

2-18 National Action Plan for Energy Efficiency

# Refer ences
Bar one, R.J. (2006, May 23). Pr esentation to the Rethinking Natural Gas Utility Rate Design Confer ence, Columbus, Ohio. Califor nia Energy Commission [CEC]. (2005, July). Implementing Califor nia’ s Loading Or der for Electr icity Resour ces. Califor nia Public Utility Commission [CPUC]. (1996, December 20). Opinion on Cost Recovery Plans, CPUC D.96-12-077. Califor nia SB 1037, Califor nia Statutes of 2005. Chapter 366. (2005) <http://info.sen.ca.gov/pub/bill/sen/sb_1001­ 1050/sb_1037_bill_20050929_chapter ed.html>. Connecticut, An Act Concer ning Energy Independence, Public Act No. 05-1 (House Bill No. 7501) (2005). <http://www .cga.ct.gov/asp/cgabillstatus/cgabillstatus.asp?selBillT ype=Bill&bill_num=7501&which_year =2005>. Costello, K. (2006, Apr il). Revenue Decoupling for Natural Gas Utilities . National Regulatory Resear ch Institute. <http://www .nrr i.ohiostate.edu/NaturalGas/r evenue-decoupling-for-natural-gas-utilities/>. Hansen, D.G. and Braithwait, S.D. (2005, Mar ch 31). A Review of Distribution Margin Normalization as Approved by the Oregon Public Utility Commission for Northwest Natural . Madison, W isconsin: Chr istensen Associates Consulting. Harr ington, C. (2003, May). Who Should Deliver Ratepayer Funded Energy Efficiency? Regulatory Assistance Pr oject. <http://www .raponline.org/ showpdf.asp?PDF_URL=”Pubs/RatePayerFundedEE/ RatePayerFundedEEPartI.pdf”>. Indiana Resour ce Assessment, Indiana Administrative Code [IAC]. 170 IAC 4-7-6, Resour ce assessment. (1995) <http://www .in.gov/legislative/iac/ T01700/A00040.PDF>. Kantor , G. (2006, June 20). Pr esentation to the 2006 W ester n Confer ence of Public Service Commissioners, Jackson, Wyoming. Minnesota, Certificate of need for large energy facility , Minnesota Statutes. Chapter 216B.243(3) (2005). <http://www .r evisor .leg.state.mn.us/stats/ 216B/243.html>. Moskovitz, D. (2000). Profits and Progress Through Distributed Resource. Regulatory Assistance Pr oject. <http://www .raponline.org/showpdf.asp?PDF_URL= Pubs/General/Pr ofitsandPr ogr essdr .pdf>. Nevada, Regulation of Public Utilities Generally . NevadaAdministrative Code 704.9523: Costs of implementing pr ograms for conservation and demand management: Accounting; r ecovery . (2004) <http://www .leg.state.nv .us/NAC/NAC704.html#NAC704Sec9523>. NERA Economic Consulting. (2006, Apr il 20). Distributed Resources: Incentives. <http://www .energetics.com/madr i/pdfs/nera_0424 06.pdf>. New Mexico, Ef ficient Use of Energy Act, New Mexico Statutes. Chapt. 62-17-2 and Chapt. 62-17-3 (2005). Pennsylvania Alter native Energy Portfolio Standar ds Act, Pennsylvania Act No. 213 (SB 1030) (2004). <http://www .legis.state.pa.us/WU01/LI/BI/BT/2003/0 /SB1030P1973.HTM>. Plunkett, J., Hor owitz, P ., Slote, S. (2005). Rewarding Successful Efficiency Investment in Three Neighboring States: The Sequel, the Re-make and the Next Generation (In V ermont, Massachusetts and Connecticut) A 2004 ACEEE Summer Study on Energy Ef ficiency in Buildings. <http://www .aceee.org/conf/04ss/panel5.htm>. U.S. Envir onmental Pr otection Agency [EP A] (2006). Clean Energy-Environment Guide to Action: Policies, Best Practices, and Action Steps for States (Section 6.2). W ashington, DC. V

ermont Section 248. 30 V ermont Statutes Annotated § 248, 4 (A)(b). New gas and electr ic pur chases, investments, and facilities; certificate of public good. <http://www .leg.state.vt.us/statutes/fullsection.cfm?T itle=30&Chapter=005&Section=00248>. 2005 W isconsin Act 141 (2005 Senate Bill 459). <http://www .legis.state.wi.us/2005/data/acts/05Act 141.pdf>.

To create a sustainable, aggressive national commitment to energy efficiency 2-19

# 3: Energy Resour ce Planning Pr ocesses

Including energy ef ficiency in the r esour ce planning pr ocess is essential to r ealizing its full value and setting r esour ce savings and funding targets accor dingly . Many utilities, states, and r e gions ar e estimating and ver ifying the wide range of benefits fr om energy ef ficiency and ar e successfully integrating energy ef ficiency into the r esour ce planning pr ocess. This chapter of the National Action Plan for Energy Ef ficiency Report discusses the barr iers that obstruct incorporating energy ef ficiency in r esour ce planning and pr esents six r egional appr oaches to demonstrate how those barr iers have been successfully over come. 

# Ov erview Planning is a cor e function of all utilities: large and small, natural gas and electr ic, public and pr ivate. The decisions made in planning af fect customer costs, r eliability of service, r isk management, and the envir onment. Many stakeholders ar e closely involved and participate in planning pr ocesses and r elated decisions. Active participants often include utilities, utility r egulators, city councils, state and local policy-makers, r egional organizations, envir onmental gr oups, and customer gr oups. Regional planning pr ocesses organized thr ough r egional transmission organizations (R TOs) also occur with the collaborations of utilities and r egional stakeholders.
Differ ent planning pr ocesses ar e employed within each utility

, state, and r egion. Depending on a utility’ s purpose and context (e.g., electr ic or gas utility , vertically integrated or r estructur ed), differ ent planning decisions must be made. Local and r egional needs also affect planning and r esour ce r equir ements and the scope of planning pr ocesses. Further , the r ole of states and r egions in planning affects decisions and pr escr ibes goals for energy portfolios, such as r esour ce pr ior ity , fuel diversity , and emissions r eduction.
Thr ough differ ent types of planning pr ocesses, utilities analyze how to meet customer demands for energy and capacity using supply-side r esour ce pr ocur ement (including natural gas supply contracts and building new generation), transmission, distr ibution, and demand-side r esour ces (including energy ef ficiency and demand r esponse). Such planning often r equir es iteration and testing to find the combination of r esour ces that offer maximum value over a range of likely futur e scenar ios, for the short- and long-term. The value of each of these r esour ces is determined at the utility , local, state and r egional level, based on ar ea-specific needs and policy dir ection. In or der to fully integrate the value of all r esour ces into planning— including energy efficiency—r esour ce value and benefits must be determined early in the planning pr ocess and pr ojected over the life of the r esour ce plan. Planning pr ocesses focus on two general ar eas: (1) energyr elated planning, such as electr icity generation and wholesale energy pr ocur ement; and (2) capacity-r elated planning, such as construction of new pipelines, power plants, or electr ic transmission and distr ibution pr ojects. The value of energy ef ficiency can be integrated into r esour ce planning decisions for both of these ar eas. 

# Leadership Gr oup Recommendations Applicable to Energy Resour ce Planning Pr ocesses

• Recognize energy ef ficiency as a high-pr ior ity energy

r esour ce.
• Make a str ong, long-term commitment to implement

cost-ef fective energy ef ficiency as a r esour ce.
• Br oadly communicate the benefits of, and opportunities for , energy ef ficiency

. • Pr ovide suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective. 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 3-1This chapter identifies common challenges for integrating energy ef ficiency into existing planning pr ocesses and descr ibes examples of successful energy ef ficiency planning appr oaches that ar e used in six r egions of the country . Finally , this chapter summar izes ways to addr ess barr iers, and of fers r ecommendations and several options to consider for specific actions that would facilitate incorporation of energy ef ficiency into Figur e 3-1. Energy Efficiency Supply Curve - Potential in 2011 (Levelized Cost in $/kilowatt-hours [kWh] Saved)
$1.00 $0.90 $0.80 $0.70
r esour ce planning.$/kwh $0.60 $0.50 

# Challenges to Incorpor ating Energy Ef ficiency Into Planning

The challenges to incorporating energy ef ficiency into r esour ce planning have common themes for a wide range of utilities and markets. This section descr ibes these challenges in the context of two central questions: A) determining the value of energy ef ficiency in the r esour ce planning, and B) setting energy efficiency targets and allocating budgets, which ar e guided by r esour ce planning, as well as r egulatory and policy decisions. 

### Determining the V alue of Energy Ef ficiency It is generally accepted that well-designed ef ficiency measur es pr ovide measurable r esour ce savings to utilities. However , ther e ar e no standar d appr oaches on how to appr opr iately quantify and incorporate those benefits into utility r esour ce planning. Also, ther e ar e many dif fer ent types of energy ef ficiency pr ograms with dif fer ent character istics and target customers. Energy ef ficiency can include utility pr ograms (r ebates, audits, education, and outr each) as well as building ef ficiency codes and standar ds impr ovements for new construction. Each type of pr ogram has dif fer ent character istics that should be consider ed in the valuation pr ocess. The pr ogram information gather ed in an energy ef ficiency potential study can be used to cr eate an energy efficiency supply curve, as illustrated in Figur e 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

Sour ce: McAulif fe, 2003

Common Challenges to Incor por ating Ener gy Efficiency Into Planning A. Determining the V a lue of Ener gy Efficiency Energy Procurement Estimating energy savings V aluing energy savings Capacity & Resource Adequacy Estimating capacity savings V aluing capacity benefits F actors in achieving benefits Other Benefits Incorporating non-energy benefits B
. Setting Ta r g ets 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 EfficiencyThe analysis commonly used to value energy ef ficiency compar es the costs of energy ef ficiency r esour ces to the costs of the r esour ces that ar e displaced by energy ef ficiency . The sidebar shows the categor ies of benefits for electr ic and gas utilities that ar e commonly evaluated. The appr oach is to for ecast expected futur e costs with and without energy ef ficiency r esour ces and then estimate the level of savings that energy ef ficiency will pr ovide. This analysis can be conducted with varying levels of sophistication depending on the metr ics used to compar e alter native r esour ce plans. T ypically , the evaluation is made based on the expected cost differ ence; however , ”portfolio” appr oaches also evaluate dif fer ences in cost var iance and r eliability , which can pr ovide additional rationale for including energy ef ficiency as a r esour ce. The r esour ce benefits of energy ef ficiency fall into two general categor ies: (1) Energy-r elated benefits that af fect the pr ocur ement of wholesale electr ic energy and natural gas, and delivery losses. (2) Capacity-r elated benefits that af fect wholesale electr ic capacity pur chases, construction of new facilities, and system r eliability

. The energy-r elated benefits of energy ef ficiency ar e r elatively easy to for ecast. Because utilities ar e constantly adjusting the amount of energy pur chased, short-term deviations in the amount of energy ef ficiency achieved can be accommodated. The capacity-r elated benefits occur when construction of a facility needed to r eliably serve customers can be delayed or avoided because the need has alr eady been met. Ther efor e, achieving capacity benefits r equir es much mor e certainty in the futur e success of energy ef ficiency pr ograms (particularly the measur es targeting peak loads) and might be har der to achieve in practice. However , the ability to pr ovide capacity benefits has been a focus in Califor nia, the Pacific Northwest, and other r egions, and it should become easier to assess capacity savings as mor e pr ograms gain exper ience, and capacity savings ar e measur ed and ver ified. Curr ent methods for estimating energy benefits and capacity benefits ar e pr esented her e. Estimating Energy Benefits Estimating energy benefits r equir es 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 var iety of ef ficiency measur es have been well studied and documented. Appr oaches to estimate the level of fr ee-r iders and pr ogram participants who would have implemented the energy ef ficiency on their own have been established. Similarly , the expected useful lives of energy ef ficiency measur es and their persistence ar e commonly evaluated and included in the analysis. Detailed databases of ef ficiency measur es have been developed for several r egions, including Califor nia and the Pacific Northwest. However, it is often necessary to investigate and validate the methods and assumptions behind those estimates to build consensus ar ound measur ed savings that all stakeholders find cr edible. Savings estimates can be ver ified thr ough measur ements and load r esear ch. Best practices for measur ement and ver ification (M&V) ar e discussed in mor e detail in Chapter 6: Energy Ef ficiency Pr ogram Best Practices.

Benefits of Ener gy Efficiency in Resour ce Planning Electr icity Natur al 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 emissionsCapacityrelated 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 V alue of Energy Savings. The most r eadily available benchmark for the value of energy savings is the pr evailing pr ice of wholesale electr icity and natural gas. Even for a vertically integrated utility with its own pr oduction, energy ef ficiency might decr ease the need to make market pur chases; or if the utility has excess energy , energy ef ficiency can allow the utility to sell mor e into the market. In cases when the market pr ices ar e not appr opr iate benchmarks (because of contract limitations on r eselling energy or limited market access), contract pr ices or pr oduction costs can be used. In addition, the value of losses and other var iable costs associated with energy delivery can be quantified and ar e well known. The challenge that r e mains is in for ecasting futur e energy costs beyond the per iod when market data ar e available or contracts ar e in place. Long-run for ecasts vary in complexity fr om a simple escalation rate to market-based appr oaches that for ecast the cost of new r esour ce additions, to models that simulate the system of existing r esour ces (including transmission constraints) and evaluate the marginal cost of operating the system as new generation is added to meet the for ecasted load gr owth. Most utilities have an established appr oach to for ecast long-term market pr ices, and the same for ecasting technique and assumptions should be used for energy ef ficiency as ar e used to evaluate supply-side r esour ce options. In addition to a for ecast of energy pr ices, some r egions include the change in market pr ices as a r esult of energy ef ficiency . Estimating these ef fects r equir es modeling of complex interactions in the energy market. Furthermor e, r educed market pr ices ar e not necessar ily a gain fr om a societal perspective, because the gains of consumers r esult in an equal loss to pr oducers; ther efor e, whether to include these savings is a policy decision. Estimating Capacity Benefits Estimating capacity benefits r equir es estimating the level of capacity savings and the associated benefits. If energy ef ficiency’ s capacity benefits ar e not consider ed in the r esour ce plan, the utility will over invest in capital assets, such as power plants and transmission and distr ibution, and under invest in energy ef ficiency

.

• Estimating Capacity Savings. In addition to energy savings, electr ic ef ficiency r educes peak demand and the need for new investments in generation, transmission, and distr ibution infrastructur e. Natural gas ef ficiency can r educe the need for a new pipeline, storage, liquefied natural gas (LNG) facility, or other investments necessary to maintain pr essur e dur ing high-load per iods. Because of the storage and pr essur e var iation possible in the natural gas system, capacity-r elated costs ar e not as extr eme in the natural gas system as they ar e for electr icity . In both cases, estimating r eductions of peak demand is mor e dif ficult for electr icity than it is for natural gas, and timing is far mor e cr itical. For peak demand savings to actually be r ealized, the targeted end-use load r eductions must occur , and the ef ficiency measur e must pr ovide savings coincident with the utility’s peak demand. Ther efor e, dif fer ent energy ef ficiency measur es that r educe load at dif fer ent times of day (e.g., commer cial vs. r esidential lighting) might have dif fer ent capacity values. Ar ea- and timespecific marginal costing appr oaches have been developed to look at the value of coincident peak load r eductions, which have significantly higher value dur ing cr itical hours and in constrained ar eas of the system (see sidebar on page 3-5).

A cr itical component of the r esour ce planning pr ocess, whether focused on demand- or supply-side r esour ces, is accurate, unbiased load for ecasting. Inaccurate load for ecasts either cause excessive and expensive investment in r esour ces if too aggr essive, or cr eate costly shortages if too low . Similarly , tracking and validation of energy ef ficiency pr ograms ar e important for incr easing the accuracy of estimates of their ef fects in futur e r esour ce plans. Estimating the capacity savings to apply to load gr owth for ecasts r equir es estimating two key factors. The first is determining the amount of capacity r educed by energy ef ficiency dur ing cr itical or peak hours. The

3-4 National Action Plan for Energy Efficiencysecond factor is estimating the ”equivalent r eliability” of the load r eduction. This measur e captur es both the pr obability that the savings will actually occur , and that the savings will occur dur ing system-constrained hours. Applying estimates of equivalent r eliability to var ious types of r esour ces allows compar ison on an equal basis with traditional capacity investments. This appr oach is similar in concept to the equivalent capacity factor used to compar e r enewable r esour ces such as wind and solar with traditional fossil-fueled generation. In markets wher e capacity is pur chased, ”counting” rules for dif fer ent r esour ce types determine the equivalent r eliability . The pr obability that savings will actually occur dur ing peak per iods is easier to estimate with some certainty for a large number of distr ibuted ef ficiency measur es (e.g., air conditioners) as opposed to a limited number of large, centralized measur es (e.g., water tr eatment plants). 

# Califor nia A voided Costs by T ime and Location
Califor nia is a good example of the ef fect of ar ea and time-dif fer entiation for ef ficiency measur es that have dramatically dif fer ent impact pr ofiles. The average avoided cost for efficiency (including energy and capacity cost components) in Califor nia is $71/megawatt-hour (MWh). Applying avoided costs for each of six time of use (TOU) per iods (super-peak, mid-peak and of f-peak

for summer and winter seasons) incr eases the value of air conditioning to $104/MWh or 45 per cent and lowers the value of outdoor lighting to $57/MWh or 20 percent. Refr igeration, with its consistent load pr ofile thr oughout the day and year , is unaf fected. Applying avoided costs by hour captur es the extr eme summer peak pr ices and incr eases the value of air conditioning savings still further to $123/MWh. Incorporating hourly avoided costs incr eases the total benefits of air conditioning load r eduction by mor e than $50/MWh. This type of hourly analysis is curr ently being used in Califor nia’ s avoided cost pr oceedings for energy ef ficiency

.

Avoided distr ibution capacity costs ar e also estimated by r egion in Califor nia. The Gr eater San Francisco Bay Ar ea r egion is shown above in detail. In San Francisco and Oakland, avoided capacity costs ar e low because those ar eas ar e exper iencing little load gr owth and have little need for new distr ibution investment. The Stockton ar ea, on the other hand, is exper iencing high gr owth and has significant new distr ibution infrastructur e r equir ements. Comparison of Avoided Costs for Three Implementation Approaches

$­ $20 $40 $60 $80 $100 $120 $140

Air Conditioning Outdoor Lighting RefrigerationWeighted Average Avoided Cost($/MWh)

Hourly TOU Average Annual Average $80.0 0 $42.5 0 $5.00 $/ M W Greater San Francisco Bay Area Avoided Distribution Costs

To create a sustainable, aggressive national commitment to energy efficiency 3-5• V aluing Capacity Benefits. The value of capacity benefits lies in the savings of not having to build or pur chase new infrastructur e, or make payments to capacity markets for system r eliability . Because r eliability of the nation’ s energy infrastructur e is cr itical, it is dif ficult to make the decision to defer these investments without some degr ee of certainty that the savings will be achieved. Disr egar ding or undervaluing the transmission and generation capacity value of energy ef ficiency can, however , lead to under investment in energy ef ficiency . Realizing energy ef ficiency’ s capacity savings r equir es close coor dination between ef ficiency and r esour ce planners 1 to ensur e that specific planned investments can actually be deferr ed as a r esult of energy ef ficiency pr ograms. In the long term, lowerload levels will naturally lead to lower levels of infrastructur e r equir ements without a change in existing planning pr ocesses.
T

argeted implementation of energy ef ficiency designed to defer or eliminate traditional r eliability investments inthe short term (whether generation, transmission, or distr ibution) r equir es that energy ef ficiency ramp up in time to pr ovide suf ficient peak load savings befor e the new infrastructur e is needed. States with existing ef ficiency pr ograms can use pr evious exper ience to estimate futur e adoption rates. In states that do not have pr evious exper ience with energy ef ficiency , however , the adoption rate of ef ficiency measur es is dif ficult to estimate, making it har d to pr ecisely quantify the savings that will be achieved by a certain date. Ther efor e, if the infrastructur e pr oject is cr itical for r eliability , it is dif ficult to r ely on energy as an alter native. The value of the targeted r eductions and pr oject deferrals can also be a challenge to quantify because of the uncertainty in the futur e investment needs and costs. However , ther e ar e examples of how to over come this challenge, such as the Bonneville Power Administration (BP A) transmission planning pr ocess (descr ibed later). V ermont Docket 7081 is another collaborative pr ocess—initiated at the dir ection of the legislatur e—that is working on a new transmission planning pr ocess that will explicitly incorporate energy ef ficiency (V ermont Public Service Boar d, 2005). Both BP A and V ermont Docket 7081 str ess the need to start well in advance of the need for r eductions to allow the energy ef ficiency pr ogram 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 alter natives ar e initiated befor e pr oject pr oponents ar e vested in building new transmission lines. The deferral of capacity expenditur es can pr oduce the same r eliability level for customers. In cases when an energy efficiency pr ogram changes the expected r eliability level (either higher or lower), the value to customers must be intr oduced as either a benefit or cost. A typical appr oach is to use the customer’ s V alue of Lost Load (VOLL) as determined thr ough V alue 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 r esults and ar e often dif ficult to substantiate.

In r egions with established capacity markets, the valuation pr ocess is easier because the posted market pr ices ar e the value of capacity . The appr oach to value these benefits is ther efor e similar to the market pr ice for ecasting appr oach descr ibed to value energy benefits. Regional planning pr ocesses can also include energy ef ficiency in their r esour ce planning. Regional electr icity planning pr ocesses pr imar ily focus on developing adequate r esour ces to meet r egional r eliability cr iter ia as defined in each of the North Amer ican Electr ic Reliability Council (NERC) r egions. Establishing capacity and ancillary service market rules that allow energy ef ficiency and customer load r esponse to participate can br ing energy ef ficiency into the planning pr ocess. For example, Independent System Operator New England (ISO-NE) Demand Resour ces W orking Gr oup will be including

1 The transmission planning pr ocess r equir es collaboration of r egional stakeholders including transmission owners, utilities, and r egulators. Distr ibution

planning departments of electr ic utilities typically make the decisions for distr ibution-level and local transmission facilitie s. Planning and development of high-voltage transmission facilities on the bulk-supply system is done at the independent system operator (ISO)/R TO and North A mer ican Electr ic Reliability Council (NERC) r egional levels. At a minimum, transmission adequacy must uphold the established NERC r eliability st andar ds.

3-6 National Action Plan for Energy Efficiencyenergy ef ficiency and demand r esponse as qualifying r esour ces for the New England Forwar d Capacity Market. Another example is PJM Inter connection (PJM), which has r ecently made its Economic Load Response Pr ogram a permanent featur e of the PJM markets (in addition to the Emergency Load Response Pr ogram that was permanently established in 2002) and has r ecently opened its Synchr onized and Non-Synchr onized Reserve markets to demand r esponse pr oviders.

Other Benefits Energy ef ficiency pr ovides several types of non-energy benefits not typically included in traditional r esour ce planning. These benefits include envir onmental impr ovement, support for low-income customers, economic development, customer satisfaction and comfort, and other potential factors such as r educed costs for bill collection and service shut-of fs, impr ovements in household safety and health, and incr eased pr operty values. As an economic development tool, energy ef ficiency attracts and r etains businesses, cr eates local jobs, and helps business competitiveness and ar ea appeal.
Envir onmental benefits, pr edominantly air emissions r eductions, might or might not have specific economic value, depending on the r egion and the pollutant. The market pr ice of energy will include the pr oducer’ s costs of obtaining r equir ed emission allowances (e.g., nitr ogen oxides [NO X ], sulfur dioxide [SO 2 ]), and emission r eduction equipment. Emissions of carbon dioxide (CO 2 ), also ar e affected by planning decisions of whether to consider the value of unr egulated emissions. The costs of CO 2 wer e included in Califor nia’ s assessment of energy ef ficiency on the basis that these costs might become pr iced in the futur e and the expected value of futur e CO 2 pr ices should be consider ed when making energy ef ficiency investments. 2 Even without r egulatory policy guidance, several utilities incorporate the estimated futur e costs of emissions such as CO 2 into their r esour ces planning pr ocess to contr ol the financial r isks associated with futur e r egulatory changes. 3 For example, Idaho Power Company includes an estimated futur e cost of CO 2 emissions in its r esour ce planning, and in determining the cost-ef fectiveness of ef ficiency pr ograms. Many of these benefits do not accrue dir ectly to the utility , raising additional policy and budgeting issues r egar ding whether , and how, to incorporate those benefits for planning purposes. Municipal utilities and gover nmental agencies have a str onger mandate to include a wider var iety of non-energy benefits in energy ef ficiency planning than do investor-owned utilities (IOUs). Regulators of IOUs might also determine that these benefits should be consider ed. Many of the benefits ar e dif ficult to quantify . However, non-energy benefits can also be consider ed qualitatively when establishing the overall energy ef ficiency budget, and in developing guidelines for targeting appr opr iate customers (e.g., low income or other gr oups). 

### Setting Energy Ef ficiency T argets and Allocating Budget One of the biggest barr iers to energy ef ficiency is developing a budget to fund energy ef ficiency , particularly at utilities or in states that haven’ t had significant pr ograms, histor ically . This is a not str ictly a r esour ce planning issue, but a r egulatory , policy , and organizational issue as well. The two main organizational appr oaches for funding energy ef ficiency ar e r esour ce planning pr ocesses, which establish the energy ef ficiency budget and targets within the planning pr ocess, and public goods-funded charges, which cr eate a separate budget to support energy ef ficiency thr ough a rate sur charge. Ther e ar e successful examples of both appr oaches, as well as examples that use both mechanisms (Califor nia, BP

A, PacifiCorp, and Minnesota). Setting targets for energy ef ficiency r esour ce savings and budgets is a collaborative pr ocess between r esour ce planning staf f, which evaluates cost-ef fectiveness, and other key stakeholders. Arguably , all energy ef ficiency

2 Califor nia 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 3-7measur es identified as cost ef fective in an integrated r esour ce plan (IRP) should be implemented. 4 In practice, a number of other factors must be consider ed. For example, the achievable level of savings and costs, expertise and labor , and ability to ramp up pr ograms also af fects the size, scope, and mix of energy ef ficiency pr ograms. All of these considerations, plus the cost-ef fectiveness of energy ef ficiency, should be taken into account when establishing the funding levels for energy ef ficiency . The funding pr ocess might also r equir e an iterative pr ocess that descr ibes the alter native plans to r egulators and other stakeholders. Some jur isdictions use a policy dir ective such as ”all cost-ef fective energy ef ficiency” (Califor nia) while others allocate a fixed budget amount (New Y ork), specify a fixed per centage of utility r evenue (Minnesota and Or egon), or a target load r eduction amount (T exas). Implementation of a target for electr ic and gas energy savings, or Energy Ef ficiency Resour ces Standar d (EERS) or Energy Ef ficiency Portfolio Standar d (EEPS), such as the Energy Ef ficiency Goal adopted in T exas (PUCT Subst. R. §25.181), is an emerging policy tool adopted or being consider ed in a number of states (ACEEE, 2006). Some states have adopted standar ds with flexibility for how utilities meet such targets, such as savings by end users, impr ovements in distr ibution system ef ficiency , and market-based trading systems.

Resour ce Planning Pr ocess If energy ef ficiency is consider ed as a r esour ce, then the appr opr iate amount of energy ef ficient funding will be allocated thr ough the utility planning pr ocess, based on cost-ef fectiveness, portfolio r isk, energy and capacity benefits, and other cr iter ia. Many utilities find that a r esour ce plan that includes energy ef ficiency yields a lower cost portfolio, so overall pr ocur ement costs should decline mor e than the incr ease in energy ef ficiency pr ogram costs, and the established r evenue r equir ement of the utility will be suf ficient to fund the entir e supply and demand-side r esour ce portfolio. A r esour ce planning pr ocess that includes energy ef ficiency must also include a mechanism to ensur e costr ecovery of energy ef ficiency spending. Most r esour ce planning pr ocesses ar e collaborative forums to ensur e that stakeholders understand and support the overall plan and its cost r ecovery mechanism. In some cases, utility costs might have to be shifted between utility functions (e.g., generation and transmission) to enable cost r ecovery for energy ef ficiency expenditur es. For example, transmission owners might not see energy ef ficiency as a non-wir es solution to transmission system deficiencies because it is unclear to what extent energy ef ficiency costs can be collected in the Federal Energy Regulatory Commission (FERC) transmission tar if f. Ther efor e, even if energy ef ficiency is less costly than thetransmission upgrade, it is unclear whether the transmission upgrade budget can be shifted to energy ef ficiency and still collected in rates. Another challenge for collecting ef ficiency funding in the transmission tar if f is allocation of energy ef ficiency costs acr oss multiple transmission owners, particularly if energy ef ficiency costs ar e incurr ed by a single transmission owner, while transmission costs ar e shar ed among several owners. These examples demonstrate that in or der to implement integrated r esour ce planning, the r egulatory agency r esponsible for determining rates must allow rates designed to support transmission, distr ibution, or other functions to be used for ef ficiency . The transmission companies in Connecticut have been allowed to include r eliability-dr iven energy ef ficiency in tar if fs, although this is noted as an emergency situation not to be r epeated as a normal course of business. These interactions between r egulatory policy and utility r esour ce planning demonstrate that utilities cannot be expected to act alone in incr easing energy ef ficiency thr ough their planning pr ocess. Public Purpose- or System Benefits Charge-Funded Pr ograms 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 r esour ce cost (TRC) test, ar e commonly used to determine the cost-effec tiveness of energy efficiency

pr ograms. Mater ial fr om Chapter 6: Energy Ef ficiency Pr ogram Best Practices descr ibes these tests in mor e detail.

3-8 National Action Plan for Energy Efficiencyinvestment in energy ef ficiency . In der egulated markets with unbundled rates, this mechanism can appear as a separate customer charge, often r eferr ed to as a system benefits charge (SBC). Establishing a public purpose charge has the advantage of ensur ing policy-makers that ther e is an allocation of funding towar ds energy efficiency , and can be necessary in der egulated markets wher e the delivery company cannot captur e the savings of energy ef ficiency . This appr oach separates the energy ef ficiency budget fr om the r esour ce planning pr ocess, however

. Developing a new rate sur charge or expanding an existing sur charge also raises many of the questions addr essed in Chapter 2: Utility Ratemaking & Revenue Requir ements. For example, ar e the customer segments paying into SBCs r eceiving a comparable level of energy ef ficiency assistance in r etur n, or ar e the incr eases a cr oss-subsidy? Often, industr ial customers pr efer to implement their own ef ficiency rather than contr ibute to a pool. Also, if the targets ar e used to set shar eholder incentives, the incentives should be appr opr iate for the aggr essiveness of the pr ogram. Additionally , because the targeted budget allocation in public purpose-funded pr ograms is often set independently of the utility’ s overall r esour ce planning pr ocess (and is not fr equently changed), utilities might not have funding available to pr ocur e all cost-ef fective savings der ived fr om energy ef ficiency measur es. This type of scenar io can r esult in potentially higher costs for customers than would occur if each cost-effective efficiency opportunity wer e pursued.


# Ov er coming Challenges: Alter nativ e Appr oaches

Successful incorporation of energy ef ficiency into the r esour ce planning pr ocess r equir es utility executives, r esour ce planning staff, r egulators, and other stakeholders to value energy ef ficiency as a r esour ce, and to be committed to making it work within the utility or r egional r esour ce portfolio. T o illustrate appr oaches to over coming these barr iers, we highlight several successful energy ef ficiency pr ograms by Califor nia, the New Y ork State Energy Resear ch and Development Author ity (NYSERDA), BP A, Minnesota, T exas, and PacifiCorp. The energy ef ficiency pr ograms in these six r egions demonstrate several dif fer ent ways to incorporate energy ef ficiency into planning pr ocesses; in each example, the economics generally work well for ef ficiency pr ograms. The pr imary dr iver of energy ef ficiency in planning is the low levelized cost of energy savings. T able 3-1 shows the r eported levelized cost of electr icity and natural gas ef ficiency fr om thr ee of the r egions surveyed. The r eported utility cost of ef ficiency ranges between $0.01/kilowatthour (kWh) and $0.03/kWh for Pacific Gas & Electr ic (PG&E), NYSERDA, and the Northwest Power and Conservation Council (NWPCC). When including both utility pr ogram costs and customer costs, the range is $0.03/kWh to $0.05/kWh. The range of r eported benefits for electr ic energy ef ficiency is fr om $0.06/kWh to $0.08/kWh. For natural gas, only P&GE r eported specific natural gas ef ficiency measur es; these show similarly low levelized costs r elative to benefits.

Table 3-1: Levelized Costs and Benefits Fr om F our 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 NY SERD A 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 T exas 4 0.02 5 N/A 0.060 6 N/A N/A N/A

1 PG&E, 2005 2 NYSERDA, 2005 3 NWPCC, 2005 4 Calculated based on T exas 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 measur e life, load factor of 26.4 per cent, which is calculated fr om T exas’ 2004 ef ficiency-based r eductions of 193 MW of peak demand and 448 GWh of energy (Fr ontier 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 T exas (PUCT) Deemed Avoided Costs of $0.0268/kWh for energy and $78.50/kW-year for capacity; 448GWh and 193MW of peak load r eduction.

To create a sustainable, aggressive national commitment to energy efficiency 3-9

### Califor nia Califor nia has had a continued commitment to energy ef ficiency since the late 1970s. T wo major ef forts ar e curr ently being coor dinated in the state that addr ess energy use in new buildings as well as ef ficiency upgrades in existing buildings. Figur e 3-2 shows the policy structur e, with the Califor nia Energy Commission (CEC) leading the building codes and standar ds pr ocess, and the Califor nia Public Utility Commission (CPUC) leading the IOU and thir d-party administer ed ef ficiency pr ograms. Jointly , the agencies publish the Energy Action Plan that explicitly states a goal to integrate ”all cost-ef fective energy ef ficiency .” Recently , the CPUC appr oved an ef ficiency budget of $2 billion over the next thr ee years to serve a population of appr oximately 35 million. The pr ocess for designing and implementing ef ficiency pr ograms in Califor nia by the IOUs is to develop the pr ograms (either by the utility or thr ough thir d-party solicitation), evaluate cost-ef fectiveness, establish and gain appr oval for the pr ogram funding, and evaluate the pr ogram’ s success thr ough M&V . Figur e 3-2 illustrates this appr oach.

T

able 3-2 descr ibes how Califor nia addr esses barr iers for incorporating energy ef ficiency in planning for the IOU pr ocess.

Sour ce: Energy and Envir onmental Economics, Inc.

3-10 National Action Plan for Energy EfficiencyFigur e 3-3. Califor nia Investor -Owned Utility (IOU) Pr ocess

Resour ces and Ramp-up Limits

Rank and Estimate Potential for Cost Ef fective Portfolios Determine T arget Energy Evaluate Pr ogram Funding Level Ef ficiency Cost Ef fectiveness (thr ough CPUC Pr ograms pr ocess) CPUC Avoided Costs

Implement Appr oved Pr ograms to Appr oved Levels

Perform M&V

and Adjust Pr ograms for

Next Y ear

Sour ce: Energy and Envir onmental Economics, Inc.

Table 3-2. Incor por ation of Ener gy Efficiency in California’ s Investor-Owned Utilities’ Planning Pr ocesses Barr ier s California CPUC-Administer ed Pr ogr ams A. Determining the V a lue of Ener gy Efficiency Ener gy Pr ocur ement Estimated energy savings Customer adoption rates are forecast into the energy efficiency plans with monthly or quarterly reporting of program success for tracking. V aluing energy savings Energy savings are based on mark et 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 & Resour ce Adequacy Estimating capacity savings Capacity savings are ev aluated using the load research data for each measure

. V aluing capacity benefits

F actors in achieving benefits Each capacity-related v alue is estimated by climate zone of the state and incorporated into an ”all-in” energy v alue

. 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 v alue for electric generation. Capacity benefits are based on the best forecast of achieved savings

. T here is no explicit link between forecasted benefits o f 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 Ta r g ets 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 ev aluation, 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 T ransmission Planning and Regional Roundtable In the Northwest, BP A has been leading an industry r oundtable to work with distr ibution utilities, local and state gover nment, envir onmental inter ests, and other stakeholders to incorporate energy ef ficiency and other distr ibuted energy r esour ces (DER) into transmission planning. DER includes energy ef ficiency as well as distr ibution generation and other nonwir es solutions. Figur e 3-4 illustrates the analysis appr oach and data sour ces. W ithin BP A, the T ransmission Business Line (TBL) works with the energy ef ficiency gr oup in Power Business Line (PBL) to develop an integrated transmission plan. The pr ocess includes significant stakeholder contr ibutions in both input data assumptions (led by NWPCC) and in r eviewing the overall analysis at the r oundtable. 5

T

able 3-3 descr ibes how BP A works with stakeholders to addr ess barr iers for incorporating energy ef ficiency in planning pr ocesses.

Figur e 3-4. BP A T ransmission Planning Pr ocess

IOUs and Public Utilities

BP

A: T ransmission Business Line T

ransmission

Planning

Regional Stakeholder Gr oup: BP A Roundtable Utilities, inter est gr oups, other stakeholders discuss issues and pr ovide analysis r eview Distributed r esour ce

analysis r esults NWPCC: Regional Planning Pr ocess

BP

A PBL Ef ficiency Gr oup: Evaluate cost-ef fective DER based on transmission plan and other for ecasts Load for ecasts Publicly vetted energy price for ecasts, conservation database
T

r ansmission costs and r e quir ed DER

load r elief

Revise transmission plan as appr opriate, and fund transmission and DER investments T

ransmission plans

Gr oup Data Decision

Sour ce: Energy and Envir onmental Economics, Inc.

5 NWPCC conducts r egional energy ef ficiency planning. Mor e information can be found at <http://www .nwcouncil.org>.

3-12 National Action Plan for Energy Efficiency’ Table 3-3. Incor por ation of Ener gy Efficiency in BP A s Planning Pr ocesses Barr ier s BP A-Administer ed Pr ogr ams A. Determining the V a lue of Ener gy Efficiency Ener gy Pr ocur ement Estimated energy savings T he process uses the NWPCC database to define the measure impact and costs

. NWPCC maintains a publicly av ailable 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

. V aluing energy savings Energy savings are v alued based on the NWPCC long-run forecast of energy v alue for the region, plus marginal losses

. Capacity & Resour ce Adequacy Estimating capacity savings Capacity savings are based on expected NWPCC efficiency measure coincident peak impacts

. V aluing capacity benefits T he deferral v alue of transmission investments is used to ev aluate the transmission capacity v alue , which is the focus of these studies

. T he approach is to calculate the difference in present v alue revenue requirement before and after the energy efficiency investment (Present W orth Method). F actors in achieving benefits T he 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 T he analysis includes an ev aluation of the environmental externalities , but no other non-energy benefits

. B
. Setting Ta r g ets and Allocating Budget Quantity of energy efficiency to implement T he target for NCAs is established by the amount of load that must be reduced to defer the transmission line and maintain reliability

. T his target is driven by the load growth forecasts of the utilities in the region. Estimating program effectiveness BP A 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

. T he 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 v alue

. Additional costs of NCAs that are justified based on energy v alue are supported by other sources (BP A 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

. T he 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 Y ork State Energy Resear ch and Development Author ity (NYSERDA) In the mid-1990s, New Y ork r estructur ed the electr ic utilities and moved r esponsibility for implementing energy ef ficiency pr ograms to the NYSERDA. The following figur e shows an overview of the NYSERDA pr ocess. The pr ograms ar e funded thr ough the SBC funds (appr oximately $175 million per year), and NYSERDA r eports on the pr ogram impact and cost-ef fectiveness to the New Y

ork State Public Service Commission (NYS PSC) annually

. T

able 3-4 descr ibes how NYSERDA addr esses the barr iers to implementing energy ef ficiency

.

Sour ce: Energy and Envir onmental Economics, Inc.
To create a sustainable, aggressive national commitment to energy efficiency 3-13’ Table 3-4. Incor por ation of Ener gy Efficiency in NY SERD A s Planning Pr ocesses Barr ier s NY SERD A-Administer ed Pr ogr ams A. Determining the V a lue of Ener gy Efficiency Ener gy Pr ocur ement Estimating energy savings NY SERD A internally develops estimates of savings for individual energy efficiency programs and the portfolio in aggregate

. In addition, NY SERD A 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. V aluing 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 & Resour ce 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. V aluing capacity benefits T he v alue of generation capacity in New Y ork is established by examining historical auction clearing prices in the NYISO’ s unforced capacity market. T he baseline v alues are then escalated over time using a growth rate derived from NY SERD A ’ s electric system modeling results

. T hese capacity costs are used to v alue those NY SERD A programs that effectively lower system peak demand. F actors in achieving benefits T he capacity v alue is included as the best estimate of future capacity savings by New Y ork utilities

. T here is no direct link, however , between the forecasted savings and the actual change in utility procurement budgets

. Other Benefits Incorporating non-energy benefits T he cost-effectiveness of NY SERD A 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 Ener gy Efficiency Ta r gets Quantity of energy efficiency to implement T he overall size of the NY SERD A program is determined by the aggregate funding level established by the NY S PSC. NY SERD A, with advice from the SBC Advisory Group , recommends specific sub-program funding levels for approv al by the staff at NY S PSC. Estimating program effectiveness NY SERD A 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 NY S 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 tow ards energy efficiency are eliminated. NY SERD A is supported primarily by SBCs collected by the utilities at the direction of NY S 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 F orecasts of savings are based on the best estimate of future savings

. T here is no direct link to ensure these savings actually occur

. 

### Minnesota The Minnesota legislatur e passed the Conservation Impr ovement Pr ogram (CIP) in 1982. State law r equir es that (1) electr ic utilities that operate nuclear-power plants devote at least 2 per cent of their gr oss operating r evenue to CIP , (2) other electr ic utilities devote at least 1.5 per cent of their r evenue, and (3) natural gas utilities devote at least 0.5 per cent. Energy is supplied pr edominantly by two utilities: Xcel, which pr ovides 49 per cent of the electr icity and 25 per cent of the natural gas, and CenterPoint Energy , which pr ovides 45 per cent of the natural gas. Facilities with a peak electr ical demand of at least 20 megawatts (MW) ar e permitted to opt out of CIP and avoid paying the pr ogram’ s rate adjustment in their electr ic and natural gas bills (10 facilities have done so). While the Minnesota Department of Commer ce oversees the CIP pr ograms of all utilities in the state, the department only has the author ity to or der changes in the pr ograms of the IOUs.
Utilities ar e r equir ed to file an IRP every 2 years, using 5-, 10- and 15-year planning hor izons to determine the need for additional r esour ces. The statutory emphasis is on demand-side management (DSM) and r enewable r esour ces. A utility must first show why these r esour ces will not meet futur e needs befor e pr oposing traditional utility investments. The plans ar e r eviewed and appr oved by the Minnesota Public Utilities Commission. CIP is the

3-14 National Action Plan for Energy EfficiencyTable 3-5. Incor por ation of Ener gy Efficiency in Minnesota’ s Planning Pr ocesses Barr ier s Minnesota-Administer ed Pr ogr ams A. Determining the V a lue of Ener gy Efficiency Ener gy Pr ocur ement 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

. V aluing energy savings Capacity & Resour ce 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. P ower plant, transmission, and distribution costs are considered trade secrets and are not disclosed publicly

. V aluing capacity benefits F actors in achieving benefits T here 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’ v aluation methods produce v arying estimates

. In addition, the Department of Commerce incorporates an externality avoided cost in the electric societal cost benefit test, providing utilities with v alues in $/ton for several emissions , which the utilities translate to amounts in $/MWh based on each utility’ s emissions profile

. B
. Setting Ta r g ets and Allocating Budget Quantity of energy efficiency to implement T he 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 conserv ation programs , depending on the type of utility

. Estimating program effectiveness Program effectiveness is handled by each utility

. Minnesota’ s IOUs rely on the softw are 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. T he conserv ation plans approved by the Department of Commerce are the primary mechanism by which utilities meet conserv ation targets included in their IRPs

.

pr imary mechanism by which the electr ic utilities achieve the conservation targets included in their IRPs. The Department of Commer ce conducts a biennial r eview of the CIP plan for each investor-owned utility

. Inter ested parties may file comments and suggest alternatives befor e the department issues a decision appr oving or modifying the utility’ s plan. Utilities that meet or exceed the energy savings goals established by the Department of Commer ce r eceive a financial bonus, which they ar e permitted to collect thr ough a rate incr ease. Both electr ic utilities have exceeded their goals for the last several years. T able 3-5 descr ibes how the Minnesota Department of Commer ce addr esses barr iers to implementing energy ef ficiency

. 

### T exas T

exas Senate Bill 7 (1999), enacted in the 1999 T exas legislatur e, mandates that at least 10 per cent of an investor -owned electr ic utility’ s annual gr owth in electr icity demand be met thr ough energy ef ficiency pr ograms each year . The Public Utility Commission of T exas (PUCT) Substantive Rule establishes pr ocedur es for meeting this legislative mandate, dir ecting the transmission and distr ibution (T&D) utilities to hir e thir d-party energy ef ficiency pr oviders to deliver energy ef ficiency services to every customer class, using “deemed savings” estimates for each energy ef ficiency measur e (PUCT , 2000). Appr oved pr ogram costs ar e included in the IOU’ s transmission and distr ibution rates, and expenditur es ar e r eported separately in the IOU’ s annual energy ef ficiency r eport to the PUCT . Actual energy and capacity savings ar e ver ified by independent experts chosen by the PUCT . Incentives ar e based on pr escr ibed avoided costs, which ar e set by
To create a sustainable, aggressive national commitment to energy efficiency 3-15Table 3-6. Incor por ation of Ener gy Efficiency in Te xas’ Planning Pr ocesses Barr ier s Te xas-Administer ed Pr ogr ams A. Determining the V a lue of Ener gy Efficiency Ener gy Pr ocur ement 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. V aluing energy savings Avoided costs shall be the estimated cost of new gas turbine , which for energy w as initially set in PUCT section 25.181­ 5 to be $0.0268 /kWh saved annually at the customer’ s meter

. Capacity & Resour ce 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. V aluing capacity benefits Avoided costs shall be the estimated cost of new gas turbine , which for capacity w as 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 Ener gy Efficiency Ta r gets 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 av ailable 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

. T he 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 T he annual energy efficiency report submitted by the IOU to the PUCT includes energy and capacity savings , program expenditures , and unspent funds

. T here is no verification that the estimated avoided costs are captured in utility savings

. the PUCT . El Paso Electr ic Company will be included in the pr ogram beginning with an efficiency target of 5 percent of gr owth in 2007 and 10 per cent of gr owth in 2008.
The 2004 r eport on T exas’ pr ogram accomplishments highlights the level of savings and success of the pr ogram: “In 2004, the investor-owned utilities in T exas achieved their statewide goals for energy ef ficiency once again. 193 MW of peak demand r eduction 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 corr espond to a r eduction of 1,460,352 pounds of nitr ogen oxide (NO X ) emissions. Incentives or r ebates wer e pr ovided to pr oject sponsors to of fset the costs of a var iety of energy ef ficiency impr ovements. T wo new energy ef ficiency pr ograms wer e voluntar ily intr oduced by the Texas utilities.” T able 3-6 descr ibes how T exas utilities addr ess barr iers to implementing energy ef ficiency

. 

### PacifiCorp PacifiCorp is an investor-owned utility with mor e than 8,400 MW of generation capacity that serves appr oximately 1.6 million r etail customers in portions of Utah, Or egon, Wyoming, W ashington, Idaho, and Califor nia. PacifiCorp pr imar ily addr esses its energy ef ficiency planning objectives as part of its IRP pr ocess. Ef ficiency-based measur es ar e evaluated based on their ef fect on the overall cost of PacifiCorp’ s pr eferr ed r esour ce portfolio,defined as the overall supply portfolio with the best balance of cost and r isk.

3-16 National Action Plan for Energy EfficiencyAdditionally , some states that ar e in PacifiCorp’ s service terr itory , such as Or egon and Califor nia, also mandate that the company allocate funds for ef ficiency under r elated statewide public goods r egulations. “In Or egon, SB 1149 r equir es that investor -owned electr ic companies collect fr om all r etail customers a public purpose charge equal to 3% of r evenues collected fr om customers. Of this amount, 57% (1.7% of r evenues) goes towar d Class 2 [energy efficiencybased] demand side management (DSM). The Energy T rust of Or egon (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 ef ficiency , however , PacifiCorp allocates mor e money to ef

ficiency than r equir ed by state statute. As of the 2004 IRP , PacifiCorp planned to implement a base of 250 average megawatts (aMW) of energy ef ficiency , and to seek an additional 200 aMW of new ef ficiency pr ograms if cost-ef fective options could be identified. PacifiCorp models the impact of energy ef ficiency as a shaped load r eduction to their for ecasted load, and computes the change in supply costs with, and without, the impact of DSM. This appr oach allows dif ferent types of DSM to r eceive dif fer ent values based on the alter native supply costs in dif fer ent parts of the PacifiCorp service terr itory . For example, the IRP plan indicates that “r esidential air conditioning decr ements pr oduce the highest value [in the East and W est].

Table 3-7. Incor por ation of Ener gy Efficiency in P acifiCor p’ s Planning Pr ocesses Barr ier s P acifiCor p-Administer ed Pr ogr ams A. Determining the V a lue of Ener gy Efficiency Ener gy Pr ocur ement Estimating energy savings T he 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). T hese load decrements have hourly shapes based on the types of measures installed for each program.

V aluing energy savings Efficiency-based (or Class 2) DSM programs are v alued based on cost effectiveness from a utility cost test perspective , minimizing the present v alue revenue requirement. T he IRP (using the preferred portfolio of supply-side resources) is run with and without these DSM decrements , and their v alue 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 & Resour ce Adequacy Estimating capacity savings

V aluing capacity benefits P acifiCorp explicitly ev aluates the capacity v alue of dispatchable and price-based DSM, or ‘Class 1’ DSM, and the ability to hit target reserve margins in the system with these resources

. T he IRP resulted in a recommendation to defer three different supply-side projects

. T he capacity benefits of more traditional energy efficiency programs are not explicitly ev aluated; 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 v alued at the forecasted costs of displaced generation projects

. By integrating the ev aluation of DSM into the overall portfolio , the v alue of energy efficiency is directly linked to specific generation projects

. It does not appear that P acifiCorp ev aluates 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 Ener gy Efficiency Ta r g ets 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 , P acifiCorp 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 v alues from existing programs and the forecasted load shapes for P acifiCorp’ 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

.
T he IRP process for P acifiCorp seeks to gain the best balance of cost and risk using the present v alue of revenue requirements , which accounts for timing issues associated with any type of resource ev aluated, including efficiency

. Successive IRPs will continue to ev aluate 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 3-17Pr ograms with this end use impact pr ovide the most value to PacifiCorp’ s system because they r educe demand dur ing the highest use hours of the year, summer heavy load hours. The commer cial lighting and system load shapes with the highest load factors pr ovide the lowest avoided costs.” It does not appear that PacifiCorp r ecomputes the overall r isk of its portfolio with incr eased energy ef ficiency . T able 3-7 descr ibes how PacifiCorp addr esses barr iers to implementing energy ef ficiency

. 

# Key Findings

This section descr ibes the common themes in the appr oaches used to navigate and over come the barr iers to incorporating energy ef ficiency in the planning pr ocess. While ther e ar e many appr oaches to solving each issue, the following key findings stand out:

• Cost and Savings Data for Energy Efficiency Measures

Are Readily A vailable. Given the long history of energy ef ficiency pr ograms in several r egions, existing r esour ces to assist in the design and implementation of energy ef ficiency pr ograms ar e widely available. Both Califor nia and the Northwest maintain extensive, publicly available online databases of energy ef ficiency measur es and impacts: the Database for Energy Ef ficiency Resour ces (DEER) in Califor nia 6 and NWPCC Database in the Northwest. 7 DEER includes both electr icity and natural gas measur es while NWPCC contains only electr icity measur es. These databases incorporate a number of factors af fecting savings estimates, includingclimate zones, building type, building vintage, and customer usage patter ns. Energy ef ficiency and r esour ce planning studies containing detailed information on ef ficiency measur es ar e available for r egions thr oughout the United States. It is often possible to adjust existing data for use in a specific utility service ar ea with r elatively straightforwar d assumptions. • Energy , Capacity , and Non-Energy Benefits Can Justify Robust Energy Efficiency Programs. Energy savings alone ar e usually mor e than suf ficient to justify and fund a wide range of ef ficiency measur es for electr icity and natural gas. However, the capacity and nonenergy benefits of energy efficiency ar e important factors to consider in assessing energy ef ficiency measur es on an equal basis with traditional utility investments. In practice, policy , budget, expertise, and human r esour ces ar e the mor e limiting constraints to effectively incorporating energy ef ficiency into planning.

— Estimating the quantity and value of energy savings is r elatively straightforwar d. W ell-established methods for estimating the quantity and value of energy savings have been used in many r egions and forums. All of the r egional examples for estimating energy and capacity savings for energy ef ficiency evaluate the savings for an individual measur e using either measur ements or engineer ing simulation, and then aggr egate these by the expected number of customers who will adopt the measur e. Both histor ical and forwar d market pr ices ar e r eadily available, particularly for natural gas wher e long-term forwar d markets ar e mor e developed.

— Estimating capacity savings is mor e dif ficult, but challenges ar e being over come. Capacity savings depend mor e heavily on r egional weather conditions and timing of the peak loads and, ther efor e, ar e dif ficult to estimate. Results fr om one r egion do not r eadily transfer to another . Also, publicly available market data for capacity ar e not as r eadily available as for energy , even though the timing and location of the savings ar e cr itical. Because potential capacity savings ar e larger for electr icity energy ef ficiency than natural gas, captur ing capacity value is a larger issue for electr ic utilities. Pr oduction simulation canexplicitly evaluate the change in power plant investment and impact of such factors as r e-dispatch due to transmission constraints, var iation in load gr owth,

6 The DEER W eb site, descr iption, and history can be found at: http://www .energy .ca.gov/deer/. The DEER database of measur es can be found at:

http://eega.cpuc.ca.gov/deer/. 7 The NWPCC W eb site, comments, and ef ficiency measur e definition can be found at: http://www .nwcouncil.org/comments/default.asp.

3-18 National Action Plan for Energy Efficiencyand other factors. But these models ar e analytically complex and planning must be tightly integrated with other utility planning functions to accurately assess savings. These challenges can and have been over come in dif fer ent ways in r egions with a long track-r ecor d of energy ef ficiency pr ograms (e.g., Califor nia, BP A, New Y ork).

— Estimating non-energy benefits is an emerging appr oach in many jur isdictions. Depending on the jur isdiction, legislation and r egulatory commission policies might expr essly permit, and even r equir e, the consideration of non-energy benefits in cost-ef fectiveness determinations. However , specific guidelines r egar ding the quantification and inclusion of nonenergy benefits ar e still under discussion or in development in most jur isdictions. The consideration of both non-energy and capacity benefits of energy ef ficiency pr ograms is r elatively new, compar ed to the long history of valuing energy savings.

• A Clear Path to Funding Is Needed to Establish a

Budget for Energy Efficiency Resources. Ther e ar e thr ee main appr oaches to funding energy ef ficiency investments: 1) utility r esour ce planning pr ocesses, 2) public purpose funding, and 3) a combination of both. In a utility r esour ce planning pr ocess, such as the BP

A non-construction alter natives pr ocess, ef ficiency options for meeting BP A

’ s objectives ar e compar ed to potential supply-side investments on an equal basis when allocating the available budget. In this type of r esour ce planning pr ocess, budget is allocated to ef ficiency measur es fr om each functional ar ea accor ding to the benefits pr ovided by ef ficiency pr ograms. The advantage of this appr oach is that the budget for ef ficiency is linked dir ectly to the savings it can achieve; however , particularly in the case of capacity-r elated benefits, which have cr itical timing and load r eduction targets to maintain r eliability , it is a dif ficult pr ocess. The public purpose funding and SBC appr oaches in New Y ork, Minnesota, and other states ar e an alter native to budget r eallocation within the planning pr ocess. In Califor nia, funding fr om both planning pr ocesses and public purpose funding is used. Public purpose funds do not have the same dir ect link to energy s a v ings, so pr ograms might not captur e all the savings attr ibuted to the pr ogram. Funding targets might be set befor e available ef ficiency options have been explor ed, so if other cost-ef fective ef ficiency measur es ar e later identified, additional funding might not be available. This situation can r esult in customer costsbeing higher than they would have been if all costef fective ef ficiency savings opportunities had been supported. Using public purpose funding significantly simplifies the planning pr ocess, however , and puts mor e contr ol over the amount of energy ef ficiency in the contr ol of r egulators or utility boar ds. As compar ed to r esour ce planning, far less time and ef fort ar e r equir ed on the part of r egulators or legislators to dir ect a specific amount of funding to cost-ef fective ef ficiency pr ograms.

• Integrate Energy Efficiency Early in the Resource

Planning Process. In or der to captur e the full value of deferr ing the need for new investments in capacity , energy ef ficiency must be integrated early in the planning pr ocess. This step will avoid sunk investment associated with longer lead-time pr ojects. Ef ficiency should also be planned to target investments far enough into the futur e so that energy ef ficiency pr ograms have the opportunity to ramp up and pr ovide suf ficient load r eduction. This timeline will allow the utility to build expertise and establish a track r ecor d for energy ef ficiency , as well as be able to monitor peak load r eductions. Starting early also allows time to gain support of the traditional pr oject pr oponents befor e they ar e 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 Ef ficiency Leadership Gr oup of fers the following r ecommendations as ways to over come many of the barr iers to energy ef ficiency in r esour ce planning, and pr ovides a number of options for consideration for consideration by utilities, r egulators and stakeholders (as presented in the Executive Summar y)

. Recommendation: Recognize energy ef ficiency as a high pr ior ity energy r esour ce. Energy ef ficiency has not been consistently viewed as a meaningful or dependable r esour ce compar ed to new supply options, r egar dless of its demonstrated contr ibutions to meeting load gr owth. Recognizing energy ef ficiency as a high-pr ior ity energy r esour ce is an important step in ef forts to captur e the benefits it of fers, and lower the overall cost of energy services to customers. Based on jur isdictional objectives, energy ef ficiency can be incorporated into r esour ce plans to account for the long-term benefits fr om energy savings, capacity savings, potential r eductions of air pollutants and gr eenhouse gases, as well as other benefits. The explicit integration of energy ef ficiency r esour ces into the formalized r esour ce planning pr ocesses that exist at r egional, state, and utility levels can help establish the rationale for energy ef ficiency funding levels and for pr operly valuing and balancing the benefits. In some jur isdictions, these existing planning pr ocesses might need to be adapted or even cr eated to meaningfully incorporate energy ef ficiency r esour ces into r esour ce planning. Some states have r ecognized energy ef ficiency as the r esour ce of first pr ior ity due to its br oad benefits. Options to Consider:
• Establishing policies to establish energy ef ficiency as a

pr ior ity r esour ce.

• Integrating energy ef ficiency into utility , state, and r egional r esour ce planning activities.

• Quantifying and establishing the value of energy ef ficiency , consider ing energy savings, capacity savings, and envir onmental benefits, as appr opr iate. Recommendation: Make a str ong, long-term commitment to implement cost-ef fective energy ef ficiency as a
r esour ce. Energy ef ficiency pr ograms ar e most successful and pr ovide the gr eatest benefits to stakeholders when appr opr iate policies ar e established and maintained over the long-term. Confidence in long-term stability of the pr ogram will help maintain energy efficiency as a dependable r esour ce compar ed to supply-side r esour ces, deferr ing or even avoiding the need for other infrastructur e investments, and maintain customer awar eness and support. Some steps might include assessing the long-term potential for cost-ef fective energy ef ficiency within a r egion (i.e., the energy ef ficiency that can be deliver ed cost-ef fectively thr ough pr oven pr ograms for each customer class within a planning hor izon); examining the r ole for cutting-edge initiatives and technologies; establishing the cost of supply-side options versus energy ef ficiency; establishing r obust M&V pr ocedur es; and pr oviding for r outine updates to information on energy ef ficiency potential and key costs. Options to Consider:
• Establishing appr opr iate cost-ef fectiveness tests for a

portfolio of pr ograms to r eflect the long-term benefits of energy ef ficiency

.

• Establishing the potential for long-term, cost-ef fective

energy ef ficiency savings by customer class thr ough pr oven pr ograms, innovative initiatives, and cuttingedge technologies.

• Establishing funding r equir ements for deliver ing longterm, cost-ef fective energy ef ficiency

.

• Developing long-term energy saving goals as part of

energy planning pr ocesses.

• Developing r obust M&V pr ocedur es.

• Designating which organization(s) is r esponsible for

administer ing the energy ef ficiency pr ograms.

• Pr oviding for fr equent updates to energy r esour ce plans

to accommodate new information and technology

.

3-20 National Action Plan for Energy EfficiencyRecommendation: Br oadly communicate the benefits of, and opportunities for , energy ef ficiency

. Exper ience shows that energy ef ficiency pr ograms help customers save money and contr ibute to lower cost energy systems. But these benefits ar e not fully documented nor r ecognized by customers, utilities, r egulators, or policymakers. Mor e ef fort is needed to establish the business case for energy ef ficiency for all decision-makers and to show how a well-designed appr oach to energy efficiency can benefit customers, utilities, and society by (1) r educing customers’ bills over time, (2) foster ing financially healthy utilities (e.g., r etur n on equity , ear nings per shar e, and debt coverage ratios unaf fected), and (3) contr ibuting to positive societal net benefits overall. Ef fort is also necessary to educate key stakeholders that although energy ef ficiency can be an important low-cost r esour ce to integrate into the energy mix, it does r equir e funding just as a new power plant r equir es funding. Options to Consider:
• Establishing and educating stakeholders on the business

case for energy ef ficiency at the state, utility , and other appr opr iate level addr essing customer , utility , and societal perspectives.

• Communicating the r ole of energy efficiency in lower ing

customer energy bills and system costs and r isks over time. Recommendation: Pr ovide suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective. Energy ef ficiency pr ograms r equir e consistent and long-term funding to ef fectively compete with energy supply options. Ef forts ar e necessary to establish this consistent long-term funding. A var iety of mechanisms has been and can be used based on state, utility , and other stakeholder inter ests. It is important to ensur e that the ef ficiency pr ogram pr oviders have suf ficient long-term funding to r ecover pr ogram costs and implement the energy ef ficiency measur es that have been demonstrated to be available and cost-effective. A number of states ar e now linking pr ogram funding to the achievement of energy savings. Options to Consider:
• Deciding on and committing to a consistent way for

pr ogram administrators to r ecover energy ef ficiency costs in a timely manner

.

• Establishing funding mechanisms for energy ef ficiency

fr om among the available options, such as r evenue r equir ements or r esour ce pr ocur ement funding, SBCs, rate-basing, shar ed-savings, incentive mechanisms, etc.

• Establishing funding for multi-year per iods.

To create a sustainable, aggressive national commitment to energy efficiency 3-21

# Refer ences
Amer ican Council for an Energy Ef ficient Economy [ACEEE] (2006, February). Energy Efficiency Resource Standards: Experience and Recommendations. <http://aceee.org/pubs/eo63.htm>. Bokenkamp, K., LaFlash, H., Singh V

. , and W ang, D. (2005, July). Hedging Carbon Risk: Pr otecting Customers and Shar eholders fr om the Financial Risk Associated with Carbon Dioxide Emissions. The Electricity Journal . 10(6):11–24. Califor nia Public Utilities Commission [CPUC]. (2005, Apr il 7). Interim Opinion On E3 A voided Cost Methodology . Or der Instituting Rulemaking to Pr omote Consistency in Methodology and InputAssumptions in Commission Applications of ShortRun and Long-run Avoided Costs, Including Pr icing for Qualifying Facilities. Rulemaking 04-04-025 (Filed Apr il 22, 2004). <http://www .ethr ee.com/ CPUC/45195.pdf>. Fr ontier Associates (2005, November 1). Energy Efficiency Accomplishments on the T exas Investor Owned Utilities (Calendar Y ear 2004)

. McAlulif fe, P

. (2003, June 20). Pr esentation to the Califor nia Energy Commission. New Y ork State Energy Resear ch and Development Author ity [NYSERDA] (2005, May). New Y ork Energy $mart SM Pr ogram Cost-Ef fectiveness Assessment. Albany , New Y ork. Northwest Power and Conservation Council [NWPCC] (2005, May). The 5th Northwest Electric Power and Conser vation Plan . <http://www .nwcouncil.org/ energy/ powerplan/default.htm> Pacific Gas & Electr ic Company [PG&E] (2005, June). 2006-2008 Energy Efficiency Program Portfolio, V

olume I, Prepared T estimony

. PacifiCorp. (2005, January). 2004 Integrated Resource Plan . <http://www .pacificorp.com/Navigation/ Navigation23807.html> Public Utilities Commission of T exas [PUCT]. (2000, Mar ch). Substantive Rule §25.181. Energy Efficiency Goal . <http://www .puc.state.tx.us/rules/ subrules/electr ic/25.181/25.181.pdf> T

exas Senate Bill 7, Section 39.905 (1999) <http://www .capitol.state.tx.us/ cgi-bin/tlo/textframe.cmd?LEG=76&SESS= R&CHAMBER=S&BILL TYPE=B&BILLSUFFIX= 00007&VERSION=5&TYPE=B> V

ermont Public Service Boar d (2005, July 20). Docket 7081: Investigation into Least-Cost Integrated Resour ce Planning for V e rmont Electr ic Power Company , Inc.'s T ransmission System.

3-22 National Action Plan for Energy Efficiency

# 4: B usiness C a s e f o r E n ergy Ef ficienc y

A well-designed appr oach to energy ef ficiency can benefit utilities, customers, and society by (1) foster ing financially healthy utilities, (2) r educing customers’ bills over time, and (3) contr ibuting to positive societal net benefits overall. By establishing and communicating the business case for energy ef ficiency acr oss utility , customer , and societal perspectives, cost-ef fective energy ef ficiency can be better integrated into the energy mix as an important low-cost r esour ce. 

# Ov erview Energy ef ficiency pr ograms can save r esour ces, lower utility costs, and r educe customer energy bills, but they also can r educe utility sales. Ther efor e, the effect on utility financial health must be car efully evaluated, and policies might need to be modified to keep utilities financially healthy (r etur n on equity [ROE], ear nings per shar e, debt coverage ratios unaf fected) as they pursue ef ficiency

. The extent of the potential economic and envir onmental benefits fr om energy ef ficiency , the impact on a utility’ s financial r esults, and the importance of modifying existing policies to support gr eater investment in these energy ef ficiency pr ograms depend on a number of market conditions that can vary fr om one r egion of the country to another

.

T

o explor e the potential benefits fr om energy ef ficiency pr ograms 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 ear nings, customer energy bills, and social r esour ces such as net



## Leadership Group Recommendation Applicable to the Business Case for Energy Efficiency

• Br oadly communicate the benefits of and

opportunities for energy ef ficiency

. 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 Fr om the Eight Business Cases Examined

• For both electr ic and gas utilities, energy efficiency

investments consistently lower costs over time for both utilities and customers while pr oviding positive net benefits to society . When enhanced by ratemaking policies to addr ess utility financial barr iers to energy ef ficiency , such as decoupling the utility’ s r evenues fr om sales volumes, utility financial health can be maintained while compr ehensive, cost-ef fective energy ef ficiency pr ograms ar e implemented.

• The costs of energy ef ficiency and r educed sales

volume might initially raise gas or electr icity bills due to slightly higher rates fr om ef ficiency investment and r educed sales. However , as the ef ficiency gains help participating customers lower their energy consumption, the decr eased energy use offsets higher rates to dr ive their total energy bills down. In the eight cases examined, average customer bills wer e r educed by 2 per cent to 9 per cent over a ten year per iod, compar ed to the no-ef ficiency scenar io.

• Investment in cost-ef fective energy ef ficiency

pr ograms yield a net benefit to society—on the or der of hundr eds of millions of dollars in net pr esent value (NPV) for the illustrative case studies (small- to medium-sized utilities).

To create a sustainable, aggressive national commitment to energy efficiency 4-1ef ficiency costs and pollutant emissions. The business cases wer e developed using an Energy Ef ficiency Benefits Calculator (Calculator) that facilitates evaluation of the financial impact of energy ef ficiency on its major stakeholders—utilities, customers, and society . The Calculator allows users to examine ef ficiency investment scenar ios acr oss dif fer ent types of utilities using transpar ent input assumptions (see Appendix B for detailed inputs and r esults). 1 Policies evaluated with the Calculator ar e discussed in mor e detail in Chapter 2: Utility Ratemaking & Revenue Requir ements and Chapter 3: Energy Resour ce Planning Pr ocesses. Eight business cases ar e pr esented to illustrate the impact of compr ehensive energy ef ficiency pr ograms on utilities, their customers, and society . The eight cases r epr esent a range of utility types under dif fer ent gr owth and investment situations. Each case compar es the consequences of thr ee scenar ios—no energy ef ficiency pr ograms without a decoupling mechanism, energy ef ficiency without decoupling, and energy ef ficiency with decoupling. Energy ef ficiency spending was assumed to be equal to 2 per cent of electr icity r evenue and 0.5 percent of natural gas r evenue acr oss cases, r egar dless of the decoupling assumption; these assumptions ar e similar to many of the pr ograms being managed in r egions of the country today

. 2 In practice, decoupling and shar eholder incentives often lead to incr eased energy efficiency investments by utilities, incr easing customer and societal benefits. 

### Business Cases Evaluated Cases 1 and 2: Investor -Owned Electr ic and Natural Gas Utilities

• Case 1: Low-Gr owth

• Case 2: High-Gr owth
Cases 3 and 4: Electr ic Power Plant Deferral

• Case 3: Low-Gr owth

• Case 4: High-Gr owth
Cases 5 and 6: Investor -Owned Electr ic Utility Structur e
• Case 5: V ertically Integrated Utility

• Case 6: Restructur ed Delivery-Only Utility Cases 7 and 8: Publicly and Cooperatively Owned Electr ic Utilities

• Case 7: Minimum Debt Coverage Ratio

• Case 8: Minimum Cash Position
T able 4-1 provides a summary of main assumptions and results of the business cases.

T

able 4-1 summar izes assumptions about the utility size, energy ef ficiency pr ogram, and each business case. All values shown compar e the savings with and without energy ef ficiency over a 15-year hor izon. The pr esent value calculations ar e computed over 30 years, to account for the lifetime of the energy ef ficiency investments over 15 years.

1 The Calculator was designed to assess a wide var iety of utility types using easily obtainable input data. It was not designed f or applications r equir ing

detailed data for specific applications such as rate setting, compar ing dif fer ent types of energy ef ficiency policies, cost-ef f ectiveness testing, energy ef ficiency r esour ce planning, and consumer behavior analysis. 2 See Chapter 6: Energy Ef ficiency Pr ogram Best Practices for mor e information on existing pr ograms. 3 Cumulative and NPV business case r esults ar e calculated using a 5 per cent discount rate over 30 years to include the pr oject li fe term for energy ef ficiency investments of 15 years. All values ar e in nominal dollars with NPV r eported in 2007 dollars (year 1 = 2007). Consistent rates ar e assumed in year 0 and then adjusted by the Calculator for case-specific assumptions. Reductions in utility r evenue r equir ement do not change wi th decoupling in the Calculator , but might in practice if decoupling motivates the utility to deliver additional energy ef ficiency . In these cases, societal benefits conservatively equals only the savings fr om r educed wholesale electr icity pur chases and capital expenditur es minus utility and participant costs of energy ef ficiency

. Energy ef ficiency pr ogram costs given in $/megawatt-hour (MWh) for electr ic utilities and $/million Br itish thermal units (MMBt u) for gas utilities. 4-2 National Action Plan for Energy EfficiencyTable 4-1. Summary of Main Assumptions and Results for Each Business Case Analyzed3

To create a sustainable, aggressive national commitment to energy efficiencyCase 1:Case 2:LowLowGrowthGrowthElectricElectricUtilityUtilityCase 3:Case 4:Low GrowthLow Growthwith 2009with 2009PowerPowerPlantPlantCase 5:Case 6:VerticalDeliveryUtilityUtilityCase 7:Case 8:ElectricElectricPublic/CoopPublic/CoopDebt CoverageNo DebtRatioUtility SizeAnnual Revenue ($MM) -Year 0Peak Load (MW) or Sales (BcF) -Year 0$284$284600 MW600 MW$284$284600 MW600 MW$284$284600 MW600 MW$237$237600 MW600 MWParameter TestedLoadLoadGrowthGrowthLoad GrowthLoad GrowthVerticalDeliveryUtilityUtilityDebt CoverageCash PositionRatioAssumptionsThat Differ BetweenCasesLoad GrowthAssumptionAverage Rate -Year 11%5%$0.12/MWh$0.12/MWh1%5%$0.12/MWh$0.12/MWh2%2%$0.12/MWh$0.12/MWh2%2%$0.10/MWh$0.10/MWhEE ProgramCumulative Savings (EE vs No EE case)Utility Spending as Percent of Revenue (%)Annual Utility Spending (NPV in $MM)EE Project LifeTerm (years)Percent of Growth SavedTotal Cost of EE inYear 0 ($/MWh or $/MMBtu)Utility Cost inYear 0 ($/MWh or $/MMBtu)Customer Cost inYear 0 ($/MWh or $/MMBtu)8,105 GWh8,105 GWh2.0%2.0%$70$701515142%21%$35.00$35.00$20.00$20.00$15.00$15.008,105 GWh8,105 GWh2.0%2.0%$70$701515142%21%$35.00$35.00$20.00$20.00$15.00$15.008,105 GWh8,105 GWh2.0%2.0%$70$70151566%66%$35.00$35.00$20.00$20.00$15.00$15.006,754 GWh6,754 GWh2.0%2.0%$58$58151555%55%$35.00$35.00$20.00$20.00$15.00$15.00Business 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$3185.5%3.0%$504$3727.0%3.5%$344$2664.8%2.5%$289$258237.5%211.9%$476$3386.0%3.0%$608$3757.7%3.3%$424$2865.4%2.5%$332$269272.6%221.0%$372$3484.1%4.4%$447$4376.4%5.6%$320$2964.5%3.8%$282$2716.7%222.2%$288$2704.0%4.3%$459$2666.4%4.2%$245$22643.4%3.6%$225$225222.2%222.2%Air Emission Savings1000 TonsCO2Tons NOx3113116161311311616131131161612592595151EE Program Results do not change when decoupling is activatedRevenue 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 activatedCase 1:Case 2:HighLow GrowthGrowthGasUtilityGas Utility$344$34433 BcF33 BcFLoad GrowthLoad Growth0%2%$1/therm$1/therm31 BcF31 BcF0.5%0.5%$21$211515410%18%$3.00$3.00$1.50$1.50$1.50$1.50$211$1423.8%2.2%$258$1564.6%2.4%$158$902.8%1.4%$143$119338.0%282.6%128128107107BcF = billion cubic feet;CO2= carbon dioxide;EE = energy efficiency;GWh = gigawatt-hour;NOx= nitrous oxides;$MM = million dollars;MMBtu = million British thermal units;MWh = megawatt-hour;NPV = net present value

4-3While these eight business cases ar e not compr ehensive, they allow some generalizations about the likely financial implications of energy ef ficiency investments. These generalizations depend upon the thr ee dif fer ent perspectives analyzed:

• Utility Perspective

. The financial health of the utility is

modestly impacted because the intr oduction of energy ef ficiency r educes sales. If energy ef ficiency is accompanied with mechanisms to pr otect shar eholders— such as a decoupling mechanism to buf fer r evenues and pr ofits fr om sales volumes—the utility’ s financial situation can r emain neutral to the ef ficiency investments. 4 This e f fect holds true for both public and investor

owned utilities.

• Customer Perspective

. Access to energy ef ficiency

dr ives customer bills down over time. Acr oss the eight case studies, energy bills ar e r educed by 2 per cent to 9 per cent over a 10 to 15-year per iod. Even though the ef ficiency investment and decr eased sales dr ives rates slightly higher , this incr ease is mor e than of fset in average customer bills due to a r eduction in energy usage.

• Societal Perspective

. The monetary benefits fr om energy

ef ficiency exceed costs and ar e supplemented by other benefits such as lower air emissions. Generalizations may also be made about the impact of policies to r emove the thr oughput incentive, such as decoupling mechanisms, acr oss these business cases. 5 These generalizations include:

• Utility Perspective. Policies that r emove the thr oughput

incentive can pr ovide utilities with financial pr otection fr om changes in thr oughput due to energy ef ficiency , by smoothing the utility’ s financial performance while lower ing customer bills. Generally , the business case r esults show that a decoupling mechanism benefits utilities mor e if the energy savings fr om ef ficiency ar e a gr eater per cent of load gr owth. Also, because small r eductions in thr oughput have a gr eater ef fect on the financial condition of distr ibution utilities, decoupling generally benefits distr ibution utilities mor e than vertically integrated utilities. A utility’ s actual r esults will depend on the structur e of its ef ficiency pr ogram, as well as the specific decoupling and attr ition mechanisms.

• Customer Perspective. Decoupling generates mor e fr equent, but smaller , rate adjustments over time because var iations in thr oughput r equir e per iodic rate “trueups.” Decoupling leads to modestly higher rates earlier for customers, when ef ficiency account for a high percent of load gr owth. In all cases, energy ef ficiency r educes average customer bills over time, with and without decoupling.

• Societal Perspective. The societal benefits of energy

ef ficiency ar e tied to the amount of energy ef ficiency implemented. Ther efor e, to the extent that decoupling encourages investment in energy efficiency , it is a positive fr om a societal perspective. Decoupling itself does not change the societal benefits of energy ef ficiency

. While these cases ar e a good starting point, each utility will have some unique character istics, such as dif fer ences in fuel and other costs, gr owth rates, r egulatory structur e, and r equir ed capital expenditur es. These and other inputs can be customized in the Calculator so users can consider the possible impacts of energy ef ficiency on their unique situations. The Calculator was developed to aid users in pr omoting the adoption of energy ef ficiency pr ograms, and the r esults ar e ther efor e gear ed for education and outr each purposes. 6

4 Though not modeled in these business case scenar ios, incentive mechanisms can also be used to let shar eholders pr ofit fr om achi eving ef ficiency goals,

further pr otecting shar eholders. Such incentives can incr ease the utility and shar eholder motivations for incr eased energy ef fi ciency investment. 5 The decoupling mechanism assumed by the Calculator is a “gener ic” balancing account that adjusts rates annually to account for r educed sales

volumes, ther eby maintaining r evenue at target pr ojections. Dif fer ences in utility incentives that alter native decoupling mecha nisms pr ovide ar e discussed in Chapter 2: Utility Ratemaking & Revenue Requir ements, but ar e not modeled. The decoupling mechanism does not pr otect the uti lity fr om cost var iations. 6 The Calculator was designed to assess a wide var iety of utility types using easily obtainable input data. It was not designed f or applications r equir ing

detailed data for specific applications such as rate setting, compar ing dif fer ent types of energy ef ficiency policies, cost ef f ectiveness testing, energy ef ficiency r esour ce planning, and consumer behavior analysis.

4-4 National Action Plan for Energy Efficiency

# Business Case Results
The eight cases evaluated wer e designed to isolate the impact of energy ef ficiency investments and decoupling mechanisms in dif fer ent utility contexts (e.g., low-growth and high-growth utilities, vertically integrated and r estructur ed utility, or cashonly and debt-financed publicly and cooperatively owned utilities). For each case, thr ee energy ef ficiency scenar ios ar e evaluated (no ef ficiency without decoupling, efficiency without decoupling, and efficiency with decoupling), while holding all other utility conditions and assumptions constant. The eight scenar ios ar e divided into four sets of two cases each with contrasting assumptions. An explanation of the key r esults of the business cases is pr ovided below, with further details pr ovided for each case in Appendix B.


### Cases 1 and 2: Low-Gr owth and High-Gr owth Utilities In this first compar ison, the r esults of implementing energy ef ficiency on two investor-owned electr ic and natural gas distr ibution utilities ar e contrasted. These utilities ar e spending the same per cent of r evenue on energy ef ficiency and vary only by load gr owth. The lowgr owth electr ic utility (Case 1) has a 1 per cent sales gr owth rate and the low-gr owth gas utility has a 0 percent sales gr owth rate, while the high-gr owth electr ic utility (Case 2) has a 5 per cent sales gr owth rate and the high-gr owth gas utility has a 2 per cent sales gr owth rate. T

able 4-2 compar es the r esults for electr ic utilities, and T

able 4-3 compar es the r esults for the natural gas utilities. In both cases (and all other cases examined), the Calculator assumes a ‘curr ent year’ test year for ratesetting. When rate adjustments ar e needed, the rates ar e set based on the costs and sales in that same year

. Ther efor e, dif fer ences between for ecasted and actual gr owth rates do not af fect the r esults.
Both electr ic and natural gas utilities show similar tr ends. W ith low load gr owth, the same level of energy ef ficiency investment of fsets a high per centage of load gr owth, and utility r etur n on equity (ROE) falls below target until the next rate case unless decoupling is in place. 7 In contrast, the high-gr owth utility has an ROE that exceeds the target rate of r etur n until the rates ar e decr eased to account for the incr easing sales. In both cases, energy ef ficiency r educes the utility r etur n fr om what it would have been absent energy ef

ficiency . Generally speaking, energy ef ficiency investments that account for a higher per centage of load gr owth expose an electr ic or natural gas utility to a gr eater negative financial ef fect unless decoupling is in place.
These cases also look at the dif fer ence between the two utilities with and without a decoupling mechanism. Both utilities ear n their target ROE in rate case years, with and without the energy ef ficiency in place. (Note that in practice, decoupling does not guarantee achieving the target ROE.) For the low-gr owth utility, the decoupling mechanism dr ives a rate adjustment to r each the target ROE, and the utility has higher ROE than without decoupling (Case 1). In the high-gr owth case, decoupling decr eases ROE r elative to the case without decoupling (Case 2), and pr events the utility fr om ear ning slightly above its target ROE fr om incr eased sales in between rate cases,allowing customer rates to decline sooner in the highgr owth electr ic case if decoupling is in place.
In both electr ic 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 electr ic utility with no decoupling compar ison, and in year 5 with decoupling. A similar patter n is found for the gas utility example. Average bills decr ease mor e when the ef ficiency is a higher per cent of load gr owth, even though rates slightly incr ease due to ef ficiency investments and r educed sales. The average customer bill declines mor e smoothly when a decoupling mechanism is used due to mor e fr equent rate adjustments.
For both electr icity and natural gas energy ef ficiency , the net societal benefit is computed as the dif fer ence of the total benefits of energy ef ficiency , less the total costs. Fr om a societal perspective, the benefits include the value of r educed expenditur e on energy (including market pr ice r eductions—

7 In Cases 1 and 2, the electr ic utility invests 2 per cent of r evenue in energy ef ficiency and the gas utility invests 0.5 per cen t of r evenue. To create a sustainable, aggressive national commitment to energy efficiency 4-5

# T able 4-2. High- and Low-Gr owth Results: Electr ic Utility

Case 1: Low-Gr owth (1%) Retur n on Equity (ROE) W ithout ef ficiency and decoupling, the low sales dr ive ROE below the target r etur n. T arget ROE is achieved with energy ef ficiency (EE) and decoupling. Incr easing energy ef ficiency without decoupling decr eases ROE. Case 2: High-Gr owth (5%) Retur n on Equity (ROE) W ith high load gr owth, without decoupling, the utility achieves gr eater than the target ROE until rates ar e adjusted. W ith energy ef ficiency , sales and ear nings ar e r educed, r educing ROE.
Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0 Year Case 1 Case 2After Tax ROE (%)

3% 6% 9% 12% 15%

1 2 3 4 5 6 7 8 9 1 0

Comparison of Average RateAverage Rate ($/kWh)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0Average Rate ($/kWh)

$0. 10 $0. 15 $0. 20 $0. 25 $0. 30

1 2 3 4 5 6 7 8 9 1 0 Year Year Case 1 Case 2 Case 1: Low-Gr owth (1%) Rates W ithout energy ef ficiency , the utility sells higher volumes than in the no ef ficiency scenar ios and has slightly lower rates. Rates in the energy ef ficiency scenar io incr ease pr imar ily due to lower thr oughput; rates ar e slightly higher in the decoupling scenar io due to incr ease ear nings to the target ROE. Case 2: High-Gr owth (5%) Rates In the high-gr owth case, rates ar e r elatively flat. W ithout energy ef ficiency , the utility sells higher volumes and has slightly lower rates. Decoupling does not have a gr eat impact in this case because the ROE is near target levels without any rate adjustments.

4-6 National Action Plan for Energy Efficiencyif any), r educed losses, r educed capital expenditur es, and societal benefits ar e positive, the energy efficiency is costr educed air emissions (if emissions ar e monetized). 8 The ef fective fr om a societal perspective. In both Case 1 and costs include both utility pr ogram and administration costs Case 2 (and all other cases evaluated using the tool), the net as well as the participant costs of energy ef ficiency . If the net societal benefits ar e positive for investments in energy 

# T

able 4-2. High- and Low-Gr owth Results: Electr ic Utility (continued)
Case 1: Low-Gr owth (1%) Bills T

otal customer bills with energy ef ficiency pr ograms decline over time, indicating customer savings r esulting fr om lower energy consumption. Rate incr eases thr ough the decoupling mechanism r educe the pace of bill savings in the decoupling case.

Percent Change in Customer Bills 

### Case 1 6% Case 2: High-Gr owth (5%) Bills T

otal customer bills with energy ef ficiency decline over time, indicating customer savings r esulting fr om lower energy consumption. Ther e is little dif fer ence betweenthe decoupling and no decoupling cases in the highgr owth scenar io.



### Case 2 6%

- 18%
1 2 3 4 5 6 7 8 9 1 0Change in Bills (%)

- 18%

- 21%

- 21% 1 2 3 4 5 6 7 8 9 1 0 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-Gr owth (1%) Net Societal Benefits Over time, the savings fr om energy ef ficiency exceed the annual costs. The societal cost and societal savings ar e the same, with and without decoupling.

Delivered Costs and Benefits of EE Case 1 $400 $300 Case 2: High-Gr owth (5%) Net Societal Benefits Over time, the savings fr om energy ef ficiency exceed the annual costs. The societal cost and societal savings ar e the same, with and without decoupling.

Case 2 $400 $300

1 2 3 4 5 6 7 8 9 1 0 $100 $100

1 2 3 4 5 6 7 8 9 1 0 $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 pr ice r eductions or monetize ai r emissions in net

societal benefits. To create a sustainable, aggressive national commitment to energy efficiency 4-7ef ficiency . In the low-gr owth case, the savings exceed costs years for the electr ic utility cases and four years for the natwithin two years for both the electr ic and natural case cases. ural gas utility cases. Energy ef ficiency has a similar ef fect In the high-gr owth case, the savings exceed costs within five upon natural gas utilities, as shown in T able 4-3. 

# T

able 4-3. High- and Low-Gr owth Results: Natur al Gas Utility
Case 1: Low-Gr owth (0%) Retur n on Equity (ROE) W ithout ef ficiency and decoupling, the low sales r esult in ROE falling below the target r etur n. Similarly , energy ef ficiency without decoupling dr ops utility r etur n below target ROE. T arget ROE is achieved with decoupling. Case 2: High-Gr owth (2%) Retur n on Equity (ROE) W ith high load gr owth, energy ef ficiency has less impact on total sales and ear nings. Thus, the utility achieves close to its target ROE in the early years, although without decoupling, ROE falls slightly in later years as energy ef ficiency r educes sales over time. Investor-Owned Utility Comparison of Return on EquityAfter Tax ROE (%)

3% 6% 9% 12% 15%

1 2 3 4 5 6 7 8 9 1 0After Tax ROE (%)

3% 6% 9% 12% 15%

1 2 3 4 5 6 7 8 9 1 0 Year
ROE% - No EE ROE% - EE no Decoupling ROE% - EE and Decoupling Target ROE% Year Case 1 Case 2

Comparison of Average RateAverage 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 1 0 Year Year Case 1 Case 2Average 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 1 0

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling Case 1: Low-Gr owth (0%) Rates Rates incr ease over time because of incr easing rate base and low sales gr owth. W ithout energy ef ficiency, the utility sells higher volumes and has lower rates. Decoupling incr eases rates when sales volumes ar e below target. Case 2: High-Gr owth (2%) Rates W ithout energy ef ficiency , the utility sells higher volumes and has lower rates. Energy efficiency incr eases rates slightly in later years by r educing sales volumes.

4-8 National Action Plan for Energy Efficiency

# T able 4-3. High- and Low-Gr owth Results: Natur al Gas Utility (continued)

Case 1: Low-Gr owth (0%) Customer Bills T

otal customer bills with energy ef ficiency decline over time, indicating customer savings r esulting fr om lower energy consumption. Customer utility bills initially incr ease slightly with decoupling as rates ar e incr eased to hold ROE at the target level and spending incr eases on ef ficiency

. Percent Change in Customer Bills Case 1 4% Case 2: High-Gr owth (2%) Customer Bills Customer utility bills with energy ef ficiency r eflect the mor e limited impact of ef ficiency pr ograms on rate pr ofile. Total customer bills decline over time, indicating customer savings r esulting fr om lower energy consumption.

Case 2 4%

-1 0 % 1 2 3 4 5 6 7 8 9 1 0 1 2 3 4 5 6 7 8 9 1 0 -10% Year YearChange 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-Gr owth (0%) Net Societal Benefits Over time, the savings fr om energy ef ficiency exceed the annual costs. The societal cost and societal savings ar e the same, with and without decoupling.

Delivered Costs and Benefits of EE Case 1 $6 $5 Case 2: High-Gr owth (2%) Net Societal Benefits Over time, the savings fr om energy ef ficiency exceed the annual costs. The societal cost and societal savings ar e the same, with and without decoupling.

Case 2 $6 $5

$1

1 3 2 5 7 6 9 4 81 0 $1 $0 $0 1 2 3 4 5 6 7 8 9 1 0 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: Electr ic Power Plant Deferral
This case study examines an electr ic investor

- owned utility with a large capital pr oject (modeled her e as a 500-MW combined-cycle power plant, although the conclusions ar e similar for other large capital pr ojects), planned for construction in 2009. 9 Again the ef fect of a 1 per cent gr owth rate (Case 3) is compar ed with a 5 per cent gr owth rate (Case 4) with identical energy ef ficiency investments of 2 per cent of electr ic utility r evenues. Figur e 4-1 shows the capital expenditur e for the pr oject with and without an aggr essive energy ef ficiency plan and a summary of the net benefits fr om each perspective. The length of investment deferral is based on the per cent of peak load r educed due to energy ef ficiency investments. The vertical axis shows how the expenditur e in nominal dollars starts at $500 million in 2009, or slightly higher (due to inflation) after deferral. W ith Case 3, energy ef ficiency investments account for a higher per centage of peak load gr owth, and can defer the pr oject until 2013. W ith higher gr owth and the same level of ef ficiency savings (Case 4), the same ef ficiency investment only defers the pr oject until 2010. In Case 3, the energy ef ficiency pr ogram causes a gr eater r eduction in r evenue r equir ement—a 30-year r eduction of $476 million rather than a Case 4 r eduction of $338 million—pr oviding benefits fr om a customer perspective. Fr om a societal perspective, the low-gr owth case energy ef ficiency pr ogram yields higher net societal benefit as well: $332 million versus $269 million. 

# Figur e 4-1. Compar ison of Deferr al Length with Low- and High-Gr owth

30-year savings impact fr om EE Low-Gr owth Utility High-Gr owth Utility Decr ease in Revenue Requir ement (net pr esent 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 Ye a rCapitalExpenditure(Nominal$Millions)

0 100 200 300 400 500 600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Ye a rCapitalExpenditure(Nominal$Millions)

Without Energy Efficiency With Energy Efficiency Case 3 Case 4 Case 3: Low-Gr owth Investment Timing Case 4: High-Gr owth Investment Timing

9 This illustration demonstrates how energy ef ficiency can be used, including ef forts to r educe peak capacity r equir ements, to de fer a single 500 MW

combined cycle power plant. Energy ef ficiency can also be used to defer other , smaller investments.

4-10 National Action Plan for Energy EfficiencyT able 4-4 compar es the r eduction in r evenue r equir ement due to the deferral of the power plant investment between the two cases. In Case 3, the r eduction in r evenue r equir ement due to the deferral to 2013 r esults in pr esent value savings of $36 million over the thr ee years that the plant was deferr ed. In Case 4, the deferral pr ovides pr esent value savings of $11 million for the one-year deferral. Although the pr oject is deferr ed longer in the lowgr owth case, fewer sales overall and higher installed capital costs r esult in higher rates over time r elative to the high-gr owth case. In both cases, the incr ease in rates fr om energy ef ficiency pr ograms, starting in year 1, is significantly less than the rate incr ease that occurs after the new power plant investment is made, leading to lower customer bills. Customer bill savings ar e gr eatest dur ing the years that the plant is deferr ed. 10


### Cases 5 and 6: V ertically Integrated Utility vs. Restructur ed Delivery Company In this example, a vertically integrated electr ic utility (Case 5) is compar ed with the r estructur ed electr ic delivery 

# T

able 4-4. P ower Plant Deferr al Results

Comparison of Average Rate

YearAverage Rate ($/kWh)

$0. 10 $0. 15 $0. 20 $0. 25 $0. 30

1 2 3 4 5 6 7 8 9 1 0 YearAverage Rate ($/kWh)

$0. 10 $0. 15 $0. 20 $0. 25 $0. 30

1 2 3 4 5 6 7 8 9 1 0 Case 3 Case 4

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling Case 3: Low-Gr owth (1%) Revenue Requir ement 2009 pr oject deferr ed to 2013, r esulting in a r eduction in r evenue r equir ement due to deferr ing the power plant over thr ee years of PV$36 million. Other Capital Expenditur es The low-gr owth case leads to the savings of other capital expenditur es compar ed to the high-gr owth case.
Retail Rates W ith low load gr owth, a given amount of energy ef ficiency defers so much load gr owth that the new power plant can be deferr ed for thr eeyears, allowing the utility to conserve capital and postpone rate incr eases for several years. Case 4: High-Gr owth (5%) Revenue Requir ement 2009 pr oject deferr ed to 2010, r esulting in a r eduction in r evenue r equir ement fr om deferr ing the power plant over a year of PV$11 million. Other Capital Expenditur es The low-gr owth case leads to the savings of other capital expenditur es compar ed to the high-gr owth case.
Retail Rates W ith high load gr owth, energy ef ficiency r educes load gr owth enough to defer the new power plant investment by one year , slowing implementation of a r elatively smaller rate incr ease.

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 decr ease in bill savings) occurs once a new major infrastructur e investment is br ought online. This c harge is due to the new level of capital expenditur es at the same time a positive decoupling rate adjustment is making up for pr evious deficiencies. To create a sustainable, aggressive national commitment to energy efficiency 4-11company (Case 6); both exper iencing a 2 per cent gr owth expenditur es than a r estructur ed delivery utility

. rate and investing 2 per cent of r evenue in energy ef fi- In general, the financial impact of energy efficiency on ciency . These cases assume that the vertically integrated delivery utilities is mor e pr onounced than on vertically utility has mor e capital assets and larger annual capital integrated utilities with the same number of customers and 

# T

able 4-4. P ower Plant Deferr al Results (continued)
Case 3: Low-Gr owth (1%) Customer Bills Although rates r ise with large capital expenditur es, bills continue to fall over time as energy efficiency dr ives customer volume down to offset the higher rates.

Percent Change in Customer Bills Case 3 6% Case 4: High-Gr owth (5%) Customer Bills Although rates r ise with large capital expenditur es, bills continue to fall over time as energy efficiency dr ives 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 1 0 1 2 3 4 5 6 7 8 9 1 0 Year Year Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling

Case 3: Low-Gr owth (1%) Case 4: High-Gr owth (5%) Load Impact Load Impact Energy ef ficiency significantly r educes load gr owth W ith high gr owth, energy ef ficiency has a limited and r educes 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 YrPeak 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 1 0 1 2 3 4 5 6 7 8 9 1 0 Year Year Forecasted Growth - EE and Decoupling Forecasted Growth - No EE

4-12 National Action Plan for Energy Efficiencysales. Once divested of a generation plant, the T able 4-5 summar izes the compar ison of ROE, rates, bills distr ibution utility is a smaller company (in terms of total and societal benefits. W ithout implementing energy ef firate base and capitalization), and fluctuations in thr ough- ciency , both utilities ar e r elatively financially healthy , put and ear nings have a r elatively larger impact o n r etur n. achieving near their target rate of r etur n in each year; 

# T

able 4-5. V ertically Integr ated and Deliv ery Company Results
Case 5: V ertically Integrated Retur n on Equity (ROE) Because the vertically integrated utility has a large rate base, the impact of energy ef ficiency upon total ear ningsis 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 Retur n on Equity (ROE) W ith a smaller rate base and r evenues only fr om kWh deliver ies, energy ef ficiency 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 1 0 Year

Case 5: V ertically Integrated Rates W ithout energy ef ficiency , the utility sells higher volumes and has lower rates. T otal r etail rates, including delivery and energy , ar e similar for the vertically integrated and r estructur ed utilities.

Comparison of Average Rate Case 5 $0. 30 3% 1 2 3 4 5 6 7 8 9 1 0 Year
ROE% - No EE ROE% - EE no Decoupling ROE% - EE and Decoupling Target ROE%
Case 6: Delivery Utility Rates W ithout energy ef ficiency , the utility sells higher volumes and has lower rates. T otal r etail rates, including delivery and energy , ar e similar for the vertically integrated and r estructur ed utilities.

Case 6 $0. 3 0Average Rate ($/kWh)Average Rate ($/kWh) $0. 2 5
$0. 2 0
$0. 1 5 $0. 25
$0. 20
$0. 15
$0. 10 $0. 1 0 1 2 3 4 5 6 7 8 9 1 0 1 2 3 4 5 6 7 8 9 1 0 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

# T able 4-5. V ertically Integr ated and Deliv ery Company Results (continued)
Case 5: V ertically Integrated Bills T

otal customer bills with energy ef ficiency pr ograms decline over time, indicating average customer savings r esulting fr om lower energy consumption. Customer utility bills decr ease mor e smoothly with decoupling as a r esult of the mor e fr equent rate adjustments.

Percent Change in Customer Bills Case 5 6% Case 6: Delivery Utility Bills T

otal customer bills with energy ef ficiency pr ograms decline over time, indicating average customer savings r esulting fr om lower energy consumption. Customer utility bills decr ease mor e slowly in the decoupling case, because rates ar e incr eased earlier to of fset r educed 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 1 0 1 2 3 4 5 6 7 8 9 1 0 - 21% Year Year Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling

Case 5: V ertically Integrated Net Societal Benefits Over time, the savings fr om energy ef ficiency exceed the annual costs. The societal cost and societal savings ar e 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 1 0$/MWh $200
$100 $100 Case 6: Delivery Utility Net Societal Benefits As with the vertically integrated utility , savings fr om energy ef ficiency exceed the costs over time. The distr ibution utility has a lower initial societal savings because the distr ibution company r educes fewer capital expenditur es at the outset of the energy ef ficiency investments. Over time, the societal costs and savings ar e similar to the distr ibution compan y

.

Case 6 $400
$300

1 2 3 4 5 6 7 8 9 1 0$/MWh $200

$0 $0 Year Year

Societal Cost ($/MWh saved) Societal Savings ($/MWh saved)

4-14 National Action Plan for Energy Efficiencyhowever , intr oducing energy ef ficiency r educes ROE and ear nings for both utilities unless a decoupling mechanism is put in place. Customer rates incr eases, bill savings, and societal benefits follow similar tr ends with energy ef ficiency , as discussed in Cases 1 and 2. 

### Cases 7 and 8: Publicly and Cooperatively Owned Electr ic Utilities The first six cases used an investor-owned electr ic utility to illustrate the business case for energy ef ficiency . The Calculator also can evaluate the impact of ef ficiency pr ograms on publicly and cooperatively owned electr ic utilities. Many of the issues r elated to the impact of gr owth rates and capital deferral discussed in the investor -owned utility examples apply equally to publicly and cooperatively owned utilities. Fr om a net societal benefit perspective, the r esults ar e identical for publicly , cooperatively , and pr ivately owned utilities. The ratemaki n g and utility financing perspectives ar e dif fer ent, however

. The financial position of publicly owned utilities is evaluated pr imar ily based on either the debt coverage ratio (which is cr itical to maintaining a high bond rating and low cost capital) or the minimum cash position (for utilities with no debt). T able 4-6 shows the r esults of a publicly or cooperatively owned utility with an energy ef ficiency pr ogram of 2 per cent of r evenue and load gr owth of 2 per cent. In both cases, the assumption is made that the utility adjusts rates whenever the debt coverage ratio or minimum cash position falls below a thr eshold. This assumption makes compar isons of dif ferent cases mor e dif ficult, but the tr ends ar e similar to the investor-owned utilities on a r egular rate case cycle. The change in utility financial health due to energy ef ficiency is r elatively modest because of the ability to adjust the r etail rates to maintain financial health. The publicly and cooperatively owned utilities will exper ience similar financial health pr ob lems as investor -owned utilities if they do not adjust rates. 

# T

able 4-6. Publicly and Cooper ativ ely 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 var iations in thr oughput. W ithout decoupling, rates ar e adjusted whenever the debt coverage rate falls below a thr eshold (ratio 2 in the example). The rate adjustment is r equir ed earlier in the energy ef ficiency scenar io. Case 8: Minimum Cash Position Utility Financial Health In the no decoupling cases (with and without energy ef ficiency), rates ar e r eset if the cash position falls below a minimum thr eshold ($70 million in this example). W ith decoupling, the utility adjusts rates to hit the target cash level in each year . The r esults ar e similar as long as ther e is an ability to r eset rates when needed to maintain a minimum cash position. Public Power/Cooperative Debt Coverage Ratio

YearDebt 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 3 5 7 9 2 4 6 8 1 0 Cash Position at End of Year

YearEnd of Year Cash ($MM)

$40 $50 $60 $70 $80

1 2 3 4 5 6 7 8 9 1 0

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 4-154-16 National Action Plan for Energy Efficiency Case 7: Minimum Debt Coverage Ratio Customer Rates W ith or without decoupling, rates ar e adjusted to maintain financial health. Rates ar e lowest without energy ef ficiency and highest with energy ef ficiency and decoupling. Case 8: Minimum Cash Position Customer Rates Once energy efficiency is implemented, r etail rate levels ar e similar , with or without decoupling in place. The decoupling case is slightly smoother with smaller , mor e fr equent rate adjustments. Comparison of Average Rate

YearAverage Rate ($/kWh)

$0. 10 $0. 15 $0. 20 $0. 25 $0. 30

1 2 3 4 5 6 7 8 9 1 0 YearAverage Rate ($/kWh)

$0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling Case 7 Case 8 

# T

able 4-6. Publicly and Cooper ativ ely Owned Utility Results (continued)

Case 7: Minimum Debt Coverage Ratio Customer Bills Average customer bills decline with energy ef ficiency investments, with and without decoupling. The ‘randomness’ in the bill change is due to dif fer ent timing of rate adjustments in the energy ef ficiency and no energy ef ficiency cases. However , overall the tr end is downwar d. Case 8: Minimum Cash Position Customer Bills Average customer bills decline with energy ef ficiency investments in both the decoupling and no decoupling cases.

Percent Change in Customer Bills

Year 1 2 3 4 5 6 7 8 9 1 0 Year 1 2 3 4 5 6 7 8 9 1 0

Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling Case 7 Case 8Change 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 summar izes eight business cases for energy ef ficiency r esulting fr om the Energy Ef ficiency Benefits Calculator . This Calculator pr ovides simplified r esults fr om a utility , customer , and societal perspective. As stated on page 4-1, the key findings fr om the eight cases examined include:

• For both electr ic and gas utilities, energy ef ficiency

investments consistently lower costs over time for both utilities and customers, while pr oviding positive net benefits to society . When enhanced by ratemaking policies to addr ess utility financial barr iers to energy ef ficiency , such as decoupling the utility’s r evenues fr om sales volumes, utility financial health can be maintained while compr ehensive, cost-ef fective energy ef ficiency pr ograms ar e implemented.

• The costs of energy ef ficiency and r educed sales

volume might initially raise gas or electr icity bills due to slightly higher rates fr om ef ficiency investment and r educed sales. However , as the ef ficiency gains helpparticipating customers lower their energy consumption, the decr eased energy use of fsets higher rates to dr ive their total energy bills down. In the 8 cases examined, average customer bills wer e r educed by 2 per cent to 9 per cent over a te n year per iod, compar ed to the no-ef ficiency scenar io.

• Investment in cost-ef fective energy ef ficiency pr ograms

yields a net benefit to society—on the or der of hundr eds 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 Ef ficiency Leadership Gr oup of fers the following r ecommendation as a way to over come many of the barr iers to energy ef ficiency , and pr ovides the following options for consideration by utilities, r egulators, and stakeholders ( as presented in the Executive Summar y

).
Recommendation: Br oadly communicate the benefits of, and opportunities for , energy ef ficiency

. Exper ience shows that energy ef ficiency pr ograms help customers save money and contr ibute to lower cost energy systems. But these impacts ar e not fully documented nor r ecognized by customers, utilities, r egulators and policy-makers. Mor e ef fort is needed to establish the business case for energy efficiency for all decision-makers and to show how a well-designed appr oach to energy ef ficiency can benefit customers, utilities, and society by (1) r educing customers bills over time, (2) foster ing financially healthy utilities (r etur n on equity [ROE], ear nings per shar e, debt coverage ratios unaf fected), and (3) contr ibuting to positive societal net benefits overall. Ef fort is also necessary to educate key stakeholders that, although energy ef ficiency can be an important low-cost r esour ce to integrate into the energy mix, it does r equir e funding, just as a new power plant r equir es funding. Options to Consider: • Establishing and educating stakeholders on the business case for energy ef ficiency at the state, utility , and other appr opr iate level addr essing r elevant customer , utility , and societal perspectives.

• Communicating the r ole of energy efficiency in lower ing

customer energy bills and system costs and r isks over time.


# Refer ence National Action Plan for Energy Ef ficiency . (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 electr icity and natural gas utility rate structur es and pr ice levels influence customer consumption, and thus ar e an important tool for encouraging the adoption of energy-ef ficient technologies and practices. The rate design pr ocess typically involves balancing multiple objectives, among which energy ef ficiency is often overlooked. Successful rate designs must balance the overall design goals of utilities, customers, r egulators, and other stakeholders, including encouraging energy ef ficiency

. 

# Ov erview
Retail rate designs with clear and meaningful pr ice signals, coupled with good customer education, can be powerful tools for encouraging energy ef ficiency . At the same time, rate design is a complex pr ocess that must take into account multiple objectives (Bonbr ight, 1961; Philips, 1988). The main pr ior ities for rate design ar e r ecovery of utility r evenue r equir ements and fair apportionment of costs among customers. Other important r egulatory and legislative goals include:

• Stable r evenues for the utility

.

• Stable rates for customers.

• Social equity in the form of lifeline rates for essential

needs of households (PURP A of 1978).

• Simplicity of understanding for customers and ease

of implementation for utilities.

• Economic ef ficiency to pr omote cost-ef fective load

management. This chapter considers the additional goal of encouraging investment in energy ef ficiency . While it is dif ficult to achieve every goal of rate design completely, consideration of a rate design’ s impact on adoption of energy ef ficiency and any necessary trade-of fs can be included as part of the ratemaking pr ocess. 

### Using Rate Design to Pr omote Energy Ef ficiency In developing tar if fs to encourage energy ef ficiency , the following questions ar ise: (1) What ar e the key rate design issues, and how do they af fect rate designs for energy ef ficiency? (2) What dif fer ent rate design options ar e possible, and what ar e their pr os and cons? (3) What other mechanisms can encourage ef ficiency that ar e not dr iven by tar if f savings? and (4) What ar e the most s u c cessful strategies for encouraging energy ef ficiency in dif fer ent jur isdictions? These questions ar e addr essed thr oughout this chapter

. 

## Leadership Gr oup Recommendations Applicable to Rate Design

• Modify ratemaking practices to pr omote energy

ef ficiency investments.

• Br oadly communicate the benefits of, and

opportunities for , energy ef ficiency

. 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

. 

# Backgr ound: Re v enues and Rates
Utility rates ar e designed to collect a specific r evenue r equir ement based on natural gas or electr icity sales. As rates ar e dr iven by sales and r evenue r equir ements, these thr ee aspects of r egulation ar e tightly linked. (Revenue r equir ement issues ar e discussed in Chapter 2: Utility Ratemaking & Revenue Requir ements.)
To create a sustainable, aggressive national commitment to energy efficiency 5-1Until the 1970s, rate structur es wer e based on the pr inciple of average-cost pr icing in which customer pr ices r eflected the average costs to utilities of serving their customer class. Because so many of a utility’ s costs wer e fixed, the main goal of rate design up until the 1970s was to pr omote sales. Higher sales allowed fixed costs to be spr ead over a larger base and helped pushrates down, keeping stakeholders content with averagecost based rates (Hyman et al., 2000). This dynamic began to change in many jur isdictions in the 1970s, with r ising oil pr ices and incr eased emphasis on conservation. W ith the passage of the 1978 Public Utility Regulatory Policies Act (PURP A), declining block rates wer e r eplaced by flat rates or even inverted block rates, as utilities began to look for ways to defer new plant investment and r educe the envir onmental impact of energy consumption. 

# Key Rate Design Issues

Utilities and r egulators must balance competing goals in designing rates. Achieving this balance is essential for obtaining r egulatory and customer acceptance. The main rate design issues ar e descr ibed below

. 

### Pr ovide Recovery of Revenue Requir ements and Stable Utility Revenues A pr imary function of rates is to let utilities collect their r evenue r equir ements. Utilities often favor rate forms that maximize stable r evenues, such as declining block rates. The declining block rate has two or mor e tiers of usage, with the highest rates in the first tier . T ier 1 is typically a r elatively low monthly usage level that most customers exceed. This rate gives utilities a high degr ee of certainty r egar ding the number of kilowatt-hours (kWh) or therms that will be billed in T ier 1. By designing T ier 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 T ier 2 rates encourage higher energy consumption rather than ef ficiency , which is detr imental to energy ef ficiency impacts. 1 Because energy ef ficiency measur es ar e most likely to change customer usage in T ier 2, customers will see smaller bill r eductions under declining block rates than under flat rates. Although many utilities have phased out declining block rates, a number of utilities continue to of fer them. 2 Another rate element that pr ovides r evenue stability but also detracts fr om the incentive to impr ove efficiency is collecting a portion of the r evenue r equir ement thr ough a customer charge that is independent of usage. Because the major ity of utility costs do not vary with changes in customer usage level in the short run, the customer charge also has a str ong theor etical basis. This appr oach has mixed benefits for energy ef ficiency

. On one hand, a larger customer charge means a smaller volumetr ic charge (per kWh or therm), which lowers the customer incentive for energy ef ficiency . On theother hand, a larger customer charge and lower volumetr ic charge r educes the utilities pr ofit fr om incr eased sales, r educing the utility disincentive to pr omote energy ef ficiency

. Rate forms like declining block rates and customer charges pr omote r e venue stability for the utility , but they cr eate a barr ier to customer adoption of energy ef ficiency because they r educe the savings that customers can r ealize fr om r educing usage. In tur n, electr icity demand is mor e likely to incr ease, which could lead to long-term higher rates and bills wher e new supply is mor e costly than energy ef ficiency . T o pr omote energy ef ficiency , a key challenge is to pr ovide a

1 Br own and Sibley (1986) opine that a declining block structur e can pr omote economic ef ficiency if the lowest tier rate can be s et above marginal cost,

while inducing additional consumption by some consumers. A r ising marginal cost envir onment suggests, however , that a declining block rate structur e with rates below the incr easing marginal costs is economically inef ficient. 2 A partial list of utilities with declining block r esidential rates includes: Dominion V irginia Power , V

A; Appalachian Power Co, V A; Indianapolis Power and Light Co., IN; Kentucky Power Co., KY ; Cleveland Electr ic Illum Co., OH; T oledo Edison Co., OH; Rappahannock Electr ic Coop, V A ; Lincoln Electr ic System, NE; Cuivr e River Electr ic Coop Inc., MO; Otter T ail Power Co., ND; Wheeling Power Co., WV ; Matanuska Electr ic Assn Inc., AK; Ho mer Electr ic Association Inc., AK; Lower V alley Energy , NE.

5-2 National Action Plan for Energy Efficiencylevel of certainty to utilities for r evenue collection without dampening customer incentive to use energy mor e ef ficiently

. 

### Fairly Apportion Costs Among Customers Revenue allocation is the pr ocess that determines the shar e of the utility’ s total r evenue r equir ement that will be r ecover ed fr om each customer class. In r egulatory pr oceedings, this pr ocess is often contentious, as each customer class seeks to pay less. This pr ocess makes it dif ficult for utilities to pr opose rate designs that shift r evenues between dif fer ent customer classes.

In r edesigning rates to encourage energy ef ficiency , it is important to avoid unnecessar ily or inadvertently shifting costs between customer classes. Rate design changes should instead focus on pr oviding a good pr ice signal for customer consumption decisions.


### Pr omote Economic Ef ficiency for CostEf fective Load Management

Accor ding to economic theory , the most ef ficient outcome occurs when pr ices ar e equal to marginal costs, r esulting in the maximum societal net benefit fr om consumption.
Marginal Costs Marginal costs ar e the changes in costs r equir ed to pr oduce one additional unit of energy . In a per iod of r ising marginal costs, rates based on marginal costs mor e r ealistically r eflect the cost of serving dif fer ent customers, and pr ovide an incentive for mor e ef ficient use of r esour ces (Bonbr ight, 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 r egulations (e.g., Clean Air Act), as well as any utility commission policies addr ess ing the envir onment (e.g., the use of the societal test for benefit-cost assessments). Rate design based on the utility's marginal costs that pr omotes cost-effective energy ef ficiency will further incr ease envir onmental pr otection by r educing energy consumption. Despite its theor etical attraction, ther e ar e significant barr iers to fully implementing marginal-cost pr icing in electr icity , especially at the r etail level. In contrast to other commodities, the necessity for generation to match load at all times means that outputs and pr oduction costs ar e constantly changing, and conveying these costs as r eal time “pr ice signals” to customers, especially r esidential customers, can be complicated and add additional costs. Curr ently , about half of the nation’ s electr icity customers ar e served by organized r eal-time electr icity markets, which can help pr ovide time-varying pr ices to customers by r egional or local ar ea. Notwithstanding the r ecent pr ice volatility , exacerbated by the 2005 hurr icane season and curr ent market conditions, wholesale natural gas pr ices ar e generally mor e stable than wholesale electr icity pr ices, largely because of the ability to stor e natural gas. As a r esult, marginal costs have been histor ically a less important issue for natural gas pr icing.

Short-Run V ersus Long-Run Pr ice Signals Ther e is a fundamental conflict between whether electr icity and natural gas pr ices should r eflect short-run or long-run marginal costs. In simple terms, short-run costs r eflect the var iable cost of pr oduction and delivery , while long-run costs also include the cost of capital expansion. For pr ograms such as r e al-time pr icing in electr icity , short-run marginal costs ar e used for the pr ice signals so they can induce efficient operating decisions on a daily or hourly basis.
Rates that r eflect long-run marginal costs will pr omote economically ef ficient investment decisions in energy ef ficiency , because the long-run perspective is consistent with the long expected useful lives of most energy ef ficiency measur es, and the potential for energy ef ficiency to defer costly capital investments. For demand-r esponse and other pr ograms 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 Distr ibuted Generation and Demand Response. The rate issues for energy ef ficiency also apply to clean distr ibuted generation and demand r esponse, with two exceptions. Demand r esponse is focused on r eductions in usage that occur for only a limited number of hours in a year , and occur at times that ar e not known far in advance (typically no mor e than one day notice, and often no mor e than a few hours notice). Because of the limited hours of operation, the r evenue er osion fr om demand r esponse is small compar ed to an energy ef ficiency measur e. In addition, it could be argued that shortrun, rather than long-run, costs ar e the appr opr iate cost metr ic to use in valuing and pr icing demand r esponse pr ograms.
Public V ersus Pr ivate Utilities. The rate issues ar e essentially the same for both public and pr ivate utilities. Revenue stability might be a lesser concer n for public utilities, as they could appr oach their city leaders for rate changes. Fr equent visits to council chambers for rate changes might be fr owned upon, however , so r evenue stability will likely r emain important to many public utilities as well.

marginal cost might be mor e appr opr iate. Ther efor e, in developing r etail rates, the goals of short-run and longrun marginal based pr icing must be balanced.

Cost CausationUsing long-run marginal costs to design an energyef ficiency enhancing tar if f can pr esent another challenge —potential inconsistency with the cost-causation pr inciple that a tar if f should r eflect the utility's var ious costs of serving a customer . This potential inconsistency diminishes in the long run, however , because over the long run, some costs that might be consider ed fixed in the near term (e.g., generation or transmission capacity , new interstate pipeline capacity or storage) ar e actually var iable. Such costs can be r educed thr ough sustained load Gas V ersus Electr ic. As discussed above, gas marginal costs ar e less volatile than electr icity marginal costs, so pr oviding pr ices that r eflect marginal costs is generally less of a concer n for the gas utilities. In addition, the natur e of gas service does not lend itself to complicated rate forms such as those seen for some electr icity customers. Nevertheless, gas utilities could implement incr easing tier block rates, and/or seasonally dif fer entiated rates to stimulate energy ef ficiency

.
Restructur ed V ersus Non-Restructur ed Markets. Restructur ing has had a substantial impact on the funding, administration, and valuation of energy ef ficiency pr ograms. It is no coincidence that ar eas with high r etail electr icity rates have been mor e apt to r estructur e their electr icity markets. The higher rates incr ease the appeal of energy ef ficiency measur es, and the entry of thir d-party energy service companies can incr ease customer inter est and education r egar ding energy ef ficiency options. In a r etail competition envir onment, however , ther e might be r elatively little ratemaking flexibility . In several states, r estructur ing has cr eated transmission and distr ibution-only utilities, so the r egulator’ s ability to af fect full electr icity rates might be limited to distr ibution costs and rates for default service customers.

r eductions pr ovided by energy ef ficiency investment, induced by appr opr iately designed marginal cost-basedrates. Some costs of a utility do not vary with a customer's kWh usage (e.g., hookup and local distr ibution). As a r esult, a marginal cost-based rate design may necessar ily include some fixed costs, which can be collecte d via a volumetr ic adder or a r elatively small customer charge. However , utilities that set usage rates near long-run marginal costs will encourage energy ef ficiency and pr omote other social policy goals such as af for dability for low-income and low-use customers whose bills might incr ease with larger , fixed charges. Hence, a practical implementation of marginal-cost based ratemaking should balance the trade-of fs and competing goals of rate design.

5-4 National Action Plan for Energy EfficiencyPr ovide Stable Rates and Pr otect Low-Income Customers Rate designs to pr omote energy ef ficiency must consider whether or not the change will lead to bill incr eases. Mitigating large bill incr eases for individual customers is a fundamental goal of rate design, and in some jur isdictions low-income customers ar e also af for ded particular attention to ensur e that they ar e not adversely af fected by rate changes. In some cases, low-income customers ar e eligible for special rates or rate r iders that pr otect them fr om large rate incr eases, as exemplified by the lifeline rates pr ovision in Section 114 of the 1978 PURP A. Strategies to manage bill impacts include phasing-in rate changes to r educe the rate shock in any single year , cr eating exemptions for certain at-r isk customer gr oups, and disaggr egating customers into small customer gr oups to allow mor e targeted rate forms. Because of the concer n over bill impacts, new and innovative rates ar e often of fer ed as voluntary rates. While impr oving acceptance, voluntary rate structur es generally attract a r elatively small per centage of customers (less than 20 per cent) unless marketed heavily by the utility

. V

oluntary rates can lead to some “fr ee r iders,” meaning customers who achieve bill r eductions without changing their consumption behavior and pr oviding any r eal savings to the utility . Rates to pr omote energy ef ficiency can be of fer ed as voluntary , but the low participation and fr ee r ider issues should be taken into account in their design to ensur e that the benefits of the consumption changes they encourage ar e at least as gr eat as the r esulting bill decr eases. Maintain Rate SimplicityEconomists and public policy analysts can become enamor ed with ef ficient pr icing schemes, but customers generally pr efer simple rate forms. The challenge for pr omoting energy ef ficiency is balancing the desir e for rates that pr ovide the r ight signals to customers with the need to have rates that customers can understand, and to which they can r espond. Rate designs that ar e too complicated for customers to understand will not be ef fective at pr omoting ef ficient consumption decisions. Particularly in the r esidential sector , customers might pay mor e attention to the total bill than to the underlying rate design.


# Addr essing the Issues: Alter nativ e Appr oaches
The pr ior sections listed the issues that stakeholders must balance in designing new rates. This section pr esents some traditional and non-traditional rate designs and discusses their mer its for pr omoting energy ef ficiency . The alter natives descr ibed below vary by meter ing/billing r equir ement, information complexity , and ability to r eflect marginal cost. 3 

### Rate Design Options Inclining Tier Block Inclining tier block rates, also r eferr ed to as inverted block rates, have per-unit pr ices that incr ease for each successive block of energy consumed. Inclining tier ed rates of fer the advantages of being simple to understand and simple to meter and bill. Inclining rates can also meet the policy goal of pr otecting small users, which often include low-income customers. In fact, it was the desir e to pr otect small users that pr ompted the initiation of incr easing tiers in Califor nia. T ermed “lifeline rates” at the time, the intention was to pr ovide a small base level of electr icity to all r esidential customers at a low rate, and charge the higher rate only to usage above thatbase level. The concept of lifeline rates continues in various forms for numer ous services such as water and sewer services, and can be consider ed for delivery or commodity rates for electr icity and natural gas. However , in many parts of the country , low-income customers ar e not necessar ily low-usage customers, so a lifeline rate might not pr otect all low-income customers fr om energy bills.

3 As part of its business model, a utility may use innovative rate options for the purpose of pr oduct dif fer entiation. For exampl e, advanced meter ing that

enables a design with continuously time-varying rates can apply to an end-use (e.g., air conditioning) that is the main contr ib utor to the utility's system peak. Another example is the bundling of sale of electr icity and consumer devices (e.g., a 10-year contract for a central air c onditioner whose pr ice includes operation cost). To create a sustainable, aggressive national commitment to energy efficiency 5-5T ier ed rates also pr ovide a good fit for r egions wher ethe long-run marginal cost of energy exceeds the curr ent average cost of energy . For example, r egions with extensive hydr oelectr ic r esour ces might have low average costs, but their marginal cost might be set by much higher fossil plant costs or market pr ices (for pur chase or export).
See T able 5-1 for additional utilities that of fer inclining tier r e sidential rates.
Time of Use (TOU) TOU rates establish varying charges by season or time of day . Their designs can range fr om simple on- and of fpeak rates that ar e constant year-r ound to mor e complicated rates with seasonally dif fer entiated pr ices for several time-of-day per iods (e.g., on-, mid- and of f-peak). TOU rates have support fr om many utilities because of the flexibility to r eflect marginal costs by time of delivery

. TOU rates ar e commonly of fer ed as voluntary rates for r esidential electr ic customers, 4 and as mandatory rates for larger commer cial and industr ial customers. Part of the r eason for TOU rates being applied pr imar ily to larger users is the additional cost of TOU meter ing and billing, as well as the assumed gr eater ability of larger customers to shift their loads.
TOU rates ar e less applicable to gas rates, because the natural storage capability of gas mains allows gas utilities to pr ocur e supplies on a daily , rather than hourly , basis. Additionally , seasonal var iations ar e captur ed to a large extent in costs for gas pr ocur ement, which ar e typically passed thr ough to the customer . An ar ea with constrained seasonal gas transportation capacity , however , could mer it a higher distr ibution cost dur ing the constrained season. Alter natively , a utility could r ecover a higher shar e of its fixed costs dur ing the high demand season, because seasonal peak demand dr ives the sizing of the mains.
As TOU rates ar e typically designed to be r evenueneutral with the status quo rates, a high on-peak pr ice will be accompanied by a low of f-peak pr ice. Numer ous studies in electr icity have shown that while the high onpeak pr ices do cause a r eduction in usage dur ing that per iod, the low of f-peak pr ices lead to an incr ease in usage in the low-cost per iod. Ther e has also been an 

# T

able 5-1. P artial List of Utilities With Inclining T ier Residential Rates Utility Name State Ta r iff URL Flor ida Power and Light FL http://www .fpl.com/access/contents/how_to_r ead_your_bill.shtml Consolidated Edison NY http://www .coned.com/documents/elec/201-210.pdf Pacific Gas & Electr ic CA http://www .pge.com/r es/financial_assistance/medical_baseline_life_support/ understanding/index.html#topic4 Souther n Califor nia Edison CA http://www .sce.com/NR/r donlyr es/728FFC8C-91FD-4917-909BAr izona Public Service Co AZ https://www .aps.com/my_account/RateCompar er .html Sacramento Municipal Util Dist CA http://www .smud.org/r esidential/rates.html Indiana Michigan Power Co MI https://www .indianamichiganpower .com/global/utilities/tar if fs/ Michigan/MISTD1-31-06.pdf Modesto Irr igation Distr ict CA http://www .mid.org/services/tar if fs/rates/ums-d-r esidential.pdf T

u rlock Irr igation Distr ict CA http://www .tid.org/Publisher_PDFs/DE.pdf Granite State Electr ic Co NH http://www .nationalgr idus.com/granitestate/home/rates/4_d.asp V

ermont Electr ic Cooperative, Inc VT http://www .vtcoop.com/PageV iewer .aspx?PageName=Rates%20Summary City of Boulder NV http://www .bcnv .org/utilities.html#electr ic,waterandsewer

4 For a survey of optional rates with voluntary participation, see Hor owitz and W oo (2006). 5-6 National Action Plan for Energy Efficiency“income effect” observed wher e people buy mor e energyas their overall bill goes down, due to switching consumption to lower pr ice per iods. The net ef fect might not be a significant decr ease in total electr icity usage, but TOU rates do encourage r educed usage when that r eduction is the most valuable. Another important consideration with TOU pr ices is the envir onmental impact. Depending on generation mix and the diur nal emissions pr ofile of the r egion, shifting consumption fr om the onpeak per iod to of f-peak per iod might pr ovide envir onmental 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 schedulesuch as time-of-use pricing, critical peak pricing, realtime pricing, or peak load reduction credits.
Dynamic Rates Under a dynamic rate structur e, 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 pr icing (R TP) rates vary continuously over

time in a way that dir ectly r eflects the wholesale pr ice of electr icity

.

• Cr itical peak pr icing (CPP) rates have higher rates

dur ing per iods designated as cr itical peak per iods by the utility . Unlike TOU blocks, the days in which cr itical peaks occur ar e not designated in the tar if f, but ar e designated on r elatively short notice for a limited number of days dur ing the year

.

• Non-firm rates typically follow the pr icing form of the

otherwise applicable rates, but of fer discounts or incentive payments for customers to curtail usage dur ing times of system need (Hor owitz and W oo, 2006). Such per iods of system need ar e not designated in advance thr ough the tar iff, and the customer might r eceive little notice befor e energy supply is interrupted. In some cases, customers may be allowed to “buy thr ough” per iods 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 ar e generally used to: 1) pr omote load shifting by large, sophisticated users, 2) give large users access to low “surplus energy” pr ices, or 3) r educe peak loads on the utility system. Ther efor e, dynamic rates ar e complementary to energy ef ficiency , but ar e mor e useful for achieving demand r esponse dur ing peak per iods than r educing overall energy usage.

T

wo-Part Rates T

wo-part rates r efer to designs wher ein a base level of customer usage is pr iced at rates similar to the status quo (Part 1) and deviations fr om the base level of usage ar e billed at the alter native rates (Part 2). T wo-part rates ar e common among R TP pr ograms to minimize the fr ee r i der pr oblem. By implementing a two-part rate, customers r eceive the r eal time pr ice only for their change in usage r elative to their base level of usage. W ithout the two-part rate form, most low load-factor customers on rates with demand charges would see large bill r eductions for moving to an R TP rate. A two-part rate form, however , could also be combined with other rate forms that ar e mor e conducive to energy ef ficiency pr ogram adoption. For example, a two-part rate could be structur ed like an incr easing tier ed block rate, with the T ier 1 allowance based on the customer’ s histor ical usage. This structur e would addr ess many of the rate design barr iers such as r evenue stability . Of course, ther e would be implementation issues, such as determining what histor ical per iod is used to set Part 1, and how often that baseline is updated to r eflect changes in usage. Also, new customers would need to be assigned an inter im baseline.

To create a sustainable, aggressive national commitment to energy efficiency 5-7Demand Charges Demand charges bill customers based on their peak usage rather than their total usage dur ing the month. For electr icity

, demand charges ar e based on usage dur ing particular TOU per iods (e.g., peak demand) or usage dur ing any per iod in the month (e.g., maximum demand). Demand charges can also use a per centage of the highest demand over the pr ior year or pr ior 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 electr icity , utilities pr efer demand charges over volumetr ic charges because they pr ovide gr eater r evenue certainty , and encourage mor e consistent asset utilization. In contrast to a demand charge, a customer charge that covers mor e of a utility’ s fixed costs r educes pr ofits fr om incr eased sales, and the utility disincentive to pr omote energy ef ficiency

. For energy ef ficiency pr ograms, demand charges could help pr omote r eductions in usage for those end uses that cause the customer’ s peak. 5 In general, however , volumetr ic rates ar e mor e favorable for energy ef ficiency pr omotion. Incr easing the demand charges would r educe the magnitude of the pr ice signal that could be sent thr ough a volumetr ic charge.


### Mechanisms Wher e Customer Benefits Ar e Not Dr iven by T a r i f f Savings The rate design forms discussed above allow customers to benefit fr om energy ef ficiency thr ough bill r eductions; however , other types of pr ograms pr ovide incentives that ar e decoupled fr om the customer’ s r etail rate.

Discount for Ef ficiency via Conservation Behavior In some cases, energy efficiency benefits ar e passed on to customers thr ough mechanisms other than r etail rates. For example, in Califor nia the “20/20” pr ogram was implemented in 2001, giving customers a 20 per cent r ebate off their summer bills if they could r educe their electr icity consumption by 20 per cent compar ed to the summer per iod the pr ior year . The pr ogram's success was likely due to a combination of aggr essive customer education, energy conservation behavior (r educing consumption thr ough limiting usage of appliances and end-uses) and investment in energy efficiency . Pacific Gas & Electr ic (PG&E) has just implemented a similar pr ogram for natural gas, wher ein customers can r eceive a r ebate of 20 per cent of their last winter’ s bill if they can r educe natural gas usage by 10 percent this winter season. The 20/20 pr ogram was popular and effective. It was easy for customers to understand, and ther e might be a psychological advantage to a pr ogram that gives you a r ebate (a r eceived r ewar d), as opposed to one that just allows you to pay less than you otherwise would have (a lessened penalty). Applying this concept might r equir e some adjustments to account for changes in weather or other factors.

Benefit Shar ing Ther e ar e two types of benefit shar ing with customers. 6 Under the first type of shar ed savings, a developer (utility or thir d party) installs an energy-saving device. The customer shar es the bill savings with the developer until the customer’ s pr oject load has been paid of f. In the second type of shar ed savings, the utility is typically the developer and installs an energy ef ficiency or distr ibuted generation device at the customer site. The customer then pays an amount comparable to what the bill would have been without the device or measur es installed, less a portion of the savings of the device based on utility avoided costs. This appr oach decouples the customer benefits fr om the utility rate, but it can be complicated to determine what the consumption would have been without the device or energy ef ficiency

. PacifiCorp in Or egon tackled this pr oblem by offer ing a cash payment of 35 per cent of the cost savings for r esidential weather ization measur es, wher e the cost savings was based on the measur e’ s expected annual kWh savings and a schedule of lifecycle savings per kWh (PacifiCorp, 2002).

5 Hor owitz and W oo (2006) show that demand charges can be used to dif fer entiate service r eliability , thus implementing curtailabl e and interruptible service pr ograms that ar e useful for meeting system r esour ce adequacy

. 6 Note that benefit shar ing is not the same as “shar ed savings,” used in the context of utility incentives for pr omoting energy e f ficiency pr ograms.

5-8 National Action Plan for Energy Efficiency

# T able 5-2. Pr os and Cons of Rate Design F orms Pr ogr am T ype Cr iter ia Avoided Cost Benefits Energy and P eak Customer Incentive and Impact on Non- Implementation and and Utility Incentives Reductions Bill Impact P articipants Transition Issues Incr easing T ier 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 Pr o: Good match when long-run marginal costs are above average costs

. Con: Might not be theright price signal if longrun marginal costs are below average costs

. Pr o: Can achieve annual energy reductions

. Con: Does not encouragereductions in any particular period (unless combined with a time-based rate like T OU). Pr o: 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

. Pr o: If mandatory , little impact on other customer classes

. Con: Could not be implemented on a voluntary basis because of free rider losses

. Pr o: Simple to bill with existing meters

. Con: Could require phased transition to mitigate bill impacts

.

T i me of Use (T OU) http://www .nationalgridus .com/masselectric/ home/rates/4_tou.asp Pr o: (1) Low implementation cost; (2) Tracks expected marginal costs

. Con: Unclear if marginalcosts should be shortor long-run. Pr o: Can achieve peak load relief

. Con: Might not achieve substantial energy reductions or produce significant emissions benefits

. Pr o: 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. Pr o: 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. Pr o: Extensive industry experience with T O U rate

. Con: (1) If mandatory , lik

ely opposed by customers , but not necessarily the utility; (2) If optional, opposed by non-participants and possibly the utility

. Dynamic Rates: Real T i me Pr icing (RTP) http://www.exeloncorp .co m/comed/library/pdfs/ adv ance_copy_tariff_ revision6.pdf http://www.southern company.com/ gulfpower/pricing/gulf_ rates .asp?mnuOpco=gulf &mnuT ype=com&mnuIte m=er#rates http://www .nationalgridus .com/niagaramohawk/ non_html/rates_psc207 .pdf Pr o: (1) Tracks dayahead or day-of shortrun marginal cost for economically efficient daily consumption decisions; (2) R TP rates can be set to help allocate capacity in an economically efficient manner during emergencies

. Con: No long-run price signal for investment decisions

. Pr o: 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: Cr itical P eak Pr icing (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 Pr o: (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. Pr o: Likely to achieve load relief

. Con: Unlikely to provide significant annual energy reductions

. Same as above

. Pr o: Little impact, unless the utility heavily discounts the rate for the non-critical hours

. Con: (1) If mandatory , lik

ely 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

# T able 5-2. Pr os and Cons of Rate Design F orms (continued) Pr ogr am T ype Cr iter ia Avoided Cost Benefits Energy and P eak Customer Incentive and Impact on Implementation and and Utility Incentives Reductions Bill Impact Non-P articipants Transition Issues Dynamic Rates Nonfirm http://www.pacificorp .com /Regulatory_Rule_Schedul e/Regulatory_Rule_Sched ule2220.pdf Pr o: (1) Provides emergency load relief to support system reliability; (2) Implements efficient rationing. Con: (1) Does not track costs; (2) Potentially high implementation cost. Pr o: (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
. Pr o: Bill savings compensate customer for accepting lower reliability

. Pr o: Little impact, unless the utility offers a curtailable rate discount that exceeds the utility's expected cost savings

. Pr o: (1) If optional, nonparticipants would not object unless discount is “excessive”; (2) If mandatory , different levels o f reliability (at increasing cost) would need to be offered. Con: Complicated notice and monitoring requirements

. T w o-P art Rates http://www.aepcustomer

. com/tariffs/Michigan/pdf/ MISTD4-28-05.pdf: Pr o: Allows rate to be set at utility avoided cost. Con: Requires establishing customer baseline , which is subject to historical usage , weather , and other factors

. Pr o: Can be used to encourage or discourage peak usage depending on characteristics of “part two” rate form. Pr o: Provides incentives for changes in customer’ s usage
. T herefore , n o change in usage results in the same bill. Pr o: Non-participants are held harmless

. Pr o: 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 Char ges http://www.sce .com/NR/ sc3/tm2/pdf/ce30-12.pdf Pr o: 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). Pr o: Can achieve load reductions

. Con: Might not achieve substantial annual reductions

. Pr o: 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. Pr o: If mandatory , little average impact, but canbe 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 utilitydue to high implementation cost; (2) If optional, few would object, unless the implementation cost spills over to other customer classes

.
Discount for Efficiency , Benefit Shar ing, etc. http://www.cpuc.ca.gov/ PUBLISHED/NEWS_ RELEASE/51362.htm http://www.pacificorp

. com/Regulatory_Rule_ Schedule/Regulatory_Rule _Schedule7794.pdf Pr o: Incentive can be tied directly to avoided costs , without the need to change overall rate design. Con: Only a portion of the benefits arereflected in the incentive , as rate savings will still be a factor for most options

. Pr o: Utilities generally have control over what measures are eligible for an incentive , so the mixof peak and energy savings can be determined during program design. Con: Impacts might be smaller than those attainable through mandatory rate programs
. Pr o: (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

. Pr o: Reflects the charac teristics of the underlying rate form. Pr o: 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

.

Ener gy Efficiency Customer Rebate Pr ogr ams (e .g., 20/20 program in California)

www.sce .com/Rebatesand Savings/2020

www.sdge .com/tm2/pdf/ 20-20-T OU .pdf

www.pge .com/tariffs/pdf/ EZ-2020.pdf Pr o: Can avoid more drastic rationing mechanisms whenresources are significantly constrained. Con: Customer discounts are not set based on utility cost savings , and therefore these programs might over-rew ard cutomers who qualify

. Pr o: (1) Links payment of incentive directly to metered energy savings; (2) Easy to measure and verify

. Con: F ocused on throughput and not capacity savings

. Pr o: (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. Pr o: V ery 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 EfficiencyOn-Bill Financing The pr imary function of on-bill financing is to r emove the barr ier pr esented by the high first-time costs of many energy efficiency measur es. On-bill financing allows the customer to pay for energy efficiency equipment over time, and fund those payments thr ough bill savings. On-billfinancing can also deliver financial benefits to the participants by pr oviding them access to low financing costs offer ed by the utility . An example of on-bill financing is the “Pay As Y ou Save” (P A

YS) pr ogram, which pr ovides upfr ont funding in r etur n for a monthly charge that is always less than the savings. 7


### Pr os and Cons of V a r ious Designs Rate design involves tradeoffs among numer ous goals. T

able 5-2 summar izes the pr os and cons of the var ious rate design forms fr om var ious stakeholder perspectives, consider ing 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 r efer ence and starting point. 

# Successful Str ategies Rate design is one of a number of factors that contr ibute to the success of energy ef ficiency pr ograms. Along with rate design, it is important to educate customers about their rates so they understand the value of energy ef ficiency investment decisions. T able 5-3 shows examples of four states with successful energy ef ficiency pr ograms and complementary rate design appr oaches. Certainly , one would expect higher rates to spur energy ef ficiency adoption, and that appears to be the case for thr ee of the four example states. However , W ashington has an active and cost-ef fective energy ef ficiency pr ogram, despite an average r esidential rate far below the national average of 10.3 cents per kWh. (EIA, 2006) 

# T

able 5-3. Conditions T hat Assist Success
California Washington State Massachusetts New Y ork
Rate F orms and Cost Structur es 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 (P acifiCorp). Gas rates are flat volumetric (Puget Sound Electric [PSE]). High export v alue 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 T O U 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

Resour ce and Load Char acter istics 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_F inal.pdf Winter peaking electric loads , but summer export opportunities

. Heavily hydroelectric, so resource av ailability can v ary 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 P art 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 Y ork City area. http://www.eia.doe .gov/ cneaf/electricity/page/ fact_sheets/newyork.html

7 See http://www .paysamer ica.org/. To create a sustainable, aggressive national commitment to energy efficiency 5-11

# T able 5-3. Conditions T hat Assist Success (continued)
California Washington State Massachusetts New Y ork
A

ver age Residential Electr ic 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 Structur e 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 V ertically integrated. http://www.wutc.w a.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

P olitical and Administr ative Actor s 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_conserv ation.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 Y ork. On 1/16/06, Governor George E. P ataki unveiled “a comprehensive , multi-faceted plan that will help reduce New Y ork’ 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.w a.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 W ashington’ s energy ef ficiency ef forts can be explained by the high value for power exports to Califor nia, and partly by the r egional focus on pr omoting energy ef ficiency . W ashington and the r est of the Pacific Northwest r egion place a high social value on envir onmental pr otection, so W ashington might be a case wher e the success of energy ef ficiency is foster ed by high public awar eness, and the willingness of the public to look beyond the short-term out-of-pocket costs and consider the longer term impacts on the envir onment. The other thr ee states shown in T able 5-3 shar e the common character istics of high r esidential rates, energy ef ficiency funded thr ough a system benefits sur charge, and competitive electr ic markets. The formation of competitive electr ic markets could have also encouraged energy ef ficiency by: (1) establishing secur e funding sour ces or energy ef ficiency agencies to pr omote energy ef ficiency , (2) incr easing awar eness of energy issues and r isks r egar ding futur e energy pr ices, and (3) the entrance of new energy agents pr omoting energy ef ficiency

.

5-12 National Action Plan for Energy Efficiency

# Key Findings
— Large Commercial and Industrial. T wo-part rates. These rates pr ovide bill stability and can be established This chapter summar izes the challenges and opportuni- so that the change in consumption thr ough adoption ties for employing rate designs to encourage utility of energy efficiency is pr iced at marginal cost. The pr omotion and customer adoption of energy ef ficiency

. complexity in establishing histor ical 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 pr ocess that balances

numer ous r egulatory and legislative goals. It is impor- — All Customer Classes. Seasonal pr ice dif fer entials. tant to r ecognize the pr omotion of energy ef ficiency in Higher pr ices dur ing the higher cost peak season the balancing of objectives. encourage customer conservation dur ing the peak and can r educe peak load gr owth. For example, • Rate design of fers opportunities to encourage cus- higher winter rates can encourage the pur chase of

tomers to invest in ef ficiency wher e they find it to be mor e ef ficient space heating equipment. cost-ef fective, and to participate in new pr ograms that pr ovide innovative technologies (e.g., smart meters) to • Energy ef ficiency can be pr omoted thr ough non-tar if f help customers contr ol their energy costs. mechanisms that r each customers thr ough their utility bill. Such mechanisms include: • Utility rates that ar e designed to pr omote sales or maximize stable r evenues tend to lower the incentive for — Benefit Sharing Programs. Benefit shar ing pr ograms customers to adopt energy ef ficiency

. can r esolve situations wher e normal customer bill savings ar e smaller than the cost of energy efficiency • Rate forms like declining block rates, or rates with large pr ograms.

fixed charges r educe the savings that customers can attain fr om adopting energy ef ficiency

. — On-Bill Financing. Financing support can help customers over come the upfr ont costs of ef ficiency • Appr opr iate rate designs should consider the unique devices.

character istics of each customer class. Some general rate design options by customer class ar e listed below

. — Energy Efficiency Rebate Programs. Pr ograms that of fer discounts to customers who r educe their

— Residential. Inclining tier block rates. These rates energy consumption, such as the 20/20 r ebate pr ocan be quickly implemented for all r esidential and gram in Califor nia, of fer clear incentives to cussmall commer cial and industr ial electr ic and gas tomers to focus on r educing their energy use. customers. At a minimum, eliminate declining tier block rates. As meter ing costs decline, also explor e • Mor e ef fort is needed to communicate the benefits dynamic rate options for r esidential customers. and opportunities for energy ef ficiency to customers, r egulators, and utility decision-makers.

— Small Commercial. T ime of use rates. While these rates might not lead to much change in annual usage, the pr ice signals can encourage customers to consume less energy when energy is the most expensive to pr oduce, pr ocur e, and deliver

.

To create a sustainable, aggressive national commitment to energy efficiency 5-13

# Recommendations and Options
The National Action Plan for Energy Ef ficiency Leadership Gr oup of fers the following r ecommendations as ways to over come many of the barr iers to energy ef ficiency in rate design, and pr ovides a number of options for consideration by utilities, r egulators, and stakeholders (as presented in the Executive Summar y): Recommendation: Modify ratemaking practices to pr omote energy ef ficiency investments. Rate design of fers opportunities to encourage customers to invest in ef ficiency wher e they find it to be cost-ef fective, and to participate in new pr ograms that br ing them innovative technologies (e.g., smart meters) to help them contr ol their energy costs. Options to Consider:
• Including the impact on adoption of energy ef ficiency

as one of the goals of r etail rate design, r ecognizing that it must be balanced with other objectives.

• Eliminating rate designs that discourage energy ef ficiency by not incr easing costs as customers consume mor e electr icity or natural gas.

• Adopting rate designs that encourage energy efficiency , consider ing the unique character istics of each customer class, and including partner ing tar if fs with other mechanisms that encourage energy ef ficiency , such as benefit shar ing pr ograms and on-bill financing. Recommendation: Br oadly communicate the benefits of, and opportunities for , energy ef ficiency

. Exper ience shows that energy ef ficiency pr ograms help customers save money and contr ibute to lower cost energy systems. But these impacts ar e not fully documented nor r ecognized by customers, utilities, r egulators and policymakers. Mor e ef fort is needed to establish the business case for energy ef ficiency for all decision-makers, and to show how a well-designed appr oach to energy ef ficiency can benefit customers, utilities, and society by (1) r educing customers bills over time, (2) foster ing financially healthy utilities (r etur n on equity [ROE], ear nings per shar e, debt coverage ratios unaf fected), and (3) contr ibuting to positive societal net benefits overall. Ef fort is also necessary to educate key stakeholders that, although energy ef ficiency can be an important low-cost r esour ce to integrate into the energy mix, it does r equir e funding just as a new power plant r equir es funding. Further , education is necessary on the impact that energy efficiency pr ograms can have in concert with other energy ef ficiency policies such as building codes, appliance standar ds, and tax incentives. Option to Consider:
• Communicating on the r ole of energy ef ficiency in

lower ing customer energy bills and system costs and r isks over time.

5-14 National Action Plan for Energy Efficiency

# Refer ences Baskette, C., Hor ii, B., Kollman, E., & Pr ice, S. (2006). Avoided Cost Estimation and Post-Reform Funding Allocation for Califor nia's Energy Ef ficiency Pr ograms. Energy , 31:6-7, 1084-1099. Bonbr ight, J.C. (1961). Principles of Public Utility Rates. New Y ork: Columbia University Pr ess. Br own, S.J. and Sibley , D.S. (1986). The Theor y of Public Utility Pricing. New Y ork: Cambr idge University Pr ess. Hor owitz, I. and W oo, C.K. (2006). Designing Par etoSuper ior Demand-Response Rate Options. Energy , 31:6-7, 1040-1051. Huntington, S. (1975). The Rapid Emergence of Marginal Cost Pr icing in the Regulation of Electr ic Utility Rate Structur es. 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, V A: Public Utilities Reports. Joskow, P

. L. (1976). Contr ibutions to the Theory of Marginal Cost Pr icing. Bell Journal of Economics, 7(1): 197-206. Joskow, P

. (1979). Public Utility Regulatory Policy Act of 1978: Electr ic Utility Rate Reform. Natural Resources Journal, 19: 787-809. Kahn, A. (1970). The Economics of Regulation. New Y

o rk: John W iley & Sons. PacifiCorp (2002, September 30). Or egon Schedule 9— Residential Energy E fficiency Rider Optional W eather ization 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: Theor y and Practice. Arlington, V A: Public Utilities Reports. Public Utility Regulatory Policies Act (PURP A) of 1978, Section 114. U.S. Energy Information Administration [EIA] (2006). A verage Retail Price of Electricity to Ultimate Customers by End-Use Sector , by State. Electr ic Power Monthly

.

To create a sustainable, aggressive national commitment to energy efficiency 5-15

# 6: Energy Ef ficiency Pr ogr am Best Pr actices

Energy ef ficiency pr ograms have been operating successfully in some parts of the country since the late 1980s. Fr om the exper ience of these successful pr ograms, a number of best practice strategies have evolved for making energy ef ficiency a r esour ce, developing a cost-ef fective portfolio of energy ef ficiency p r o grams for all customer classes, designing and deliver ing energy ef ficiency pr ograms that optimize budgets, and ensur ing that pr ograms deliver r esults. 

# Ov erview
Cost-ef fective energy ef ficiency pr ograms have been deliver ed by large and small utilities and thir d-party pr ogram administrators in some parts of the country since the late 1980s. The rationale for utility investment in ef ficiency pr ogramming is that within certain existing markets for energy-ef ficient pr oducts and services, ther e ar e barr iers that can be over come to ensur e that customers fr om all sectors of the economy choose mor e energyef ficient pr oducts and practices. Successful pr ograms have developed strategies to over come these barr iers, in many cases partner ing with industry and voluntary national and r egional pr ograms so that ef ficiency pr ogram spending is used not only to acquir e demand-side r esour ces, but also to accelerate market-based pur chases by consumers.



# Leadership Gr oup Recommendations Applicable to Energy Ef ficiency Pr ogr am Best Pr actices

• Recognize energy ef ficiency as a high pr ior ity

energy r esour ce.
• Make a str ong, long-term commitment to

cost-ef fective energy ef ficiency as a r esour ce.
• Br oadly communicate the benefits of, and opportunities for , energy ef ficiency

. • Pr ovide suf ficient and stable pr ogram funding to

deliver energy ef ficiency wher e cost-ef fective. A list of options for promoting best practice energy efficiency programs is provided at the end of this chapter

. 

### Challenges that limit gr eater utility investment in energy ef ficiency include the following:

• The major ity of utilities r ecover fixed operating costs

and ear n pr ofits 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 standar d appr oaches on how to quantify and

incorporate the benefits of energy ef ficiency into r esour ce planning ef forts, and institutional barr iers at many utilities that stem fr om the histor ical business model of acquir ing generation assets and building transmission and distr ibution systems. Strategies for overcoming these challenges are addressed in Chapter 3: Incorporating Energy Efficiency in Resource Planning.

• Rate designs that ar e counterpr oductive to energy

ef ficiency might limit gr eater ef ficiency investment by large customer gr oups, wher e many of the most cost-ef fective opportunities for ef ficiency pr ogramming exist. Strategies for encouraging rate designsthat are compatible with energy efficiency are discussed in Chapter 5: Rate Design.

• Ef ficiency pr ograms need to addr ess multiple customer needs and stakeholder perspectives while simultaneously addr essing multiple system needs, in many cases while competing for inter nal r esour ces. This chapter focuses on strategies for making energyefficiency a resource, developing a cost-effective portfolio of energy efficiency programs for all customer classes, designing and delivering efficiency programsthat 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 6-1Pr ograms that have been operating over the past decade, and longer , have a history of pr oven savings in megawatts (MW), megawatt-hours (MWh), and therms, as well as on customer bills. These pr ograms show that energy ef ficiency can compar e very favorably to supplyside options. This chapter summar izes key findings fr om a portfoliolevel 1 r eview of many of the energy efficiency pr ograms that have been operating successfully for a number of years. It pr ovides an overview of best practices in the following ar eas:

• Political and human factors that have led to incr eased

r eliance on energy ef ficiency as a r esour ce.

• Key considerations used in identifying target measur es 2 for

energy ef ficiency pr ogramming in the near - and long-term.

• Pr ogram design and delivery strategies that can maximize pr ogram impacts and incr ease cost-ef fectiveness.

• The r o le of monitor ing and evaluation in ensur ing that

pr ogram dollars ar e optimized and that energy efficiency investments deliver r esults. 

### Backgr ound Best practice strategies for pr ogram planning, design and implementation, and evaluation wer e der ived fr om a r eview of energy ef ficiency pr ograms at the portfolio level acr oss a range of policy models (e.g., public benefit charge administration, integrated r esour ce planning). The box on page 6-3 descr ibes the policy models and T

able 6-1 pr ovides additional details and examples of pr ograms operating under var ious policy models. This chapter is not intended as a compr ehensive r eview of the energy efficiency pr ograms operating ar ound the country , but does highlight key factors that can help impr ove and accelerate energy ef ficiency pr ogram success. Organizations r eviewed for this ef fort have a sustained history of successful energy ef ficiency pr ogram implementation (See T ables 6-2 and 6-3 for summar ies of these pr ograms) and shar e the following character istics:

• Significant investment in energy ef ficiency as a

r e sour ce within their policy context.

• Development of cost-ef fective pr ograms that deliver

r esults.

• Incorporation of pr ogram design strategies that work

to r emove near - and long-term market barr iers to investment in energy ef ficiency

.

• W illingness to devote the necessary r esour ces to make

pr ograms successful. Most of the organizations r eviewed also have conducted full-scale impact evaluations of their portfolio of energy ef ficiency investments within the last few years. The best practices gleaned fr om a r eview of these organizations can assist utilities, their commissions, state energy of fices, and other stakeholders in over coming barr i ers to significant energy ef ficiency pr ogramming, and begin tapping into energy ef ficiency as a valuable and clean r esour ce to ef fectively meet futur e supply needs.

1 For the purpose of this chapter , portfolio r efers to the collective set of energy ef ficiency pr ograms of fer ed by a utility or thir d-party energy ef ficiency pr ogram administrator

. 2 Measures r efer to the specific technologies (e.g., ef ficient lighting fixtur e) and practices (e.g., duct sealing) that ar e used to achie ve energy savings.

6-2 National Action Plan for Energy Efficiency

# Energy Ef ficiency Pr ogr ams Ar e Deliv er ed Within Many P olicy Models

Systems Benefits Charge (SBC) Model In this model, funding for pr ograms comes fr om an SBC that is either determined by legislation or a r egulatory pr ocess. The charge is usually a fixed amount per kilowatt-hour (kWh) or million Br itish thermal units (MMBtu) and is set for a number of years. Once funds ar e collected by the distr ibution or integrated utility , pr ograms can be administer ed by the utility , a state agency , or a thir d party . If the utility implements the pr ograms, it usually r eceives curr ent cost r ecovery and a shar eholder incentive. Regar dless of administrative structur e, ther e is usually an opportunity for stakeholder input. This model pr ovides stable pr ogram design. In some cases, funding has become vulnerable to raids by state agencies. In ar eas aggr essively pursuing energy ef ficiency as a r esour ce, limits to additional funding have cr eated a ceiling on the r esour ce. While pr edominantly used in the electr ic sector , this model can, and is, being used to fund gas pr ograms. Integrated Resour ce Plan (IRP) Model In this model, energy ef ficiency is part of the utility’ s IRP . Energy ef ficiency , along with other demand-side options, is tr eated on an equivalent basis with supply

. Cost r ecovery can either be in base rates or thr ough a separate charge. The utility might r eceive a shar eholder incentive, r ecovery of lost r evenue (fr om r educed sales volume), or both. Pr ograms ar e dr iven mor e by the r esour ce need than in the SBC models. This generally is an electr ic-only model. The r egional planning model used by the Pacific Northwest is a var iation on this model. Request For Pr oposal (RFP) ModelIn this case, a utility or an independent system operator (ISO) puts out a competitive solicitation RFP to acquir e energy ef ficiency fr om a thir d-party pr ovider to meet demand, particularly in ar eas wher e ther e ar e transmission and distr ibution bottlenecks or a generation need. Most examples of this model to date have been electr ic only . The focus of this type of pr ogram is typically on saving peak demand.

Portfolio Standar d In this model, the pr ogram adminstrator is subject to a portfolio standar d expr essed in terms of per centage of overall energy or demand. This model can include gas as well as electr ic, and can be used independently or in conjunction with an SBC or IRP r equir ement. Municipal Utility/Electr ic Cooperative Model In this model, pr ograms ar e administer ed by a municipal utility or electr ic cooperative. If the utility/cooperative owns or is r esponsible for generation, the energy efficiency r esour ce can be part of an IRP . Cost r ecovery is most likely in base rates. This model can include gas as well as electr ic.

To create a sustainable, aggressive national commitment to energy efficiency 6-3

# T able 6-1. Ov erview of Energy Ef ficiency Pr ogr ams

P olicy Model/

Examples Funding T

ype Shar eholder Incentive 1 Lead Administr ator Role in Resour ce Acquisition Scope of Pr ogr ams P olitical Conte xt
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 w as anexisting infrastructure at the utilities

SBC with state or thir d-party implementation:

● New Y o rk

● V ermont
● Wisconsin Separate charge No State agency T hird 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:

● Nev ada

● Arizona

● Minnesota

● Bonneville P ower

Administration (BP A) (regional planning model as well)

● V ermont Gas

● Keyspan V aries: in rates , capitalized, or separate charge In some cases Utility Integrated Program type dictated by resource need P art of IRP requirement; may be combined with other models

RFP model for full-scale pr ogr ams and congestion r elief V aries 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 P ortfolio standar d model (can be combined with SBC or IRP):

● Nev ada

● California

● Connecticut

● T

exas V aries V aries 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 & electr ic cooper ative:

● 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 shar eholder incentive is a financial incentive to a utility (above those that would normally be r ecover ed in a rate case) forachieving set goals for

energy e f ficiency pr ogram performance. 6-4 National Action Plan for Energy Efficiency

### Key Findings Overviews of the energy ef ficiency pr ograms r eviewed for this chapter ar e pr ovided in T able 6-2 and 6-3. Key findings drawn fr om these pr ograms include:

• Energy ef ficiency r esour ces ar e being acquir ed on average at about one-half the cost of the typical new power sour ces, and about one-thir d of the cost of natural gas supply in many cases—and contr ibute to an overall lower cost energy system for rate-payers (EIA, 2006).

• Many energy ef ficiency pr ograms ar e being deliver ed at

a total pr ogram cost of about $0.02 to $0.03 per lifetime kilowatt-hour (kWh) saved and $0.30 to $2.00 per lifetime million Br itish thermal units (MMBtu) saved. These costs ar e less than the avoided costs seen in most r egions of the country. Funding for the major ity of pr ograms r eviewed ranges fr om about 1 to 3 percent of electr ic utility r evenue and 0.5 to 1 per cent of gas utility r evenue.

• Even low energy cost states, such as those in the Pacific

Northwest, have r eason to invest in energy ef ficiency , as energy ef ficiency pr ovides a low-cost, r eliable r esour ce that r educes customer utility bills. Energy ef ficiency also costs less than constructing new generation, and pr ovides a hedge against market, fuel, and envir onmental r isks (Northwest Power and Conservation Council, 2005).

• W ell-designed pr ograms pr ovide opportunities for customers of all types to adopt energy savings measur es and r educe their energy bills. These pr ograms can help customers make sound energy use decisions, incr ease contr ol over their energy bills, and empower them to manage their energy usage. Customers can exper ience significant savings depending on their own habits and the pr ogram of fer ed.

• Consistently funded, well-designed efficiency pr ograms

ar e cutting electr icity and natural gas load—pr oviding annual savings for a given pr ogram year of 0.15 to 1 per cent of energy sales. These savings typically will accrue at this level for 10 to 15 years. These pr ograms ar e helping to of fset 20 to 50 per cent of expected energy gr owth in some r egions without compr omising end-user activity or economic well being.

• Resear ch and development enables a continuing s o u r c e

of new technologies and methods for impr oving energy ef ficiency and helping customers contr ol their energy bills.

• Many state and r egional studies have found that pursuing economically attractive, but as yet untapped energy ef ficiency could yield mor e than 20 per cent savings in total electr icity demand nationwide by 2025. These savings could help cut load gr owth by half or mor e, compar ed to curr ent for ecasts. Savings in dir ect use of natural gas could similarly pr ovide a 50 per cent or gr eater r eduction in natural gas demand gr owth. Potential var ies by customer segment, but ther e ar e cost-ef fective opportunities for all customer classes.

• Energy ef ficiency pr ograms ar e being operated successfully acr oss many dif fer ent contexts: r egulated and unr egulated markets; utility , state, or thir d-party administration; investor-owned, public, and cooperatives; and gas and electr ic utilities.

• Energy ef ficiency r esour ces ar e being acquir ed thr ough

a var iety of mechanisms including system benefits charges (SBCs), energy ef ficiency portfolio standar ds (EEPSs), and r esour ce planning (or cost of service) ef forts.

• Cost-ef fective energy ef ficiency pr ograms for electr icity

and natural gas can be specifically targeted to r educe peak load.

• Ef fective models ar e available for deliver ing gas and

electr ic energy ef ficiency pr ograms to all customer classes.Models may vary based on whether a utility is in the initial stages of energy ef ficiency pr ogramming, or has been implementing pr ograms for a number of years.

To create a sustainable, aggressive national commitment to energy efficiency 6-5

# T able 6-2. Ef ficiency Measur es of Natur al Gas Savings Pr ogr ams

Pr ogr am Administr ator K eyspan (MA) V ermont Gas (VT) SoCal Gas (CA)
P o licy Model Gas Gas Gas P e r iod 2004 2004 2004 Pr ogr am 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% T otal Avoided Cost (2005 $/MMBtu) 3 12 11 7

1 SWEEP , 2006; Souther n Califor nia Gas Company , 2004. 2 Lifetime MMBtu calculated as 12 times annual MMBtu saved wher e not r eported (not r eported for Keyspan or V ermont Gas). 3 VT and MA avoided cost (therms) r epr esents all r esidential (not wholesale) cost considerations (ICF Consulting, 2005).

• Energy ef ficiency pr ograms, pr ojects, and policies benefit fr om established and stable r egulations, clear goals, and compr ehensive evaluation.

• Energy ef ficiency pr ograms benefit fr om committed

pr ogram administrators and oversight author ities, as well as str ong stakeholder support.

• Most large-scale pr ograms have impr oved pr oductivity , enabling job gr owth in the commer cial and industr ial sectors.

• Large-scale energy ef ficiency pr ograms can r educe

wholesale market pr ices.
Lessons lear ned fr om the energy ef ficiency pr ograms operated since inception of utility pr ograms in the late 1980s ar e pr esented as follows, and cover key aspects of energy ef ficiency pr ogram planning, design, implementation, and evaluation. 

### Summary of Best Practices In this chapter , best practice strategies ar e organized and explained under four major gr oupings:

• Making Energy Ef ficiency a Resour ce

• Developing an Energy Ef ficiency Plan

• Designing and Deliver ing Energy Ef ficiency Pr ograms

• Ensur ing Energy Ef ficiency Investments Deliver Results For the most part, the best practices ar e independent of the policy model in which the pr ograms operate. Wher e policy context is important, it is discussed in r elevant sections of this chapter

.

6-6 National Action Plan for Energy EfficiencyMaking Energy Ef ficiency a Resour ce Energy ef ficiency is a r esour ce that can be acquir ed to help utilities meet curr ent and futur e energy demand. T o r ealize this potential r equir es leadership at multiple levels, organizational alignment, and an understanding of the natur e and extent of the energy ef ficiency r esour ce.

• Leadership at multiple levels is needed to establish the

business case for energy ef ficiency, educate key stakeholders, and enact policy changes that incr ease investment in energy ef ficiency as a r esour ce. Sustained leadership is needed fr om:

— Key individuals in upper management at the utility who understand that energy efficiency is a r esour ce alter native that can help manage r isk, minimize longterm costs, and satisfy customers.

— State agencies, r egulatory commissions, local gover nments and associated legislative bodies, and/or consumer advocates that expect to see energy ef ficiency consider ed as part of compr ehensive utility management.

— Businesses that value energy ef ficiency as a way to impr ove operations, manage energy costs, and contr ibute to long-term energy pr ice stability and availability

, as well as trade associations and businesses, such as Energy Service Companies (ESCOs), that help members and customers achieve impr oved energy performance.

— Public inter est gr oups that understand that in or der to achieve energy ef ficiency and envir onmental 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 b y utilities. 3

• Organizational alignment. W ith policies in place to support energy efficiency pr ogramming, organizations need to institutionalize policies to ensur e that energy efficiency goals ar e r ealized. Factors contr ibuting to success include: — Str ong support fr om upper management and one or mor e inter nal champions.

— A framework appr opr iate to the organization that supports large-scale implementation of energy ef ficiency pr ograms.

— Clear , well-communicated pr ogram goals that ar e tied to organizational goals and possibly compensation.

— Adequate staf f r esour ces to get the job done.

— A commitment to continually impr ove business pr ocesses.

• Understanding of the efficiency resource is necessary

to cr eate a cr edible business case for energy ef ficiency

. Best practices include the following:

— Conduct a “potential study” pr ior to starting pr ograms to inform and shape pr ogram and portfolio design.

— Outline what can be accomplished at what costs.

— Review measur es for all customer classes including those appr opr iate for har d-to-r each customers, such as low income and very small business customers. Developing an Energy Ef ficiency Plan An energy ef ficiency plan should r eflect a long-term perspective that accounts for customer needs, pr ogram cost-ef fectiveness, the interaction of pr ograms with other policies that incr ease energy ef ficiency, the opportunities for new technology , and the importance of addr essing multiple system needs including peak load r eduction and congestion r elief. Best practices include the following:

• Of fer pr ograms for all key customer classes.

• Align goals with funding.

3 Public inter est gr oups include envir onmental organizations such as the National Resour ces Defense Council (NRDC), Alliance to Save Energy (ASE), and

Amer ican Council for an Energy Ef ficient Economy (ACEEE) and r egional market transformation entities such as the Northeast Ener gy Ef ficiency Partnerships (NEEP), Southwest Energy Ef ficiency Pr oject (SWEEP), and Midwest Energy Ef ficiency Alliance (MEEA). To create a sustainable, aggressive national commitment to energy efficiency 6-7

# T able 6-3. Ef ficiency Measur es of Electr ic and Combination Pr ogr ams

NY SERD A (NY) Efficiency V

ermont

(VT) MA Utilities (MA) WI Department of Administr ation 12 CA Utilities (CA)

P o licy Model SBC w/State Admin SBC w/3 rd P arty Admin SBC w/Utility Admin SBC w/State Admin SBC w/Utility Admin & P ortfolio Standard P e r iod 2005 2004 2002 2005 2004 Pr ogr am Funding Spending on Electr ic Ener gy Efficiency ($MM) 1 138 14 123 63 317 Budget as % of Electr ic Revenue 2 1.3% 3.3% 3.0% 1.4% 1.5% A

vg 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-Ener gy Benefits $79M bill reduction 37,200 CCF of w ater $21M bill reduction 2,090 new jobs created V alue of non-energy benefits:

Residential: $6M C/I: $36M NR

A

voided Emissions (tons/yr for 1 pr ogr am year) (could include benefits from load response , renew able , and DG programs) NO X : 470 SO 2 : 850 CO 2 : 400,000 Unspecified pollutants: 460,000 over

lifetime NO X : 135 SO 2 : 395 CO 2 : 161,205 NO X : 2,167 SO 2 : 4,270 CO 2 : 977,836 (annual savings from 5 program years) NR

Cost-Effectiveness Cost of Ener gy Efficiency

$/lifetime (kWh) 6 0.02 0.02 0.03 0.05 0.01 $/lifetime (MMBtu) NA NA 0.32 NA NA Retail Electr icity Pr ices ($/kWh) 0.13 0.11 0.11 0.07 0.13 Retail Gas Pr ices ($/mcf) NA NA NR NA NA A

voided Costs (2005$) 7,8 Energy ($/kWh) 0.03 0.07 0.07 0.02 to 0.06 13 0.06 Capacity ($/kW) 9 28.20 3.62 6.64 On-P eak Energy ($/kWh) 0.08 Off-P eak Energy ($/kWh) 0.06 Cost of Energy Efficiency as % Avoided Energy Cost 89% 29% 10% 90% 23%

C/I = Commer cial and Industr ial; CO 2 = Carbon Dioxide; $MM = Million Dollars; N/A = Not Applicable; NR = Not Reported; NO X = Nitr ogen Oxides; SO 2 = Sulfur Dioxide 1 NYSERDA 2005 spending der ived fr om subtracting cumulative 2004 spending fr om cumulative 2005 spending; includes demand r e sponse and

r esear ch and development (R&D). 2 ACEEE, 2004; Seattle City Light, 2005. 3 Annual MWh Saved averaged over pr ogram per iods for W isconsin and Califor nia Utilities. NYSERDA 2005 energy efficiency savings d er ived fr om

subtracting cumulative 2004 savings fr om 2005 cumulative r eported savings. 4 EIA, 2006; Austin Energy , 2004; Seattle City Light, 2005. T otal sales for Califor nia Utilities in 2003 and SMUD in 2004 wer e de r ived based on gr owth in total Califor nia r etail sales as r eported by EIA. 5 Lifetime MWh savings based on 12 years effective life of installed equipment wher e not r eported for NYSERDA, W isconsin, Nevada, SMUD, BP A, and Minnesota. Lifetime MMBtu savings based on 12 years effective life of installed equipment.
6-8 National Action Plan for Energy Efficiency

# T able 6-3. Ef ficiency Measur es of Electr ic and Combination Pr ogr ams (continued)

Nevada CT Utilities (CT) SMUD (CA) Seattle City Light (W A) Austin Ener gy Bonneville P ower Administr ation (ID , M T , OR, W A

) MN Electr ic and Gas Investor -Owned Utilities (MN)

IRP with P ortfolio Standard SBC w/Utility Admin & P ortfolio Standard Municipal Utility Municipal Utility Municipal Utility Regional Planning IRP and Conserv ation Improvement Program 2003 2005 2004 2004 2005 2004 2003 Pr ogr am 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 P otentially over 900 jobs created Residential: $6M C/I: $36M NR NR

NR NO X : 334 SO 2 : 123 CO 2 : 198,586 NO X : 1 8 CO 2 : 353,100 (cummulative annual savings for 13 years) NO X : 640 SO 2 : 104 CO 2 : 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 pr ovided by J. Parks, Manager , Energy Efficiency and Customer R&D, Sacramento M unicipal Utility Distr ict (personal communication, May 19, 2006). 7 A voided cost r eported as a consumption ($/kWh) not a demand (kW) figur e. 8 T

otal NST AR avoided cost for 2006. 9 A voided capacity r eported by NYSERDA as the thr ee-year averaged hourly wholesale bid pr ice per MWh. 10 NYSERDA does not separately track gas-r elated pr oject budget, r evenue, or benefits. 11 NST AR Gas only

. 12 W isconsin has a portfolio that includes r enewable distr ibuted generation; some compar isons might not be appr opr iate. 13 Range based on cr edits given for r enewable distr ibuted generation.

To create a sustainable, aggressive national commitment to energy efficiency 6-9• Use cost-ef fectiveness tests that ar e consistent with long-term planning.

• Consider building codes and appliance standar ds when

designing pr ograms.

• Plan to incorporate new technologies.

• Consider ef ficiency investments to alleviate transmission and distr ibution constraints.

• Cr eate a r oadmap of key pr ogram components,

milestones, and explicit energy use r eduction goals.
Designing and Deliver ing Energy Ef ficiency Pr ograms Pr ogram administrators can r educe the time to market and implement pr ograms and incr ease cost-ef fectiveness by leveraging the wealth of knowledge and exper ience gained by other pr ogram administrators thr oughout the nation and working with industry to deliver energy ef ficiency 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.

— Pr omote both energy and non-energy (e.g., impr oved comfort, impr oved air quality) benefits of energy ef ficient pr oducts and practices to customers.

— Coor dinate with other utilities and thir d-party pr ogram administrators.

— Leverage the national ENERGY ST AR pr ogram.

— Keep participation simple. — Keep funding (and other pr ogram character istics) as consistent as possible.

— Invest in education, training, and outr each.

— Leverage customer contact to sell additional ef ficiency and conservation.

• Leverage private sector expertise, external funding,

and financing.

— Leverage manufactur er and r etailer r esour ces thr ough cooperative pr omotions.

— Leverage state and federal tax cr edits and other tax incentives (e.g., accelerated depr eciation, first-year expensing, sales tax holidays) wher e available.

— Build on ESCO and other financing pr ogram options.

— Consider outsour cing some pr ograms to pr ivate and not-for -pr ofit organizations that specialize in pr ogram design and implementation thr ough a competitive bidding pr ocess.

• Start with demonstrated program models—build

infrastructure for the future.

— Start with successful pr ogram appr oaches fr om other utilities and pr ogram administrators and adapt them to local conditions to accelerate pr ogram design and ef fective implementation.

— Determine the r ight incentives, and if incentives ar e financial, make sur e that they ar e set at appropr iate levels.

— Invest in educating and training the service industry(e.g., home performance contractors, heating and cooling technicians) to deliver incr easingly sophisticated energy ef ficiency services.

— Evolve to mor e compr ehensive pr ograms.

6-10 National Action Plan for Energy Efficiency— Change measur es over time to adapt to changing markets and new technologies.

— Pilot test new pr ogram concepts. Ensur ing Energy Ef ficiency Investments Deliver Results Pr ogram evaluation helps optimize pr ogram ef ficiency and ensur e that energy ef ficiency pr ograms deliver intended r esults. Best practices include the following:

• Budget, plan and initiate evaluation fr om the

onset; formalize and document evaluation plans and pr ocesses.

• Develop program and project tracking systems that

support evaluation and pr ogram implementation needs.

• Conduct process evaluations to ensur e that pr ograms

ar e working ef ficiently

.

• Conduct impact evaluations to ensur e that mid- and

long-term goals ar e being met.

• Communicate evaluation results to key stakeholders.

Include case studies to make success mor e tangible. 

# Making Energy Ef ficiency a Resour ce Energy efficiency pr ograms ar e being successfully operated acr oss many differ ent contexts including electr ic and gas utilities; r egulated and unr egulated markets; utility , state, and thir d-party administrators; and investor-owned, public, and cooperatively owned utilities. These pr ograms ar e r educing annual energy use by 0.15 to 1 per cent at spending levels between 1 and 3 per cent of electr ic, and 0.5 and 1.5 per cent of gas r evenues—and ar e poised to deliver substantially gr eater r eductions over time. These organizations w e r e able to make br oader use of the energy efficiency r esour ce in their portfolio by having:

• Leadership at multiple levels to enact policy change.

• Organizational alignment to ensur e that ef ficiency

goals ar e r ealized. • A well-informed understanding of the ef ficiency r esour ce 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 natur e and extent of the ef ficiency r esour ce ar e pr ovided in the next sections. 

### Leadership Many energy efficiency pr ograms r eviewed in this chapter began in the integrated r esour ce plan (IRP) era of the electr ic utilities of the 1980s. As r estructur ing started in the late 1990s, some pr ograms wer e suspended or halted. In some cases (such as Califor nia, New Y ork, Massachusetts, Connecticut, and Rhode Island), however , settlement agr eements wer e r eached that allowed r estructur ing legislation to move forwar d if energy ef ficiency pr ogramming was pr ovided thr ough the distr ibution utility or other thir d-party pr oviders. In many cases, envir onmental advocates, energy service pr oviders, and state agencies played active r oles in the settlement pr ocess to ensur e energy ef ficiency was part of the r estructur ed electr ic utility industry . Other states (such as Minnesota, W isconsin, and Vermont) developed legislation to addr ess the need for stable energy ef ficiency pr ogramming without r estructur ing their state electr icity markets. In addition, a few states (including Califor nia, Minnesota, New Jersey , Or egon, V ermont, and W isconsin) enacted r egulatory r equir ements for utilities or other parties to pr ovide gas energy ef ficiency pr ograms (Kushler , et al., 2003). Over the past few years, the mountain states have steadily ramped up energy ef ficiency pr ograms. In all cases, to establish energy ef ficiency as a r esour ce r equir ed leadership at multiple levels:

• Leadership is needed to establish the business case for

energy ef ficiency , educate key stakeholders, and enact policy changes that incr ease investment in energy ef ficiency as a r esour ce. Sustained leadership is needed fr om:

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 r esour ce alter native that can help manage r isk, minimize longterm costs, and satisfy customers.

— State agencies, r egulatory commissions, local gover nments and associated legislative bodies, and/or consumer advocates that expect to see energy efficiency consider ed as part of compr ehensive utility management.

— Businesses that value energy ef ficiency as a way to impr ove operations, manage energy costs, and contr ibute to long-term energy pr ice stability and availability , as well as trade associations and businesses, such as ESCOs, that help members and customers achieve impr oved energy performance.

– Public inter est gr oups that understand that in or der to

achieve energy ef ficiency and envir onmental objectives,they must help educate key stakeholders and find workable solutions to some of the financial challenges that limit acceptance and investment in energy ef ficiency by utilities. The following ar e examples of how leadership has r esulted in incr eased investment in energy ef ficiency:

• In Massachusetts, energy ef ficiency was an early consideration as r estructur ing legislation was discussed. The Massachusetts Department of Public Utilities issued an or der in D.P .U. 95-30 establishing pr inciples to “establish the essential underpinnings of an electr ic industry structur e and r egulatory framework designedto minimize long-term costs to customers while maintaining safe and r eliable electr ic service with minimum impact on the envir onment.” Maintaining demand side management (DSM) pr ograms was one of the major pr inciples the department identified dur ing the transition to a r estructur ed electr ic industry

. The Conservation Law Foundation, the Massachusetts Energy Ef ficiency Council, the National Consumer Law Center , the Division of Energy Resour ces, the Union of Concer ned Scientists, and others took leadership r oles in ensur ing energy ef ficiency was part of a r estructur ed industry (MDTE, 1995). • Leadership at multiple levels led to significantly expanded pr ogramming of Nevada’ s energy ef ficiency pr ogram, fr om about $2 million in 2001 to an estimated $26 million to $33 million in 2006:
“Ther e ar e ‘champions’ for expanded energy efficiency ef forts in Nevada, either in the state energy of fice or in the consumer advocate’ s of fice. Also, ther e have been very supportive individuals in key positions within the Nevada utilities. These individuals a r e committed to developing and implementing effective DSM pr ograms, along with a supportive policy framework” (SWEEP , 2006).
Public inter est organizations, including SWEEP , also played an important r ole by pr omoting a supportive poli c y framework (see box on page 6-13, “Case Study: Nevada Ef ficiency Pr ogram Expansion” for additional information).

• Fort Collins City Council (Colorado) pr ovides an example

of local leadership. The council adopted the Electr ic Energy Supply Policy in Mar ch 2003. The Energy Policyincludes specific goals for city-wide energy consumption r eduction (10 per cent per capita r eduction by 2012) and peak demand r eduction (15 per cent per capita by 2012). Fort Collins Utilities intr oduced a var iety of new demand-side management (DSM) pr ograms and services in the last several years in pursuit of the energy policy objectives.

• Gover nor Huntsman’ s compr ehensive policy on energy ef ficiency for the state of Utah, which was unveiled in Apr il 2006, is one of the most r ecent examples of leadership. The policy sets a goal of incr easing the state’ s energy ef ficiency by 20 per cent by the year 2015. One key strategy of the policy is to collaborate with utilities, r egulators, and the pr ivate sector to expand energy ef ficiency pr ograms, working to identify and r emove barr iers, and assisting the utilities in ensur ing that efficiency pr ograms ar e effective, attainable, and feasible to implement.

6-12 National Action Plan for Energy Efficiency

### Organizational Alignment Once policies and pr ocesses ar e in place to spearhead incr eased investment in energy ef ficiency , organizations often institutionalize these policies to ensur e that goals ar e r ealized. The most successful energy ef ficiency pr ograms by utilities or thir d-party pr ogram administrators shar e a number of attr ibutes. They include:

• Clear support fr om upper management and one or

mor e inter nal champions.

• Clear , well-communicated pr ogram goals that ar e tied to organizational goals and, in some cases, compensation.

• A framework appr opr iate to the organization that supports large-scale implementation of energy ef ficiency pr ograms. • Adequate staf f r esour ces to get the job done.

• Str ong r egulatory support and policies.

• A commitment to continually impr ove business pr ocesses. “Support of upper management is cr itical to pr ogram success” (Komor , 2005). In fact, it can make or br eak a pr ogram. If the CEO of a company or the lead of an agency is an inter nal champion for energy ef ficiency , itwill be truly a part of how a utility or agency does business. Inter nal champions below the CEO or agency level ar e cr itical as well. These inter nal champions moti vate their fellow employees and embody energy efficiency a s part of the corporate cultur e.



### Case Study: Nevada Ef ficiency Pr ogram Expansion
Nevada investor-owned utilities (IOUs), Nevada Power , and Sierra Pacific Power Company phased-out DSM pr ograms in the mid-1990s. After 2001, when the legislatur e r efined the state’ s r etail electr ic r estructur ing law to permit only large customers (>1 megawatt [MW]) t o p u r chase power competitively , utilities r etur ned to a vertically integrated structur e and DSM pr ograms wer e r estarted, but with a budget of only about $2 million that year

. As part of a 2001 IRP pr oceeding, a collaborative pr ocess was established for developing and analyzing a wider range of DSM pr ogram options. All parties r eached an agr eement to the IRP pr oceeding calling for $11.2 million per year in utility-funded DSM pr ograms with an emphasis on peak load r eduction but also significant energy savings. New pr ograms wer e launched in Mar ch 2003. In 2004, the Nevada public utilities commission also appr oved a new policy concer ning DSM cost r ecovery , allowing the utilities to ear n their appr oved rate of r etur n plus 5 per cent (e.g., a 15 per cent r etur n if the appr oved rate is 10 per cent) on the equity-portion of their DSM pr ogram funding. This step gave the utilities a much gr eater financial incentive to expand their DSM pr ograms. In June 2005, legislation enacted in Nevada added energy savings fr om DSM pr ograms to the state’ s Renewable Portfolio Standar d. This innovative policy allows energy savings fr om utility DSM pr ograms and ef ficiency measur es acquir ed thr ough contract to supply up to 25 per cent of the r equir ements under the r enamed clean energy portfolio standar d. The clean energy standar d is equal to 6 per cent of electr icity supply in 2005 and 2006 and incr eases to 9 per cent in 2007 and 2008, 12 per cent fr om 2009 to 2010, 15 per cent in 2011 and 2012, 18 per cent in 2013 and 2014, and 20 per cent in 2015 and ther eafter . At least half of the energy savings cr edits must come fr om electr icity savings in the r esidential sector

. W ithin months of passage, the utilities pr oposed a large expansion of DSM pr ograms for 2006. In addition t o t h eexisting estimated funding of $26 million, the Nevada utilities pr oposed adding another $7.5 million to 2006 DSM pr ograms. If funding is appr oved, the Nevada utilities estimate the 2006 pr ograms alone will yield gr oss energy savings of 153 gigawatt-hours/yr and 63 MW (Larry Holmes, personal communication, February 28, 2006). Sour ce: Geller , 2006.

To create a sustainable, aggressive national commitment to energy efficiency 6-13T ying energy efficiency to overall corporate goals and compensation is important, particularly when the utility is the administrator of energy efficiency pr ograms. T ies to corporate goals make energy efficiency an integral part of how the organization does business as exemplified below:

• Bonneville Power Administration (BP A) includes energy ef ficiency as a part of its overall corporate strategy , and its executive compensation is designed to r eflect how well the organization meets its ef ficiency goals. BP A

’ s strategy map states, “Development of all cost-ef fective energy ef ficiency in the loads BP A serves facilitates development of r egional r enewable r esour ces, and adopts cost-ef fective non-construction alter natives to transmission expansion” (BP A, 2004).

• National Gr id ties energy ef ficiency goals to staf f and

executive compensation (P . Ar ons, personnel communication, June 15, 2006).

• Sacramento Municipal Utility Distr ict (SMUD) ties energy

ef

ficiency to its r eliability goal: “T o ensur e a r eliable energy supply for customers in 2005, the 2005 budget includes suf ficient capacity r eserves for the peak summer season. We have funded all of the Distr ict’ s commer cial and r esidential load management pr ograms, and on-going efficiency pr ograms in Public Good to continue to contr ibute to peak load r eduction” (SMUD, 2004a).

• Nevada Power’ s Conservation Department had a

“Performance Dashboar d” that tracks costs, participating customers, kWh savings, kW savings, $/kWh, $/kW , customer contr ibution to savings, and total customer costs on a r eal time basis, both by pr ogram and overall.

• Austin Energy’ s Mission Statement is “to deliver clean, af for dable, r eliable energy and excellent customer services” (Austin Energy , 2004).

• Seattle City Light has actively pursued conservation as

an alter native to new generation since 1977 and has tracked pr ogr ess towar d its goals (Seattle City Light, 2005). Its longstanding, r esolute policy dir ection establishes energy conservation as the first choice r esour ce. In mor e r ecent years, the utility has also been guided by the city’ s policy to meet of all the utility’ s futur e load gr owth with conservation and r enewable r esour ces (Steve Lush, personal communication, June 2006). 

### Fr om Pacific Gas and Electr ic’ s (PG&E’ s) Second Annual Corporate Responsibility Report (2004): “One of the ar eas on which PG&E puts a lot of emphasis is helping our customers use energy mor e ef ficiently .” “For example, we plan to invest mor e than $2 billion on energy ef ficiency initiatives over the next 10 years. What’ s exciting is that the most r ecent r egulatory appr oval we r eceived on this was the r esult of collaboration by a large and br oad gr oup of parties, including manufactur ers, customer gr oups, envir onmental gr oups, and the state’ s utilities.”

— Beverly Alexander , V ice Pr esident, Customer Satisfaction, PG&E
Having an appr opr iate framework within the organization to ensur e success is also important. In the case of the utility , this would include the r egulatory framework that supports the pr ograms, including cost r ecovery and potentially shar eholder incentives and/or decoupling. For a thir d-party administrator , an appr opr iate framework might include a sound bidding pr ocess by a state agency to select the vendor or vendors and an appr opr iate r e gulatory arrangement with the utilities to manage the funding pr ocess. Adequate r esour ces also ar e cr itical to successful implementation of pr ograms. Energy ef ficiency pr ograms need to be understood and supported by departments outside those that ar e immediately r esponsible for pr ogram delivery . If information technology , legal, power supply , transmission, distr ibution, and other departments do not shar e and support the energy ef ficiency goals and pr ograms, it is dif ficult for energy ef ficiency pr ograms to succeed. When pr ograms ar e initiated, the need for support fr om other departments is gr eatest. Support fr om other departments needs to be consider ed in planning and budgeting pr ocesses.

6-14 National Action Plan for Energy EfficiencyAs noted in the Nevada case study , having a shar eholder incentive makes it easier for a utility to integrate ef ficiency goals into its business because the incentive of fsets some of the concer ns r elated to financial tr eatment of pr ogram expenses and potential lost r evenue fr om decr eased sales. For thir d-party pr ogram administrators, goals might be built into the contract that gover ns the overall implementation of the pr ograms. For example, Ef ficiency V ermont’ s contract with the V ermont Department of Public Service Boar d has specific performance targets. An added shar eholder r etur n will not motivate publicly and cooperatively owned utilities, though they might appr eciate r educed r isks fr om exposur e to wholesale markets, and the value added in impr oved customer service. SMUD, for example, cites conservation pr ograms as a way to help customerslower their utility bills (SMUD, 2004b). These companies, like IOUs, can link employee compensation to achieving energy ef ficiency targets. Business pr ocesses for deliver ing energy ef ficiency pr ograms and services to customers should be developed and tr eated like other business pr ocesses in an organization and r eviewed on a r egular basis. These pr ocesses should include documenting clear plans built on explicit assumptions, ongoing monitor ing of r esults and plan inputs (assumptions), and r egular r eassessment to impr ove performance (using impr oved performance itself as a metr ic). 

### Understanding the Ef ficiency Resour ce Energy ef ficiency potential studies pr ovide the initial justification (the business case) for utilities embarking on or expanding energy ef ficiency pr ograms, by pr oviding information on (1) the overall potential for energy ef ficiency and (2) the technologies, practices, and sectors with the gr eatest or most cost-ef fective opportunities for achieving that potential. Potential studies illuminate the natur e of energy ef ficiency r esour ce, and can be used by legislators and r egulators to inform ef ficiency policy and pr ograms. Potential studies can usually be completed in thr ee to eight months, depending on the level of detail, availability of data, and complexity . They range in cost fr om $100,000 to $300,000 (exclusive of pr imary data collection). Incr easingly , many existing studies can be drawn fr om to limit the extent and cost of such an ef fort. The major ity of organizations r eviewed in developing this chapter have conducted potential studies in the past five years. In addition, numer ous other studies have been conducted in r ecent years by a var iety of organizations interested in lear ning mor e about the efficiency r esour ce in their state or r egion. T able 6-4 summar izes key findings for achievable potential (i.e., what can r ealistically be achieved fr om pr ograms within identified funding parameters), by customer class, fr om a selection of these studies. It also illustrates that this potential is well r epr esented acr oss the r esidential, commer cial, and industr ial sectors. The achievable estimates pr esented ar e for a futur e time per iod, ar e based on r ealistic pr ogram scenar ios, and r e pr esent potential pr ogram impacts above and beyond naturally occurr ing conservation. Energy efficiency potential studies ar e based on curr ently available technologies. New technologies such as those discussed in Table 6-9 will continuously and significantly incr ease potential over time. The studies show that achievable potential for r educing overall energy consumption ranges fr om 7 to 32 per cent for electr icity and 5 to 19 per cent for gas, and that demand for electr icity and gas can be r educed by about 0.5 to 2 per cent per year . For context, national electr icity consumption is pr ojected to gr ow by 1.6 per cent per year , and gas consumption is gr owing 0.7 per cent per year (EIA, 2006a). The box on page 6-17, “Overview of a W ell-Designed Potential Study” pr ovides information on key elements of a potential study . Related best practices for ef ficiency pr ograms administrators include:

• Conducting a “potential study” pr ior to starting pr ograms.

• Outlining what can be accomplished at what cost.

• Reviewing measur es appr opr iate to all customer classes

including those appr opr iate for har d-to-r each customers, such as low income and very small business customers.

To create a sustainable, aggressive national commitment to energy efficiency 6-156-16 National Action Plan for Energy EfficiencyTable 6-4. Achievable Energy Efficiency Potential From Recent StudiesState/RegionStudyLength(Years)AchievableDemandReduction (MW)Achievable GasConsumptionReduction (MMBtu)AchievableGWh ReductionDemandSavingsas% of 2004StateNameplateCapacity10Annual% MWSavingsElectricitySavingsas% ofTotal2004 StateUsage11Annual% GWhSavingsGasSavingsas% ofTotal2004 StateUsage12Annual %MMBtuSavingsResidentialCommercialIndustrialResidentialCommercialIndustrialResidentialCommercialIndustrialElectricityElectricityGasU.S.(CleanEnergy Future)120n/an/an/a500,000,000300,000,0001,400,000,000392,732281,360292,076n/an/a24%1.2%10%0.5%Con Edison210n/an/an/a11,396,70010,782,100231,000n/an/an/an/an/an/an/a19%1.9%Pacific NW320n/an/an/an/an/an/a11,1699,7155,011n/an/a12.5%0.6%n/an/aPuget Sound42013314816n/an/an/a1,1691,2931399.3%0.5%9.5%0.5%n/an/aConnecticut5824057593n/an/an/a1,6552,08872312.5%1.6%13.4%1.7%n/an/aCalifornia691,8002,6001,55027,500,00020,600,000-9,20011,9008,8009.6%1.1%11.8%1.3%10%1.1%Southwest717n/an/an/an/an/an/a24,59350,291-n/an/a32.8%1.9%n/an/aNew York8193,5848,180602n/an/an/a15,7282,9488,18023.1%1.2%14.3%0.8%n/an/aIllinois917n/an/an/an/an/an/a--67,000n/an/a43.2%2.5%n/an/aAVERAGE:1.1%1.3%1.2%MW = Megawatt;MMBtu = Million British thermal units.1ORNL, 2000.2NYSERDA/OE, 2006.3NPCC, 2005.4Puget Sound Energy,2003.5GDS Associatesand Quantum Consulting, 2004.6KEMA, 2002; KEMA & XENERGY,2003a; KEMA & XENERGY,2003b.7SWEEP, 2002.8NYSERDA/OE, 2003.9ACEEE, 1998.10EIA, 2005a.11EIA, 2005b.12EIA, 2006b.

### Overview of a W ell-Designed Potential Study
W ell-designed potential studies assess the following types of potential: T

echnical potential assumes the complete penetration of all energy-conservation measur es that ar e consider ed technically feasible fr om an engineer ing perspective. Economic potential r efers to the technical potential of those measur es that ar e cost-ef fective, when compar ed to supply-side alter natives. The economic potential is very large because it is summing up the potential in existing equipment, without accounting for the time per iod dur ing which the potential would be r ealized. Maximum achievable potential descr ibes the economic potential that could be achieved over a given time per iod under the most aggr essive pr ogram scenar io. Achievable potential r efers to energy saved as a r esult of specific pr ogram funding levels and incentives. These savings ar e above and beyond those that would occur naturally in the absence of any market intervention. Naturally occurr ing potential r efers to energy saved as a r esult of normal market for ces, that is, in the absence of any utility or gover nmental intervention. The output of technical and economic potential is the size of the energy ef ficiency r esour ce in MW , MWh, MMBtu and other r esour ces. The potential is built up fr om savings and cost data fr om hundr eds of measur es and is typically summar ized by sector using detailed demographic information about the customer base and the base of appliances, building stock, and other character istics of the r elevant service ar ea.After technical and economic potential is calculated, typically the next phase of a well-designed potential study is to cr eate pr ogram scenar ios to estimate actual savings that could be generated by pr ograms or other forms of intervention, such as changing building codes or appliance standar ds. Pr ogram scenar ios developed to calculate achievable potential ar e based on modeling example pr ograms and using market models to estimate the penetration of the pr ogram. Pr ogram scenar ios r equir e making assumptions about r ebate or incentive levels, pr ogram staf fing, and marketing ef forts. Scenar ios can also be developed for dif fer ent pr ice assumptions and load gr owth scenar ios, as shown below in the figur e of a sample benefit/cost output fr om a potential study conducted for the state of Califor nia.

Benefits and Costs of Electric Energy Efficiency Savings, 2002-2011

$0 $5 $10 $15 $20 $25Present 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

Sour ce: KEMA, 2002

To create a sustainable, aggressive national commitment to energy efficiency 6-17• Ensur ing that potential state and federal codes and standar ds ar e modeled and included in evaluation scenar ios

• Developing scenar ios for r elevant time per iods. In addition, an emerging best practice is to conduct uncertainty analysis on savings estimates, as well as other var iables such as cost.

W ith study r esults in hand, pr ogram administrators ar e well positioned to develop energy ef ficiency goals, identify pr ogram measur es and strategies, and determine funding r equir ements to deliver energy ef ficiency pr ograms to all customers. Information fr om a detailed potential study can also be used as the basis for calculating pr ogram cost-ef fectiveness and determining measur es for inclusion dur ing the pr ogram planning and design phase. Detailed potential studies can pr ovide information to help determine which technologies ar e r eplaced most fr equently and ar e ther efor e candidates to deliver early r etur ns (e.g., an ef ficient light bulb), and how long the savings fr om var ious technologies persist and ther efor e will continue to deliver energy savings. For example, an energy ef ficient light bulb might last six years, wher eas an ef ficient r esidential boiler might last 20 years. (Additional information on measur e savings and lifetimes can be found in Resources and Expertise , a forthcoming pr oduct of the Action Plan Leadership Gr oup.)


# De v eloping an Energy Ef ficiency Plan The major ity of organizations r eviewed for this chapter ar e acquir ing energy ef ficiency r esour ces for about $0.03/lifetime kWh for electr ic pr ograms and about $1.30 to $2.00 per lifetime MMBtu for gas pr ogram (as shown pr eviously in T ables 6-1 and 6-2). In many cases, energy ef ficiency is being deliver ed at a cost that is substantially less than the cost of new supply—on the or der of half the cost of new supply . In addition, in all cases wher e information is available, the costs of saved energy ar e less than the avoided costs of energy . These organizations operate in diverse locations under dif fer ent administrative and r egulatory structur es. They do, however , shar e many similar best practices when it comes to pr ogram planning, including one or mor e of the following:

• Pr ovide pr ograms for all key customer classes.

• Align goals with funding.

• Use cost-ef fectiveness tests that ar e consistent with

long-term planning.

• Consider building codes and appliance standar ds when

designing pr ograms.

• Plan for developing and incorporating new technology

.

• Consider ef ficiency investments to alleviate transmission and distr ibution constraints.

• Cr eate a r oadmap that documents key pr ogram components, milestones, and explicit energy r eduction goals.


### Pr ovide Pr ograms for All Customer Classes

One concer n sometimes raised when funding energy ef ficiency pr ograms is that all customers ar e r equir ed to contr ibute to energy ef ficiency pr ogramming, though not all customers will take advantage of pr ograms once they ar e available, raising the issue that non-participants subsidize the ef ficiency upgrades of participants. While it is true that pr ogram participants r eceive the dir ect benefits that accrue fr om energy ef ficiency upgrades, all customer classes benefit fr om wellmanaged energy ef ficiency pr ograms, r egar dless of whether or not they participate dir ectly . For example, an evaluation of the New Y ork State Energy Resear ch and Development Author ity’ s (NYSERDA ’ s) pr ogram portfolio concluded that: “total cost savings for all customers, including non participating customers [in the New Y ork Energy $mart Pr ograms] is estimated to be $196 million for pr ogram activities thr ough year-end 2003, incr easingto $420 to $435 million at full implementation” (NYSERDA, 2004).

6-18 National Action Plan for Energy EfficiencyIn addition, particularly for pr ograms that aim to accelerate market adoption of energy efficiency pr oducts or services, ther e is often pr ogram “spillover” to non-pr ogram participants. For example, an evaluation of National Gr id’ s Energy Initiative, Design 2000plus, and other small commer cial and industr ial pr ograms found energy ef ficient measur es wer e installed by non-participants due to pr ogram influences on design pr ofessionals and vendors. The analysis indicated that “non-participant spillover fr om the pr ograms amounted to 12,323,174 kWh in the 2001 pr ogram year , which is appr oximately 9.2 per cent of the total savings pr oduced in 2001 by the Design 2000plus and Energy Initiative pr ograms combined” (National Gr id, 2002).
Furthermor e, energy ef ficiency pr ogramming can help contr ibute to an overall lower cost system for all customers over the longer term by helping avoid the need to pur chase energy, or the need to build new infrastructur e such as generation, transmission and distr ibution lines. For example:

• The Northwest Power Planning and Conservation

Council found in its Portfolio Analysis that strategies that included mor e conservation had the least cost and the least r isk (measur ed in dollars) r elative to strategies that included less conservation. The most aggr essive conservation case had an expected system cost of $1.8 billion lower and a r isk factor of $2.5 billion less than the strategy with the least conservation (NPPC, 2005).

• In its 2005 analysis of energy ef ficiency and r enewable

energy on natural gas consumption and pr ice, ACEEE states, “It is important to note that while the dir ect benefits of energy ef ficiency investment flow to participating customers, the benefits of falling pr ices accrue to all customers.” Based on their national scenar io of cost-ef fective energy ef ficiency opportunities, ACEEE found that total costs for energy ef ficiency would be $8 billion, and would r esult in consumer benefits of $32 billion in 2010 (Elliot & Shipley , 2005). • Thr ough cost-ef fective energy ef ficiency investments in 2004, V ermonters r educed their annual electr icity use by 58 million kWh. These savings, which ar e expected to continue each year for an average of 14 years, met 44 per cent of the gr owth in the state's energy needs in 2004 while costing ratepayers just 2.8 cents per kWh. That cost is only 37 per cent of the cost of generating, transmitting, and distr ibuting power to V ermont's homes and businesses (Ef ficiency V e rmont, 2004).

• The Massachusetts Division of Energy noted that

cumulative impact on demand fr om energy ef ficiency measur es installed fr om 1998 to 2002 (excluding r eductions fr om one-time interruptible pr ograms) was significant—r educing demand by 264 megawatt (MW). Dur ing the summer of 2002, a r eduction of this magnitude meant avoiding the need to pur chase $19.4 million worth of electr icity fr om the spot market (Massachusetts, 2004). Despite evidence that both pr ogram participants and non-participants can benefit fr om energy ef ficiency pr ogramming, it is a best practice to pr ovide pr ogram opportunities for all customer classes and income levels. This appr oach is a best practice because, in most cases, funding for ef ficiency pr ograms comes fr om all customer classes, and as mentioned above, pr ogram participants will r eceive both the indir ect benefits of system-wide savings and r eliability enhancements and the dir ect benefits of pr ogram participation. All pr ogram portfolios r eviewed for this chapter include pr ograms for all customer classes. Pr ogram administrators usually str ive to align pr ogram funding with spending based on customer class contr ibutions to funds. It is not uncommon, however , to have limited cr oss-subsidization for (1) low-income, agr icultural, and other har d-to-r each customers; (2) situations wher e budgets limit achievable potential, and the most cost-ef fective energy ef ficiency savings ar e not aligned with customer class contr ibutions to energy ef ficiency funding; and (3) situations wher e energy ef ficiency savings ar e targeted geographically based on system needs—for example, air conditioner

To create a sustainable, aggressive national commitment to energy efficiency 6-19tur n-ins or gr eater new construction incentives that ar e targeted to curtail load gr owth in an ar ea with a supply or transmission and distr ibution need. For pr ograms targeting low-income or other har d-to-r each customers, it is not uncommon for them to be implemented with a lower benefit-cost thr eshold, as long as the overall energy ef ficiency pr ogram portfolio for each customer class (i.e., r esidential, commer cial, and industr ial) meets costef fectiveness cr iter ia. NYSERDA‘s pr ogram portfolio is a good example of pr ograms for all customer classes and segments (see T able 6-5). 

# T

able 6-5. NYSERD A 2004 P ortfolio

Sector Pr ogr am % of Sector Budget Residential Small Homes 23% Keep Cool 19% ENERGY ST AR Products 20% Program Marketing 16% Multifamily 10% Aw areness/Other 12% Low Income Assisted Multifamily 59% Assisted Home P erformance 17% Direct Install 8% All Other 16% Business P erformance Contracting 36% P eak Load Reduction 12% Efficient Products 9% New Construction 23% T echnical Assistance 10% All Other 10% Nevada Power/Sierra Pacific Power Company’ s portfolio pr ovides another example with notable expansion of pr ogram investments in efficient air conditioning, ENERGY ST

AR appliances, r efr igerator collection, and r enewable energy investments within a one-year timeframe (see T

able 6-6). 

### Align Goals With Funding Regar dless of pr ogram administrative structur e and policy context, it is a best practice for organizations to align funding to explicit goals for energy ef ficiency over the near-term and long-term. How quickly an organization is able to ramp up pr ograms to captur e achievable potential can vary based on organizational history of running DSM pr ograms, and the sophistication of the marketplace in which a utility operates (e.g., whether ther e is a network of home energy raters, ESCOs, or certified heating, ventilation, and air conditioning [HV AC] contractors).
Utilities or thir d-party administrators should set longterm goals for energy ef ficiency designed to captur e a significant per centage of the achievable potential energy savings identified thr ough an energy ef ficiency potential study . Setting long-term goals is a best practice for administrators of energy ef ficiency pr ogram portfolios, r egar dless of policy models and whether they ar e an investor-owned or a municipal or cooperative utility , or a thir d-party pr ogram administrator . Examples of how long-term goals ar e set ar e pr ovided as follows:

• In states wher e the utility is r esponsible for integrated

r esour ce planning (the IRP Model), energy ef ficiency must be incorporated into the IRP . This pr ocess generally r equir es a long-term for ecast of both spending and savings for energy ef ficiency at an aggr egated level that is consistent with the time hor izon of the IRP—generally atleast 10 years. Five- and ten-year goals can then be developed based on the r esour ce need. In states without an SBC, the budget for energy ef ficiency is usually a r evenue r equir ement expense item, but can be a capital investment or a combination of the two. (As discussed in Chapter 2: Utility Ratemaking & Revenue Requir ements, capitalizing ef ficiency pr ogram investments rather than expensing them can r educe short-term rate impacts.)

• M unicipal or cooperative utilities that own generation

typically set efficiency goals as part of a r esour ce planning pr ocess. The budget for energy efficiency is usually a r evenue r equir ement expense item, a capital expenditur e, or a combination of the two.

6-20 National Action Plan for Energy Efficiency

# T able 6-6. Ne vada Resour ce Planning Pr ogr ams 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 ST AR 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 & T echnology 225,000 725,000 Total Nevada Resour ce Planning Pr ogr ams $14,491,000 $30,624,000
SolarGenerations 1,780,075 7,220,000 Company Renew able – PV 1,000,000 1,750,000 California Program 370,000 563,000 Sierra Natural Gas Programs — 820,000 Total All Pr ogr ams $17,641,075 $40,977,000

• A r esour ce portfolio standar d is typically set at a percentage of overall energy or demand, with pr ogram plans and budgets developed to achieve goals at the portfolio level. The or iginal standar d can be developed based on achievable potential fr om a potential study , or as a per centage of gr owth fr om a base year

.

• In most SBC models, the funding is determined by a

small volumetr ic charge on each customer’ s utility bill. This charge is then used as a basis for determining the overall budget for energy ef ficiency pr ogramming— contr ibutions by each customer class ar e used to inform the pr oportion of funds that should be targeted t o each customer class. Annual goals ar e then based on these budgets and a given pr ogram portfolio. Over time, the goal of the pr ogram should be to captur e a large percentage of achievable potential. • In most gas pr ograms, funding can be tr eated as an expense, in a capital budget, or a combination (as is the case in some of the electr ic examples shown pr eviously). Goals ar e based on the budget developed for the time per iod of the plan. Once actual pr ogram implementation starts, pr ogram exper ience is usually the best basis for developing futur e budgets and goals for individual pr ogram years. 

### Use Cost-Ef fectiveness T ests That Ar e Consistent With Long-T erm Planning All of the organizations r eviewed for this chapter use cost-ef fectiveness tests to ensur e that measur es and pr ograms ar e consistent with valuing the benefits and costs of their ef ficiency investments r elative to long-term

To create a sustainable, aggressive national commitment to energy efficiency 6-21supply options. Most of the organizations r eviewed use either the total r esour ce cost (TRC), societal, or pr ogram administrator test (utility test) to scr een measur es. None of the organizations r eviewed for this chapter used the rate impact measur e (RIM) test as a pr imary decisionmaking test. 5 The key cost-ef fectiveness tests ar e descr ibed as follows, per Swisher , et al. (1997), with key benefits and costs further illustrated in T able 6-7.

• T otal Resource Cost (TRC) T est. Compar es the total costs and benefits of a pr ogram, including costs and benefits to the utility and the participant and the avoided costs of energy supply

.

• Societal T est. Similar to the TRC T est, but includes the ef fects of other societal benefits and costs such as envir onmental impacts, water savings, and national secur ity

.

• Utility/Program Administrator T est. Assesses benefits and costs fr om the pr ogram administrator’ s perspective (e.g., benefits of avoided fuel and operating capacity costs compar ed to r ebates and administrative costs).

• Participant T est. Assesses benefits and costs fr om a participant’ s perspective (e.g., the r eduction in customers’ bills, incentives paid by the utility , and tax cr edits r eceived as compar ed to out-of-pocket expenses such as costs of equipment pur chase, operation, and maintenance).

• Rate Impact Measure (RIM). Assesses the ef fect of

changes in r evenues and operating costs caused by a pr ogram on customers’ bills and rates.
Another metr ic used for assessing cost-ef fectiveness is the cost of conserved energy , which is calculated in cents per kWh or dollars per thousand cubic feet (Mcf). This measur e does not depend on a futur e pr ojection of energy pr ices and is easy to calculate; however , it does not fully captur e the futur e market pr ice of energy

. An overall energy ef ficiency portfolio should pass the cost-ef fectiveness test(s) of the jur isdiction. In an IRP situation, energy ef ficiency r esour ces ar e compar ed to new supply-side options–essentially the pr ogram administrator or utility test. In cases wher e utilities have divested generation, a calculated avoided cost or a wholesale market pr ice pr ojection is used to r epr esent the generation benefits. Cost-ef fectiveness tests ar e appr opr iate to scr een out poor pr ogram design, and to identify pr ograms in markets that have been transformed and might need to be r edesigned to continue. Cost-ef fectiveness analysis is important but must be supplemented by other aspects of the planning pr ocess.
If the TRC or societal tests ar e used, “other r esour ce benefits” can include envir onmental benefits, water savings, and other fuel savings. Costs include all pr ogram costs (administrative, marketing, incentives, and evaluation) as well as customer costs. Futur e benefits fr om emissions trading (or other r egulatory appr oaches that pr ovide payment for emission cr edits) could be tr eated as additional benefits in any of these models. Other benefits of pr ograms can include job impacts, sales generated, gr oss state pr oduct added, impacts fr om wholesale pr ice r eductions, and personal income (W isconsin, 2006; Massachusetts, 2004). 

### Example of Other Benefits The Massachusetts Division of Energy Resour ces estimates that its 2002 DSM pr ograms pr oduced 2,093 jobs, incr eased disposable income by $79 million, and pr ovided savings to all customers of$19.4 million due to lower wholesale energy clearing pr ices (Massachusetts, 2004).

At a minimum, r egulators r equir e pr ograms to be costef fective at the sector level (r esidential, commer cial, and industr ial) and typically at the pr ogram level as well. Many pr ogram administrators bundle measur es under a single pr ogram umbr ella when, in r eality , measur es ar e deliver ed to customers thr ough dif fer ent strategies and marketing channels. This pr ocess allows pr ogram admin5 The RIM test is viewed as less certain than the other tests because it is sensitive to the dif fer ence between long-term pr oject ions of marginal or market

costs and long-term pr ojections of rates (CEC, 2001).

6-22 National Action Plan for Energy Efficiency

# T able 6-7. Ov erview of Cost-Ef fectiv eness T ests

Benefits Costs

Test Externalities Ener gy Benefits G, T&D Demand Benefits G, T&D Non-Ener gy Benefits Other Resour ce Benefits Impact On Rates Pr ogr am Implementation Costs Pr ogr am Evaluation

Costs Customer Costs

T otal Resour ce Cost T est X X X X X X
Societal Test X X X X X X X X Utility Test/ Administr ator Test X X X X
Rate Impact Test X X X X X

P articipant T est X X X X
G, T&D = Generation, T ransmission, and Distr ibution

istrators to adjust to market r ealities dur ing pr ogram implementation. For example, within a customer class or segment, if a high-performing and well-subscr ibed pr ogram or measur e is out-performing a pr ogram or measur e that is not meeting pr ogram targets, the pr ogram administrator can r edir ect r esour ces without seeking additional r egulatory appr oval.

I ndividual pr ograms should be scr eened on a r egular basis, consistent with the r egulatory schedule—typically , once a year . Individual pr ograms in some customer segments, such as low income, ar e not always r equir ed to be costeffective, as they pr ovide other benefits to society that might not all be quantified in the cost-effectiveness tests. The same is true of education-only pr ograms that have har d-to-quantify benefits in terms of energy impacts. (See section on conducting impact evaluations for information r elated to evaluating energy education pr ograms.) Existing measur es should be scr eened by the pr ogramadministrator at least every two years, and new measur es should be scr eened annually to ensur e they ar e performing as anticipated. Pr ograms should be r eevaluated and updated fr om time to time to r eflect new methods, technologies, and systems. For example, many pr ograms today include measur es such as T -5 lighting that did not exist five to ten years ago. 

### Consider Building Codes and Appliance Standar ds When Designing Pr ograms Enacting state and federal codes and standar ds for new pr oducts and buildings is often a cost-ef fective opportunityfor energy savings. Changes to building codes and appliance standar ds ar e often consider ed an intervention that could be deployed in a cost-ef fective way to achieve r esults. Adoption of state codes and standar ds in many states r equir es an act of legislation beyond the scope of utility pr ogramming, but utilities and other thir d-party pr ogram administrators can and do interact with state and federal codes and standar ds in several ways:

• In the case of building codes, code compliance and

actual building performance can lag behind enactment of legislation. Some energy ef ficiency pr ogram administrators design pr ograms with a central goal of impr oving code compliance. Ef ficiency V ermont’ s ENERGY ST AR Homes pr ogram (descr ibed in the box on page 6-24) includes incr easing compliance with V

ermont Building Code as a specific pr ogram objective.

To create a sustainable, aggressive national commitment to energy efficiency 6-23The Califor nia investor owned utilities also ar e working with the national ENERGY ST AR pr ogram to ensur e availability of ENERGY ST AR/T itle 24 Building Codecompliant r esidential lighting fixtur es and to ensur e overall compliance with their new r esidential building code thr ough their ENERGY ST AR Homes pr ogram.

• Some efficiency pr ograms fund activities to advance

codes and standar ds. For example, the Califor nia IOUs ar e funding a long-term initiative to contr ibute expertise, r esear ch, analysis, and other kinds of support to help the Califor nia Energy Commission (CEC) develop and adopt energy efficiency standar ds. One rationale for utility investment in advancing codes and standar ds is that utilities can lock in a baseline of energy savings and fr ee up pr ogram funds to work on efficiency opportunities that could not otherwise be r ealized. In Califor nia’ s case, the IOUs also developed a method for estimating savings associated with their codes and standar ds work. The method was accepted by the Califor nia Public Utilities Commission, and is formalized in the Califor nia Energy Ef ficiency Evaluation Pr otocols: T echnical, Methodological, and Reporting Requir e-ments for Evaluation Pr ofessionals (CPUC, 2006). Regar dless of whether they ar e a component of an energy ef ficiency pr ogram, organizations have found that it is essential to coor dinate acr oss multiple states and r egions when pursuing state codes and standar ds, to ensur e that r etailers and manufactur ers can r espond appr opr iately in deliver ing pr oducts to market.

Pr ogram administrators must be awar e of codes and standar ds. Changes in codes and standar ds af fect the baseline against which futur e pr ogram impacts ar e measur ed. Codes and standar ds should be explicitly consider ed in planning to pr event double counting. The Northwest Power and Conservation Council (NWPCC) explicitly models both state codes and federal standar ds in its long-term plan (NWPCC, 2005). 

### Plan for Developing and Incorporating New T

echnology Many of the organizations r eviewed have a history of pr oviding pr ograms that change over time to accommodate changes in the market and the intr oduction of new technologies. The new technologies ar e cover ed using one or mor e of the following appr oaches:

• They ar e included in r esear ch and development (R&D)

budgets that do not need to pass cost-ef fectiveness tests, as they ar e, by definition, addr essing new or exper imental technologies. Sometimes R&D funding



### Ef ficiency V ermont ENERGY ST AR Homes Pr ogram In the r esidential new construction segment, Efficiency V

ermont partners with the national ENERGY ST AR pr ogram to deliver whole house performance to its customers and meet both r esour ce acquisition and market transformation goals. Specific objectives of Efficiency V ermont’ s pr ogram ar e to:

• Incr ease market r ecognition of super ior construction

• Increase compliance with the V ermont Building Code

• Incr ease penetration of cost-ef fective energy

ef ficiency measur es
• Impr ove occupant comfort, health, and safety

(including impr oved indoor air quality) • Institutionalize Home Energy Rating Systems (HERS) Participating homebuilders agr ee to build to the pr ogram's energy ef ficiency standar ds and allow homes to be inspected by an HERS rater . The home must scor e 86+ on the HERS inspection and include four energy ef ficient light fixtur es, power-vented or sealed combustion equipment, and an ef ficient mechanical ventilation system with automatic contr ols. When a home passes, builders r eceive a r ebate check, pr ogram certificate, an ENERGY ST AR Homes certificate, and gifts. Ef ficiency V ermont ENERGY ST AR Homes Pr ogram saved mor e than 700 MWh with pr ogram spending of $1.4 million in 2004. Sour ce: Ef ficiency V ermont, 2005

6-24 National Action Plan for Energy Efficiencycomes fr om sour ces other than the utility or state agency . T able 6-8 summar izes R&D activities of several organizations r eviewed.

• They ar e included in pilot pr ograms that ar e funded as

part of an overall pr ogram portfolio and ar e not individually subject to cost-ef fectiveness tests.

• They ar e tested in limited quantities under existing pr ograms (such as commer cial and industr ial custom r ebate pr ograms).
T

echnology innovation in electr icity use has been the cornerstone of global economic pr ogr ess for mor e than 50 years. In the futur e, advanced industr ial pr ocesses, heating and cooling, and meter ing systems will play very important r oles in supporting customers’ needs for ef ficient use of energy . Continued development of new, mor e ef ficient technologies is cr itical for futur e industr ial and commer cial pr ocesses. Furthermor e, technology innovation that targets impr oved energy ef ficiency and energy management will enable society to advance and sustain energy ef ficiency in the absence of gover nment-sponsor ed or r egulatory-mandated pr ograms. Robust and competitive consumer-dr iven markets ar e needed for energy ef ficient devices and energy ef ficiency service.
The Electr ic Power Resear ch Institute (EPRI)/U.S. Department of Energy (DOE) Gr idwise collaborative and the Souther n Califor nia Edison (SCE) Lighting Energy Ef ficiency Demand Response Pr ogram ar e two examples of r esear ch and development activities:

• The EPRI IntelliGrid Consortium is an industry-wide initiative and public/pr ivate partnership to develop the technical foundation and implementation tools to evolve the power delivery gr id into an integrated energy and communications system on a continental scale. A key development by this consortium is the IntelliGr id Ar chitectur e, an open-standar ds-based ar chitectur e 

# T

able 6-8. Resear ch & De v elopment (R&D) Activities of Select Organizations

Pr ogr am Administr ator R&D Funding Mechanism(s) R&D as % of Ener gy Efficiency Budget Examples of R&D T echnologies/ 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

NY SERD A SBC funding 13% c,d Product development, demonstration and ev aluation, university research, technology market opportunities studies

BP

A 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 T echnologies and Innov ative 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 Califor nial Clean Energy Fund (CCEF , 2005). b [Denominator] $867 million to be spent 2006-2008 on energy ef ficiency pr ojects not including evaluation, measur ement, and valid ation (CPUC,

2005). 1/3 of full budget used for single year budget ($289 million).

c [Numerator] $17 million for annual energy ef ficiency R&D budget consists of "r esidential ($8 M), industr ial ($6 M), and transpo rtation ($3 M)"

(G. W almet, NYSERDA, personal communication, May 23, 2006). d [Denominator] $134 M for New Y ork Energy $mart fr om 3/2004-3/2005 (NYSERDA, 2005b).

e [Numerator] BP A funded the Northwest Energy Ef ficiency Alliance with $10 million in 2003. [Denominator] The total BP A energy ef ficiency allocation was $138 million (Blumstein, et al., 2005). f [Note] BP A overall budgetting for energy ef ficiency incr eased in subsequent years (e.g., $170 million in 2004 with higher comm itments going to an average of $245 million fr om 2006-2012) (Alliance to Save Energy , 2004). g Funding for the statewide Emerging T echnologies pr ogram will incr ease in 2006 to $10 million [Numerator] out of a total budget of $581 million [Denominator] for utility energy-ef ficiency pr ograms (Mills and Livingston, 2005). h [Note] Data fr om Mills and Livingston (2005) dif fers fr om $675 million 3-yr figur e fr om CPUC (2005). i Additional 3% is spent on Innovative Design for Energy Ef ficiency (InDEE) (D. Arambula, SCE, personal communication, June 8, 20 06). To create a sustainable, aggressive national commitment to energy efficiency 6-25for integrating the data communication networks and smart equipment on the gr id and on consumer pr emises. 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 ef ficiency pr ogram administrators ar e pilot testing Gr idW ise/Intelligr id as pr esented in the box below

.

• The Lighting Energy Efficiency Demand Response

Program is a pr ogram pr oposed by SCE. It will use W estinghouse’ s two–way wir eless dimmable energy efficiency T -5 fluor escent lighting as a r etr ofit for existing T

-12 lamps. SCE will be able to dispatch these lighting systems using wir eless technology . The technology will be piloted in small commer cial buildings, the educational sector , office buildings, and industr ial facilities and could give SCE the ability to r educe load by 50 per cent on those installations. This is an excellent example of combining energy efficiency and dir ect load contr ol technologies.
Both EPRI and ESour ce (a for-pr ofit, membership-based energy information service) ar e explor ing opportunities to expand their ef forts in these ar eas. ESour ce is also



### Pilot T ests of Gr idWise/Intelligr id
Gr idWise Pacific Northwest Demonstration Pr ojects These pr ojects ar e designed to demonstrate how advanced, information-based technologies can be used to incr ease power gr id ef ficiency , flexibility , and r eliability while r educing the need to build additional transmission and distr ibution infrastructur e. These pilots ar e funded by DOE’ s Of fice of Electr icity Delivery and Energy Reliability

. Olympic Peninsula Distr ibuted Resour ces Demonstration This pr oject will integrate demand r esponse and distr ibuted r esour ces to r educe congestion on the gr id, including demand r esponse with automated contr ol technology , smart appliances, a virtual r eal-time consider ing developing a database of new energy ef ficiency and load r esponse technologies. Leveraging R&D r esour ces thr ough r egional and national partner ing ef forts has been successful in the past with energy ef ficiency technologies. Examples include compact fluor escent lighting, high-ef ficiency ballasts and new washing machine technologies. Regional and national ef forts send a consistent signal to manufactur ers, which can be cr itical to incr easing R&D activities.

Pr ograms must be able to incorporate new technologies over time. As new technologies ar e consider ed, the pr ograms must develop strategies to over come the barr iers specific to these technologies to incr ease their acceptance. T

able 6-9 pr ovides some examples of new technologies, challenges, and possible strategies for over coming these challenges. A cr oss-cutting challenge for many of these technologies is that average rate designs do not send a pr ice signal dur ing per iods of peak demand. A strategy for over coming this barr ier would be to investigate timesensitive rates (see Chapter 5: Rate Design for additional information).

market, Inter net-based communications, contract options for customers, and the use of distr ibuted generation. Gr id-Fr iendly Appliance Demonstration In this pr oject, appliance contr ollers will be used inboth clothes dryers and water heaters to detect fluctuations in fr equency that indicate ther e is str ess in the gr id, and will r espond by r educing the load on that appliance. These pilots include: Pacific Northwest National Laboratory , Bonneville Power Administration, PacificCorp, Portland General Electr ic, Mason County PUD #3, Clallam County PUD, and the city of Port Angeles.

6-26 National Action Plan for Energy Efficiency

# T able 6-9. Emerging T echnologies for Pr ogr ams

Technology/

Pr ogr am Descr iption A vailability Ke y Challenges K ey Str ategies Examples
Smart Gr id/ Gr idWise technologies Smart grid technologies include both customer -side and grid-side technologies that allow for more efficient operation of the grid. Av ailable in pilot situations Cost Customer Acceptance Communication Protocols Pilot programs R&D programs GridWise pilot in P acific NW

Smart appliances/ Smart Homes Homes with gatew ays that would allow for control of appliances and other end-uses via the Internet. Av ailable Cost Customer Acceptance Communication Protocols Pilot programs Customer education GridWise pilot in P acific NW

Load contr ol of A/C via smart thermostat A/C controlled via smart thermostat. Communication can be via wireless , power line carrier (PLC) or Internet. Widely av ailable Cost Customer acceptance Used to control loads in congested situation Pilot and full-scale programs Customer education Long Island P ower Authority (LIP A), Austin Energy , Utah P ower and Light, ISO New England

Dynamic pr icing/cr itical peak pr icing/ thermostat contr ol with enhanced meter ing 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

. Av ailable Cost Customer acceptance Split incentives in deregulated mark ets Regulatory barriers Pilot and full-scale Programs Used in congested areas Customer education Georgia (large users) Niagara Mohawk, California P eak Pricing Experiment, Gulf P ower

Contr ol of lighting via wir eless, power line carr ier or other communication technologies Using direct control to control commercial lighting during high price periods

. Recently av ailable Cost Customer acceptance Contractor acceptance R&D programs Pilot programs SCE pilot using wireless NY SERD A pilot with power line carrier control

T -5s Relatively new lighting technology for certain applications

. Widely av ailable Cost Customer acceptance Contractor acceptance Add to existing programs as a new measure Included in most large-scale programs

New gener ation tankless water heater s T ankless w ater heaters do not have storage tanks and do not have standby losses

. T hey can save energy relative to conventional w ater heaters in some applications

. P eak demand implications are not yet known. Widely av ailable Cost Customer acceptance Contractor acceptance Add to existing programs as a new measure More common in the EU

Some load contr ol technologies will r equir e mor e than • Interactive communications. Interactive communicaR&D activities to become widespr ead. T o fully captur e tions that allow for two-way flow of pr ice information and utilize some of these technologies, the following and decisions would add new functionality to the four building blocks ar e needed: electr icity system.

To create a sustainable, aggressive national commitment to energy efficiency 6-27• Innovative rates and regulation. Regulations ar e needed to pr ovide adequate incentives for energy ef ficiency investments to both suppliers and customers.

• Innovative markets. Market design must ensur e that

energy ef ficiency and load r esponse measur es that ar e advanced by r egulation become self-sustaining in the marketplace.

• Smart end-use devices. Smart devices ar e needed to

r espond to pr ice signals and facilitate the management of the energy use of individual and networked appliances. In addition, the use of open ar chitectur e systems is the only long-term way to take existing non-communicating equipment into an energy-ef ficient futur e that can use two-way communications to monitor and diagnose appliances and equipment.


### Consider Ef ficiency Investments to Alleviate T

ransmission and Distr ibution Constraints Energy ef ficiency has a history of pr oviding value by r educing generation investments. It should also be consider ed with other demand-side r esour ces, such as demand r esponse, as a potential r esour ce to defer or avoid investments in transmission and distr ibution systems. Pacific Gas and Electr ic’ s (PG&E) Model Energy Communities Pr oject (the Delta Pr oject) pr ovides one of the first examples of this appr oach. This pr oject was conceived to test whether demand r esour ces could be used as a least cost r esour ce to defer the capital expansion of the transmission and distr ibution system in a constrained ar ea. In this case, ef forts wer e focused on the constrained ar ea, and customers wer e of

fer ed versions of existing pr ograms and additional measur es to achieve a significant r eduction in the constrained ar ea (PG&E, 1993). A r ecently appr oved settlement at the Federal Energy Regulatory Commission (FERC) allows energy ef

ficiency along with load r esponse and distr ibuted generation to participate in the Independent System Operator New England (ISO-NE) Forwar d Capacity Market (FERC, 2006;FERC, 2005). In addition, Consolidated Edison has successfully used a Request For Pr oposals (RFP) appr oach to defer distr ibution upgrades in four substation ar eas with contracts totaling 45 MW. Con Ed is curr ently in a second r ound of solicitations for 150 MW (NAESCO, 2005). Recent pilots using demand r esponse, energy ef ficiency , and intelligent gr id ar e pr oving pr omising as shown in the BP A example in the box on page 6-29.

T

o evaluate strategies for deferr ing transmission and distr ibution investments, the benefits and costs of energy ef ficiency and other demand r esour ces ar e compar ed to the cost of deferr ing or avoiding a distr ibution or transmission upgrade (such as a substation upgrade) in a constrained ar ea. This cost balance is influenced by location-specific transmission and distr ibution costs, which can vary gr eatly

. 

### Create a Roadmap of Key Program Components, Milestones, and Explicit Energy Use Reduction Goals Decisions r egar ding the key considerations discussed thr oughout this section ar e used to inform the development of an energy ef ficiency plan, which serves as a r oadmap with key pr ogram components, milestones, and explicit energy r eduction goals.A well-designed plan includes many of the elements discussed in this section including:

• Budgets (see section titled “Leverage Pr ivate-Sector

Expertise, Exter nal Funding, and Financing” for information on the budgeting pr ocesses for the most common policy models)

— Overall

— By pr ogram
• Kilowatt , kWh, and Mcf savings goals overall and by

pr ogram

— Annual savings

— Lifetime savings
• Benefits and costs overall and by pr ogram

• Descr iption of any shar eholder incentive mechanisms

6-28 National Action Plan for Energy Efficiency

### Bonneville Power Administration (BP A) T r ansmission Planning
BP

A has embarked on a new era in transmission planning. As plans take shape to addr ess load gr owth, constraints, and congestion on the transmission system, BP A is consider ing measur es other thanbuilding new lines, while maintaining its commitment to pr ovide r eliable transmission service. The agency , along with others in the r egion, is explor ing “non-wir es solutions” as a way to defer large construction pr ojects. BP

A defines non-wir es solutions as the br oad array of alter natives including, but not limited to, demand r esponse, distr ibuted generation, conservation measur es, generation siting, and pr icing strategies that individually , or in combination, delay or eliminate the

For each pr ogram, the plan should include the following:

• Pr ogram design descr iption

• Objectives

• T arget market

• Eligible measur es

• Marketing plan

• Implementation strategy

• Incentive strategy

• Evaluation plan

• Benefit/cost outputs

• Metr ics for pr ogram success

• Milestones The plan serves as a r oad-map for pr ograms. Most pr ogram plans, however , ar e modified over time based on need for upgrades to the transmission system. The industry also r efers to non-wir es solutions as nonconstruction alter natives or options. BP

A has r econfigur ed its transmission planning pr ocess to include an initial scr eening of pr ojects to assess their potential for a non-wir es solution. BP A is now committed to using non-wir es solutions scr eening cr iter ia for all capital transmission pr ojects gr eaterthan $2 million, so that it becomes an institutionalized part of planning. BP A is curr ently sponsor ing a number of pilot pr ojects to test technologies, r esolve institutional barr iers, and build confidence in using non-wir es solution.

changing conditions (e.g., utility supply or market changes) and pr ogram exper ience. Changes fr om the or iginal r oadmap should be both documented and justified. A plan that includes all of these elements is an appr opr iate starting point for a r egulatory filing. A well-documented plan is also a good communications vehicle for informing and educating stakeholders. The plan should also include a descr iption of any pilot pr ograms and R&D activities. 

# Energy Ef ficiency Pr ogr am Design and Deliv ery The organizations r eviewed for this chapter have lear ned that pr ogram success is built over time by understanding the markets in which ef ficient pr oducts and services ar e deliver ed, by addr essing the wants and needs of their customers, by establishing r elationships with customers and suppliers, and by designing and deliver ing pr ograms accor dingly

.

• They have lear ned that it is essential to pr ogram success to coor dinate with pr ivate market actors and other influential stakeholders, to ensur e that they ar e well informed about pr ogram of fer ings and shar e this information with their customers/constituents.
To create a sustainable, aggressive national commitment to energy efficiency 6-29• Many of the organizations r eviewed go well beyond mer ely informing businesses and organizations, by actually partner ing with them in the design and delivery of one or mor e of their ef ficiency pr ograms.

• Recognizing that markets ar e not defined by utility

service terr itory , many utilities and other thir d-party pr ogram administrators actively cooperate with one another and with national pr ograms, such as ENERGY ST

AR, in the design and delivery of their pr ograms. This section discusses key best practices that emerge fr om a decade or mor e of exper ience designing and implementing energy ef ficiency pr ograms. 

### Begin With the Market in Mind Energy ef ficiency pr ograms should complement, rather than compete with, pr ivate and other existing markets for energy ef ficient pr oducts and services. The rationale for utility or thir d-party investment in ef ficiency pr ogramming is usually based on the concept that within these markets, ther e ar e barr iers that need to be over come to ensur e that an ef ficient pr oduct or service is chosen over a less ef ficient pr oduct or standar d practice. Barr iers 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 landlor d who owns the building, lack of supply for a pr oduct or service, or lack of time (e.g., to r esear ch efficient options, seek multiple bids—particularly dur ing emergency r eplacements).

Conduct a Market Assessment Understanding how markets function is a key to successful pr ogram implementation, r egar dless of whether a pr ogram is designed for r esour ce acquisition, market transformation, or a hybr id appr oach. A market assessment can be a valuable investment to inform pr ogram design and implementation. It helps establish who is part of the market (e.g., manufactur ers, distr ibutors, r etailers, consumers), what the key barr iers ar e to gr eater energy efficiency fr om the pr oducer or consumer perspectives, who ar e the key tr end-setters in the business and the key influencers in consumer decision-making, and what appr oaches might work best to over come barr iers to gr eater supply and investment in energy efficient options, and/or uptake of a pr ogram. A cr itical part of completing a market assessment is a baseline measur ement of the goods and services involved and the practices, attitudes, behaviors, factors, and conditions of the marketplace (Feldman, 1994). In addition to informing pr ogram design and implementation, the baseline assessment also helps inform pr ogram evaluation metr ics, and serves as a basis for which futur e pr ogram impacts ar e measur ed. As such, market assessments ar e usually conducted by independent thir d-party evaluation pr ofessionals. The extent and needs of a market assessment can vary gr eatly . For well-established pr ogram models, market assessments ar e somewhat less involved, and can r ely on existing pr ogram exper ience and literatur e, with the goal of understanding local differ ences and establishing the local or r egional baseline for the targeted energy efficiency pr oduct or service.

T

able 6-10 illustrates some of the key stakeholders, barr iers to energy ef ficiency , and pr ogram strategies that ar e explor ed in a market assessment, and ar e useful for consider ing when designing pr ograms. Solicit Stakeholder Input Convening stakeholder advisory gr oups fr om the onset as part of the design pr ocess is valuable for obtaining multiple perspectives on the need and natur e of planned pr ograms. This pr ocess also serves to impr ove the pr ogram design, and pr ovides a base of pr ogram support within the community

. Once pr ograms have been operational for a while, stakeholder gr oups should be r econvened to pr ovide pr ogram feedback. Stakeholders that have had an ongoing r elationship with one or mor e of the pr ograms can pr ovide insight on how the pr ograms ar e operating and per ceived in the community , and can r ecommend pr ogram modifications. They ar e also useful r esour ces for tapping into extended networks beyond those easily accessible to the pr ogram pr oviders. For example, contractors, building owners, and building operators can be helpful in pr oviding access to their specific trade or business organizations.

6-30 National Action Plan for Energy Efficiency

# T able 6-10. Key Stak eholders, Barr iers, and Pr ogr am Str ategies by Customer Segment

Customer Segment K ey Stakeholder s K ey Pr ogr am Barr ier s K ey Pr ogr am Str ategies
Lar ge Commer cial & Industr ial Retr ofit ● Contractors ● Building owners and operators ● Distributors: lighting, HV A C , motors , other ● Product manufacturers ● Engineers ● Energy services companies ● Access to capital ● Competing priorities ● Lack of information ● Short-term payback (<2 yr) mentality ● F inancial incentives (rebates) ● P erformance contracting ● P erformance benchmarking ● P artnership with ENERGY ST AR ● Low interest financing ● Information from unbiased sources ● T

echnical assistance ● Operations and maintenance training Small Commer cial ● Distributors: lighting, HV A C , other ● Building owners ● Business owners ● Local independent trades ● Access to capital ● Competing priorities ● Lack of information ● F inancial incentives (rebates) ● Information from unbiased sources ● Direct installation ● P artnership with ENERGY ST AR Commer cial & Industr ial New Construction ● Architects ● Engineers ● Building and energy code officials ● Building owners ● P otential 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 ● P erformance targeting/benchmarking ● P artnership with ENERGY ST AR ● Training of architects and engineers ● Visible and ongoing presence in design

community ● Education on life cycle costs Residential Existing Homes ● Distributors: appliances , H V A C, lighting ● Retailers: appliance , lighting, windows ● Contractors: HV A C , 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 ● F inancial incentives ● P artnership with ENERGY ST AR ● Information on utility W eb sites , bill inserts ,

and at retailers ● Coordination with retailers and contractors

Residential New Homes ● Contractors: general and HV A C ● Architects ● Code officials ● Builders ● Home buyers ● Real estate agents ● F inancial institutions ● Higher initial cost ● Split incentives: builder is not the

occupant ● P artnership with ENERGY ST AR ● Linking efficiency to quality ● W orking with builders ● Building code education & compliance ● Energy efficient mortgages
Multifamily ● Owners and operators ● Contractors ● Code officials ● T

enants ● Split incentives ● Lack of aw areness ● F inancial incentives ● Marketing through owner and operator

associations

Low Income ● Service providers: W eatherization Assistance Program (WAP), Low-Income Home Energy Assistance Program (LIHEAP) ● Social service providers: state and local

agencies ● NGOs and advocacy groups ● Credit counseling organizations ● T

enants ● Program funding ● Program aw areness ● Bureaucratic challenges ● Consistent eligibility requirements with existing programs ● Direct installation ● Leveraging existing customer channels for

promotion and delivery ● Fuel blind approach

T

o be successful, stakeholder gr oups should focus on the big pictur e, be well organized, and be r epr esentative. Stakeholder gr oups usually pr ovide input on budgets, allocation of budgets, sectors to addr ess, pr ogram design, evaluation, and incentives. Listen to Customer and T rade Ally Needs Successful energy efficiency pr ograms do not exist without customer and trade ally participation and acceptance of these technologies. Pr ogram designs should be tested with customer market r esear ch befor e finalizing offer ings. Customer r esear ch could include surveys, focus gr oups,

To create a sustainable, aggressive national commitment to energy efficiency 6-31

### Best Practice: Solicit Stakeholder Input Minnesota's Energy Ef ficiency Stakeholder Pr ocessexemplifies the best practice of engaging stakeholders in pr ogram design. The Minnesota Public Utility Commission hosted a r oundtable with the commission, utilities, and other stakeholders to r eview pr ograms. Rate implications and changes to the pr ograms ar e worked out thr ough this collaborative and dr ive pr ogram design (MPUC, 2005). Successful stakeholder pr ocesses generally have the following attr ibutes:
• Neutral facilitation of meetings.

• Clear objectives for the gr oup overall and for each

meeting.

• Explicit definition of stakeholder gr oup's r ole in

pr ogram planning (usually advisory only).

• Explicit and fair pr ocesses for pr oviding input.

• A timeline for the stakeholder pr ocess.
forums, and in-depth interviews. T esting of incentive levels and existing market conditions by surveying trade allies is cr itical for good pr ogram design.
Use Utility Channels and Brand Utilities have existing channels for pr oviding information and service of fer ings to their customers. These include W eb sites, call centers, bill stuf fers, targeted newsletters, as well as public media. Using these channels takes advantage of existing infrastructur e and expertise, and pr ovides customers with energy information in the way that they ar e accustomed to obtaining it. These methods r educe the time and expense of br inging information to customers. In cases wher e ef ficiency pr ogramming is deliver ed by a thir d party , gaining access to customer data and leveraging existing utility channels has been highly valuable for pr ogram design and implementation. In cases such as V ermont (wher e the utilities ar e not r esponsible for running pr ograms), it has been helpful to have linkages fr om the utility W eb sites to Ef ficiency V

ermont’ s pr ograms, and to establish Ef ficiency V ermont as a brand that the utilities leverage to deliver information about ef ficiency to their customers.

Pr omote the Other Benefits of Energy Ef ficiency and Energy Ef ficient Equipment Most customers ar e inter ested in r educing energy consumption to save money . Many , however , have other motivations for r eplacing equipment or r enovating space that ar e consistent with energy ef ficiency impr ovements. For example, homeowners might r eplace their heating system to impr ove the comfort of their home. A fur nace with a var iable speed dr ive fan will further incr ease comfort (while saving energy) by pr oviding better distr ibution of both heating and cooling thr oughout the home and r educing fan motor noise. It is a best practice for pr ogram administrators to highlight these featur es wher e non-energy claims can be substantiated.

Coor dinate With Other Utilities and Thir d-Party Pr ogram Administrators Coor dination with other utilities and thir d-party pr ogram administrators is also important. Both pr ogram allies and customers pr efer pr ograms that ar e consistent acr oss states and r egions. This appr oach r educes transaction costs for customers and trade allies and pr ovides consistent messages that avoid confusing the market. Some pr ograms can be coor dinated at the r egional level by entities such as Northeast Energy Ef ficiency Partnership (NEEP), the Northwest Energy Ef ficiency Alliance, and the Midwest Energy Ef ficiency Alliance. Figur e 6-1 illustrates the significant impact that initiative sponsors of the Northeast Lighting and Appliance Initiative (coor dinated r egionally by NEEP) have been able to have on the market for energy-ef ficient clothes washers by working in coor dination over a long time per iod. NEEP estimates the pr ogram is saving an estimated 36 million kWh per year , equivalent to the annual electr icity needs of 5,000 homes ( NEEP , undated ). Similarly , low-income pr ograms benefit fr om coor dination with and use of the same eligibility cr iter ia as the federal Low-Income Home Energy Assistance Pr ogram (LIHEAP) or W eather ization Assistance Pr ogram (W AP). These pr ograms have existing delivery channels that can

6-32 National Action Plan for Energy EfficiencyFigure 6-1. Impacts of the Northeast Lighting and Appliance InitiativePercentofENERGYSTARClothes WasherSales 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 wi t h in i t i a t i v e S t a n d a r d t a kes ef f e c t 2007: F e d e r a l M i n i m u m E f f i ci e n cy
N a t i onal average Sponsor states ab s e n t in i t i a t i v e S p o n so r st at es ( w it h init ia t i v e ) 2 0 0 3 : N a t i o n a l c l o t h e s w a sh er s cam p a i g n k i ck s o f f 2004: M o r e s t r i n g e n t E N E R G Y S T A R sp ec t a kes ef f e c t 1998: 6 m a n u f act u r e r s , 2002: 18 m a n u f act u r e r s , 1 5 qua l i f i e d pr oduc t s 9 9 qua l i f i e d pr oduc ts N a ti o n a l A v erag e 2 0 0 1 : W h ir lp o o l e n t e r s ma r k e t 1998: R e g i o n a l in it ia t i v e b e g i n s S p o n so r st at es ( a bs e n t init ia t i v e )

be used to keep pr ogram costs down while pr ovidingsubstantial benefit to customers. On average, weatherization r educes heating bills by 31 per cent 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 weather ization pr oviders to adopt a whole-house appr oach wher eby they appr oach r esidential energy ef ficiency as a system rather than as a collection of unr elated pieces of equipment (DOE, 2006). The Long Island Power Author ity’ s (LIP A) pr ogram shown at r ight pr ovides an example.
Leverage the National ENERGY ST AR Pr ogram Nationally , ENERGY ST AR pr ovides a platform for pr ogram implementation acr oss customer classes and defines voluntary ef ficiency levels for homes, buildings, and pr oducts. ENERGY ST AR is a voluntary , public-pr ivate partnership designed to r educe energy use and r elated gr eenhouse gas emissions. The pr ogram, administer ed by the U.S. Envir onmental Pr otection Agency (EP A) and the DOE, has an extensive network of partners including equipment manufactur ers, r etailers, builders, ESCOs, p r i

vate businesses, and public sector organizations. Since the late 1990s, EP A and DOE have worked with utilities, state energy of fices, and r egional nonpr ofit organizations to help leverage ENERGY ST AR messaging, tools, and strategies to enhance local energy efficiency pr ograms. T oday mor e than 450 utilities (and other ef ficiency pr ogram administrators), servicing 65 per cent of U.S. households, participate in the ENERGY ST

AR pr ogram. (See box on page 6-34 for additional information.) New Jersey and Minnesota pr ovide examples of states that have leveraged ENERGY ST AR.


### Long Island Power Author ity (LIP A): Residential Energy Af for dability Partnership Pr ogram (REAP) This pr ogram pr ovides installation of compr ehensive electr ic energy ef ficiency measur es and energy education and counseling. The pr ogram targets customers who qualify for DOE’ s Low-Income W eather ization Assistance Pr ogram (W AP), as well as electr ic space heating and cooling customers who do not qualify for W AP and have an income of no mor e than 60 per cent of the median household income level. LIP A

’ s REAP pr ogram has saved 2.5 MW and 21,520 MWh 1999 to 2004 with spending of $12.4 million.

Sour ce: LIP A, 2004

To create a sustainable, aggressive national commitment to energy efficiency 6-33• New Jersey's Clean Energy Program. The New Jersey Boar d of Public Utilities, Office of Clean Energy has incorporated ENERGY ST AR tools and strategies since the inception of its r esidential pr oducts and W arm Advantage (gas) pr ograms. Both pr ograms encourage customers to pur chase qualified lighting, appliances, windows, pr ogrammable thermostats, fur naces, and boilers. The New



### ENERGY ST AR Pr ogram Investments In support of the ENERGY ST AR pr ogram, EP A and DOE invest in a portfolio of energy ef ficiency ef forts that utilities and thir d-party pr ogram administrators can leverage to further their local pr ograms including:

• Education and A wareness Building. ENERGY ST AR sponsors br oad-based public campaigns to educate consumers on the link between energy use and air emissions, and to raise awar eness about how pr oducts and services carrying the ENERGY ST AR label can pr otect the envir onment while saving money

.

• Establishing Performance Specifications and

Performing Outreach on Efficient Products. Mor e than 40 pr oduct categor ies include ENERGY STARqualifying models, which ENERGY ST AR pr omotes thr ough education campaigns, information exchanges on utility-r etailer pr ogram models, and extensive online r esour ces. Online r esour ces include qualifying pr oduct lists, a stor e locator , and information on pr oduct featur es.

• Establishing Energy Efficiency Deliver y Models to Existing Homes. ENERGY ST AR assistance includes an emphasis on home diagnostics and evaluation, impr ovements by trained technicians/building pr ofessionals, and sales training. It featur es online consumer tools including the Home Energy Y a r dstick and Home Energy Advisor

. Jersey Clean Energy Pr ogram also educates consumers, r etailers, builders, contractors, and manufactur ers about ENERGY ST AR. In 2005, New Jersey's Clean Energy Pr ogram saved an estimated 60 million kWh of electr icity , 1.6 million therms of gas, and 45,000 tons of carbon dioxide (CO 2 ).

• Establishing Performance Specifications and

Performing Outreach for New Homes. ENERGY ST

AR of fers builder r ecruitment mater ials, sales toolkits, consumer messaging, and outr each that help support builder training, consumer education, and ver ification of home performance.

• Improving the Performance of New and Existing

Commercial Buildings. EP A has designed an Energy Performance Rating System to measur e the energy performance at the whole-building level, to help go beyond a component-by-component appr oach that misses impacts of design, sizing, installation, contr ols, operation, and maintenance. EP A uses this tool and other guidance to help building owners and utility pr ograms maximize energy savings. Additional information on strategies, tools, and r esour ces by customer segment is pr ovided in the fact sheet “ENERGY ST AR—A Powerful Resour ce for Saving Energy ,” which can be downloaded fr om www .epa.gov/cleanenergy/pdf/napee_energystar

factsheet.pdf.

6-34 National Action Plan for Energy Efficiency• G reat River Energy , Minnesota. In 2005, Gr eat River Energy emphasized cost-effective energy conservation by offer ing appliance r ebates to cooperative members who pur chase ENERGY ST AR qualifying r efr igerators, clothes washers, and dishwashers. Gr eat River pr ovided its member cooperatives with nearly $2 million for energy conservation r ebates and grants, including the ENERGY ST AR r ebates, a s a low-cost r esour ce alter native to building new peaking generation. In addition to several off-peak pr ograms, G r eat River Energy's r esidential DSM/conservation pr ogram consists of:

— Cycled air conditioning

— Interruptible commer cial load r esponse/management

— Interruptible irr igation

— Air and gr ound sour ce heat pumps

— ENERGY ST AR high-ef ficiency air conditioning r ebate

— ENERGY ST AR appliance r ebates

— ENERGY ST AR compact fluor escent lamp r ebate

— Low-income air conditioning tune-ups

— Residential and commer cial energy audits
Keep Participation Simple Successful pr ograms keep participation simple for both customers and trade allies. Oner ous or confusing participation rules, pr ocedur es, and paperwork can be a major deterr ent to participation fr om trade allies and customers. Applications and other forms should be clear and r equir e the minimum information (equipment and customer) t o confirm eligibility and track participation by customer for measur ement and ver ification (M&V) purposes. Given that most energy ef ficiency impr ovements ar e made at the time of either equipment failur e or r etr ofit, timing can be cr itical. A pr ogram that potentially delays equipment installation or r equir es customer or contractor time for participation will have fewer 

### A Seattle City Light Example of a Simple Pr ogram Seattle City Light’ s $mart Business pr ogram of fers a “per -fixtur e” r ebate for specific fixtur es in existing small businesses. Customers can use their own licensed electr ical contractor or select fr om a pr eappr oved contractor list. Seattle City Light pr ovides the r ebate to either the installer or participating customer upon completion of the work. Completed work is subject to onsite ver ification. Since 1986, Seattle City Light’ s $mart Business pr ogram has cumulative savings (for all measur es) of 70,382 MWh and 2.124 MW

. Sour ce: Seattle City Light, 2005

participants (and less support fr om trade allies). Seattle City Light’ s pr ogram shown above has two paths for easy participation. Keep Funding (and Other Pr ogram Character istics) as Consistent as Possible Over time, both customers and trade allies become incr easingly awar e and comfortable with pr ograms. Disruptions to pr ogram funding frustrate trade allies who cannot stock appr opr iately or ar e uncomfortable making pr omises to customers r egar ding pr ogram of ferings for fear that ef ficiency pr ogram administrators will be unable to deliver on services or financial incentives.
Invest in Education, T r aining, and Outr each Some of the key barr iers to investment in energy ef ficiency ar e informational. Education, outr each, and training should be pr ovided to trade allies as well as customers. Some pr ograms ar e information-only pr ograms; some pr ograms have educational components integrated into the pr ogram design and budget; and in some cases, education is budgeted and deliver ed somewhat independently of specific pr ograms. In general, standalone education pr ograms do not compr ise mor e than
To create a sustainable, aggressive national commitment to energy efficiency 6-3510 per cent of the overall energy ef ficiency budget, but information, training, and outr each might compr ise a larger portion of some pr ograms that ar e designed to af fect long-term markets, when such activities ar e tied to explicit uptake of ef ficiency measur es and practices. This appr oach might be particularly applicable in the early years of implementation, when information and training ar e most cr itical for building supply and demand for pr oducts and services over the longer term. KeySpan and Flex Y our Power ar e examples of coor dinating education, training, and outr each activities with pr ograms. Leverage Customer Contact to Sell Additional Ef ficiency and Conservation Measur es Pr ogram pr oviders can take advantage of pr ogram contact with customers to pr ovide information on other pr ogram 

### KeySpan Example KeySpan uses training and certification as cr itical parts of its energy ef ficiency pr ograms. KeySpan pr ovides building operator certification training, pr ovides training on the Massachusetts state building code, and trains mor e than 1,000 trade allies per year

. Sour ce: Johnson, 2006



### Califor nia: Flex Y our Power Campaign
The Califor nia Flex Your Power Campaign was initiated in 2001 in the wake of Califor nia’ s r olling black-outs. While initially focused on immediate conservation measur es, the campaign has transitioned to pr omoting energy ef ficiency and longterm behavior change. The pr ogram coor dinates with the national ENERGY ST AR pr ogram as well as the Califor nia investor-owned utilities to ensur e that consumers ar e awar e of energy ef ficiency options and the incentives available to them thr ough their utilities. offer ings, as well as on no or low-cost opportunities to r educe energy costs. Information might include pr oper use or maintenance of newly pur chased or installed equipment or general practices ar ound the home or workplace for efficiency impr ovements. Education is often included in low-income pr ograms, which generally include dir ect installation of equipment, and thus alr eady include in-home interaction between the pr ogram pr ovider and customer

. The box below pr ovides some additional considerations for low-income pr ograms.
Leverage Pr ivate-Sector Expertise, Exter nal Funding, and Financing W ell-designed energy ef ficiency pr ograms leverage exter nal funding and financing to str etch available dollars and to take advantage of transactions as they occur in


### Low-Income Pr ograms Most utilities of fer energy ef ficiency programs targeted to low-income customers for multiple r easons:
• Low-income customers ar e less likely to take

advantage of r ebate and other pr ograms, because they ar e less likely to be pur chasing appliances or making home impr ovements.
• The “energy bur den” (per cent of income spent

on energy) is substantially higher for low-income customers, making it mor e dif ficult to pay bills. Pr ograms that help r educe energy costs r educe the bur den, making it easier to maintain r egular payments.
• Energy ef ficiency impr ovements often incr ease

the comfort and safety of these homes.
• Utilities have the opportunity to leverage federal

pr ograms, such as LIHEAP and W A P , to pr ovide compr ehensive services to customers.
• Low-income customers often live in less ef ficient

housing and have older , less ef ficient appliances.
• Low-income customers often compr ise a substantial per centage (up to one-thir d) of utility r esidential customers and r epr esent a large potential for ef ficiency and demand r eduction.
• Using ef ficiency education and incentives in

conjunction with cr edit counseling can be very ef fective in this sector

.

6-36 National Action Plan for Energy Efficiencythe marketplace. This appr oach of fers gr eater financial incentives to the consumer without substantially incr easing pr ogram costs. It also has some of the best practice attr ibutes discussed pr eviously , including use of existing channels and infrastructur e to r each customers. The following ar e a few opportunities for leveraging exter nal funding and financing:

• Leverage Manufacturer and Retailer Resources Through

Cooperative Promotions. For example, for mass market lighting and appliance pr omotions, many pr ogram administrators issue RFPs to r etailers and manufactur ers asking them to submit pr omotional ideas. These RFPs usually r equir e cost shar ing or in-kind advertising and pr omotion, as well as r equir ements that sales data be pr ovided as a condition of the contract. This appr oach allows competitors to dif fer entiate themselves and market energy ef ficiency in a way that is compatible with their business model.

• Leverage State and Federal T ax Credits Where A vailable. Many energy ef ficiency pr ogram administrators ar e now pointing consumers and businesses to the new federal tax cr edits and incorporating them in their pr ograms. In addition, pr ogram administrators can educate their customers on existing tax strategies, such as accelerated depr eciation and investment tax strategies, to help them r ecoup the costs of their investments faster . Some states of fer additional tax cr edits, and/or of fer sales tax “holidays,” wher e sales tax is waived at point of sale for a specified per iod of time ranging fr om one day to a year . The North Car olina Solar Center maintains a database of ef ficiency 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 commer cial and industr ial pr ojects.
The NYSERDA and Califor nia pr ograms pr esented at r ight and on the following page ar e both good examples of leveraging the energy services market and incr easing ESCO pr esence in the state. 

### New Y ork Energy $mart Commer cial/ Industr ial Performance Pr ogram
The New Y ork Energy $mart Commer cial/Industr ial Performance Pr ogram, which is administer ed by NYSERDA, is designed to pr omote energy savings and demand r eduction thr ough capital impr ovement pr ojects and to support gr owth of the energy service industry in New Y ork state. Thr ough the pr ogram, ESCOs and other energy service pr oviders r eceive cash incentives for completion of capital pr ojects yielding ver ifiable energy and demand savings. By pr oviding $111 million in performance-based financial incentives, this nationally r ecognized pr ogram has leveraged mor e than $550 million in pr ivate capital investments. M & V ensur es that electr ical energy savings ar e achieved. Since January 1999, mor e than 860 pr ojects wer e completed in New York with an estimated savings of 790 million kWh/yr

. Sour ces: Thor ne-Amann and Mendelsohn, 2005; AESP , 2006

• Leverage Organizations and Outside Education and

T raining Opportunities. Many organizations pr ovide education and training to their members, sometimes on energy ef ficiency . W orking with these organizations pr ovides access to their members, and the opportunity to leverage funding or marketing opportunities pr ovided by these organizations. In addition, the energy ef ficiency contracting industry has matur ed to the level that many pr oven pr ograms have been “commoditized.” A number of pr ivate firms and not-for-pr ofit entities deliver energy ef ficiency pr ograms thr oughout the United States or in specific r egions of the country . “The energy ef ficiency 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 pr ograms for
To create a sustainable, aggressive national commitment to energy efficiency 6-37

### Califor nia Non-Residential Standar d Performance Contract (NSPC) Pr ogram
The Califor nia NSPC pr ogram is targeted at customer ef ficiency pr ojects and is managed on a statewide basis by PG&E, SCE, and San Diego Gas & Electr ic. Pr ogram administrators of fer fixed-pr ice incentives (by end use) to pr oject sponsors for measur ed kilowatt-hour energy savings achieved by the installation of energy ef ficiency measur es. The fixed pr ice per kW h , performance measur ement pr otocols, payment terms, and other operating rules of the pr ogram ar e specified in a standar d contract. This pr ogram has helped to stimulate the energy services market in the state. In pr ogram year 2003, the Califor nia NSPC served 540 customers and s aved 336 gigawatt-hours and 6.54million therms.
Sour ce: Quantum Consulting Inc., 2004

utilities and pr ojects for all types of customers acr oss the country” (NAESCO, 2005). These firms can quickly get a pr ogram up and running, as they have the expertise, pr ocesses, and infrastructur e to handle pr ogram activities. New pr ogram administrators can contract with these organizations to deliver energy ef ficiency pr ogram design, delivery , and/or implementation support in their service terr itory

. Fort Collins Utilities was able to achieve early r etur ns for its Lighting with a T wist pr ogram (discussed on page 6­ 39) by hir ing an exper ienced implementation contractor thr ough a competitive solicitation pr ocess and negotiating cooperative marketing agr eements with national r etail chains and manufactur ers, as well as local har dwar e stor es. 

### The Building Owners & Managers Association (BOMA) Energy Ef ficiency Pr ogram The BOMA Foundation, in partnership with the ENERGY ST AR pr ogram, has cr eated an innovative operational excellence pr ogram to teach pr operty owners and managers how to r educe energy consumption and costs with pr oven no- and low-cost strategies for optimizing equipment, people and practices. The BOMA Energy Ef ficiency Pr ogram consists of six W eb-assisted audio seminars (as well as live of fer ings at the BOMA Inter national Convention). The courses ar e taught pr imar ily by r eal estate pr ofessionals who speak in business ver nacular about the pr ocess of impr oving performance. The courses ar e as follows:

• Intr oduction to Energy Performance

• How to Benchmark Energy Performance

• Energy-Ef ficient Audit Concepts & Economic

Benefits

• No- and Low-Cost Operational Adjustments to

Impr ove Energy Performance

• V aluing Energy Enhancement Pr ojects & Financial Retur ns

• Building an Energy Awar eness Pr ogram
The commer cial r eal estate industry spends appr oximately $24 billion annually on energy and contr ibutes 18 per cent of the U.S. CO 2 emissions. Accor ding to EP A and ENERGY ST AR Partner observations, a 30 per cent r eduction is r eadily achievable simply by impr oving operating standar ds.

6-38 National Action Plan for Energy Efficiency

### Fort Collins Utilities Lighting With a T wist Fort Collins Utilities estimates annual savings of 2,023 MWh of electr icity with significant winter peak demand savings of 1,850 kW at a total r esour ce cost of $0.018/kWh fr om its Lighting with a T w ist pr ogram, which uses ENERGY ST AR as a platform. The pr ogram was able to get off to quick and successful start by hir ing an exper ienced implementation contractor and negotiating cooperative marketing agr eements with r etailers and manufactur ers—facilitating the sale of 78,000 compact fluor escent light bulbs thr ough six r etail outlets fr om October to December 2005 (Fort Collins Utilities, et al., 2005).



### Start Simply With Demonstrated Pr ogram Models: Build Infrastructur e for the Futur e Utilities starting out or expanding pr ograms should look to other pr ograms in their r egion and thr oughout the country to leverage existing and emerging best pr ograms. After mor e than a decade of exper ience running energy ef ficiency pr ograms, many successful pr ogram models have emerged and ar e constantly being r efined to achieve even mor e costef

fective r esults. While pr ograms must be adapted to local r ealities, utilities and state utility commissions can dramatically r educe their lear ning curve by taking advantage of the wealth of data and exper ience fr om other organizations ar ound the country . The energy ef ficiency and services community has numer ous r esour ces and venues for shar ing information and formally r ecognizing best practice pr ograms. The Association of Energy Service Pr ofessionals ( www .aesp.org ), the Association of Energy Engineers ( www .aeecenter .org ), and the Amer ican Council for an Energy Ef ficient Economy ( www .aceee.org ) ar e a few of these r esour ces. Opportunities for education and information shar ing ar e also pr ovided via national federal pr ograms such as ENERGY ST

AR ( www .energystar .gov ) and the Federal Energy Management Pr ogram ( www .eere.energy .gov/femp ). Additional r esour ces will be pr ovided in Energy Efficiency Best Practices Resources and Expertise (a forthcoming pr oduct of the Leadership Gr oup). Leveraging these r esour ces will r educe the time and expense of going to market with new ef ficiency pr ograms. This will also incr ease the quality and value of the pr ograms implemented.

Start With Demonstrated Pr ogram Appr oaches That Can Easily Be Adapted to New Localities Particularly for organizations that ar e new to energy efficiency pr ogramming or have not had substantial energy ef

ficiency pr ogramming for many years, it is best to start with tr ied and true pr ograms that can easily be transferr ed to new localities, and be up and running quickly to achieve near term r esults. ENERGY ST AR lighting and appliance pr ograms that ar e coor dinated and deliver ed thr ough r etail sales channels ar e a good example of this appr oach on the r esidential side. On the commer cial side, pr escr iptive incentives for technologies such as lighting, packaged unitary heating and cooling equipment, commer cial food service equipment, and motors ar e good early targets. While issues r elated to installation can emerge, such as design issues for lighting, and pr oper sizing issues for packaged unitary heating and cooling equipment, these technologies can deliver savings independent fr om how well the building’ s overall energy system is managed and contr olled. In the early phase of a pr ogram, of fer ing pr escr iptive r ebates is simple and can gar ner supplier inter est in pr ograms, but as pr ograms pr ogr ess, r ebates might need to be r educed or transitioned to other types of incentives (e.g., cooperative marketing appr oaches, customer r eferrals) or to mor e compr ehensive appr oaches to achieving energy savings. If the utility or state is in a tight supply situation, it might make sense to start with pr oven larger scale pr ograms that addr ess cr itical load gr owth dr ivers such as incr eased air conditioning load fr om both incr eased central air conditioning in new construction and incr eased use of r oom air conditioners.
Determine the Right Incentives and Levels Ther e ar e many types of incentives that can be used to spur incr eased investment in energy-efficient pr oducts and services. W ith the exception of education and
To create a sustainable, aggressive national commitment to energy efficiency 6-39

# T able 6-11. T ypes of Financial Incentiv es Financial Incentives Descr iption
Pr escr iptive 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

. T ypically given to the customer

. P erformance Contr acting Incentive A program administrator provides an incentive to reduce the risk premium to the ESCO installing the measures

. Low Inter est Financing A reduced interest rate loan for efficiency projects

. T ypically provided to the customer

. Cooper ative 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 pr ograms, most pr ograms offer some type of financial incentive. T able 6-11 shows some of the most commonly used financial incentives. Getting incentives r ight, and at the r ight levels, ensur es pr ogram success and efficient use of r esour ces by ensur ing that pr ograms do not “overpay” to achieve r esults. The market assessment and stakeholder input pr ocess can help inform initial incentives and levels. Ongoing pr ocess and impact evaluation (discussed below) and r eassessment of costeffectiveness can help inform when incentives need to be changed, r educed, or eliminated. Invest in the Service Industry Infrastructur e Ultimately , energy ef ficiency is implemented by people— home performance contractors, plumbers, electr icians, ar chitects, ESCOs, pr oduct manufactur ers, 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 pr ograms, these pr ograms cannot occur unless the pr ogram administrator has a skilled, supportive community of energy service pr ofessionals to call upon to deliver these services to market. In ar eas of the country lacking these talents, development of these markets is a key goal and cr itical part of the pr ogram design. In many markets—even those with well established ef ficiency pr ograms—it is often this lack of infrastructur e or supply of qualified workers that pr events wider deployment of otherwise cost-ef fective energy ef ficiency pr ograms. Energy ef ficiency pr ogram administrators often try to addr ess this lack of infrastructur e thr ough var ious pr ogram strategies, including pilot testing pr ograms that foster demand for these services and help cr eate the business case for pr ivate sector infrastructur e development, and vocational training and outr each to universities, with incentives or business r eferrals to spur technician training and certification. Examples of pr ograms that have leveraged the ESCO industry wer e pr ovided pr eviously . One pr ogram with an explicit goal of encouraging technical training for the r e sidential marketplace is Home Performance with ENERGY ST AR, which is an emerging pr ogram model being implemented in a number of states including W isconsin, New Y ork, and T exas (see box on page 6-41 for an example). The pr ogram can be applied in the gas or electr ic context, and is ef fective at r educing peak load, because the pr ogram captur es impr ovements in heating and cooling performance.

6-40 National Action Plan for Energy Efficiency

### Austin Energy: Home Performance with ENERGY ST AR

In T exas, Austin Energy’ s Home Performance with ENERGY ST AR pr ogram focuses on educating customers, and pr oviding advanced technical training for pr ofessional home performance contractors to identify energy ef ficiency opportunities, with an emphasis on safety , customer comfort, and energysavings. Participating Home Performance contractors ar e given the opportunity to r eceive technical accr editation thr ough the Building Performance Institute. Qualified contractors perform a top-to-bottomenergy inspection of the home and make customized r ecommendations for impr ovements. These impr ovements might include measur es such as air-sealing, duct sealing, adding insulation, installing energy ef ficient lighting, and installing new HV AC equipment or windows, if needed. In 2005, Austin Energy served mor e than 1,400homeowners, with an average savings per customer of $290 per year

. Collectively , Austin Energy customers saved an estimated $410,000 and mor e than 3 MW thr ough the Home Performance with ENERGY ST AR pr ogram.
Sour ce: Austin Energy , 2006

Evolve to Mor e Compr ehensive Pr ograms A sample of how pr ogram appr oaches might evolve over time is pr esented in T able 6-12. As this table illustrates, pr ograms typically start with pr oven models and often simpler appr oaches, such as pr oviding pr escr iptive r ebates for multiple technologies in commer cial/industr ial existing building pr ograms. In addition, early pr ogram options ar e of fer ed for all customer classes, and all of the pr ograms deliver capacity benefits in addition to energy ef ficiency . Ultimately , the initial appr oach taken by a pr ogram administrator will depend on how quickly the pr ogram needs to ramp up, and on the availability of service industry pr ofessionals who know how to plan for , and deliver , energy ef ficiency to market. As pr ogram administrators gain inter nal exper ience and a gr eater understanding of local market conditions, and r egulators and stakeholders gain gr eater confidence in the value of the energy ef ficiency pr ograms being of fer ed, pr ogram administrators can add complexity to the pr ograms pr ovided and technologies addr essed. The early and simpler pr ograms will help establish inter nal r elationships (acr oss utility or pr ogram pr ovider departments) and exter nal r elationships (between pr ogram pr oviders, trade allies and other stakeholders). Both the pr ogram pr ovider and trade allies will better understand r oles and r elationships, and trade allies will develop familiar ity with pr ogram pr ocesses and develop trust in the pr ograms. Additional complexity can include alter native financing appr oaches (e.g., performance contracting), the inclusion of custom measur es, bidding pr ograms, whole buildings and whole home appr oaches, or additional cutting edge technologies. In addition, once pr ograms ar e pr oven within one subsector , they can often be offer ed with slight modification to other sectors; for example, some pr oven r esidential pr ogram of fer ings might be appr opr iate for multi-family or low-income customers, and some large commer cial and industr ial of fer ings might be appr opr iate for smaller customers or multifamily applications. Many of the curr ent ENERGY STAR marketbased lighting and appliance pr ograms that exist in many parts of the country evolved fr om customer-based lighting r ebates with some in-stor e pr omotion. Many of the mor e complex commer cial and industr ial pr ograms, such at NST AR and National Gr id’ s Energy Initiative pr ogram evolved fr om lighting, HV AC, and motor r ebate pr ograms.
The W isconsin and Xcel Energy pr ograms discussed on page 6-43 ar e also good examples of pr ograms that have become mor e complex over time.
Change Measur es Over Time Pr ogram success, changing market conditions, changes in codes, and changes in technology r equir e r eassessing the measur es included in a pr ogram. High saturations in the market, lower incr emental costs, mor e r igid codes, or

To create a sustainable, aggressive national commitment to energy efficiency 6-41

# T able 6-12. Sample Pr ogr ession of Pr ogr am Designs

Sector Pr ogr am Ramp Up Ener gy & Envir onmental Co-Benefits (In Addition to kWh) Early (6 Months -2 YRS) Midterm (2-3 YRS) Longer Term (3 To 7 YRS) Other Fuels P eak (S = Summer , W = Winter) Water Savings Other
Residential: Existing Homes Market-based lighting & appliance program Home performance with ENERGY ST AR pilot Home performance with ENERGY ST AR

HV

A C rebate Add HV A C practices X

X

X S, W

S, W

S X Bill savings and reduced emissions

Residential: New Construction ENERGY ST AR Homes pilot (in areas without existing infrastructure) ENERGY ST AR Homes

Add ENERGY ST AR Adv anced Lighting P ackage 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

Commer cial: Existing Buildings Lighting, motors , HV

A C , pumps , refrigeration, food service equipment prescriptive rebates ESCO-type program Custom measures Comprehensive approach S, W

S, W X Bill savings and reduced emissions

Commer cial: New Construction Lighting, motors , HV

A C , 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 HV

A C rebates Direct install S, W S, W Bill savings and reduced emissions
the availability of newer , mor e ef ficient technologies ar e specific applications. As barr iers hinder ing customer all r easons to r eassess what measur es ar e included in a investment in a measur e ar e r educed, it might be appr opr ogram. Changes can be incr emental, such as limiting pr iate to lower or eliminate financial incentives altogether

. incentives for a specific measur e to specific markets or It is not uncommon, however , for pr ograms to continue

6-42 National Action Plan for Energy Efficiency

### Wisconsin Focus on Energy: Compr ehensive Commer cial Retr ofit Pr ogram
W isconsin Focus on Energy’ s Feasibility Study Grants and Custom Incentive Pr ogram encourages commercial customers to implement compr ehensive, multimeasur e r etr ofit pr ojects r esulting in the long-term, in-depth energy savings. Customers implementing multi-measur e pr ojects designed to impr ove the whole building might be eligible for an additional 30 per cent payment as a compr ehensive bonus incentive. The Compr ehensive Commer cial Retr ofit Pr ogram saved 70,414,701 kWh, 16.4 MW , and 2 million therms fr om 2001 thr ough 2005.
Sour ces: Thor ne-Amann and Mendelsohn, 2005; W isconsin, 2006.



### Xcel Energy Design Assistance Energy Design Assistance of fer ed by Xcel, targets new construction and major r enovation pr ojects. The pr ogram goal is to impr ove the energy ef ficiency of new construction pr ojects by encouraging the design team to implement an integrated package of energy ef ficient strategies. The target markets for the pr ogram ar e commer cial customers and small business customers, along with ar chitectural and engineer ing firms. The pr ogram targets pr imar ily big box r etail, public gover nment facilities, gr ocery stor es, healthcar e, education, and institutional customers. The pr ogram of fers thr ee levels of support depending on pr oject size. For pr ojects gr eater than 50,000 squar e feet, the pr ogram of fers custom consulting. For pr ojects between 24,000 and 50,000 squar e feet, the pr ogram of fers plan r eview . Smaller pr ojects get a standar d of fer ing. The pr ogram covers multiple HV AC, lighting, and building envelope measur es. The pr ogram also addr esses industr ial pr ocess motors and var iable speed dr ives. Statewide, the Energy Design Assistance pr ogram saved 54.3 GWh and 15.3 MW at a cost of $5.3 million in 2003.
Sour ce: Minnesota Of fice of Legislative Auditor , 2005; Quantum Consulting Inc., 2004 monitor ing pr oduct and measur e uptake after pr ogramshave ceased or to support other activities, such as continued education, to ensur e that market shar e for pr oducts and services ar e not adversely affected once financial incentives ar e eliminated.

Pilot New Pr ogram Concepts New pr ogram ideas and delivery appr oaches should be initially offer ed on a pilot basis. Pilot pr ograms ar e often very limited in duration, geographic ar ea, sector or technology , depending upon what is being tested. Ther e should be a specific set of questions and objectives that the pilot pr ogram is designed to addr ess. After the pilot per iod, a quick assessment of the pr ogram should be conducted to determine successful aspects of the pr ogram and any pr oblem ar eas for impr ovement, which can then be addr essed in a mor e full-scale pr ogram. The NST AR pr ogram shown below is a r ecent example of an emerging pr ogram type that was or iginally started as a pilot.

T

able 6-13 pr ovides a summary of the examples pr ovided in this section.



### NST AR Electr ic’ s ENERGY ST AR Benchmarking Initiative
NST AR is using the ENERGY ST AR benchmarking and portfolio manager to help its commer cial customers identify and pr ior itize energy ef ficiency upgrades. NST AR staf f assist the customer in using the ENERGY ST AR tools to rate their building r elative to other buildings of the same type, and identify energy ef ficiency upgrades. Additional support is pr ovided thr ough walk-thr ough energy audits and assistance in applying for NST AR financial incentive pr ograms to implement ef ficiency measur es. Ongoing support is available as participants monitor the impact of the energy ef ficiency impr ovements on the building’ s performance.

To create a sustainable, aggressive national commitment to energy efficiency 6-43

# T able 6-13. Pr ogr am Examples for Key Customer Segments
Customer Pr ogr am Pr ogr am Pr ogr am Descr iption/ Pr ogr am Model Ke y B e s t Segment Administr ator Str ategies Pr actices Pr oven Emer ging All Training and certification components KeySpan KeySpan’ s programs include a significant certification and training component. T his includes building operator certification, building code training and training for HV A C installers

. Strategies include training and certification. X Don’t underinvest in education, training, and outreach. Solicit stakeholder input. Use utilities channels and brand.

Commer cial, Industr ial Non-residential performance contracting program California Utilities T his program uses a standard contract approach to provide incentives for measured energy savings

. T he k ey strategy is the provision of financial incentives

. X Build upon ESCO and other financing program options

. Add program complexity over time

. K eep participation simple

. Commer cial, Industr ial, New Construction Energy design assistance XCEL T his program targets new construction and major renov ation projects

. Key strategies are incentives and design assistance for electric saving end uses

. X K eep participation simple

. Add complexity over time

.
Commer cial, Industr ial Custom incentive program Wisconsin F ocus on Energy T his program allows commercial and industrial customers to implement a wide array of measures

. Strategies include financial assistance and technical assistance

. X K eep participation simple

. Add complexity over time

.

Lar ge Commer cial, Industr ial NY P erformance Contracting Program NY SERD A Comprehensive P erformanceContracting Program provides incentives for measures and leverages the energy services sector

. T he 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

. K eep participation simple

. Build upon ESCO and other financing options

.
Lar ge Commer cial, Industr ial ENERGY ST AR Benchmarking NST AR NST AR uses EP A

’ s ENERGY ST AR benchmarking and P ortfolio Manager to assist customers in rating their buildings

. X Coordinate with other programs
. Keep participation simple

. Use utility channels and brand. Leverage ENERGY ST AR. Small Commer cial Smart business Seattle City Light T his 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

. K eep funding consistent. Residential Flex Y our P ower California IOU’ s T his is an example of the CA utilitiesworking 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 stak eholder input. Use utilities channels and brand. Coordinate with other programs
. Leverage manufacturer and retailer resources
. Keep participation simple

. Leverage ENERGY ST AR. Residential ­ Low Income Residential affordability program LIP A 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

# T able 6-13. Pr ogr am Examples for Key Customer Segments (continued) Customer Segment Pr ogr am Pr ogr am Administr ator Pr ogr am Descr iption/ Str ategies Pr ogr am Model K e y Best Pr actices Pr oven Emer ging Residential Existing Homes Home P erformance with ENERGY ST AR Austin Energy Whole house approach to existing homes

. Measures include: air sealing, insulation, lighting, duct-sealing, and replacing HV A C

. X Start with proven models

. Use utilities channels and brand. Coordinate with other programs

. Residential New Construction ENERGY ST AR Homes Efficiency V ermont Comprehensive new construction program based on a HERS rating system. Measures include HV A C , 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 ST AR. 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

.

Commer cial 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 educationand training opportunities

. Leverage ENERGY ST

AR. 

# Ensur ing Energy Ef ficiency Inv estments Deliv er Results
Pr ogram evaluation informs ongoing decision-making, impr oves pr ogram delivery , ver ifies energy savings claims, and justifies futur e investment in energy efficiency as a r eliable energy r esour ce. Engaging in evaluation dur ing the early stages of pr ogram development can save time and money by identifying pr ogram inefficiencies, and suggesting how pr ogram funding can be optimized. It also helps ensur e that cr itical data ar e not lost. The major ity of organizations r eviewed for this paper have formal evaluation plans that addr ess both pr ogram pr ocesses and impacts. The evaluation plans, in general, ar e developed consistent with the evaluation budget cycle and allocate evaluation dollars to specific pr ograms and activities. Pr ocess and impact evaluations ar e performed for each pr ogram early in pr ogram cycles. As pr ograms and portfolios matur e, pr ocess evaluations ar e less fr equent than impact evaluations. Over the maturation per iod, impact evaluations tend to focus on larger pr ograms (or pr ogram components), and addr ess mor e complex impact issues. Most pr ograms have an evaluation r eporting cycle that is consistent with the pr ogram funding (or budgeting) cycle. In general, savings ar e r eported individually by sector and totaled for the portfolio. Organizations use evaluation r esults fr om both pr ocess and impact evaluations to impr ove pr ograms moving forwar d, and adjust their portfolio of energy efficiency offer ings based on evaluation findings and other factors. Several organizations have adopted the Inter national Performance Measur ement and V

e r ification Pr otocol (IPMVP) to pr ovide guidelines for evaluation appr oaches. Califor nia has its own set of formal pr otocols that addr ess specific pr ogram types. Key methods used by organizations vary based on pr ogram type and can include billing analysis, engineer ing analysis, meter ing, sales data tracking, and market ef fects studies.
T

able 6-14 summar izes the evaluation practices of a subset of the organizations r eviewed for this study

. To create a sustainable, aggressive national commitment to energy efficiency 6-456-46 National Action Plan for Energy EfficiencyTable 6-14. Evaluation ApproachesNYSERDA(NY)EfficiencyVermont(VT)Electric UtilitiesNSTAR (MA)WI Department ofAdministration(WI)CA Utilities(CA)MN Electric andGas Investor-Owned Utilities(MN)Bonneville PowerAdministration(ID,MT,OR ,WA)Policy ModelSBC w/stateadministrationSBC w/3rdpartyadministrationSBC w/utilityadministrationSBC w/stateadministrationSBC w/utilityadministrationIRP and ConservationImprovement ProgramRegional Planning ModelProgram Funding SourceAnnual appropriation.8-year renewableportfolio standardprogram.5-yearpublic benefitprograms.Not availableSBCSBC**–**electric ratepayersNot availableUtilities,by order of statelegislature,to spend apercent of revenues onefficiency programs.Not availableProgram Budgeting CycleAnnual3 yearsAnnual from SBCAnnualCurrent funding cycleis 3 years.Previousperiods were only 2years.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 CycleAnnualNot availableAnnual;evaluation is aline item in budgetingprocess.AnnualOngoing,every year.Upcoming contractswill be 3 year evaluationwith annual reporting.Funded as neededEvaluation funded periodicallywhen necessary.Starting to domore frequent evaluations thanin previous years.Evaluation ReportingCycleQuarterly andannuallyAnnually and asneededAnnually but not everyprogram every yearTwice per yearAnnualAnnual status reportsNot availableRole of Deemed Savings(i.e.,pre-determinedsavings)Estimate savings.Program planningand goals.Estimate savings.DOER for report tolegislature.Programplanning and design.Estimate savings.Programplanning and goals.Planning.Inputs forTRC analysis.Adjustedregularly based onevaluation results.Not availableDetermine payment schedulefor efficiency measures withestablished savings records.Report Gross Savings(usually kWh,kW)NoNoYesYesYesNot availableYes.Gross savings forms basisfor regional power plans.Report Net Savings(usually kWh,kW)YesYesYesYesYesNot availableYes.Used to evaluate the efficiency of measures and finetune programs.Savings nettedout depends upon program.Net Savings ComponentsInstallation VerificationYesYesYesYesNot availableEngineering ReviewYesYesYesYesNot availableFree RidershipYesYesYesYesYesYesNot availableSpillover or Market EffectsYesYesYesYesYesNot availableRetentionYesYesYesYesNot availableNon-Energy BenefitsYesYesNot availableOther Not SpecifiedYesTable 6-14.Evaluation Approaches (continued)NYSERDA(NY)EfficiencyVermont(VT)Electric UtilitiesNSTAR (MA)WI Department ofAdministration(WI)CA Utilities(CA)MN Electric andGas InvestorOwned Utilities(MN)Bonneville PowerAdministration(ID,MT,OR ,WA)Education andTraining inEE BudgetYesNot availableYesNot availableYesNot availableYesEducation andTrainingEvaluatedYesNot availableDepends on programInitial years onlyYesNot availableNoEvaluation Funding asPercent of ProgramBudgetNot available<1%2%8% increase from 4.25%No more than 3% ofminimum efficiencyspending requirement.<1%Evaluation BudgetNot availableNot availableVaries annually dependentupon project portfolioandother demands.Not Available$160MM over 3 years.Not available$1MMFinancial EvaluationInternalState ComptrollerCPACPAInternal CPACPANot avaiableInternal.Reviewed byDepartment of Commerce.Reviewed by Legislature.InternalCost-EffectivenessAnalysisYesYesYesYesYesYesYesTimingAnnuallyTrienniallyVaries annually dependentupon project portfolioandother demands.Periodically (less frequentthan funding cycle)Not available2 yearsPeriodicallyTest Used (RIM,TRC,Utility,Other)TRC;OtherUtility CostTest andSocietal CostBenefit TestTRCSocietal;also includeseconomic impactsTRCPAC(programadministrator test)Societal;Utility;Participant;RatepayerTRCWho EvaluatesIndependentevaluatorsIndependentexperts under contract to DPSUtilities manage independent evaluatorsthrough RFP processOne independent team ofevaluatorsIndependent evaluators hired for each program via RFP processDepartment ofCommerce LegislatureAuditCommission,if deemednecessaryIndependent evaluatorsOversight of evaluationNYSERDAprovides ongoingoversight.Public UtilitiesCommission finalaudience.Department ofPublic ServiceEvaluations are reviewedin collaborative and filedwith the MassachusettsDepartment ofTelecommunications andEnergyWI Department ofAdministrationCalifornia PublicUtilities Commissionand CECDepartment of CommercePower CouncilProtocolsIPMVPNot availableNot availableNoneHas had statewide protocols for many years.New protocols wererecently adopted.Not availableIPMVP as reference

To create a sustainable, aggressive national commitment to energy efficiency 6-47Best practices for pr ogram evaluation that emerge fr om r eview of these organizations include the following:

• Budget, plan, and initiate evaluation fr om the onset.

• Formalize and document evaluation plans.

• Develop pr ogram tracking systems that ar e compatible

with needs identified in evaluation plans.

• Conduct pr ocess evaluations to ensur e that pr ograms

ar e working ef ficiently

.

• Conduct impact evaluations to ensur e that mid- and

long-term goals ar e being met.

• Communicate evaluation r esults. 

### Budget, Plan, and Initiate Evaluation Fr om the Onset A well-designed evaluation plan addr esses pr ogram pr ocess and impact issues. Process evaluations addr ess issues associated with pr ogram delivery such as marketing, staf fing, paperwork flow, and customer interactions, to understand how they can be impr oved to better meet pr ogram objectives. Impact evaluations ar e designed to determine the energy or peak savings fr om the pr ogram. Sometimes evaluations addr ess other pr ogram benefits such as non-energy benefits to consumers, water savings, economic impacts, or emission r eductions. Market r esear ch is often included in evaluation budgets to assist in assessing pr ogram delivery options, and for establishing baselines. An evaluation budget of 3 to 6 per cent of pr ogram budget is a r easonable spending range. Often evaluation spending is higher in the second or thir d year of

“W e should measur e the performance of DSM pr ograms in much the same way and with the same competence and diligence that we monitor the performance of power plants.”
—Er ic Hirst (1990), Independent Consultant and Former Corporate Fellow , Oak Ridge National Laboratory a pr ogram. Certain evaluation activities such as establishing baselines ar e cr itical to undertake fr om the onset to ensur e that valuable data ar e not lost. 

### Develop Pr ogram and Pr oject T racking Systems That Support Evaluation Needs A well-designed tracking system should collect sufficiently detailed information needed for pr ogram evaluation a n d implementation. Data collection can vary by pr ogram type, technologies addr essed, and customer segment; however , all pr ogram tracking systems should include:

• Participating customer information. At a minimum,

cr eate 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. Recor d equipment type,

equipment size or quantity , efficiency level and estimated savings.

• Program tracking information. T rack r ebates or other pr ogram services pr ovided (for each participant) and key pr ogram dates.

• All program cost information. Include inter nal staf fing

and marketing costs, subcontractor and vendor costs, and pr ogram incentives.
Ef ficiency V ermont’ s tracking system incorporates all of these featur es in a compr ehensive, easy-to-use r elational database that includes all pr ogram contacts including, pr ogram allies and customers, tracks all pr oject savings and costs, shows the underlying engineer ing estimates for all measur es, and includes billing data fr om all of the V

ermont utilities.

6-48 National Action Plan for Energy Efficiency

### Conduct Pr ocess Evaluations to Ensur e Pr ograms Ar e W orking Ef ficiently

Pr ocess evaluations ar e a tool to impr ove the design and delivery of the pr ogram and ar e especially important for newer pr ograms. Often they can identify impr ovements to pr ogram delivery that r educe pr ogram costs, expedite pr ogram delivery , impr ove customer satisfaction, and better focus pr ogram objectives. Pr ocess evaluation can also addr ess what technologies get r ebates or determine r ebate levels. Pr ocess evaluations use a var iety of qualitative and quantitative appr oaches including r eview of pr ogram documents, in-depth interviews, focus gr oups, and surveys. Customer r esear ch in general, such as r egular customer and vendor surveys, pr ovides pr ogram administrators with continual feedback on how the pr ogram is working and being r eceived by the market. 

### Conduct Impact Evaluations to Ensur e Goals Ar e Being Met Impact evaluations measur e the change in energy usage (kWh, kW , and therms) attr ibutable to the pr ogram. They use a var iety of appr oaches to quantify energy savings including statistical compar isons, engineer ing estimation, modeling, meter ing, and billing analysis. The impact evaluation appr oach used is a function of the budget available, the technology(ies) addr essed, the certainty of the or iginal pr ogram estimates, and the level of estimated savings. The appliance r ecycling example shown at r ight is an example of how pr ocess and impact evaluations have impr oved a pr ogram over time.



### Measur ement and V e r ification (M&V)
The term “measur ement and ver ification” is often used in r egar d to evaluating energy ef ficiency pr ograms. Sometimes this term r efers to ongoing M&V that is incorporated into pr ogram operations, such as telephone confirmation of installations by thir d-party installers or measur ement of savings for selected pr ojects. Other times, it r efers to exter nal (pr ogram operations) evaluations to document savings. 

### Califor nia Residential Appliance Recycling Pr ogram (RARP)
The Califor nia RARP was initially designed to r emove older , inef ficient second r efr igerators fr om participant households. As the pr ogram matur ed, evaluations showed that the potential for r emoving old second r efr igerators fr om households had decr eased substantially as a r esult of the pr ogram. The pr ogram now focuses on pick-up of older r efr igerators that ar e being r eplaced, to keep these r efr igerators out of the secondary r efr igerator market. Organizations ar e beginning to explor e the use of the EP A Energy Performance Rating System to measur e the energy performance at the whole-building level, complement traditional M&V measur es, and go beyond componentby-component appr oaches that miss the interactive impacts of design, sizing, installation, contr ols, and operation and maintenance. While most energy pr ofessionals see inher ent value in pr oviding energy education and training (lack of information is often identified as a barr ier to customer and market actor adoption of energy ef ficiency pr oducts and practices), few pr ograms estimate savings dir ectly as a r esult of education ef forts. Until 2004, Califor nia assigned a savings estimate to the Statewide Education and T raining Services pr ogram based on expenditur es. Captur ing the energy impacts of energy education pr ograms has pr oven to be a challenge for evaluators for several r easons. First, education and training ef forts ar e often integral to specific pr ogram of fer ings. For example, training of HV AC contractors on sizing air conditioners might be integrated into a r esidential appliance r ebate pr ogram. Second, education and training ar e often a small part of a pr ogram in terms of budget and estimated savings. Thir d, impact evaluation ef forts might be expensive compar ed to the education and training budget and anticipated savings. Fourth, education and training efforts ar e not always designed to achieve dir ect benefits. They ar e often designed to inform participants or market actors of pr ogram opportunities, simply to familiar ize them with energy ef ficiency 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 pr ogram plan.

• Adopting a mor e in-depth evaluation plan each

pr ogram year

. • Pr ior itizing evaluation r esour ces wher e the r isks ar e

highest. This includes focusing impact evaluation activities on the most uncertain outcomes and highest potential savings. New and pilot pr ograms have the most uncertain outcomes, as do newer technologies.

• Allowing evaluation cr iter ia to vary acr oss some

pr ogram types to allow for education, outr each, and innovation.

• Conducting ongoing ver ification as part of the

pr ogram pr ocess. energy education and training initiatives have focused on pr ocess issues. Recently , ther e have been impact evaluations of training pr ograms, especially those designed to pr oduce dir ect energy savings, such as Building Operator Certification.
In the futur e, energy efficiency will be part of emissions trading initiatives (such as the Regional Gr eenhouse Gas Initiative [RGGI]) and is likely to be eligible for payments for r educing congestion and pr oviding capacity value such as in the ISO-NE capacity market settlement. These emerging opportunities will r equir e that evaluation methods become mor e consistent acr oss states and r egions, which might necessitate adopting consistent pr otocols for pr oject-level ver ification for large pr ojects, and standar dizing sampling appr oaches for r esidential measur es such as compact fluor escent lighting. This is an emerging need and should be a futur e ar ea of collaboration acr oss states. 

### Communicate Evaluation Results to Key Stakeholders Communicating the evaluation r esults to pr ogram administrators and stakeholders is essential to enhancing pr ogram ef fectiveness. Pr ogram administrators need to understand evaluation appr oaches, findings, and especially r ecommendations to impr ove pr ogram pr ocesses • Establishing a pr ogram tracking system that includes necessary information for evaluation.

• Matching evaluation techniques to the situation in

r egar ds to the costs to evaluate, the level of pr ecision r equir ed, and feasibility

. • Maintaining separate staf f for evaluation and for

pr ogram implementation. Having outside r eview of evaluations (e.g., state utility commission), especially if conducted by inter nal utility staf f.

• Evaluating r egularly to r efine pr ograms as needed

(changing market conditions often r equir e pr ogram changes).

and incr ease (or maintain) pr ogram savings levels. Stakeholders need to see that savings fr om energy ef ficiency pr ograms ar e r ealized and have been ver ified independently

. Evaluation r eports need to be gear ed towar d the audiences r eviewing them. Pr ogram staf f and r egulators often pr efer r eports that clearly descr ibe methodologies, limitations, and findings on a detailed and pr ogram level. Outside stakeholders ar e mor e likely to r ead shorter evaluation r eports that highlight key findings at the customer segment or portfolio level. These r eports must be wr itten in a less technical manner and highlight the impacts of the pr ogram beyond energy or demand savings. For example, summary r eports of the W isconsin Focus on Energy pr ograms highlight energy , demand, and therm savings by sector , but also discuss the envir onmental benefits of the pr ogram and the impacts of energy savings on the W isconsin economy . Because the public benefits budget goes thr ough the state legislatur e, the summary r eports include maps of W isconsin showing wher e Focus on Energy pr ojects wer e 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 mor e tangible to stakeholders.

6-50 National Action Plan for Energy Efficiency

# Recommendations and Options The National Action Plan for Energy Ef ficiency Leadership Gr oup of fers the following r ecommendations as ways to pr omote best practice energy ef ficiency pr ograms, and pr ovides a number of options for consideration by utilities, r egulators, and stakeholders. Recommendation: Recognize energy ef ficiency as a highpr ior ity energy r esour ce. Energy ef ficiency has not been consistently viewed as a meaningful or dependable r esour ce compar ed to new supply options, r egar dless of its demonstrated contr ibutions to meeting load gr owth. Recognizing energy ef ficiency as a high pr ior ity energy r esour ce is an important step in ef forts to captur e the benefits it of fers and lower the overall cost of energy services to customers. Based on jur isdictional objectives, energy ef ficiency can be incorporated into r esour ce plans to account for the long-term benefits fr om energy savings, capacity savings, potential r eductions of air pollutants and gr eenhouse gases, as well as other benefits. The explicit integration of energy ef ficiency r esour ces into the formalized r esour ce planning pr ocesses that exist at r egional, state, and utility levels can help establish the rationale for energy ef ficiency funding levels and for pr operly valuing and balancing the benefits. In some jur isdictions, existing planning pr ocesses might need to be adapted or new planning pr ocesses might need to be cr eated to meaningfully incorporate energy ef ficiency r esour ces into r esour ce planning. Some states have r e cognized energy ef ficiency as the r esour ce of first pr ior ity due to its br oad benefits. Option to Consider:

• Quantifying and establishing the value of energy ef ficiency , consider ing energy savings, capacity savings, and envir onmental benefits, as appr opr iate.
Recommendation: Make a str ong, long-term commitment to cost-ef fective energy ef ficiency as a r esour ce. Energy ef ficiency pr ograms ar e most successful and pr ovide the gr eatest benefits to stakeholders when appr opr iate policies ar e established and maintained over the longterm. Confidence in long-term stability of the pr ogram will help maintain energy ef ficiency as a dependable r esour ce compar ed to supply-side r esour ces, deferr ing or even avoiding the need for other infrastructur e investments, and maintains customer awar eness and support. Some steps might include assessing the long-term potential for cost-ef fective energy ef ficiency within a r egion (i.e., the energy ef ficiency that can be deliver ed cost-ef fectively thr ough pr oven pr ograms for each customer class within a planning hor izon); examining the r ole for cutting-edge initiatives and technologies; establishing the cost of supply-side options versus energy ef ficiency; establishing r obust M&V pr ocedur es; and pr oviding for r outine updates to information on energy ef ficiency potential and key costs. Options to Consider:

• Establishing appr opr iate cost-ef fectiveness tests for a

portfolio of pr ograms to r eflect the long-term benefits of energy ef ficiency

.

• Establishing the potential for long-term, cost-ef fective

energy ef ficiency savings by customer class thr ough pr oven pr ograms, innovative initiatives, and cuttingedge technologies.

• Establishing funding r equir ements for deliver ing longterm, cost-ef fective energy ef ficiency

.

• Developing long-term energy saving goals as part of

energy planning pr ocesses.

• Developing r obust M&V pr ocedur es.

• Designating which organization(s) is r esponsible for

administer ing the energy ef ficiency pr ograms.

• Pr oviding for fr equent updates to energy r esour ce plans

to accommodate new information and technology

. Recommendation: Br oadly communicate the benefits of, and opportunities for , energy ef ficiency

. Exper ience shows that energy ef ficiency pr ograms help customers save money and contr ibute to lower cost energy systems. But these impacts ar e not fully documented nor
To create a sustainable, aggressive national commitment to energy efficiency 6-51r ecognized by customers, utilities, r egulators, and policymakers. Mor e ef fort is needed to establish the business case for energy ef ficiency for all decision-makers, and to show how a well-designed appr oach to energy efficiency can benefit customers, utilities, and society by (1) r educing customers bills over time, (2) foster ing financially healthy utilities (r etur n on equity [ROE], ear nings per shar e, debt coverage ratios), and (3) contr ibuting to positive societal net benefits overall. Ef fort is also necessary to educate key stakeholders that, although energy efficiency can be an important low-cost r esour ce to integrate into the energy mix, it does r equir e funding, just as a new power plan r equir es funding. Further , education is necessary on the impact that energy ef ficiency pr ograms can have in concert with other energy ef ficiency policies such as building codes, appliance standar ds, and tax incentives. Options to Consider:

• Communicating the r ole of energy efficiency in lower ing

customer energy bills and system costs and r isks over time.

• Communicating the r ole of building codes, appliance

standar ds, tax and other incentives.

Recommendation: Pr ovide suf ficient and stable pr ogram funding to deliver energy ef ficiency wher e costef fective. Energy ef ficiency pr ograms r equir e consistent and long-term funding to effectively compete with energy supply options. Ef forts ar e necessary to establish this consistent long-term funding. A var iety of mechanisms have been, and can be, used based on state, utility , and other stakeholder inter ests. It is important to ensur e that the ef ficiency pr ograms pr oviders have suf ficient pr ogram funding to r ecover energy ef ficiency pr ogram costs and implement the energy ef ficiency that has been demonstrated to be available and cost-effective. A number of states ar e now linking pr ogram funding to the achievement of energy savings. Option to Consider: • Establishing funding for multi-year per iods. 

# Refer ences Alliance to Save Energy (2004, December 1). Alliance to Save Energy’ s 2004 ‘Stars of Energy Efficiency’: Bank of America, Marriott International, BP A/SCE, EEI’ s Kuhn, DOE’ s Garman, Alliance Founder Sen. Charles Percy

. < http://www .ase.org/content/ news/detail/1919 > Amer ican Council for an Energy Ef ficiency Economy [ACEEE] (1998). Energy Efficiency and Economic Development in Illinois —Statewide Savings, 2015. Association of Energy Services Pr ofessionals [AESP] (2006, February 6). AESP Annual Awar ds Pr ogram Pr esentation. Austin Energy (2004). 2004 Annual Report

. < http://www .austinenergy .com/About%20Us/ Newsroom/Reports/annualReport.pdf > Austin Energy (2006). 2006 ENERGY ST AR A wards Application

. Balzar , B. (2006, February 21). Recent Histor y and Successes Energy Efficiency & Conser vation, State of Nevada . Pr esentation to the Arkansas Public Service Commission. Blumstein, C. Goldman, C., & Barbose, G. (2005, May). Who should administer energy-ef ficiency pr ograms? Energy Policy 33(8) :1053-1067. Bonnville Power Administration (2004, May 27). BP A Strategy Map . < http://www .bpa.gov/corporate/ about_BP A/Strategy .cfm > Califor nia Clean Energy Fund [CCEF] (2005). About Us—Over view. < http://www .calcef.org/about/index.asp > Califor nia Energy Commission (2001, October). California Standard Practice Manual: Economic Analysis of Demand Side Programs and Projects. < http://www .energy .ca.gov/greenbuilding/documents/ background/07-J_CPUC_ST ANDARD_PRACTICE _MANUAL.PDF > Califor nia Public Utilities Commission [CPUC] (2006, Apr il). California Energy Efficiency Evaluation Protocols: T echnical, Methodological, and Reporting Requirements for Evaluation Professionals. <http://www .calmac.org/publications/EvaluatorsPr ot ocols_Final_AdoptedviaRuling_06-19-2006.pdf>

6-52 National Action Plan for Energy EfficiencyCalifor nia Public Utilities Commission [CPUC] (2005, August 17). Interim Opinion: Energy Efficiency Portfolio Plans and Program Funding Levels For 2006–2008—Phase 1 Issues . < http://www .cpuc.ca.gov/ published/comment_decision/48667-03.htm#P292_ 37591 > Ef ficiency V ermont (2004). W orking T ogether for an Energy Efficient V ermont: 2004 Annual Report. < http://www .efficiencyvermont.com/pages/ Common/AboutUs/AnnualReport/ > Electr ic Power Resear ch Institute [EPRI] (2006). IntelliGrid . < http://www .epri.com/IntelliGrid/ > Elliot, R. N. & Shipley , A. M. (2005, Apr il). Impacts of Energy Efficiency and Renewable Energy on Natural Gas Markets

. Updated and Expanded Analysis

. Amer ican Council for an Energy Ef ficient Economy

. Report #E052. Feldman, S. (1994). Market T ransformation: Hot T opic or Hot Air . ACEEE Summer Study on Energy Ef ficiency in Buildings. W ashington, D.C.: Amer ican Council for an Energy Ef ficient Economy [ACEEE]. Fort Collins Utilities, APT , & EFI (2005). 2005 ENERGY ST

AR A wards Application

. GDS Associates & Quantum Consulting (2004, June). Independent Assessment of Conser vation and Energy Efficiency Potential for Connecticut and the Southwest Connecticut Region

. Geller , H. (2006, May). Catching Up: Progress with Utility Energy Efficiency Programs in the Southwest

. Southwest Energy Ef ficiency Pr oject [SWEEP]. Hirst, E. (1990). Measuring Performance: Key to Successful Utility Demand-Side Management Programs . Oak Ridge National Laboratory [ORNL]. ICF Consulting (2005, September). A voided Costs of Energy in New England Due to Energy Efficiency Programs . Pr esented to AESC Study Gr oup. Johnson, B. (2006, Apr il 27). Market T ransformation as a T ool to Meet Natural Gas Savings T argets

. KeySpan Energy Delivery: AESP Br own Bag Session Pr esentation. KEMA (2004). New Jersey Energy Efficiency and Distributed Generation Market Assessment

. KEMA (2002, September). California’ s Secret Energy Surplus: The Potential for Energy Efficiency

. KEMA & XENERGY (2003a, Apr il). California Residential Sector Energy Efficiency Potential Study

. KEMA & XENERGY (2003b, Mar ch). California Statewide Commercial Sector Natural Gas Energy Efficiency Potential Study

. Komor , P

. (2005, Mar ch). T en Key Lessons Lear ned fr om Successful Energy Ef ficiency Pr ograms. Platts

. Kushler , M., Y ork, D., & W itte, P

. (2004, Apr il). Five Y

ears In: An Examination of the First Half-Decade of Public Benefits Energy Efficiency Policies

. W ashington, D.C.: Amer ican Council for an Energy Ef ficient Economy [ACEEE]. < http://www .aceee.org/pubs/u042.htm > Kushler , M., Y ork, D., & W itte, P

. (2003, December). Responding to the Natural Gas Crisis: America’ s Best Natural Gas Energy Efficiency Programs

. W ashington, D.C.: Amer ican Council for an Energy Ef ficient Economy

. Long Island Power Author ity (2004). LIP A Clean Energy Initiative Annual Report 2004 . Uniondale, N.Y

. Massachusetts Department of T elecommunications and Energy [MDTE] (1998). Investigation by the DTE upon its own motion commencing a Notice of Inquir y/Rulemaking, pursuant to 220 C.M.R. §§ 2.00 et seg., establishing the procedures to be followed in electric industr y restructuring by electric companies subject to G.L. c. 164 . (D.P .U./D.T .E. 96­ 100). Massachusetts Department of T elecommunications and Energy [MDTE] (1995). Investigation by the Department of Public Utilities on its own motion into electric industr y restructuring . (D.P .U. 95-30). Massachusetts Of fice of Consumer Af fairs and Business Regulation, Division of Energy Resour ces [Massachusetts] (2004, Summer). 2002 Energy Efficiency Activities: A Report by the Division of Energy Resources, An Annual Report to the Great and General Court on the Status of Energy Efficiency Activities in Massachusetts. <http://www .mass.gov/doer/pub_info/ee02­ long.pdf>

To create a sustainable, aggressive national commitment to energy efficiency 6-53Mills, E. and Livingston, J. (2005, November 11). Energy: T raversing The V alley Of Death. Forbes

. < http://www.forbes.com/2005/11/17/utilitiesemerging-tech-cz_1117energy_programs.html > Minnesota Public Utilities Commission [MPUC] (2005, December 6). Next Generation of Energy Efficiency Initiatives in Minnesota Presentation

. < http://www .raponline.org/Conferences/Minnesota/ NextGenerationofEnergyEfficiencyNotes.pdf > Minnesota Of fice of Legislative Auditor (2005). Evaluation Report: Energy Conservation Impr ovement Pr ogram. National Association of Energy Service Companies [NAESCO] (2005). Industr y Information: Is it DeJa V

u All Over Again? The Resurgence of DSM Bidding Programs

. National Gr id (2002, July 2). 2001 Commercial and Industrial Free-Ridership and Spillover Study

. New Y ork State Energy Resear ch and Development Author ity [NYSERDA] & Optimal Energy Inc. [OE] (2006). Gas Energy Resource Development Potential in Consolidated Edison Ser vice Area

. Service Ar ea Savings, 2016. New Y ork State Energy Resear ch and Development Author ity [NYSERDA] (2005a, May). Annual Report for 2004 – Evaluation and Status Report to the Systems Benefits Advisor y Group

. < http://www .nyserda.org/Energy_Information/05sbc report.asp > New Y ork State Energy Resear ch and Development Author ity [NYSERDA] (2005b). Making a Difference Through Education: 2004–2005 Annual Report

. < http://www .nyserda.org/publications/04-05annual report.asp > New Y ork State Energy Resear ch and Development Author ity [NYSERDA] (2004, May). Annual Report for 2003 – Evaluation and Status Report to the Systems Benefits Advisor y Group

. <http://www .nyser da.org/Energy_Information/04sbc r eport.asp> New Y ork State Energy Resear ch and Development Author ity [NYSERDA]/Optimal Energy , Inc. (2003). Energy Efficiency and Renewable Energy Resource Development Potential in New Y ork State

. Northeast Energy Ef ficiency Pr oject [NEEP] (undated). The Northeast Residential ENERGY ST AR Products Initiative

. Northwest Power and Conservation Council [NWPCC] (2005, May). The Fifth Northwest Electric Power and Conser vation Plan

. Oak Ridge National Laboratory [ORNL] (2000). Scenarios for a Clean Energy Future

. Pacific Gas and Electr ic [PG&E] (1993, September). The Model Energy Communities Program (the Delta Project): Summar y of Lessons Learned

. Puget Sound Energy (2003). Least Cost Plan Advisor y Group/Conser vation Resource Advisor y Group Meeting

. Quantum Consulting Inc. (2004, December). National Energy Efficiency Best Practices Study

. <http://www .eebestpractices.com > RL

W Analytics, Inc. & Shel Feldman Management

Consulting (2001, June 7). The Remaining Electric Energy Efficiency Opportunities in Massachusetts

. Pr epar ed for Pr ogram Administrators and Massachusetts Division of Energy Resour ces. < http://www .mass.gov/doer/pub_info/e3o.pdf > Sacramento Municipal Utility Distr ict [SMUD] (2004a). Benefiting Society and the Environment . SMUD Public Good Report 2004. < http://www .smud.org/about/reports/report_pdfs/2 004_PublicGoods.pdf > Sacramento Municipal Utility Distr ict [SMUD] (2004b, November 3). 2005 Budget . Letter to Boar d of Dir ectors. Seattle City Light (2005). Energy Conser vation Accomplishments: 1977-2004 . Evaluation Unit, Conservation Resour ces Division. < http://www

. seattle.gov/light/Conser ve/cv5_pub.htm > Souther n Califor nia Gas Company (2004, May). Energy Efficiency Programs Annual Summar y and T echnical Appendix – 2003 Results

. < http://www .socalgas.com/regulator y/efficiency/rep orts2003.shtml > Southwest Energy Ef ficiency Pr oject [SWEEP] (2006, January). Natural Gas Demand-Side Management Programs: A National Sur vey

.

6-54 National Action Plan for Energy EfficiencySouthwest Energy Ef ficiency Pr oject [SWEEP] (2002, November). The New Mother Lode: The Potential for More Efficient Electricity Use in the Southwest

. Swisher , J., de Martino Jannuzzi, G., & Redlinger , R. (1997, November). T ools and Methods for Integrated Resource Planning: Improving Energy Efficiency and Protecting the Environment . United Nations Envir onment Pr ogramme [UNEP] Collaborating Centr e on Energy and Envir onment. Thor ne-Amann, J. and Mendelsohn, E. (2005). Comprehensive Commercial Retrofit Programs: A Review of Activity and Opportunities, Report Number A052 . Amer ican Council for an Energy Ef ficient Economy [ACEEE]. U.S. Department of Energy [DOE] (2006). W

eatherization Assistance Plan . <http://www .eere. energy .gov/weatherization > U.S. Energy Information Administration [EIA] (2006a). Annual Energy Outlook . W ashington, DC. U.S. Energy Information Administration [EIA] (2006b, June). Natural Gas Consumption by End Use

. Natural Gas Navigator

. < http://tonto.eia.doe.gov/dnav/ng/ng_cons_sum_a_ EPG0_VC0_mmcf_a.htm > U.S. Energy Information Administration [EIA] (2005a, November). U.S. Electric Power Industr y Existing Net Summer Capacity by State . Electr ic 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

. Electr icity Sales, 2004—Electr ic Sales, Revenue, and Pr ice. < 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 > W isconsin Department of Administration, Division of Energy Focus Evaluation T e am. [W isconsin] (2006, Mar ch 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 r eport pr esents a var iety of policy , planning, and pr ogram appr oaches that can be used to help natural gas and electr ic utilities, utility r egulators, and partner organizations pursue the National Action Plan for Energy Ef ficiency r ecommendations and meet their commitments to energy ef ficiency . This chapter summar izes these r ecommendations and the energy ef ficiency key findings discussed in this r e port. 

# Ov erview This National Action Plan for Energy Ef ficiency (Action Plan) is a call to action to br ing diverse stakeholders together at the national, r egional, state, or utility level, as appr opr iate, to foster the discussions, decisionmaking, and commitments necessary to take investment in energy ef ficiency to a new level. The overall goal is to cr eate a sustainable, aggr essive national commitment to energy ef ficiency thr ough gas and electr ic utilities, utility r egulators, and partner organizations. Based on the policies, practices, and ef forts of many organizations pr eviously discussed in this r eport, the Leadership Gr oup of fers five r ecommendations as ways to over come many of the barr iers that have limited gr eater investment in pr ograms to deliver energy ef ficiency to customers of electr ic and gas utilities (Figur e 7-1). These r ecommendations may be pursued thr ough a number of dif fer ent options, depending on state and utility cir cumstances. As part of the Action Plan, leading organizations ar e committing to aggr essively pursue energy ef ficiency opportunities in their organizations and to assist others who want to incr ease the use of energy efficiency in their r egions. The commitments pursued under the Action Plan have the potential to save Amer icans many billions of dollars on energy bills over the next 10 to 15 years, contr ibute to energy secur ity , and impr ove the envir onment. 

# Recommendations and Options to Consider The Action Plan Report pr ovides information on the barr i ers that limit gr eater investment in pr ograms to deliver energy ef ficiency to customers of electr ic and gas utilities. Figur e 7-2 illustrates the key barr iers and how they r elate to policy structur e, utility r esour ce planning, and pr ogram implementation.


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

• Recognize energy ef ficiency as a high-pr ior ity energy r esour ce.

• Make a str ong, long-term commitment to implement cost-ef fective energy ef ficiency as a r esour ce.

• Br oadly communicate the benefits of and opportunities for energy ef ficiency

.

• Pr omote suf ficient, timely , and stable pr ogram funding to deliver energy ef ficiency wher e cost-ef fective

.

• Modify policies to align utility incentives with the delivery of cost-ef fective energy ef ficiency and

modify ratemaking practices to pr omote energy ef ficiency investments.

To create a sustainable, aggressive national commitment to energy efficiency 7-1Several options exist for utilities, r egulators, and partner organizations to over come these barr iers and pursue the Action Plan r ecommendations. Dif fer ent state and utility cir cumstances affect which options ar e pursued. T able 7-1 pr ovides a list of the Leadership Gr oup r ecommendations along with sample options to consider . The table also pr ovides a cr oss r efer ence to supporting discussions i n Chapters 2 thr ough 6 of this r eport. 

# Key Findings The key finding of the Action Plan Report is that energy ef ficiency can be a cost-ef fective r esour ce and can pr ovide multiple benefits to utilities, customers, and society

. These benefits, also discussed in mor e detail in Chapter 1: Intr oduction and Backgr ound, 1 include: • Lower energy bills, gr eater customer contr ol, and gr eater customer satisfaction.

• Lower cost than only supplying new generation fr om

new power plants.

• Advantages fr om being modular and quick to deploy

.

• Significant energy savings.

• Envir onmental benefits.

• Economic development opportunities.

• Energy secur ity

.

Figur e 7-2: National Action Plan for Energy Ef ficiency Report Addr esses Actions to Encourage Gr eater Energy Ef ficiency
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 notincorporate demandside resources Rate Design

Rates do not encourage energy efficiency investments Model Program Documentation Limited information on existing best practices

1 Chapter 6: Energy Ef ficiency Pr ogram Best Practices also pr ovides mor e information on these benefits.

7-2 National Action Plan for Energy Efficiency

# T able 7-1. Leadership Gr oup Recommendations and Options to Consider , by Chapter

Leader ship Gr oup Recommendations (With Options T o Consider) Chapter 2: Utility Ratemaking & Revenue Requir ements Chapter 3: Ener gy Resour ce Planning Pr ocesses Chapter 4: Business Case

for Ener gy Efficiency Chapter 5: Rate Design Chapter 6: Ener gy Efficiency Pr ogr am Best Pr actices
Recognize ener gy efficiency as a high pr ior ity ener gy r esour ce . 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 str ong, long-term commitment to cost effective ener gy efficiency as a r esour ce . 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 XDesignating 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

Br oadly communicate the benefits of , and opportunities for , ener gy efficiency

. X X X X X Establishing and educating stak eholders on the business case for energy efficiency at the state , utility , and other appropriate level addressing relev ant 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

# T able 7-1. Leadership Group Recommendations and Options to Consider , by Chapter (continued)

Leader ship Gr oup Recommendations (With Options T o Consider) Chapter 2: Utility Ratemaking & Revenue Requir ements Chapter 3: Ener gy Resour ce Planning Pr ocesses Chapter 4: Business Case

for Ener gy Efficiency Chapter 5: Rate Design Chapter 6: Ener gy Efficiency Pr ogr am Best Pr actices

Pr ovide sufficient, timely , and stable pr ogr am funding to deliver ener gy efficiency wher e cost-effective

. X X X

Deciding on and committing to a consistent w ay for program administrators to recover energy efficiency costs in a timely manner

. X X

Establishing funding mechanisms for energy efficiency from among the av ailable 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 ener gy efficiency and modify r atemaking pr actices to pr omote ener gy 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 energyefficiency 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 EfficiencyAs discussed in Chapter 2: Utility Ratemaking & Revenue Requir ements, financial disincentives exist that hinder utilities fr om pursuing energy ef ficiency , even when cost-ef fective. Many states have exper ience in addr essing utility financial disincentives in the following ar eas:

• Over coming the thr oughput incentive.

• Pr oviding r eliable means for utilities to r ecover energy

ef ficiency costs.

• Pr oviding a r etur n on investment for ef ficiency pr ograms that is competitive with the r etur n utilities ear n on new generation.

• Addr essing the r isk of pr ogram costs being disallowed,

along with other r isks.

• Recognizing the full value of energy ef ficiency to the

utility system. Chapter 3: Energy Resour ce Planning Pr ocesses found that ther e ar e many appr oaches to navigate and over come the barr iers to incorporating energy efficiency in planning pr ocesses. Common themes acr oss appr oaches include:

• Cost and savings data for energy ef ficiency measur es

ar e r eadily available.

• Energy , capacity , and non-energy benefits can justify r obust energy ef ficiency pr ograms.

• A clear path to funding is needed to establish a budget for energy ef ficiency r esour ces.

• Parties should integrate energy ef ficiency early in the

r esour ce planning pr ocess. Based on the eight cases examined using the Energy Ef ficiency Benefits Calculator in Chapter 4: Business Case for Energy Ef ficiency , energy ef ficiency investments wer e found to pr ovide consistently lower costs over time for both utilities and customers, while pr oviding positive net benefits to society . Key findings include:

• Ratemaking policies to addr ess utility financial barr iers

to energy ef ficiency maintain utility health while compr ehensive, cost-ef fective energy ef ficiency pr ograms ar e implemented. • The costs of energy ef ficiency and the r eduction in utility sales volume initially raise gas or electr icity bills due to slightly higher rates, but ef ficiency gains will r educe average customer bills by 2 to 9 per cent over a 10-year per iod.

• Energy ef ficiency investments yielded net societal benefits on the or der of hundr eds of millions of dollars for each of the eight small- to medium-sized utility cases examined. Chapter 5: Rate Design found that r ecognizing the pr omotion of energy ef ficiency is an important factor to balance along with the numer ous r egulatory and legislative goals addr essed dur ing the complex rate design pr ocess. Additional key findings include:

• Several rate design options exist to encourage customers

to invest in ef ficiency and to participate in new pr ograms that pr ovide innovative technologies (e.g., smart meters).

• Utility rates that ar e designed to pr omote sales or maximize stable r evenues tend to lower customer incentives to adopt energy efficiency

.

• Some rate forms, like declining block rates or rates with

large fixed charges, r educe the savings that customers can attain fr om adopting energy efficiency

.

• Appr opr iate rate designs should consider the unique

character istics of each customer class.

• Energy ef ficiency can be pr omoted thr ough non-tar if f mechanisms that r each customers thr ough their utility bill.

• Mor e ef fort is needed to communicate the benefits

and opportunities for energy ef ficiency to customers, r egulators, and utility decision-makers. Chapter 6: Energy Ef ficiency Pr ogram Best Practices pr ovided a summary of best practices, as well as general pr ogram key findings. The best practice strategies for pr ogram planning, design, implementation, and evaluation ar e found to be independent of the policy model in which the pr ogram operates. These best practices, organized by four major gr oupings, ar e pr ovided below:

• Making Energy Ef ficiency A Resour ce

— Requir e leadership at multiple levels.

To create a sustainable, aggressive national commitment to energy efficiency 7-5— Align organizational goals.

— Understand the ef ficiency r esour ce.

• Developing An Energy Ef ficiency Plan

— Of fer pr ograms for all key customer classes.

— Align goals with funding.

— Use cost-ef fectiveness tests that ar e consistent with long-term planning.

— Consider building codes and appliance standar ds when designing pr ograms.

— Plan to incorporate new technologies.

— Consider ef ficiency investments to alleviate transmission and distr ibution constraints.

— Cr eate a r oadmap of key pr ogram components, milestones, and explicit energy use r eduction goals.

• Designing and Deliver ing Energy Ef ficiency Pr ograms

— Begin with the market in mind.

— Leverage pr ivate sector expertise, exter nal funding, and financing.

— Start with demonstrated pr ogram models—build infrastructur e for the futur e.

• Ensur ing Energy Ef ficiency Investments Deliver Results

— Budget, plan, and initiate evaluation.

— Develop pr ogram and pr oject tracking systems.

— Conduct pr ocess evaluations. — Conduct impact evaluations.

— Communicate evaluation r esults to key stakeholders. The key pr ogram findings in Chapter 6 ar e drawn fr om the pr ograms r eviewed for this r eport. 2 These findings include:

• Energy ef ficiency r esour ces ar e being acquir ed on average at about one-half the cost of typical new power sour ces and about one-thir d of the cost of natural gas supply in many cases—contr ibuting to an overall lower-cost energy system for rate-payers (EIA, 2006).

• Many energy efficiency pr ograms ar e being deliver ed at a

total pr ogram cost of about $0.02 to $0.03 per lifetimekilowatt-hour (kWh) saved and $1.30 to $2.00 per lifetime million Br itish thermal units (MMBtu) saved. These costs ar e less than the avoided costs seen in most r egions of the country . Funding for the major ity of pr ograms r eviewed ranges fr om about 1 to 3 per cent of electr ic utility r evenue and 0.5 to 1 per cent of gas utility r evenue.

• Even low energy cost states, such as those in the Pacific

Northwest, have r eason to invest in energy ef ficiency because energy ef ficiency pr ovides a low-cost, r eliable r esour ce that r educes customer utility bills. Energy efficiency also costs less than constructing new generation and pr ovides a hedge against market, fuel, and envir onmental r isks (NWPCC, 2005).

• W ell-designed energy ef ficiency pr ograms pr ovide

opportunities for customers of all types to adopt energy saving measur es and r educe their energy bills. These pr ograms can help customers make sound energy-use decisions, incr ease contr ol over their energy bills, and empower them to manage their energy usage. Customers can exper ience significant savings depending on their own habits and the pr ogram of fer ed.

• Consistently funded, well-designed ef ficiency pr ograms ar e cutting electr icity and natural gas load—pr oviding annual savings for a given pr ogram year of 0.15 to 1 per cent of energy sales. These savings typically will

2 See Chapter 6: Energy Efficiency Pr ogram Best Practices, T a bles 6-2 and 6-3, for mor e information on energy efficiency pr ograms r eviewed.

7-6 National Action Plan for Energy Efficiencyaccrue at this level for 10 to 15 years. These pr ograms ar e helping to of fset 20 to 50 per cent of expected energy gr owth in some r egions without compr omising end-user activity or economic well being.

• Resear ch and development enables a continuing sour ce of

new technologies and methods for impr oving energy ef

ficiency and helping customers contr ol their energy bills.

• Many state and r egional studies have found that pursuing

economically attractive, but as yet untapped, energy ef

ficiency could yield mor e than 20 per cent savings in total electr icity demand nationwide by 2025. These savings could help cut load gr owth by half or mor e compar ed to curr ent for ecasts. Savings in dir ect use of natural gas could similarly pr ovide a 50 per cent or gr eater r eduction in natural gas demand gr owth. Energy savings potential var ies by customer segment, but ther e ar e cost-ef fective opportunities for all customer classes.

• Energy ef ficiency programs ar e being operated successfully acr oss many dif fer ent contexts: r egulated and unr egulated markets; utility , state, or thir d-party administration; investor -, publicly-, and cooperatively-owned utilities; and gas and electr ic utilities.

• Energy efficiency r esour ces ar e being acquir ed thr ough a

var iety of mechanisms including system benefits charges (SBC), energy efficiency portfolio standar ds (EEPS), and r esour ce planning (or cost-of-service) efforts.

• Cost-ef fective energy ef ficiency pr ograms exist for

electr icity and natural gas, including pr ograms that can be specifically targeted to r educe peak load. • Ef fective models exist for deliver ing gas and electr ic energy ef

ficiency pr ograms to all customer classes. Models might vary for some pr ograms based on whether a utility is in the initial stages of energy ef ficiency pr ogramming or has been implementing pr ograms for years.

• Energy efficiency pr ograms, pr ojects, and policies benefit

fr om established and stable r egulations, clear goals, and compr ehensive evaluation.

• Energy ef ficiency pr ograms benefit fr om committed

pr ogram administrators and oversight author ities, as well as str ong stakeholder support.

• Most large-scale energy ef ficiency pr ograms have

impr oved pr oductivity , enabling job gr owth in the commer cial and industr ial sectors.

• Large-scale energy ef ficiency pr ograms can r educe

wholesale market pr ices.


# Refer ences Northwest Power and Conservation Council [NWPCC] (2005, May). The 5th Northwest Electric Power and Conser vation Plan. <http://www .nwcouncil.org/energy/ powerplan/default.htm>. U.S. Energy Information Administration [EIA] (2006). Annual Energy Outlook 2006. W ashington, 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. Someoptions 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 utilitiesmake 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 ofdifferent 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 givesthe utility the incentive to reduce fuel and other variable costs), while using a revenue-per-customerapproach 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 Incentive 1Implementing 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 notchange again until the next rate case. Note that the revenue requirement contains an allowance for profit anddebt 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 CostsBased on the rate case “test year” data, an average revenueper-customer value can then be calculated for each rate class. Revenue Requirement t 0 /number of customers t 0 = revenue per customer (RPC) Thus, at time “zero”(t 0 ), the company’s revenues equal its number of customers multiplied by the revenues per customer, while the prices paid by customers equal therevenues to be collected divided by customers’ consumption units (usually expressed as $/kW for metereddemand and $/kWh for metered energy). Looking forward, as the number of customers changes, the revenue to be collected changes. Revenue Requirement t n = RPC * number of customers t n For each future period (t 1 , t 2 ..., t n ), the new revenue tobe collected is then divided by the expected consumption to periodically derive a new price, the true-up. Price (Rates) t n = Revenue Requirement t n / Sales t n True up = Price t n – Price t 0 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 t n ). 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 distinguishescommodity 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 EfficiencyAn 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 economicconditions, 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 regulatoryapproach (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 canbe 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, theunderlying 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 businessfor 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 couldbe 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 greaterand/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 pr ice. Designing this band

To create a sustainable, aggressive national commitment to energy efficiency Appendix A-3should 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 longrun 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 percustomer 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 aregrowing rapidly, decoupling will have the effect of lowering future earnings, although not necessarily below the company’s allowed rate of return. On the otherhand, 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 differenttype 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 costper 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-Gr owth Electr ic and Gas Utility Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by r e tur n on equity (ROE), while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio. Electr ic Gas Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0 Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0

Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If energy ef ficient (EE) r educes capital investment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be af fected. Utility Earnings

YearEarnings ($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 1 0 Utility Earnings

YearEarnings ($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 1 0

Appendix B-2 National Action Plan for Energy Efficiency

### Customer Perspective Customer Bills – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. Total customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption. Electr ic Gas
Percent Change in Customer Bills

YearChange 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 1 0 Percent Change in Customer Bills

YearChange 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 1 0

Utility Rates – Mild Incr ease The rates customers pay ($/kWh, $/therm) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales.
Comparison of Average Rate

YearAverage Rate ($/kWh)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0 Comparison of Average Rate

YearAverage 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 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-3

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first yea r, the cost of the EE pr ogram is a cost to society . Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown. Electr ic Gas

Annual Total Societal Net Savings

YearNet 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 1 0 Annual Total Societal Net Savings

YearNet 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 1 0

T

otal Societal Cost Per Unit – Declines T

o tal cost of pr oviding each unit of energy (MWh, therm) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om EE. The Societal Cost and Societal Savings ar e 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 1 0 $1 $3 $5 Delivered Costs and Benefits of EE

Year$/therm

Societal Cost ($/therm saved) Societal Savings ($/therm saved) $0 $2 $4 $6

1 3 5 7 9 2 4 6 8 1 0

Appendix B-4 National Action Plan for Energy EfficiencyEmissions and Cost Savings – Incr ease Annual tons of emissions saved incr eases. Emissions cost savings incr eases when emissions cost is monetized. Emissions costs and savings ar e the same with and without decoupling. Electr ic Gas
Annual Emissions SavingsTons Saved

0 10 20 30 40 50 60 70

1 2 3 4 5 6 7 8 9 1 0

0 20 40 60 80 100 120 140 160 180 200 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved1000 Tons CO2saved

Year Annual Emissions SavingsTons Saved 90 80 70 60 50 40 30 20 10

0 Tons NO xSaved Tons PM-10 Saved Tons SO 2 Saved Tons CO Saved 1000 Tons CO 2 Saved

1 2 3 4 5 6 7 8 9 1 0 Year
Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset shown.

Percent Growth Offset by Energy EfficiencyGWh

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 1 0

0% 20% 40% 60% 80% 100% 120% 140% 160% Percent Growth Offset by Energy EfficiencyMcf

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 1 0 0% 5% 10% 15% 20% 25%

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-5Peak Load Gr owth – Decr ease Peak load r equir ements decr ease because peak capacity savings ar e captur ed due to EE measur es. Peak load is not impacted by decoupling.

Electr ic Gas

90% 100% 110% 120% 130% 140% 150% 160%

1 2 3 4 5 6 7 8 9 1 0 Comparison of Peak Load Growth

YearPeak Load % of First Yr

Forecasted Growth - No EE Forecasted Growth - EE and Decoupling Comparison of Peak Load Growth

YearPeak 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 1 0

Appendix B-6 National Action Plan for Energy Efficiency

## Case 2: High-Gr owth Electr ic and Gas Utility Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by ROE, while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio. Electr ic Gas Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0 Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0

Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If EE r educes capital investment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be af fected. Utility Earnings

YearEarnings ($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 1 0 Utility Earnings

YearEarnings ($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 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-7

### Customer Perspective Customer Bills – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. Total customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption. Electr ic Gas

Percent Change in Customer Bills

YearChange 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 1 0 Percent Change in Customer Bills

YearChange 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 1 0

Utility Rates – Mild Incr ease The rates customers pay ($/kWh, $/therm) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales.
Comparison of Average Rate

YearAverage Rate ($/kWh)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0 Comparison of Average Rate

YearAverage Rate ($/therm)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 8 0 $0. 8 5 $0. 9 0 $0. 9 5 $1. 0 0 $1. 0 5 $1. 1 0

1 2 3 4 5 6 7 8 9 1 0

Appendix B-8 National Action Plan for Energy Efficiency

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first yea r, the cost of the EE pr ogram is a cost to society . Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown. Electr ic Gas

Annual Total Societal Net Savings

YearNet 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 Saving sNet Societal Benefit ($M)

Tot a l So c iet a l Net S a vings ($M) Ye a r $- 15 $- 10 $- 5 $0 $5 $10 $15 $20 $25

1 2 3 4 5 6 7 8 9 1 0

T

otal Societal Cost Per Unit – Declines T

o tal cost of pr oviding each unit of energy (MWh, therm) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om EE. The Societal Cost and Societal Savings ar e 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 1 0

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 3 5 7 9 2 4 6 8 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-9Emissions and Cost Savings – Incr ease Annual tons of emissions saved incr eases. Emissions cost savings incr eases when emissions cost is monetized. Emissions costs and savings ar e the same with and without decoupling. Electr ic Gas
Annual Emissions SavingsTons Saved

0 10 20 30 40 50 60 70

1 2 3 4 5 6 7 8 9 1 0

0 20 40 60 80 100 120 140 160 180 200 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved1000 Tons CO2saved

Year 7 8 9 Annual Emissions SavingsTons Saved Tons SO 2 Saved Tons CO Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved

0 10 20 30 40 50 60 70 80 90

1 2 3 4 5 6 1 0 Year
Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset 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 1 0

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 1 0

0% 5% 10% 15% 20% 25%

Year

Appendix B-10 National Action Plan for Energy EfficiencyPeak Load Gr owth – Decr ease Peak load r equir ements decr ease because peak capacity savings ar e captur ed due to EE measur es. Peak load is not impacted by decoupling.

Electr ic Gas

90% 100% 110% 120% 130% 140% 150% 160%

1 2 3 4 5 6 7 8 9 1 0 Comparison of Peak Load Growth

YearPeak Load % of First Yr

Forecasted Growth - No EE Forecasted Growth - EE and Decoupling Comparison of Peak Load Growth

YearPeak 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 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-11

## Case 3: Low-Gr owth with P ower Plant Deferr al Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by ROE, while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio.
Investor-Owned Utility Comparison of Return on EquityAfter 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 1 0 Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If EE r educes capital investment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be affected.
Utility Earnings

YearEarnings ($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 1 0

Appendix B-12 National Action Plan for Energy Efficiency

### Customer Perspective Customer Bills – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. T otal customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption. Percent Change in Customer Bills
6% 

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first year , the cost of the EE pr ogram is a cost to society

. Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown.Change in Bills (%) 3% 0% -3 % -6 % -9 % -1 2 % -1 5 % -1 8 % -2 1 % Annual Total Societal Net Savings

YearNet Societal Benefit ($M)

Total Societal Net Savings ($M) -$600 -$400 -$200

$0 $200 $400 $600

1 2 3 4 5 6 7 8 9 1 0 1 2 3 4 5 6 7 8 9 1 0 Year
Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling Utility Rates – Mild Incr ease The rates customers pay ($/kWh) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales. Comparison of Average Rate

YearAverage Rate ($/kWh)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-13T otal Societal Cost Per Unit – Declines T

otal cost of pr oviding each unit of energy (MWh) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. Societal savings incr ease when an infrastructur e pr oject is delayed and then decr ease when built. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om 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 1 0 Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset shown.
Percent Growth Offset by Energy EfficiencyGWh

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 1 0 0% 20% 40% 60% 80% 100% 120% 140% 160%

Year

Emissions and Cost Savings - Incr ease Peak Load Gr owth – Decr ease Annual tons of emissions saved incr eases. Emissions cost Peak load r equir ements decr ease because peak capacity savings incr eases when emissions cost is monetized. savings ar e captur ed due to EE measur es. Peak load is not Emissions costs and savings ar e 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 1 0 Comparison of Peak Load Growth

YearPeak Load % of First Yr

Forecasted Growth - No EE Forecasted Growth - EE and Decoupling Annual Emissions SavingsTons Saved

0 10 20 30 40 50 60 70

1 2 3 4 5 6 7 8 9 1 0

0 20 40 60 80 100 120 140 160 180 200 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved1000 Tons CO2saved

Year

Appendix B-14 National Action Plan for Energy Efficiency

## Case 4: High-Gr owth With P ower Plant Deferr al Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by ROE, while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio.
Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0 Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If EE r educes capital intvestment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be af fected.

U t ilit y E ar nings

YearEarnings($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 – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. T otal customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption.
P e r c ent C hange in C u s t om er B i lls

YearChangeinBills(%)

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 1 0

Utility Rates – Mild Incr ease The rates customers pay ($/kWh) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales. 

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first year , the cost of the EE pr ogram is a cost to society

. Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown.
A nnual T o t a l S oc i e t a l N et S a v i ngs

YearNetSocietalBenefit($M)

Total Societal Net Savings ($M) $200 $400 $600

1 2 3 4 5 6 7 8 9 1 0 $0 -$200 -$400 -$600

Comparison of Average Rate

YearAverage Rate ($/kWh)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0

Appendix B-16 National Action Plan for Energy EfficiencyT otal Societal Cost Per Unit – Declines T

otal cost of pr oviding each unit of energy (MWh) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. Societal savings incr ease when an infrastructur e pr oject is delayed and then decr ease when built. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om EE.

D e liv er ed C o s t s and B e nef i t s of E E$/MWh

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 1 0

Emissions and Cost Savings – Incr ease Annual tons of emissions saved incr eases. Emissions cost savings incr eases when emissions cost is monetized. Emissions costs and savings ar e the same with and without decoupling.
Annual Emissions SavingsTons Saved

0 10 20 30 40 50 60 70

1 2 3 4 5 6 7 8 9 1 0

0 20 40 60 80 100 120 140 160 180 200 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved1000 Tons CO2saved

Year Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset shown. Percent Growth Offset by Energy EfficiencyGWh

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 1 0 0% 20% 40% 60% 80% 100% 120% 140% 160%

Year

Peak Load Gr owth – Decr ease Peak load r equir ements decr ease because peak capacity savings ar e captur ed due to EE measur es. Peak load is not impacted by decoupling.

90% 100% 110% 120% 130% 140% 150% 160%

1 2 3 4 5 6 7 8 9 1 0 Comparison of Peak Load Growth

YearPeak 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: V ertically Integr ated Utility Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by ROE, while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio. Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0 Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If EE r educes capital investment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be af fected. Utility Earnings

YearEarnings ($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 1 0

Appendix B-18 National Action Plan for Energy Efficiency

### Customer Perspective Customer Bills – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. T otal customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption. Percent Change in Customer Bills

6% 3% 

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first year , the cost of the EE pr ogram is a cost to society

. Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown. Annual Total Societal Net Savings

YearNet Societal Benefit ($M)

Total Societal Net Savings ($M) -$15 -$10 -$5 $0 $5 $10 $15 $20 $25

1 2 3 4 5 67 8 9 1 0 1 2 3 4 5 6 7 8 9 1 0Change in Bills (%) 0% -3 % -6 % -9 % -1 2 % -1 5 % -1 8 % -2 1 %
Year
Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling Utility Rates – Mild Incr ease The rates customers pay ($/kWh) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales. Comparison of Average Rate

YearAverage Rate ($/kWh)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-19T otal Societal Cost Per Unit – Declines T

otal cost of pr oviding each unit of energy (MWh) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om EE. The Societal Cost and Societal Savings ar e 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 1 0 140% 1, 200 120% 1, 000 100%

800 80% 600 60% 400 40% 200 20% 0% 1 2 3 4 5 6 7 8 9 1 0 0 Year Energy Savings - EE (GWh) Load Growth - No EE (GWh) Growth Offset by EE (%)

Peak Load Gr owth – Decr ease Peak load r equir ements decr ease because peak capacity savings ar e captur ed due to EE measur es. Peak load is not impacted by decoupling. Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset shown.

Percent Growth Offset by Energy Efficiency
160%

1, 400GWh

Emissions and Cost Savings – Incr ease Annual tons of emissions saved incr eases. Emissions cost savings incr eases when emissions cost is monetized. Emissions costs and savings ar e the same with and without decoupling.

Annual Emissions SavingsTons Saved

0 10 20 30 40 50 60 70

1 2 3 4 5 6 7 8 9 1 0

0 20 40 60 80 100 120 140 160 180 200 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved1000 Tons CO2saved

Year 90% 100% 110% 120% 130% 140% 150% 160%

1 2 3 4 5 6 7 8 9 1 0 Comparison of Peak Load Growth

YearPeak Load % of First Yr

Forecasted Growth - No EE Forecasted Growth - EE and Decoupling

Appendix B-20 National Action Plan for Energy Efficiency

## Case 6: Restr uctur ed Deliv ery-Only Utility
Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by ROE, while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio.
Investor-Owned Utility Comparison of Return on Equity

YearAfter 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 1 0 Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If EE r educes capital investment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be af fected. Utility EarningsEarnings ($MM)

Earnings $MM - No EE Earnings $MM - EE no Decoupling Earnings $MM - EE and Decoupling Y

ear $0 $20 $40 $60 $80 $100

1 2 3 4 5 6 7 8 9 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-21

### Customer Perspective Customer Bills – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. T otal customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption. Percent Change in Customer Bills

YearChange 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 1 0

Utility Rates – Mild Incr ease The rates customers pay ($/kWh) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales. 

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first year , the cost of the EE pr ogram is a cost to society

. Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown. Annual Total Societal Net Savings

YearNet 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 1 0

Comparison of Average Rate

YearAverage 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 1 0

Appendix B-22 National Action Plan for Energy EfficiencyT otal Societal Cost Per Unit – Declines T

otal cost of pr oviding each unit of energy (MWh) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om EE. The Societal Cost and Societal Savings ar e the same with and without decoupling.

Delivered Costs and Benefits of EE
$400 Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset shown. Percent Growth Offset by Energy Efficiency
160% 140% 1, 400 1, 200 120% 1, 000 100%

800 80%

Peak Load Gr owth – Decr ease Peak load r equir ements decr ease because peak capacity savings ar e captur ed due to EE measur es. Peak load is not impacted by decoupling. $300

Emissions and Cost Savings – Incr ease Annual tons of emissions saved incr eases. Emissions cost savings incr eases when emissions cost is monetized. $200 200GWh 600 60% 400 40%$/MWh
20% $100 0% 1 2 3 4 5 6 7 8 9 1 0 $0 0
Year 1 2 3 4 5 6 7 8 9 1 0 Energy Savings - EE (GWh) Year Load Growth - No EE (GWh) Growth Offset by EE (%) Societal Cost ($/MWh saved) Societal Savings ($/MWh saved)

Comparison of Peak Load Growth

YearPeak 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 1 0 Emissions costs and savings ar e the same with and without decoupling.

Annual Emissions SavingsTons Saved

0 10 20 30 40 50 60 70

1 2 3 4 5 6 7 8 9 1 0

0 20 40 60 80 100 120 140 160 180 200 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved1000 Tons CO2saved

Year

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-23

## Case 7: Electr ic Publicly and Cooper ativ ely Owned Debt Cov er age Ratio Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by ROE, while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio.

Public Power/Cooperative Debt Coverage Ratio

YearDebt 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 3 5 7 9 2 4 6 8 1 0 Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If EE r educes capital investment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be af fected. Utility EarningsEarnings ($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 1 0 Ye a r

Appendix B-24 National Action Plan for Energy Efficiency

### Customer Perspective Customer Bills – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. T otal customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption.
Percent Change in Customer Bills

YearChange 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 1 0

Utility Rates – Mild Incr ease The rates customers pay ($/kWh) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales. 

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first year , the cost of the EE pr ogram is a cost to society

. Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown. Annual Total Societal Net Savings

YearNet Societal Benefit ($M)

Total Societal Net Savings ($M) -$15 -$10 -$5 $0 $15 $20 $25

1 2 3 4 5 6 7 8 9 1 0 $5 $10

Comparison of Average Rate

YearAverage Rate ($/kWh)

Utility Average Rate - No EE Utility Average Rate - EE no Decoupling Utility Average Rate - EE and Decoupling $0. 1 0 $0. 1 5 $0. 2 0 $0. 2 5 $0. 3 0

1 2 3 4 5 6 7 8 9 1 0

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-25T otal Societal Cost Per Unit – Declines T

o tal cost of pr oviding each unit of energy (MWh) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om EE. The Societal Cost and Societal Savings ar e 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 1 0 140% 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 1 0 Year Energy Savings - EE (GWh) Load Growth - No EE (GWh) Growth Offset by EE (%)

Peak Load Gr owth – Decr ease Peak load r equir ements decr ease because peak capacity savings ar e captur ed due to EE measur es. Peak load is not impacted by decoupling. Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset shown.
Percent Growth Offset by Energy Efficiency
160%

1, 400GWh

Emissions and Cost Savings – Incr ease Annual tons of emissions saved incr eases. Emissions cost savings incr eases when emissions cost is monetized. Emissions costs and savings ar e the same with and without decoupling.
Annual Emissions SavingsTons Saved

0 10 20 30 40 50 60 70

1 2 3 4 5 6 7 8 9 1 0

0 20 40 60 80 100 120 140 160 180 200 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved1000 Tons CO2saved

Year Comparison of Peak Load Growth

YearPeak 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 1 0

Appendix B-26 National Action Plan for Energy Efficiency

## Case 8: Electr ic Publicly and Cooper ativ ely Owned Cash P osition Utility Perspective Utility Financial Health – Small Changes The change in utility financial health depends on whether or not ther e ar e decoupling mechanisms in place, if ther e ar e shar eholder incentives in place (for investor -owned utilities), the fr equency of rate adjustments, and other factors. Depending on the type of utility , the measur e of financial health changes. Investor -owned utility health is measur ed by ROE, while publicly or cooperatively owned utility health is measur ed by cash position or debt coverage ratio.

Cash Position at End of Year

YearEnd of Year Cash ($MM)

$40 $50 $60 $70 $80

1 2 3 4 5 6 7 8 9 1 0

Cash Position - No EE Cash Position - EE no Decoupling Cash Position - EE and Decoupling Utility Ear nings – Results V ary Utility ear nings depend on gr owth rate, capital investment, fr equency of rate adjustments, and other factors. If EE r educes capital investment, the ear nings will be lower in the EE case, unless shar eholder incentives for EE ar e intr oduced. However , utility r etur n (ROE or ear nings per shar e) may not be af fected. Utility EarningsEarnings ($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 1 0 Ye a r

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-27

### Customer Perspective Customer Bills – Decr ease In the first year , customer utility bills incr ease because the cost of the EE pr ogram has not yet pr oduced savings. T otal customer bills decline over time, usually within the first thr ee years, indicating customer savings r esulting fr om lower energy consumption. Percent Change in Customer Bills

YearChange in Bills (%)

Change in Customer Bills (%) - EE no Decoupling Change in Customer Bills (%) - EE and Decoupling -2 1 % -1 8 % -1 5 % -1 2 % -9 % -6 % -3 % 0% 3% 6%

1 2 3 4 5 6 7 8 9 1 0

Utility Rates – Mild Incr ease The rates customers pay ($/kWh) incr ease when avoided costs ar e less than r etail rates, which is typically the case for most EE pr ograms. Rates incr ease because r evenue r equir ements incr ease mor e quickly than sales. 

### Societal Perspective Societal Net Savings – Incr ease The net savings ar e the dif fer ence of total utility costs, including EE pr ogram costs, with EE and without EE. In the first year , the cost of the EE pr ogram is a cost to society

. Over time, cumulative EE savings lead to a utility pr oduction cost savings that is gr eater than the EE pr ogram cost. The graph shape is ther efor e upwar d sloping. T otal Societal Net Savings is the same with and without decoupling; ther efor e, only one line is shown.
Annual Total Societal Net Savings

YearNet Societal Benefit ($M)

Total Societal Net Savings ($M) -$15 -$10 -$5 $0 $15 $20 $25

1 2 3 4 5 6 7 8 9 1 0 $5 $10

Comparison of Average Rate

YearAverage 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 1 0

Appendix B-28 National Action Plan for Energy EfficiencyT otal Societal Cost Per Unit – Declines T

otal cost of pr oviding each unit of energy (MWh) declines over time because of the impacts of energy savings, decr eased peak load r equir ements, and decr eased costs dur ing peak per iods. W ell-designed EE pr ograms can deliver energy at an average cost less than that of new power sour ces. When the two lines cr oss, the annual cost of EE equals the annual savings r esulting fr om EE. The Societal Cost and Societal Savings ar e the same with and without decoupling. Gr owth Of fset by EE – Incr ease As EE pr ograms ramp up, energy consumption declines. This compar ison shows the gr owth with and without EE, and illustrates the amount of EE r elative to load gr owth. Load gr owth and energy savings ar e not impacted by decoupling. W ith load gr owth assumed at zer o, no load or per cent gr owth of fset shown. Percent Growth Offset by Energy EfficiencyGWh

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 1 0

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 1 0

Peak Load Gr owth – Decr ease Peak load r equir ements decr ease because peak capacity Emissions and Cost Savings – Incr ease savings ar e captur ed due to EE measur es. Peak load is not Annual tons of emissions saved incr eases. Emissions cost sav- impacted by decoupling. ings incr eases when emissions cost is monetized. Emissions costs and savings ar e the same with and without decoupling.
Annual Emissions Savings

70 Tons SO 2 Saved Tons CO Saved Tons VOC Saved 1000 Tons CO 2 Saved Tons NO xSaved Tons PM-10 Saved 200 180 60 Comparison of Peak Load Growth

YearPeak 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 1 0 160 50 140 120 40 100 30 80 60 40 20
10 20 0 0

1 2 3 4 5 6 7 8 9 1 0 Year1000 Tons COsaved2Tons Saved

To create a sustainable, aggressive national commitment to energy efficiency Appendix B-29Funding and pr inting for this r eport was pr ovided by the U.S. Department of Energy and U.S. Envir onmental Pr otection Agency in their capacity as co-sponsors for the National Action Plan for Energy Ef ficiency

. Recycled/Recyclable—Pr inted with V egetable Oil Based Inks on 100% (Minimum 50% postconsumer) Recycled Paper