Energy Efficiency 

Cost-Effectiveness Screening

How to Properly Account for ‘Other Program Impacts’ 

and Environmental Compliance Costs

Authors

Tim Woolf

William Steinhurst 

Erin Malone

Kenji Takahashi

November 2012
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Acknowledgements

The authors would like to thank the following persons for taking the time to 

provide helpful comments on earlier drafts of this paper: Chris Neme, Julie 

Michaels, Elizabeth Titus, Jerrold Oppenheim, Jamie Barber, John Plunkett, 

and Walter Poor.

Other reviewers who made valuable contributions include Riley Allen, David 

Farnsworth, David Lamont, Ajith Rao, Richard Sedano, and Rick Weston from 

the Regulatory Assistance Project. 

This paper was produced in part through support from the 

John D. and Catherine T. MacArthur Foundation.

Prepared for the Regulatory Assistance Project 

and the Vermont Housing Conservation Board.
1

Energy Efficiency Cost-Effectiveness Screening

Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2. Cost-Effectiveness Tests And Their Uses. . . . . . . . 12

2.1 Defining the Cost-Effectiveness Tests. . . . . . . . . . 12

2.2 Implications of the Cost-Effectiveness Tests. . . . . 14

2.3 Considerations in Applying the 

Cost-Effectiveness Tests. . . . . . . . . . . . . . . . . . . . 17

2.4 Recommendations for Applying the Tests. . . . . . . 19

3. Other Program Impacts. . . . . . . . . . . . . . . . . . . . . . 21

3.1 Description of Other Program Impacts. . . . . . . . . 21

3.2 The Rationale for Accounting for 

Other Program Impacts. . . . . . . . . . . . . . . . . . . . . 23

3.3 The Application of Other Program 

Impacts Today. . . . . . . . . . . . . . . . . . . . . . . . . . . 24

3.4 Estimating the Value of Other Program Impacts. . . 27

Table Of Contents

3.5 Implications for Efficiency Program Screening. . . . 31

3.6 Considerations in Setting Customer 

Financial Incentives. . . . . . . . . . . . . . . . . . . . . . . 32

3.7 Regulatory Options to Address Other 

Program Impacts. . . . . . . . . . . . . . . . . . . . . . . . . . 34

3.8 Recommendations. . . . . . . . . . . . . . . . . . . . . . . . 35

4. Environmental Compliance Costs. . . . . . . . . . . . . . 38

4.1 Environmental Compliance Costs 

Versus Externalities. . . . . . . . . . . . . . . . . . . . . . . . 38

4.2 Current and Anticipated EPA Regulations. . . . . . . 38

4.3 Current and Anticipated Climate Change

Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

5. References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Appendix A: Principles Underlying The Tests. . . . . . 59

Appendix B: Choice Of Discount Rate. . . . . . . . . . . . 62

List of Figures

Figure ES-1: Other Program Impacts Applied to 

Efficiency Screening in Vermont. . . . . . . . . . . . . . . 6

Figure ES-2: Cost-Effectiveness Analysis 

Implications of OPIs. . . . . . . . . . . . . . . . . . . . . . . . 6

Figure ES-3: Illustrative Example of Potential 

Cumulative Retrofit Costs. . . . . . . . . . . . . . . . . . . . 8

Figure ES-4: Levelized Carbon Price Estimates: 

Low, Mid, and High Cases. . . . . . . . . . . . . . . . . . . 9

Figure 2-1: Scope of the Societal Cost, TRC, 

and PAC Tests. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Figure 3-1: Other Program Impacts Applied to 

Efficiency Screening in Vermont. . . . . . . . . . . . . . 26

Figure 3-2: Cost-Effectiveness Analysis Implications 

of OPIs; PAC and TRC Tests. . . . . . . . . . . . . . . . . 32

Figure 4-1: Estimated Forward-Going Cost of 

Environmental Controls. . . . . . . . . . . . . . . . . . . . 41

Figure 4-2: Illustrative Example of Potential 

Cumulative Retrofit Costs. . . . . . . . . . . . . . . . . . . 42

Figure 4-3: US Coal Capacity at Risk Due to 

Compliance with EPA Regulations. . . . . . . . . . . . 43

Figure 4-4: Generic Carbon Price Estimates – 

Edison Electric Institute and Synapse. . . . . . . . . . 47

Figure 4-5: States with Climate Initiatives and 

Emission Targets. . . . . . . . . . . . . . . . . . . . . . . . . . 48

Figure 4-6: Carbon Price Estimates Incorporated 

in Utility IRPs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Figure 4-7: Levelized Carbon Price Estimates: 

Low, Mid, and High Cases. . . . . . . . . . . . . . . . . . 50

List of Tables

Table 2-1: Components of the Energy Efficiency 

Cost-Effectiveness Tests. . . . . . . . . . . . . . . . . . . . 12

Table 2-2: Implications of the Five Principle 

Cost-Effectiveness Tests. . . . . . . . . . . . . . . . . . . . 15

Table 3-1: Utility-Perspective Non-Energy Impacts. . . 28

Table 3-2: Participant-Perspective Non-Energy 

Impacts – Residential. . . . . . . . . . . . . . . . . . . . . . 29

Table 3-3: Participant-Perspective Non-Energy 

Impacts – C&I. . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Table 4-1: Major EPA Rulemakings Impacting 

Power Plants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Table A-1: Sample NEIs for a Low-Income Program: 

Internal vs. External Costs. . . . . . . . . . . . . . . . . . 61
2

Energy Efficiency Cost-Effectiveness Screening

Foreword

Why do we in the electric and natural 

gas regulation business spend so much 

time and money on energy efficiency 

cost-effectiveness? Several reasons are 

highlighted below.

Compliance with energy efficiency obligations is 

one reason. If an efficiency program administrator (utility or 

otherwise) is charged with a mission to deliver cost-effective 

energy efficiency, regulators overseeing the programs need 

tools to evaluate administrators’ claims. Tried-and-true 

programs may appear to require less work after years of 

performance data, but the evidence-based oversight process 

typical in most states requires persistent thoroughness.

Value for consumers is another reason. On behalf of 

the captive consumers paying for these savings, regulators 

need reassurance that costs added to electric bills are 

justified investments that will more than offset those costs 

over time. History shows that making this case clearly and 

continuously is important to maintain public support with 

an ever-changing crop of new regulators, elected officials, 

editorial writers, and other opinion leaders.

Value to the economy and broader society is still 

another important reason. Unlike most other utility 

resource investments, energy efficiency influences an 

impressive array of other aspects of society, as this paper 

explores. Thus, a narrower focus only on the value that 

energy efficiency brings to utility consumers is too limiting 

an analysis. However, analysis of the effects of energy 

efficiency investment on other program impacts, such as 

fuel and water savings, are often ignored or mishandled, 

and should be properly recognized. 

Evaluating utility risk is often over-looked. Costeffectiveness analyses for energy efficiency and other 

utility investments do not usually evaluate impact on 

utility risk. Many risks to the power sector that may drive 

up costs to consumers, or add regulatory risk to utilities, 

could be mitigated by energy efficiency. The ability of 

energy efficiency to mitigate utility risk is factored into 

the evaluation in only a few states, and these methods are 

rough and conservative.

We recognize that energy efficiency is evolving. As 

states increase their ambitions for energy efficiency savings 

from utility consumer-funded programs, the stakes for 

measuring cost-effectiveness escalate. Justifying the cost 

to pursue savings is not the only objective. Decisions of 

whether or not to integrate energy efficiency into utility 

system planning, capital budgeting, and even system 

operations are motivated by cost-effectiveness analyses. In 

the future, states will consider integrating energy efficiency 

with demand response, distributed generation, and other 

customer-side services enabled by technology. As they do 

this, the essentials for cost-effectiveness will still apply, but 

may be applied in new ways.

State identities may interact with regional 

approaches. States’ values vary as represented by their 

customized cost-effectiveness tests. Perhaps this will persist, 

then again it may not. Convergence in approaches among 

states is also possible, driven by regional imperatives to use 

energy efficiency and other demand resources as preferred 

resources.

States want to ensure that energy efficiency 

investments reflect their values. Why do we in the 

electric and natural gas regulation business spend so much 

time and money on energy efficiency cost-effectiveness? 

Because regulation requires it, but also because the process 

itself reflects our priorities, and allows us to reassess them 

from time to time to ensure we are valuing energy efficiency 

in ways consistent with our values. RAP staff hopes this 

paper provides useful perspective to regulators and others 

interested in doing just that. Thanks to the staff at Synapse 

Energy Economics for providing this useful and clear 

analysis.

Rich Sedano

Principal and Director, US Program

Regulatory Assistance Project
3

Energy Efficiency Cost-Effectiveness Screening

Energy efficiency is widely recognized 

as a low-cost, readily available 

resource that offers a variety of 

benefits to utility customers and to 

society as a whole. Many states have established 

efficiency savings targets, some states require 

that energy efficiency be the first choice among 

resource options, and an increasing number 

of states require energy efficiency program 

administrators to pursue all cost-effective 

energy efficiency. As states continue to advance 

ratepayer-funded energy efficiency initiatives 

and establish increasingly aggressive savings 

goals, it is vitally important that effective 

practices be communicated and used in 

screening energy efficiency resources for cost-effectiveness. 

There is a great amount of variation across the states in 

the ways that energy efficiency programs are screened for 

cost-effectiveness. Many states are applying methodologies 

and assumptions that do not capture the full value of 

efficiency resources, leading to under-investment in 

this low-cost resource, and thus higher costs to utility 

customers and society.

The purpose of this report is to address two elements 

of energy efficiency program screening that are frequently 

treated improperly: other program impacts (OPIs)1

 and the 

costs of complying with environmental regulations. In some 

states, proper treatment of these two elements would likely 

result in a significantly larger amount of energy efficiency 

being deemed cost-effective relative to today’s practices. We 

begin our report with a discussion of the cost-effectiveness 

tests used to evaluate energy efficiency programs, because 

the choice and use of these tests is directly related to our 

discussion of these two key elements of program screening.

A goal of this paper is to address some key issues related 

to application of cost-effectiveness tests that are often 

overlooked; it is not the goal of this paper to address all 

aspects of costs and benefits that may be relevant to one or 

more tests. Many issues relevant to the tests are addressed 

Executive Summary

with only a passing reference, or are left off 

the discussion entirely. As noted, the focus of 

this paper is on what we refer to in this paper 

as the OPIs that are appropriate to include in 

certain cost-effectiveness tests, and the costs of 

complying with environmental regulation.

The Best Tests for Screening 

Energy Efficiency 

Five standard tests are used to evaluate 

energy efficiency programs, three of which are 

predominately used by states as the primary 

test for screening efficiency programs: the 

Societal Cost Test, the Total Resource Cost 

(TRC) Test, and the Program Administrator Cost (PAC) 

Test. The choice of which test to use – and whether it is 

appropriately applied – will have a significant impact on 

the amount of energy efficiency resources that are identified 

as being cost-effective.

First, we note that ideally all three tests, the broader 

Societal Cost Test and the TRC Test, as well as the PAC 

Test, should be considered when assessing energy efficiency 

cost-effectiveness. We recognize, however, that this still 

leaves the ultimate question of which test results to use 

in determining the programs to implement, and that in 

practice it is more common and straightforward to use a 

single, primary test to answer this ultimate question. Our 

recommendations below include a primary test applied 

at the program level, but a secondary test applied, at a 

1 We use the term “other program impacts” (OPIs) to describe what are commonly referred to as non-energy benefits 

(NEBs) or non-energy impacts (NEIs). OPIs are those costs 

and benefits that are not part of the costs, or the avoided 

costs, of the energy provided by the utility that funds the 

efficiency program. In addition to NEIs, OPIs also include 

“other fuel savings,” which are the savings of fuels that are 

not provided by the utility that funds the efficiency program.

The purpose of this 

report is to address 

two elements of 

energy efficiency 

screening that are 

frequently treated 

improperly, 

namely: other 

program impacts 

and the cost of 

complying with 

environmental 

regulations.
4

Energy Efficiency Cost-Effectiveness Screening

minimum, at the portfolio level. This approach offers the 

benefits of both breadth and simplicity.

We recommend that the Societal Cost Test be used to 

screen energy efficiency programs. This test includes the 

broadest range of energy efficiency costs and benefits, and 

provides the best measure of public policy benefits that are 

of great importance to legislators and regulators, including 

environmental benefits. If a state chooses to use the Societal 

Cost Test, the test should account for all the public policy 

benefits to the greatest extent possible.

We recommend that all states that choose not to rely on 

the Societal Cost Test use the TRC Test to screen energy 

efficiency programs. If a state chooses the TRC (or Societal 

Cost) Test, the test should account for OPIs to the greatest 

extent possible. If OPIs are excluded, then the analysis 

would include all of the relevant costs but not all of the 

relevant benefits. As a result, the TRC Test will provide 

misleading results that are skewed against energy efficiency, 

and will result in underinvestment in energy efficiency 

programs and higher costs for customers. 

We also recommend that efficiency resources be screened 

using the Societal Cost Test or the TRC Test at the program 

level. Although there may be, in theory, advantages to 

measure-level screening, these advantages are outweighed 

by the practical benefits associated with program-level 

screening, including accounting for the interactive effects 

between efficiency measures, increasing customer adoption 

of efficiency measures, promoting comprehensive efficiency 

solutions, and avoiding lost opportunities. Screening energy 

efficiency at the program level achieves an appropriate 

balance between achieving important efficiency goals and 

sufficient regulatory oversight. Energy efficiency resources 

should be analyzed at the measures level, in order to provide 

program administrators and other stakeholders with the 

greatest level of detail regarding their costs and benefits, but 

the screening is best performed at the program level in order 

to reduce the risk of screening out measures that provide 

program-level benefits.

However, when evaluating ratepayer-funded energy 

efficiency programs with either the Societal Cost Test or the 

TRC Test it is important to consider potential bill impacts 

and customer equity concerns. Properly accounting for 

OPIs and the associated public policy benefits may increase 

the universe of efficiency measures that are deemed costeffective. This may lead to increased energy efficiency 

budgets, or in the case of limited efficiency budgets it may 

result in the adoption of a different, more expensive mix 

of efficiency measures. In addition, properly accounting 

for OPIs and the associated public policy benefits may 

be seen as burdening utility customers with costs for 

achieving benefits that are not related to utility services. 

This is a critical consideration, particularly for states that 

are pursuing aggressive levels of energy efficiency savings or 

pursuing all cost-effective energy efficiency. 

To address these equity concerns, we recommend that 

the PAC Test be applied, at a minimum, to the entire 

portfolio of efficiency programs to ensure that the entire 

package of programs will result in a net reduction in 

revenue requirements and a net reduction in costs to utility 

customers. The PAC test includes only those costs and 

benefits that affect utility revenue requirements, and thus 

provides a clear indication of potential impacts on customer 

bills. Under this approach, either the Societal Cost Test or 

the TRC Test would be the primary test for screening each 

energy efficiency program. Programs that do not pass the 

primary test would not be considered cost-effective and 

would not be included in the efficiency portfolio. Then the 

PAC Test would be applied, at a minimum, to the portfolio 

of programs that do pass the primary test. If a portfolio of 

programs does not pass the PAC Test, then one or more of 

the programs would need to be modified in such a way that 

the entire portfolio eventually passes the PAC Test. More 

granular ratepayer equity concerns can be addressed at the 

measure or program level by applying the PAC Test review 

at those levels in program design.

This combined screening approach should be simple 

to apply because it would rely upon a single, primary 

test (either the Societal Cost Test or the TRC Test) for 

screening at the program level, and a secondary test (the 

PAC Test) that would be applied as a check on behalf of 

utility customers. Regulators and other stakeholders could 

use the results of the portfolio-level PAC test (expressed 

as millions of dollars in net reductions in utility costs) to 

assess the overall value of the efficiency portfolio to utility 

customers as a whole. Applying the tests in this manner 

helps regulators and other stakeholders ensure that public 

policy objectives for acquisition of cost-effective energy 

efficiency also result in a net reduction in utility costs to 

utility customers. 
5

Energy Efficiency Cost-Effectiveness Screening

Other Program Impacts

OPIs are those costs and benefits that are 

not part of the cost, or the avoided cost, of 

energy. OPIs fall into three categories: 

•	 Utility-perspective OPIs include, for 

example, reduced customer arrearages 

and reduced bad debt write-offs. 

•	 Participant-perspective OPIs

include, for example, improved health, 

increased safety, other fuel savings, 

reduced maintenance costs, reduced 

sick days from work or school, increased 

worker or student productivity, improved aesthetics, 

and increased comfort. Many of these participantperspective OPIs are especially significant for lowincome customers.

•	 Societal-perspective OPIs include, for example, 

reduced environmental impacts and reduced costs of 

providing health care.

These OPIs should be included in cost-effectiveness tests 

for which the relevant costs and benefits are applicable. The 

primary rationale for including OPIs is to ensure that the 

tests are internally consistent. This is especially important 

in the application of the TRC Test. By definition, this 

test includes the participant cost of the energy efficiency 

measures, which can be quite large in many cases. For 

the TRC Test to be internally consistent, it must also 

include the participant benefits from the energy efficiency 

measures, including OPIs. Excluding the participantperspective OPIs from the TRC Test will provide misleading 

results that are skewed against energy efficiency, and will 

result in underinvestment in energy efficiency programs 

and higher costs for utility customers.

Unfortunately OPIs are often not accounted for in 

a comprehensive manner and are frequently ignored 

altogether. A recent survey found that most states use the 

TRC Test as the primary test for screening energy efficiency 

programs; however, only 12 states quantify participant 

OPIs, and even in those states the quantification is only 

partial and generally conservative. As a result, many states 

are applying the TRC Test in a way that is skewed and 

understates the true value of energy efficiency. 

This may be the most significant problem with 

energy efficiency program screening methods 

in the United States today.

Those states that do account for OPIs have 

found that they can be quite large. Figure 

ES-1 presents a summary of the OPIs that are 

accounted for in energy efficiency screening 

in Vermont, in terms of levelized costs (in $/

MWh). The leftmost column indicates the 

benefits that would be applied to all programs 

under the PAC Test. The second column from 

the left indicates the risk benefits and the 

non-energy benefits that would be applied 

to all energy efficiency programs under the 

TRC Test. The second column from the right indicates 

the potential magnitude of the water, operations and 

maintenance (O&M), other fuel savings, and low-income 

benefits under the TRC Test. The rightmost column also 

includes the avoided emissions benefit that is applied under 

the Societal Cost Test. 

There are two types of participant-perspective OPIs 

that deserve particular attention: low-income benefits and 

other fuel savings. These impacts tend to be of significant 

magnitude, and if they are not correctly accounted for, 

then some programs, including low-income programs, 

residential retrofit programs, and new construction 

programs, may be improperly deemed uneconomic.2

 All 

of these programs offer significant public policy benefits 

by serving a broad range of customer types; achieving 

comprehensive, whole-house savings; promoting customer 

equity; and reducing lost opportunities. 

 The importance of properly applying OPIs is 

apparent in many program administrators’ energy 

efficiency screening results. We recommend caution 

when considering quantitative estimates of OPIs, such as 

those presented in Figure ES-1. It is very difficult to fully 

quantify and monetize all of the OPIs, especially all of the 

participant-perspective non-energy benefits, associated with 

all energy efficiency programs. Furthermore, experience 

indicates that most attempts to do so result in very 

Excluding the 

participantperspective OPIs 

from the TRC Test will 

provide misleading 

results that are 

skewed against 

energy efficiency, 

and will result in 

underinvestment 

in energy efficiency 

programs and higher 

costs for utility 

customers.

2 OPIs can be significant for commercial and industrial programs as well. Commercial and industrial programs may be 

less likely to be uneconomic, however, if the OPIs are not 

accounted for.
6

Energy Efficiency Cost-Effectiveness Screening

Figure ES-2 presents the 

actual cost-effectiveness results 

for an electric utility’s 2012 

residential efficiency programs. 

The figure presents the benefitcost ratios under the PAC 

Test, the TRC Test with OPIs 

included, and the TRC Test 

without OPIs included. When 

the OPIs are not included in 

the TRC Test, the low-income, 

residential new construction, 

and residential retrofit programs 

are all at risk for being 

improperly deemed not costeffective – even though these 

are some of the most important 

residential efficiency programs 

available. 

It is important to recognize 

that including OPIs in the 

Societal Cost and TRC Tests is 

likely to expand the universe of 

efficiency resources that are deemed cost-effective and may 

lead to increased energy efficiency budgets, or in the case of 

limited efficiency budgets, it may result in the adoption of 

a different, more expensive mix of efficiency measures. In 

addition, properly accounting for OPIs and the associated 

conservative estimates and a continued understatement 

of the full benefits of energy efficiency. Nonetheless, when 

applying the Societal Cost Test or the TRC Test, using the 

best estimates available is a significant improvement over 

using no estimates at all.

Figure ES-1

Other Program Impacts Applied to Efficiency Screening in Vermont

Figure ES-2*

Cost-Effectiveness Analysis Implications of OPIs

GHG Emissions

PAC 

Benefits

Minimum 

TRC Benefits 

(for all 

programs)

Potential 

TRC Benefits 

(for relevant 

programs)

Potential 

Societal Benefits 

(for relevant 

programs)

$200

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0

Energy Efficiency Benefits ($/Mwh)

Avoided Energy

Avoided Capacity

Avoided Transmission

Avoided Distribution

Line Losses

Avoided Reserves

Risk Benefits

OPIs Adder

Water

O&M

Other Fuel Savings

Low-Income OPIs

Source: See Figure 3-1

Source: See Figure 3-2

Residential New 

Construction

Low-Income 

Retrofit

Residential 

Retrofit

Residential 

Lighting

Residential 

Appliances

Low-Income 

New Construction

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Benefit-Cost Ratio

PAC Test

TRC Test without OPIs

TRC Test with OPIs

*Figure ES-2 represents an example 

of how the choice of economic tests can 

have significant impacts on the results. 

These results should not be misinterpreted 

as extending to other regions and 

circumstances. The results will likely vary 

significantly by region, available fuels, and 

other program impacts that are customerclass and location specific. Further, the 

fact that some benefit-cost ratios exceed 

others should not be misinterpreted to 

favor investments in programs with higher 

ratio to the exclusion of lower ratios. 

The objective of the energy efficiency 

investments should be to get the greatest 

net economic benefit for the available 

investment. 
7

Energy Efficiency Cost-Effectiveness Screening

public policy benefits may be seen as burdening utility 

customers with costs for achieving benefits that are not 

related to utility services. 

These concerns are addressed by applying the PAC Test 

to the entire portfolio of energy efficiency programs at the 

culmination of the testing process, as described previously. 

This approach can be used to assure regulators and other 

stakeholders that utility customer funds spent on energy 

efficiency programs will result in a net reduction in utility 

costs for utility customers. 

Recommendations

When using the Societal Cost Test, it is important to 

account for the utility-perspective, participant-perspective, 

and societal-perspective OPIs to the greatest extent possible.

When using the TRC Test, it is important to account for 

the utility-perspective and participant-perspective OPIs 

to the greatest extent possible. It is particularly important 

to account for the participant-perspective OPIs, because 

otherwise the TRC Test will be internally inconsistent 

and will lead to cost-effectiveness results that are skewed 

against energy efficiency. This in turn will cause program 

administrators to underinvest in energy efficiency programs, 

and will impose higher costs on utility customers.

We recommend that each state adopt OPIs 

for screening energy efficiency initiatives. Each 

state will inevitably need to develop its own 

approach for accounting for OPIs that best suits 

its needs and best accounts for values of the 

OPIs relevant to it. One of the key barriers to 

adopting some OPIs is that they are difficult to 

quantify. Nonetheless, it is important for states 

to attempt to quantify OPIs to the greatest 

extent possible, because assuming that they do 

not exist or assuming that they are worth nothing is clearly 

inaccurate and incorrect. To this end, we recommend that 

each state do the following:

•	 Develop quantitative, monetary estimates for all

OPIs that can be readily monetized. At a minimum, 

this should include the other fuel and water savings, 

because these savings can be relatively easily 

monetized using forecasts of the prices for those fuels.

•	 Develop some methodology for addressing those OPIs

that are not monetized, for example, by conducting 

sensitivities or using an adder to the benefits as a 

proxy. Although there are limits to these approaches, 

and adders are sometimes critiqued for being too 

conservative, these approaches may be necessary 

to ensure that some of the significant OPIs are not 

ignored simply because they are difficult to quantify. 

•	 Address the OPIs associated with low-income

customers. Many studies have shown that these are 

among the most significant OPIs and can have a 

substantial impact on the cost-effectiveness of lowincome programs.

•	 Identify those OPI assumptions, methodologies,

and outcomes that can be transferred across utilities 

and across states, in order to increase awareness of 

the issues, promote consistency where appropriate, 

increase acceptance of hard-to-quantify values, and 

reduce costs. 

Environmental Compliance Costs

Current and Anticipated EPA Regulations

The US Environmental Protection Agency (EPA) has 

proposed and promulgated a number of environmental 

rulemakings that have significant implications for the 

operation of existing and new power plants. Costs 

associated with complying with these 

regulations should be included in the PAC, 

the TRC, and the Societal Cost Tests when 

evaluating energy efficiency resources.

Figure ES-3 provides an illustrative example 

of potential retrofit costs at an older 300-MW 

coal-fired power plant. This figure shows how 

various forthcoming environmental regulations 

can contribute to total power plant costs relative 

to the current operating cost. These costs are 

illustrative; many coal plants will not require all 

of these controls, and costs are likely to vary considerably 

between plants. The extent to which any one coal plant will 

have to install one or more of these controls will depend 

upon the age of the plant, the efficiency with which the 

plant operates, and the extent to which some of these 

controls have already been installed. 

Several recent studies have estimated the amount of US 

coal capacity that is at risk for being retired as a result of 

the costs associated with the recent EPA regulations. Some 

of the most recent studies, which include the possibility 

of federal climate change requirements, estimate that up 

to one third of the US coal fleet may be uneconomic. This 

There is no 

doubt that 

energy efficiency 

should play a 

significant role, 

even the primary 

role, in meeting 

climate change 

requirements.
8

Energy Efficiency Cost-Effectiveness Screening

will clearly have important implications for the avoided 

energy and capacity costs associated with energy efficiency 

resources. 

Current and Anticipated Climate Change 

Requirements

There are currently many initiatives for reducing 

greenhouse gas (GHG) emissions from power plants at 

the federal, regional, state, and local levels. 

Costs associated with complying with these 

initiatives should be included in the PAC, 

TRC, and Societal Cost Tests when evaluating 

energy efficiency resources.

Despite several attempts in the past, the US 

Congress has yet to pass legislation requiring 

GHG emission reductions. However, this may 

change at some point in the near- to midterm 

future. In addition, the EPA has announced that it will issue 

New Source Performance Standards for GHG emissions, 

which will result in compliance costs for new and modified 

power plants.

Many utilities recognize the likelihood of federal climate 

change requirements, and have developed forecasts of 

the potential CO2 allowance costs that might result from 

such requirements. Figure ES-4 presents a summary of the 

range of recent CO2 price forecasts that have been used by 

utilities, as well as independent forecasts from the Edison 

Electric Institute and from Synapse Energy Economics. 

Many states have undertaken initiatives to reduce 

GHGs. Twenty-three US states and five Canadian Provinces 

currently participate in regional initiatives to reduce GHG 

emissions from power plants, and are seen 

as laboratories for future regional climate 

change activities. Furthermore, roughly 43 

states have adopted a GHG inventory and/or 

registry, 36 states have adopted a state climate 

change action plan (with additional states in 

the process of developing such plans), and 

23 states have established GHG emission 

reduction targets. Some of these state targets 

are relatively stringent, for example, requiring the reduction 

of CO2 emissions of 80 percent below 1990 levels by 2050.

Energy efficiency is typically one of the lowest cost 

options for reducing GHG emissions. In fact, cost-effective 

energy efficiency programs reduce overall costs, whereas 

$/Mwh

Figure ES-3

Illustrative Example of Potential Cumulative Retrofit Costs

$140

$120

$100

$80

$60

$40

$20

$0

Current 

condition

+ SCR in 

2014

+ Low-NOx 

burners 

in 2014

+ FGD 

in 

2016

+ Particulate 

Baghouse in 

2016

+ ACI 

in 

2016

+ Cooling 

Tower in 

2018

+ Coal 

Residuals 

in 2018

+ Effluent 

in 2018

+ CO2 @ 

$20/ton 

in 2020

Current operating cost

SCR

Low-NOx burners

FGD

Baghouse

ACI

Cooling

CCR

Effluent

CO2 @ $20/ton

Source: See Figure 4-2

Some recent studies 

estimate that up to 

one third of the US 

coal fleet may be 

uneconomic as a 

result of the recent 

EPA regulations.
9

Energy Efficiency Cost-Effectiveness Screening

many GHG abatement options lead to increased costs. 

There is no doubt that energy efficiency should play a 

significant role, and maybe even the primary role, in 

meeting climate change requirements. If states do not 

properly assess the value of energy efficiency in complying 

with climate change requirements, then they will understate 

the cost-effectiveness of energy efficiency and will impose 

higher costs on utility customers over the long-term. 

Recommendations

All states should recognize that the costs of compliance 

with current and anticipated EPA regulations and climate 

change requirements must be included in the PAC, TRC, 

and Societal Cost Tests. These costs are not environmental 

externalities; they will be incurred by utilities and passed 

on to ratepayers, and therefore should be included in all of 

these tests.

We recommend that all states recognize the importance 

of accounting for climate change compliance costs now. 2012 $/short ton

$120

$100

$80

$60

$40

$20

$0

Figure ES-4

Levelized Carbon Price Estimates: Low, Mid, and High Cases

x

x x

x

x

x

x x x

x

x

x

Entergy (2009)

Connecticut Light and Power (2010)

Delmarva Power and Light (2010)

Duke Carolinas (2011)2011 FundamentalDuke Carolinas (2011)2010 Fundamental

American Electric Power (CPCN)

Ameren (2011)

Public Service Company of New Mexico (2011)

Tennessee Valley Authority (2011)

Public Service Company of New Mexico (2011)

Puget Sound Energy (2011 Update)

PacifiCorp (2011/2012)

Avista (2011)

Omaha (2010)

Portland General Electric (2011)

Imperial Irrigation District (2010)

Sunflower (2010)

Los Angeles Department of Water and Power (2011)

Seattle City Light (2010) 

APS (2012)

Nevada Power (2012)

Synapse

Source: See Figure 4-7. The CO2 prices are in levelized terms. The low value for each forecast represents the levelized value of the Low Case; 

the middle value represents the levelized value of the Mid Case or Reference Case; and the high value represents the levelized value of the 

High Case.

Uncertainty regarding the timing and size of those costs 

does not justify inaction. Many energy efficiency resources 

have measure lives of 15 years, 20 years, or more. Supplyside resources have operating lives that are even longer. 

Resource decisions made today should be based on the best 

assumptions available about the conditions that will exist 

over these long periods of time.

Energy efficiency resources should be screened on a 

frequent, periodic basis (e.g., every one to three years), 

because energy efficiency programs may take several years 

to ramp up to the levels needed to respond to evolving 

environmental requirements or to replace a retiring power 

plant.

Energy efficiency program administrators should account 

for all anticipated environmental compliance costs (EPA 

regulations, climate change requirements, and others), 

because this is the most accurate reflection of the future, 

and these environmental requirements can have significant 

cumulative effects. Piecemeal analyses of environmental 
10

Energy Efficiency Cost-Effectiveness Screening

All states that have state-specific climate 

change requirements should account for the 

costs of complying with those requirements in 

screening energy efficiency programs. Ideally 

states should use state-specific, economy-wide 

marginal GHG abatement costs. In the absence 

of these, states can use reasonable proxies for 

marginal GHG abatement costs. Such proxies 

can be developed based on other resources that the state has 

decided to implement to address climate change concerns 

(e.g., renewable resources). The key issue here is that energy 

efficiency resources are evaluated for cost-effectiveness 

relative to other GHG abatement options that the state has 

decided are necessary to address climate change.

compliance costs can lead to uneconomic 

decisions and higher costs to customers.

All states should establish energy efficiency 

screening methodologies that account for the 

cost of complying with federal climate change 

requirements. Although some uncertainty 

about the timing of federal GHG emissions 

regulations remains, it is likely that limits will 

be imposed at some point over the near- to mid-term 

future. If a state or utility does not have its own forecast of 

federal CO2 allowance prices, then it could rely upon publicly available forecasts such as those described in this study. 

Other options include conducting sensitivity analyses or 

using probabilistic modeling.

Piecemeal analyses 

of environmental 

compliance costs can 

lead to uneconomic 

decisions and higher 

costs to customers.
11

Energy Efficiency Cost-Effectiveness Screening

F

or more than two decades, many states have relied 

upon a standard set of economic tests to decide 

what level of energy efficiency is cost-effective. 

The standard tests include the Ratepayer Impact 

Measure (RIM) Test, the Participant Test, the Program 

Administrator Cost (PAC) Test, the Total Resource Cost 

(TRC) Test, and the Societal Cost Test. These tests have 

played a significant role in determining the amount and 

type of efficiency programs implemented to date.

In theory, these tests provide regulators and other 

stakeholders with the full range of perspectives and the 

full range of costs and benefits with which to determine 

energy efficiency cost-effectiveness. In practice, however, 

these tests are frequently not applied properly. In many 

cases important benefits are excluded, energy efficiency is 

undervalued, and utility customers bear higher costs as a 

result. 

Some of the energy efficiency program impacts are 

difficult to quantify, such as benefits to low-income 

customers, and are often ignored altogether. Other energy 

efficiency program impacts are uncertain, such as the cost 

of compliance with future climate change requirements, 

and are often understated or ignored altogether.

This report briefly describes the current state of 

energy efficiency cost-effectiveness analyses and makes 

recommendations for how to fill in the missing pieces. 

We focus on two key issues: accounting for other program 

impacts (OPIs) and accounting for the cost of compliance 

with environmental regulations. 

We use the term “other program impacts” to describe 

what are commonly referred to as non-energy impacts 

(NEIs) or non-energy benefits (NEBs). OPIs are those costs 

and benefits that are not part of the cost, or the avoided 

1. Introduction

cost, of energy provided by the utility funding the efficiency 

program. In addition to NEIs, OPIs also include “other 

fuel savings,” which are the savings of fuels that are not 

provided by the utility that funds the efficiency program. 

For efficiency programs that are funded by electric utilities, 

the other fuels would primarily include gas, oil, propane, 

and wood. These other fuel savings are typically included 

in non-energy impacts, even though they actually involve 

energy savings. We use the term OPIs to refer to both 

NEIs and other fuel savings. OPIs can include both other 

program benefits and other program costs.

One of the premises underlying this report is that energy 

efficiency program administrators should implement all 

cost-effective energy efficiency, and therefore it is critical 

that the cost-effectiveness tests be properly designed and 

implemented. Another is that regulatory commissioners, 

consumer advocates, and other key energy efficiency 

stakeholders need to have confidence that the design 

and application of the energy efficiency cost-effectiveness 

screening is in the public interest and will result in reduced 

costs to utility customers.

We note that this report was prepared in conjunction 

with a similar report for the National Home Performance 

Council (Synapse, 2012). Some of the analyses, 

conclusions, and recommendations are the same in both 

reports. The purpose of this report is to provide more depth 

on the two issues of OPIs and environmental compliance 

costs.

While a goal of this report is to address these key issues 

related to application of cost-effectiveness tests, it is not 

the goal of this report to address all aspects of costs and 

benefits that may be relevant to one or more tests. 
12

Energy Efficiency Cost-Effectiveness Screening

2.1 Defining the Cost-Effectiveness Tests

The costs and benefits of energy efficiency are 

qualitatively different from those of supplyside resources in that they can have different 

implications for different parties. As a result, five 

cost-effectiveness tests have been developed to consider 

efficiency costs and benefits from different perspectives. 

Each of these tests combines the various costs and 

2. Cost-Effectiveness Tests and Their Uses

benefits of energy efficiency programs in different ways, 

depending upon which costs and which benefits pertain to 

the different parties. These tests are described below and 

summarized in Table 2-1 and Figure 2-1.3

•	 The Societal Cost Test4

 – This test includes the costs 

and benefits experienced by all members of society. The 

costs include all of the costs incurred by any member 

of society: the program administrator, the customer, 

and anyone else. Similarly, the benefits include all of 

the benefits experienced by any member of society. 

3 These tests are sometimes defined slightly differently by 

different public utility commissions. For comprehensive 

descriptions and discussions of these tests, see CA PUC, 2001 

and NAPEE, 2008.

Table 2-1

Components of the Energy Efficiency Cost-Effectiveness Tests

Participant 

Test

RIM 

Test

PAC

Test

TRC 

Test

Societal 

Cost Test

4 The California Standard Practice Manual (SPM) considers the 

Societal Cost Test to be a variant on the TRC Test (CA PUC, 

2001, p. 18). Many states and studies depart from the SPM by 

drawing a more complete distinction between these two tests.

Energy Efficiency Program Benefits 

Customer Bill Savings X — — — —

Avoided Energy Costs — X X X X

Avoided Capacity Costs — X X X X

Avoided Transmission and Distribution Costs — X X X X

Wholesale Market Price Suppression Effects — X X X —

Avoided Cost of Environmental Compliance — X X X X

Other Program Impacts (Utility Perspective) — — X X X

Other Program Impacts (Participant Perspective) X — — X X

Other Program Impacts (Societal Perspective) — — — — X

Energy Efficiency Program Costs 

Program Administrator Costs — X X X X

EE Measure Cost: Program Financial Incentive — X X X X

EE Measure Cost: Participant Contribution X — — X X

Non-Energy Costs X — X X X

Lost Revenues to the Utility — X — — —
13

Energy Efficiency Cost-Effectiveness Screening

The costs and benefits are the same 

as for the TRC Test, except that they 

also include externalities, such as 

environmental costs and reduced costs 

for government services. The Societal 

Cost Test also includes the use of a 

lower societal discount rate. 

•	 The Total Resource Cost (TRC) Test

– This test includes the costs and benefits experienced by all utility customers, including both program participants 

and non-participants. The costs include 

all the costs incurred by the program 

administrator, plus all the costs incurred 

by the customers. The benefits include 

all the avoided utility costs, plus any 

OPIs experienced by the participating 

customers, such as avoided water costs, 

other fuel savings, reduced O&M costs, 

improved productivity in school and 

at work, improved sales for businesses 

with improved aesthetics, improved 

comfort levels, health and safety benefits, and more. 

•	 The Program Administrator Cost 

(PAC) Test5

 – This test includes the 

energy costs and benefits that are 

experienced by the energy efficiency 

program administrator. The costs 

include all expenditures by the 

program administrator to design, plan, 

administer, deliver, monitor, and evaluate efficiency 

programs offset by any revenue from the sale of freedup energy supply. The benefits include all the avoided 

utility costs, including avoided energy costs, avoided 

capacity costs, avoided transmission and distribution 

costs, and any other costs incurred by the utility to 

provide electric services (or gas services in the case of 

gas energy efficiency programs).

•	 The Participant Test – This test includes the 

costs and benefits experienced by the customer 

who participates in the efficiency program. The 

costs include all the direct expenses incurred by the 

customer to purchase, install, and operate an efficiency 

measure. The benefits include the reduction in the 

customer’s electricity bills, any financial incentive paid 

Figure 2-1

Scope of the Societal Cost, TRC, and PAC Tests

Costs

5 This is sometimes referred to as the Utility Cost Test or the 

Energy System Test.

6 Throughout this analysis we use the term “program 

administrator” to refer to the entity that implements energy 

efficiency programs, whether it be a vertically integrated 

utility, a distribution utility, or a third-party administrator.

7 This has previously been referred to as the Non-Participant 

Test and the No-Losers Test.

by the program administrator, and OPIs experienced 

by the participating customer.6

 

•	 The Ratepayer Impact Measure (RIM) Test7

 – This 

test provides an indication of the impact of energy 

efficiency programs on utility rates. The results of 

this test provide an indication of the impact of energy 

Utility Customer

Benefits

Avoided 

emissions and 

other societal 

benefits

Customer 

OPI 

benefits*

Utility 

OPI

Electricity and 

system savings

Customer 

OPI costs†

Measure costs 

and measure 

incentives

Program and 

administration 

costs

*Includes other non-electric fuel and resource benefits, increased comfort, and other 

ultility fuel and resource benefits such as water and natural gas savings. 

†Could include other fuel costs from energy efficiency measures and programs that 

result in additional fuel costs from non-electric initiatives.

Societal Cost test

TRC test

Limited application 

of the TRC test

PAC test

Source: RAP
14

Energy Efficiency Cost-Effectiveness Screening

8 The ACEEE report provides the results of a comprehensive 

survey and assessment of the current “state of the practice” of 

utility-sector energy efficiency program evaluations across the 

50 states and the District of Columbia. The study examines 

many aspects relating to how states conduct their evaluations 

and the key assumptions employed, including the use of 

cost-effectiveness tests (ACEEE, 2012).

9 The 45 jurisdictions include 44 states and the District of 

Columbia. The states that have essentially no formally 

approved utility ratepayer-funded energy efficiency programs 

are Alabama, Alaska, Louisiana, Mississippi, North Dakota, 

and West Virginia (ACEEE, 2012, p. 3). 

10 This is not the case for load management/demand response 

programs or renewable energy programs, where only 67 

percent and 28 percent of states, respectively, report using 

benefit-cost tests for those ratepayer-funded programs 

(ACEEE, 2012, p. 30).

efficiency on those customers who do not participate 

in the energy efficiency programs. The costs include 

all the expenditures by the program administrator, 

plus the “lost revenues” to the utility as a result of the 

inability to recover fixed costs over fewer sales. The 

benefits include the avoided utility costs. 

How the Cost-Effectiveness Tests are 

Being Used Today

A recent survey by the American Council for an EnergyEfficient Economy (ACEEE) provides a useful summary of 

how the cost-effectiveness tests are used across the states.8

 

Nationwide, a total of 45 jurisdictions have some level 

of formally approved ratepayer-funded energy efficiency 

programs in operation.9

 All of these jurisdictions use some 

type of benefit-cost test in connection with their ratepayerfunded energy efficiency programs.10 Most states have some 

type of legal requirement for the use of such tests, either by 

legislation or regulatory order (ACEEE, 2012, p. 30).

Many states examine more than one benefit-cost test. 

The ACEEE survey found that 36 states (85 percent) apply 

the TRC Test; 28 states (63 percent) apply the PAC Test; 

23 states (53 percent) apply the Participant Test; 22 states 

(51 percent) apply the RIM Test; and 17 states (40 percent) 

apply the Societal Cost Test (ACEEE, 2012, p. 12). 

However, regulators tend to adopt one of these tests 

as the primary guideline for screening energy efficiency 

programs. The ACEEE survey found that 95 percent of 

states rely on a single, primary screening test for defining 

energy efficiency cost-effectiveness, as follows:

•	 The TRC Test is used by 29 states (71 percent) as the

primary test for screening efficiency. 

•	 The Societal Cost Test is used by six states (15

percent) as the primary test for screening efficiency.11

•	 The PAC Test is used by five states (12 percent) as the

primary test for screening efficiency.

•	 The RIM Test is used by one state (2 percent) as the

primary test for screening efficiency.12 

Most states (70 percent) apply the cost-effectiveness 

tests, often with exceptions, at both the program and the 

portfolio level. A minority of states (30 percent) apply the 

cost-effectiveness tests at the measure level (ACEEE, 2012, 

p. 5). 

2.2 Implications of the 

Cost-Effectiveness Tests

In theory, all of the cost-effectiveness tests should be 

considered in the evaluation of ratepayer-funded energy 

efficiency resources to provide the most complete picture 

of the impacts on different parties. This approach is rarely 

used in practice, however, due to the challenges of working 

with multiple tests showing different results. Most states 

rely upon one or two tests as the primary standard for 

screening energy efficiency programs.

Also, it is important to recognize that the different tests 

provide different types of information and should be used 

for different purposes. The RIM Test and the Participant 

11 Note that, while only six states were identified as using the 

Societal Cost Test for screening energy efficiency programs, 

a larger number of states include environmental impacts 

in their resource planning and siting practices in general. 

A 2001 study found that a majority of states include 

environmental protection in certification and citing decisions 

by regulatory commissions, and 16 state commissions have 

general authority or responsibility to consider environmental 

matters in regulatory decisions (Dworkin et. al., 2001). 

Several states also require electric and gas utilities to account 

for environmental impacts in their integrated resource plans.

12 Shortly after ACEEE published its findings, the one state 

using the RIM test as the primary test (Virginia) enacted a 

new law providing that a program or portfolio of programs 

“shall not be rejected solely based on the results of a single 

test” (see Code of Virginia, C. 821, §§ 56-576 (Approved 

April 18, 2012)). The practical impact of this new law on 

efficiency screening in Virginia is not yet clear.
15

Energy Efficiency Cost-Effectiveness Screening

Test provide “distributional” information, that is, 

information regarding how the impacts of energy efficiency 

are distributed across customers. In particular, the RIM Test 

provides an indication of the primary impacts of energy 

efficiency on those customers who do not participate in the 

energy efficiency programs, because the main impacts on 

these customers are the adjustments in rates resulting from 

energy efficiency. The Participant Test, on the other hand, 

provides an indication of the primary impact of energy 

efficiency on the program participants. These two tests 

together provide a rough indication of how the benefits 

are distributed between program participants and nonparticipants.

In the paragraphs that follow we summarize some of the 

key implications of each of the five cost-effectiveness tests. 

Table 2-2 summarizes some of the key points. In Appendix 

A, we provide some additional detail about the important 

differences between the cost-effectiveness tests, with some 

clarifications regarding the differences between the PAC, 

13 The name of this test is misleading, because it does not 

include “total” costs of an energy efficiency resource. A more 

accurate and descriptive name for this test would be the 

All Customers Test, because it includes the total costs and 

benefits to all customers.

the TRC, and the Societal Cost Tests. 

The Societal Cost Test is the most comprehensive 

standard for evaluating the cost-effectiveness of efficiency, 

because this is the only test that includes all benefits 

and costs to all members of society. Ideally, the Societal 

Cost Test should include all costs and benefits, including 

externalities, regardless of who experiences them. 

The TRC Test is the next most comprehensive standard 

for evaluating the cost-effectiveness of energy efficiency 

by including all the impacts to the program administrator 

and its customers.13 It offers the advantage of including the 

full incremental cost of the efficiency measure, regardless 

of which portion of that cost is paid for by the utility and 

Table 2-2

Implications of the Five Principal Cost-Effectiveness Tests

Test

Societal Cost

Total Resource 

Cost

Program 

Administrator 

Cost

Participant 

Rate Impact 

Measure

Key Question Answered

Will total costs to 

society decrease?

Will utility costs and 

program participants’ 

costs decrease?

Will utility costs 

decrease?

Will program 

participants’ costs 

decrease?

Will utility rates 

decrease?

Summary Approach

Includes the costs and benefits 

experienced by all members of 

society

Includes the costs and benefits 

experienced by all utility customers, 

including energy efficiency program 

participants and non-participants

Includes the costs and benefits 

experienced by the energy 

efficiency program administrator

Includes the costs and benefits 

experienced by the customer 

who participates in the efficiency 

program

Includes the costs and benefits that 

will affect utility rates, including 

program administrator costs and 

benefits as well as lost revenues

Implications

Most comprehensive comparison 

Includes the full incremental costs 

and benefits of the efficiency measure, 

including participant and utility costs 

and benefits 

Limited to impacts on utility revenue 

requirements; indicates net impact on 

utility costs and utility bills

Provides distributional information; 

useful in program design to improve 

participation; of limited use for costeffectiveness screening

Provides distributional information; 

useful in program design to find 

opportunities for broadening 

programs; should not be used for costeffectiveness screening

Adapted from NAPEE, 2008, p. 2-2, with modifications.
16

Energy Efficiency Cost-Effectiveness Screening

14 The name of this test is a little misleading, because it 

does not include the costs and benefits to the program 

administrator itself (e.g., utility profits). A more descriptive 

name for this test would be the Revenue Requirements Test.

15 Note that in those jurisdictions where utilities are not 

allowed to collect lost revenues and do not have decoupling, 

this transfer payment is actually between the utility 

shareholders and program participants for the years in 

between rate cases.

which portion is paid for by the customer. In practice, 

however, the TRC Test is frequently misapplied. Many 

states that use the TRC Test do not include all of the costs 

and benefits to customers, in particular the non-energy 

costs and benefits. Applying the TRC Test in this way skews 

cost-effectiveness results, typically skewed against energy 

efficiency. This issue is discussed in detail in Section 3.

The PAC Test is more restrictive than the TRC Test 

in that it only compares the program administrator costs 

to the costs of avoided supply-side resources. One way 

to think of this test is that it is limited to the impacts that 

would eventually be charged to all customers through the 

revenue requirements; the costs being those costs passed on 

to ratepayers for implementing the efficiency programs, and 

the benefits being the supply-side costs that are avoided 

and not passed on to ratepayers as a result of the efficiency 

programs.14 This test is most consistent with the way that 

utilities typically evaluate the cost-effectiveness of supplyside resources. The PAC Test, however, does not include 

several significant impacts that have important public 

policy implications and are important in planning energy 

efficiency programs, most notably other fuel savings, other 

resource savings (e.g., water), and improved health and 

safety.

The Participant Test is fundamentally different from 

the other tests in that it limits benefits to customer bill 

savings as the primary benefit of the programs. Customer 

rates are typically higher than the marginal avoided costs 

of the energy system, leading to higher energy efficiency 

benefits per unit of energy saved. Also, the only costs in 

this test are the customer costs, which in many cases are 

lower than the costs incurred by the program administrator 

to plan, design, and deliver the energy efficiency programs. 

Consequently, this test is typically the least restrictive 

of all the cost-effectiveness tests. As noted, it provides 

an indication of the distributional effects of the energy 

efficiency program, along with the RIM Test, and may be 

useful in optimizing program design for participation.

It is important to note that there are additional benefits 

of energy efficiency that accrue to the utility system as 

a whole that are not necessarily captured in the benefits 

listed earlier. Energy efficiency offers significant benefits 

in terms of reducing risk (e.g., the risks associated with 

fossil fuels and the risks inherent in load forecasting), as 

well as benefits in terms of improving the overall reliability 

of the utility system (e.g., by reducing peak demand 

and by slowing the rate of growth of peak demand). A 

comprehensive assessment of energy efficiency resources 

should include these benefits in all of the cost-effectiveness 

tests described previously. 

The Rate Impact Measure Test tends to be the most 

restrictive of all the efficiency tests, because the utility lost 

revenues can make very large contributions to the energy 

efficiency program costs. Most, if not all, states have ruled 

that the RIM Test should not be used as the primary test 

for evaluating energy efficiency cost-effectiveness. There are 

several reasons for this.

•	 Applying the RIM Test to screen efficiency programs

will not result in the lowest cost to society or the 

lowest cost to customers on average. Instead it 

will lead to the lowest rates (all else being equal). 

Achieving the lowest rates is not the primary goal of 

utility planning and regulation, however, especially 

if lower rates lead to higher costs to customers on 

average.

•	 The RIM Test is heavily influenced by the lost

revenues to the utility. Lost revenues are not a true 

cost to society, however. Lost revenues represent 

a “transfer payment” between efficiency program 

participants and non-participants; the bill savings to 

the program participants result in the lost revenues 

that are collected from all customers, including 

non-participants.15 In this way, lost revenues are 

not a new or an incremental cost in the same way 

that the program administration costs are a new and 

incremental cost of implementing energy efficiency 

programs, and they should not be applied as such in 

screening a new energy efficiency resource. 

•	 A strict application of the RIM Test can result in

the rejection of large amounts of energy savings 

and the opportunity for large reductions in many 
17

Energy Efficiency Cost-Effectiveness Screening

16 It is important to note that all customers benefit from 

energy efficiency programs in certain ways, regardless of 

whether they participate in the programs. For example, all 

customers will experience reduced risk, improved reliability, 

reduced transmission and distribution costs, reduced costs of 

environmental compliance, reduced environmental impacts, 

and the benefits of price suppression effects in wholesale 

electric markets.

17 For additional information regarding the management of rate 

and bill impacts, see US DOE, 2011.

customers’ bills in order to avoid what are often small 

impacts on non-participants’ bills. From a public 

policy perspective, such a trade-off is illogical and 

inappropriate.

•	 The RIM Test does not provide useful information

about what happens to rates as a result of program 

implementation. A RIM Test benefit-cost ratio of 

less than one indicates that rates will increase (all 

else being equal), but says little to nothing about the 

magnitude of the rate impact. And it says nothing at 

all about the amount of cost savings associated with 

the energy efficiency program.

•	 Screening efficiency programs with the RIM Test is

inconsistent with the way that supply-side resources 

are screened, and creates an uneven playing field 

for the consideration of supply- and demand-side 

resources. There are many instances in which utilities 

invest in new power plants or transmission and 

distribution facilities in order to meet the needs of a 

subset of customers (e.g., new residential divisions, 

an expanding industrial base, geographically-based 

upgrades). These supply-side resources are not 

evaluated on the basis of their equity effects, nor are 

the “non-participants” seen as cross-subsidizing the 

“participants.” 

Nonetheless, efficiency programs can lead to increased 

rates, and rate impacts are an important consideration for 

regulators and other efficiency stakeholders. It is important 

to recognize, however, that the rate impacts of energy 

efficiency programs are not a matter of cost-effectiveness. 

(As noted previously, the lost revenues are simply a transfer 

payment and do not represent an incremental cost.) 

Instead, they are a matter of customer equity between 

program participants who experience reduced bills and 

non-participants who experience increased rates and 

therefore increased bills.16 

The RIM Test therefore should not be used in screening 

energy efficiency programs for cost-effectiveness. Instead, 

efficiency program administrators should take steps to (1) 

analyze rate and bill impacts in a fashion that provides 

much more information than what is available from the 

RIM Test; (2) design programs in a way that mitigates rate 

impacts without sacrificing energy efficiency savings; and 

(3) work to increase the number of program participants so 

as to mitigate the equity concerns between participants and 

non-participants.17

2.3 Considerations in Applying the 

Cost-Effectiveness Tests

Which Test to Use as the Primary Test?

The decision of which cost-effectiveness test to use for 

screening efficiency programs has been a matter of debate 

since the introduction of energy efficiency programs, 

and continues to be a subject of debate today (Neme & 

Kushler, 2010; CA PUC, 2012b). This decision requires 

consideration of several factors, including economic factors 

and public policy issues. Below we describe the key issues 

to consider in making this decision.

First is the question of scope. Although the costeffectiveness tests are frequently described as pertaining to 

different perspectives, another way to distinguish them is 

that they vary by the scope of the impacts to be accounted 

for. If the scope of the test is to be limited to revenue 

requirements, then the PAC Test is most appropriate. If 

the scope of the test is to include the total incremental 

impacts of the efficiency measure on all customers, then 

the TRC Test is most appropriate. If the scope of the test is 

to include all impacts to society, then the Societal Cost Test 

is most appropriate. The decision of which scope to use is 

a policy decision that will need to balance several public 

policy considerations, discussed subsequently.

The Societal Cost Test is the most comprehensive test, 

and is most appropriate for those states that wish to give 

consideration to the societal benefits of energy efficiency 

programs, particularly the environmental and health 

benefits. The disadvantages of this test are that some 

stakeholders may view the scope as outside the interests 

and jurisdiction of regulatory commissions; some of the 

societal impacts are uncertain and difficult to forecast; and 

this test might lead to undesirable cost impacts on utility 

customers.
18

Energy Efficiency Cost-Effectiveness Screening

The TRC Test is the next most comprehensive test and 

is the most widely used test. Regulators and legislators are 

apparently drawn to this test because it includes the total 

incremental impacts of efficiency measures. The TRC Test 

creates a dilemma for policymakers, however. In order 

to be internally consistent, the test must include OPIs on 

the program participants, but regulators are often wary of 

doing so because some of the benefits are uncertain and 

difficult to quantify. In addition, including OPIs in the TRC 

test is likely to expand the universe of efficiency resources 

that are deemed cost-effective and may lead to increased 

energy efficiency budgets, or a more expensive mix of 

efficiency measures. Properly accounting for OPIs in the 

TRC test may burden utility customers with higher-cost 

efficiency measures in order to achieve benefits that are not 

related to utility services.

The PAC Test is most appropriate for those states that 

want to limit the energy efficiency cost-effectiveness 

analysis to the impacts on revenue requirements. There 

are many advantages to this test: it is consistent with the 

way that supply-side investments are frequently evaluated; 

it includes costs that are relatively easy to identify and 

quantify; and it includes the energy costs and energy 

benefits that are most important to utility ratepayers. 

Probably the most important benefit of the PAC Test is that 

it provides legislators, regulators, consumer advocates, and 

others with confidence that the energy efficiency programs 

will result in lower costs to utility customers. This is an 

extremely important consideration, particularly for those 

states that seek to implement all cost-effective energy 

efficiency resources.

Relying on the PAC Test has one significant disadvantage, 

however, in that the costs and benefits to energy efficiency 

program participants are not taken into consideration. 

There are two implications of this. First, by not including 

the participant’s cost, the PAC Test does not include the 

full incremental cost of efficiency measures, which may be 

important to policymakers. Second, the PAC Test does not 

include the other program benefits of efficiency measures, 

some of which are clearly important to policymakers. The 

other program benefits that are typically most important 

to regulators are (1) benefits that pertain to low-income 

customers, due to the significant public policy implications 

of this sector; and (2) other fuel savings, as these savings 

are important for promoting comprehensive, whole-house, 

one-stop-shopping residential retrofit programs, as well as 

new construction programs where customers tend to use 

multiple fuels. In Section 4.1 we provide an illustration 

of how these two types of benefits can have a significant 

impact on program cost-effectiveness.

Once the scope is established, it is important to ensure 

that the test being applied includes all of the appropriate 

costs and benefits in a way that is internally consistent. For 

example, when applying the PAC Test, it is important to 

include all the costs and all the benefits that are expected 

to affect utility revenue requirements. Similarly, when 

applying the TRC Test, it is important to include all the 

participant benefits, as well as the participant costs in order 

to maintain internal consistency. Otherwise the test results 

will be skewed and misleading. These issues are discussed 

in more detail in Section 4.1. In addition, it is important to 

ensure that there is no double counting of costs or benefits 

in the test being applied. Finally, it is important to ensure 

that transfer payments are properly accounted for when 

deciding which costs and benefits to include in each test.

To summarize, in choosing the appropriate test to 

use, policymakers must consider and balance several 

key questions. How important is it to include all societal 

impacts, including environmental and health impacts? How 

important is it to include the full incremental cost of the 

efficiency measures? How important is it to include OPIs 

and the associated public policy benefits (e.g., low-income 

benefits, other fuel savings)? How important is it to ensure 

that utility revenue requirements are minimized?

At What Level Should the Screening be 

Performed?

Cost-effectiveness tests for energy efficiency resources 

can be applied at different levels of detail. In general, 

there are three levels to evaluate cost-effectiveness when 

planning energy efficiency programs: the “measure” level, 

the “program” level, and the “portfolio” level. Evaluating 

cost-effectiveness at the measure level means that each 

individual component (i.e., measure, equipment, or other 

action) of an efficiency program must be cost-effective. 

Evaluation at the program level means that collectively 

the measures within a program must be cost-effective, but 

some measures might not be if there are other measures 

that more than make up for them. (There must, however, 

be sound reasons for including measures that do not 

screen, such as sound program design.) Evaluating costeffectiveness at the portfolio level means that all of the 
19

Energy Efficiency Cost-Effectiveness Screening

programs taken together must be cost-effective, but some 

programs might not be. (Here too, there must be sound 

reasons for including programs that are not cost-effective 

on their own.)

We note that there is an important distinction between 

analyzing energy efficiency resources and screening them. 

Analyzing includes comparing the costs and benefits for 

the purpose of understanding the broad economic impact, 

whereas screening includes making a decision as to which 

programs should be implemented through ratepayerfunded programs and which should be redesigned or not 

funded.

We recommend that all energy efficiency resources be 

analyzed at the measure level. This is important so that 

the energy efficiency assessment can (1) be based on the 

most detailed level of information; (2) provide the greatest 

transparency for regulators and other stakeholders; and 

(3) allow program administrators and other stakeholders 

the ability to consider the implications of energy efficiency 

resources at the greatest level of detail.

Efficiency resources, however, do not need to be 

screened at the same level at which they are analyzed. We 

recommend that energy efficiency resources be screened 

at the program level. In theory, measure-level screening 

offers the advantage of ensuring that every component of 

the efficiency program will result in net benefits, and that 

programs will not include measures that are exorbitantly 

expensive or uneconomic. In practice, however, these 

advantages can be outweighed by several benefits 

associated with program-level screening.

Program level screening allows for program 

administrators to account for the interactive effects 

between efficiency measures, including the fact that 

some measures may be uneconomic but may have a big 

impact on encouraging customers to participate in the 

program or to adopt other, more cost-effective measures 

in the program. Program-level screening also allows for 

comprehensive, whole-house or whole-building energy 

efficiency improvements, which may be important to 

customers, program administrators, or other stakeholders. 

Additionally, program-level screening helps prevent lost 

opportunities by allowing program administrators to 

implement all appropriate energy efficiency measures while 

they are engaging with program participants (Synapse, 

2012).

Allowing for program-level screening does not mean that 

program administrators should be allowed to implement 

efficiency measures that are clearly not cost-effective. 

Program administrators should be encouraged to include 

in their programs only those efficiency measures that are 

cost-effective, unless there are marginally uneconomic 

measures that are appropriate to include in a program 

because of their ability to promote customer participation, 

their interactive effects with other measures, their ability to 

promote comprehensive efficiency solutions, or their ability 

to avoid lost opportunities. 

2.4 Recommendations for Applying 

the Tests

With all of these considerations in mind, we offer the 

following recommendations.

First, we note that ideally all three tests, the broader 

Societal Cost Test and TRC Test, as well as the PAC Test, 

should be considered when assessing energy efficiency 

cost effectiveness. We recognize, however, that this still 

leaves the ultimate question of which test results to use 

in determining the programs to implement, and that in 

practice it is more common and straightforward to use a 

single, primary test to answer this ultimate question. Our 

recommendations below include a primary test applied 

at the program level, but a secondary test applied at the 

portfolio level. This approach offers the benefits of both 

breadth and simplicity.

We recommend that the Societal Cost Test be used to 

screen energy efficiency programs, for all those states that 

have the authority to account for the societal impacts of 

efficiency programs. This test includes the broadest range 

of energy efficiency costs and benefits, and provides the 

best measure of the public policy benefits that are of great 

importance to legislators and regulators, such as lowincome benefits, other fuel savings, and environmental 

benefits. Many of the concerns about quantifying the 

societal impacts can be addressed through rigorous analysis 

or sound public policy decision-making.

We recommend that all states that do not use the 

Societal Cost Test use the TRC Test to screen energy 

efficiency programs at the program level, and that this test 

should include OPIs to the greatest extent possible. At a 

minimum, the TRC Test should include the OPIs associated 

with low-income programs and with other fuel savings. Not 

accounting for OPIs will result in a biased application of 
20

Energy Efficiency Cost-Effectiveness Screening

the test, leading to undervaluing of energy efficiency and 

higher costs for customers. 

When evaluating ratepayer-funded energy efficiency 

programs with either the Societal Cost Test or the TRC Test, 

however, it is important to consider potential bill impacts 

and customer equity concerns. Properly accounting for 

OPIs and the associated public policy benefits may increase 

the universe of efficiency measures that are deemed costeffective. This may lead to increased energy efficiency 

budgets, or in the case of limited efficiency budgets, it may 

result in the adoption of a different, more expensive mix 

of efficiency measures. In addition, properly accounting 

for OPIs and the associated public policy benefits may 

be seen as burdening utility customers with costs for 

achieving benefits that are not related to utility services. 

This is a critical consideration, particularly for states that 

are pursuing aggressive levels of energy efficiency savings or 

pursuing all cost-effective energy efficiency. 

To address these equity concerns, we recommend that 

the PAC Test be applied, at a minimum, to the portfolio 

of efficiency programs to ensure that the entire package 

of programs will result in a net reduction in revenue 

requirements and a net reduction in costs to utility 

customers. The PAC test includes only those costs and 

benefits that affect utility revenue requirements, and thus 

provides a clear indication of potential impacts on customer 

bills. Under this approach, either the Societal Cost Test or 

the TRC Test would be the primary test for screening each 

energy efficiency program. Programs that do not pass the 

primary test would not be considered cost-effective and 

not be included in the efficiency portfolio. Then, the PAC 

Test would be applied, at a minimum, to the portfolio of 

programs that do pass the primary test. If the portfolio of 

programs does not pass the PAC Test, then one or more of 

the programs would need to be modified in such a way that 

the entire portfolio eventually passes the PAC Test. More 

granular ratepayer equity concerns can be addressed at the 

measure or program level by applying the PAC Test review 

at those levels in program design.

This combined screening approach should be simple 

to apply because it would rely upon a single, primary 

test (either the Societal Cost Test or the TRC Test) for 

screening at the program level, and a secondary test (the 

PAC Test) that would be applied as a check on behalf of 

utility customers. Regulators and other stakeholders could 

use the results of the portfolio-level PAC Test (expressed 

as millions of dollars in net reductions in utility costs) to 

assess the overall value of the efficiency portfolio to utility 

customers as a whole. Applying the tests in this manner 

helps regulators and other stakeholders ensure that public 

policy objectives for acquisition of cost-effective energy 

efficiency also result in a net reduction in utility costs to 

utility customers. 

We note that good judgment should always be applied 

at all levels of cost-effectiveness screening. This should 

apply at all levels of screening using both the TRC and the 

PAC Tests. Program administrators should design programs 

to ensure that on a portfolio basis the PAC net benefits 

are significant relative to the PAC costs (i.e., that the PAC 

benefit-cost ratio is significantly greater than one).
21

Energy Efficiency Cost-Effectiveness Screening

3. Other Program Impacts

3.1 Description of Other Program 

Impacts

OPIs are those costs and benefits that are not 

part of the cost, or the avoided cost, of energy. 

There is a wide range of OPIs associated 

with energy efficiency programs. OPIs are 

categorized by the perspective of the party that experiences 

the impact: the utility, the participant, or society at large.

Below we present a summary of the OPIs that have been 

identified for inclusion in cost-effectiveness tests. This list 

is not intended to be all-inclusive; instead it presents those 

OPIs that are most frequently cited in the literature and are 

expected to have a significant impact on energy efficiency 

program cost-effectiveness.

Utility-Perspective OPIs

Utility-perspective OPIs are indirect costs or savings to 

the utility and its ratepayers. These OPIs can be further 

divided into the following subcategories. 

•	 Financial and accounting: From the utility 

perspective, a number of NEBs are realized from 

efficiency program implementation in the form of 

financial savings. Energy-efficient technologies often 

result in reduced energy bills for participants, which 

can decrease the likelihood that customers experience 

difficulties with paying their utility bills. In turn, 

utilities realize financial savings through reduced 

costs associated with events such as arrearages and 

late payments (NMR, 2011, p. 4-1). These NEBs are 

often separately identified as the following: reduced 

arrearages, reduced carrying costs on arrearages 

(interest), reduced bad debt written off, and rate 

discounts (NMR, 2011; Hall, 2002).

•	 Customer service: Timely customer bill payments can 

result in fewer customer calls, late payment notices, 

shut-off notices, terminations, reconnections, and other 

collection activities. The utility realizes savings in staff 

time and materials (NMR, 2011, p. 4 11).

•	 Safety: Utilities may realize savings from their efficiency programs due to a reduction in safety-related emergency calls and insurance costs due to reduced fires 

and other emergencies (NMR, 2011, pp. 4-1, 4-15).

Participant-Perspective OPIs

Participants in energy efficiency programs can realize a 

variety of OPIs (NMR, 2011, pp. 2-6, 5-1). Most of these 

participant-perspective OPIs are relevant to both lowincome and non-low-income customers. Some of these 

OPIs, however, may have significantly greater value for 

low-income customers than for non-low-income customers. 

Participant-perspective OPIs can be divided into the 

following categories:

•	 Resource savings: Energy efficiency can result in 

reduced water and/or sewage costs. Resource savings 

can also include heat (or lack thereof) generated by 

efficient equipment, as well as other fuel savings or 

costs (NMR, 2011; SERA, 2010).

•	 Equipment cost and performance: Participants 

often experience efficient equipment performing 

better than previous equipment or inefficient 

equipment, resulting in reduced (or increased) 

maintenance costs, improved lighting quality, and so 

on (NMR, 2011, pp. 5-13–5-15; SERA, 2010).

•	 Health and safety: Energy efficiency programs 

may have direct impacts on health through 

improved home environments, reduced exposure to 

hypothermia or hyperthermia – particularly during 

heat waves and cold spells – improved indoor air 

quality, and potential reductions in moisture and 

mold, leading to amelioration of asthma triggers and 

other respiratory ailments. Reduced incidence of fire 

and carbon monoxide exposure are also commonly 

identified as safety-related benefits resulting from 
22

Energy Efficiency Cost-Effectiveness Screening

weatherization. Safety is also improved from better, 

more durable lighting equipment (NMR, 2011, pp. 

5-30–5-34; SERA, 2010; NZ EEAC, 2012).

•	 Comfort: Participants in energy efficiency 

programs commonly experience greater perceived 

comfort, either due to fewer drafts and more steady 

temperatures with HVAC equipment or reduced noise 

from better equipment. Improved (or worsened) 

aesthetics can also be considered a comfort NEI 

(NMR, 2011, p. 5-9; SERA, 2010).

•	 Reduced costs for businesses: There are a variety 

of OPIs that pertain to commercial and industrial 

customers, including reductions in O&M costs, 

administration costs, materials handling, other 

labor costs, spoilage/defects, water usage, and waste 

disposal (Tetra Tech, 2012, p. 3-9).

•	 Economic stability: Low-income households spend 

a disproportionate amount of their income on energy 

costs when compared to the population at large. 

Reducing energy costs decreases rates of mobility 

among low-income households, and allows income to 

be made available for other uses, such as healthcare 

(NMR, 2011, p. 5-19; SERA, 2010).

•	 Improved productivity: Improvements in comfort 

and lighting can result in increased worker and 

student productivity. Health and safety benefits can 

result in reduced student and worker sick days (NZ 

EECA, 2012).

•	 Increased sales revenues: Customer serviceoriented businesses can increase sales as a result of 

improved aesthetics and improved comfort levels in 

stores (Tetra Tech, 2012, p. 3-9).

• Property value: Increased property value is frequently 

recognized as a non-energy benefit associated with 

program participation. The benefit of increased property value has been estimated through the value of 

anticipated ease of selling or renting, or in some cases, 

increased resale or rental value. The improved durability and reduced maintenance for the home is also 

taken into consideration (NMR, 2011, p. 5-16; SERA, 

2010).18

•	 Benefits for owners of low-income rental 

housing:19 Owners of low-income rental properties 

can experience NEBs such as marketability/ease of 

finding renters, reduced tenant turnover, property 

value increases, reduced equipment maintenance for 

heating and cooling systems, reduced maintenance for 

lighting, greater durability of property, and reduced 

tenant complaints (NMR, 2011, pp. 1-8, 7-1).

•	 Utility-related benefits: Just as utilities incur costs 

associated with making bill-related calls to paymenttroubled participants or service terminations and 

reconnections, participants also incur opportunity 

costs of time spent addressing utility billing issues. 

Participants are impacted through reduced bill-related 

calls to utilities, greater control over their utility bills, 

reduced termination and reconnections, reduced 

transaction costs, and buffers against energy price 

increases (NMR, 2011, p. 5-45; SERA, 2010; Hall and 

Riggert, 2002).

Societal-Perspective OPIs

Societal-perspective OPIs are indirect program effects 

that accrue to society at large beyond those realized by 

utilities, their ratepayers, or program participants (SERA, 

2010, p. 2). These OPIs can be further divided into the 

following subcategories.

•	 Environmental impacts: Electricity generation can 

have a variety of environmental impacts, including 

emissions of GHGs, SO2, NOX, particulates, and air 

toxics; emissions of solid wastes; consumption of 

water; land use; mining impacts; aesthetic impacts, 

and more. By reducing the need to generate, transmit, 

and distribute electricity, energy efficiency can result 

in a variety of significant environmental benefits that 

will accrue to society as a whole (NMR, 2011, p. 6-1; 

SERA, 2010). 

18 Although increased property value is frequently cited as a 

significant benefit of home energy retrofit programs, some 

parties argue that the increased property value is primarily a 

function of the reduced utility bills and that to include both 

would be double-counting. We include this item in our list 

in order to be comprehensive, but caution that the property 

value NEI should include only those changes in property 

value that are not accounted for in the other categories of 

energy efficiency benefits. Also, from a societal perspective, 

increases to property value may be a benefit to owners but a 

cost to buyers and renters. 

19 It is important to ensure that any impacts included in this 

category are not double counting the impacts in other 

categories listed here (e.g., reduced maintenance, increased 

property value).
23

Energy Efficiency Cost-Effectiveness Screening

•	 Healthcare: To the extent that energy efficiency 

programs can improve health and reduce healthcare 

costs, they provide a benefit to society. Examples 

include reduced hospitalization and visits to doctors 

due to reduced incidences of illness or reduced 

incidence rates of chronic conditions (NMR, 2011, 

pp. 6-3, 6-4; SERA, 2010; NZ EEAC, 2012). 

Healthcare costs can fall on individuals, insurance 

providers (which are generally passed to individuals 

through higher premiums), or taxpayers. 

•	 Economic development: Efficiency programs can 

impact economic conditions such as employment, 

tax revenues, earnings, and economic output (NMR, 

2011, pp. 6 1–6-4; SERA, 2010). Energy efficiency 

can offer significant benefits in terms of creating jobs, 

even relative to alternative supply-side resources. 

These employment impacts tend to be particularly 

important to legislators and regulators, as well as 

other efficiency stakeholders. These benefits are rarely 

accounted for in energy efficiency program screening 

practices, however.

•	 Reduced tax burden: Energy efficiency programs 

provided to government facilities, including public 

schools, town halls, libraries, police and fire stations, 

military facilities, and others, will help lower the costs 

of supporting those facilities. These lower costs will 

often translate into lower taxes to the local, state, or 

federal taxpayers.20 

•	 National security: A benefit of efficiency comes 

from reducing the need for energy imports, thereby 

enhancing national security (NMR, 2011, p. 6-6; 

SERA, 2010).

It is important to note that some OPIs can have benefits 

to more than one perspective. For example, reduced billrelated calls save time and money for the utility and the 

participant, or improved health can affect a participant and 

reduce the societal costs of healthcare. 

The decision of whether and how to include OPIs has 

significant implications for the cost-effectiveness of energy 

efficiency programs. The inclusion of OPIs can frequently 

make the difference between a program being cost-effective 

or not.

In theory, the different categories of OPIs should be 

included in those tests in which the relevant costs and 

benefits are applicable. In other words, the Societal Cost 

Test should include the utility-, participant-, and societalperspective OPIs because this test accounts for the impacts 

from all these perspectives; the TRC Test should include the 

utility- and participant-perspective OPIs because this test 

accounts for the impacts on utilities and participants; and 

the PAC Test should include the utility-perspective OPIs 

because this test accounts for the impacts on utilities and 

customer revenue requirements.

3.2 The Rationale for Accounting for 

Other Program Impacts

The primary reason for including OPIs in the costeffectiveness tests is that they provide a more complete 

and balanced indication of the impacts of energy efficiency 

programs on customers. In fact, including OPIs in the 

cost-effectiveness tests is necessary to ensure that the tests 

are internally consistent. The whole premise of the tests is 

to assess the costs and benefits from different perspectives 

so that regulators and other stakeholders can consider the 

implications of the programs from those perspectives. If any 

one test includes some of the costs (or benefits) from one 

perspective, but excludes some of the costs (or benefits) 

from that same perspective, then the test results will be 

skewed (i.e., they will not provide an accurate indication 

of cost-effectiveness from that perspective). Test results that 

are skewed are misleading at best, and could lead program 

administrators to significantly underinvest or overinvest in 

energy efficiency. In some cases, the test results could be 

skewed so much as to render them meaningless.

This is especially important in the application of the 

TRC Test.21 By definition, the TRC Test includes the 

participant’s cost of the energy efficiency measure. In 

some cases, this cost can be quite large. In order for this 

test to be internally consistent, it must also include the 

participant benefits associated with the energy efficiency 

measure, including other program benefits. Excluding 

the participant-perspective OPIs from the TRC Test will 

20 The reduced bills from energy efficiency programs are 

already accounted for in the participant’s benefits. Energy 

efficiency at government facilities, however, can help to 

reduce taxes, which can provide incremental benefits to 

society.

21 This is also important for the Societal Cost Test. Here we 

focus on the TRC Test because of its widespread use.
24

Energy Efficiency Cost-Effectiveness Screening

provide cost-effectiveness results that are skewed against 

energy efficiency. This results in underinvestment in energy 

efficiency programs and will result in higher costs for all 

customers on average.

A second reason for including OPIs in the costeffectiveness tests is that they help achieve important 

public policy goals. Achieving other fuel savings, 

improving health and safety for low-income customers, 

and reducing O&M costs for struggling businesses are all 

public policy objectives that are important to regulators 

and other stakeholders. In addition, accounting for OPIs 

helps to support more comprehensive, whole-building 

programs and to offer a more diverse set of efficiency 

measures to a broader range of customers. This promotes 

greater customer equity, both within sectors and between 

sectors, which is clearly an important public policy goal of 

regulators.

A third reason for including OPIs in the costeffectiveness tests is that they often play an important role 

in customers choosing to implement energy efficiency 

measures. Customers will frequently adopt efficiency 

measures because of the resulting improvements to 

comfort, improved aesthetics, reduced O&M costs, 

improved quality of energy services, and more. Sometimes 

these benefits are more important to customers than the 

reductions in their energy bills. This indicates that these 

OPIs are of significant magnitude and should not be 

ignored in assessing the full costs and benefits of the energy 

efficiency programs.

Regulators and other stakeholders, however, may 

understandably be concerned that including OPIs when 

screening energy efficiency programs is too comprehensive. 

Including OPIs in the TRC Test is likely to expand the 

universe of efficiency resources that are deemed costeffective and may lead to increased energy efficiency 

budgets to support increased numbers of measures, or they 

may lead to a more expensive mix of efficiency measures 

for those program administrators with fixed budgets. In 

addition, properly accounting for OPIs in the TRC Test 

may burden utility customers with higher-cost efficiency 

measures in order to achieve benefits that are not related 

to utility services. These concerns are very important 

and should be addressed when deciding which costeffectiveness tests to apply and how to apply them. We 

recommend that these concerns be addressed by applying 

the Societal Cost Test or the TRC Test when screening 

efficiency at the program level, and then applying the 

PAC Test at the portfolio level as a check on whether the 

impacts on utility costs are appropriate. We discuss this 

recommendation in more detail in Section 2.4.

It is important to recognize that the issue of scope (i.e., 

whether to include impacts on participants) arises at the 

point when a commission (or legislature) decides on which 

test to use as the primary screening test. If the TRC Test 

is chosen as the primary test, then the commission (or 

legislature) is making an explicit or implicit decision to 

include costs to participants that are typically outside the 

scope of regulators’ primary objectives in the same way that 

other program benefits are outside that scope. Once this 

decision is made, the scope is established (i.e., impacts on 

both non-participants and participants); then it is necessary 

to determine how to maintain internal consistency within 

this scope.

Among the participant-perspective OPIs that should be 

included in the TRC Test, there are two types that deserve 

mention at this point: low-income other program benefits 

and other fuel savings. First, these two types of OPIs tend 

to have the biggest impact on the cost-effectiveness of 

certain programs. This is demonstrated in our illustrative 

example below. Second, these two types of OPIs tend to 

support important public policy goals of regulators and 

other stakeholders. Low-income other program benefits 

are vital because they help justify programs that serve an 

important, hard-to-reach, disadvantaged set of customers. 

Other fuel savings are important because they help justify 

comprehensive residential retrofit and residential new 

construction programs that are designed to treat multiple 

fuels in customers’ homes. Consequently we recommend 

that regulators place priority on finding ways to account for 

at least these two participant-perspective OPIs.

3.3 The Application of Other Program 

Impacts Today

As described in Section 2.1, a recent survey by ACEEE 

provides a summary of how the cost-effectiveness tests are 

used across the states. The study finds that, although 36 

states use the TRC Test (which includes participant costs) 

as their primary test, only 12 of those states treat any type 

of participant non-energy benefits as a benefit (ACEEE, 

2012, p. 31).

Of those states that do include non-energy benefits, most 
25

Energy Efficiency Cost-Effectiveness Screening

22 Skumatz Economic Research Associates, Inc. (SERA) recently 

published a paper that provides a comprehensive analysis of 

the “state of the art” in NEIs, and reports on the status and 

recommendations on estimation approaches for low-income 

programs in California (SERA, 2010, p. 1). 

of them were limited to water and other fuel savings. Only 

two states quantify a benefit for participant operation and 

maintenance savings, and no state quantifies benefits for 

things like comfort, health, safety, or improved productivity 

in their primary benefit-cost test (ACEEE, 2012, p. 32).

This survey clearly documents the fundamental 

imbalance in how the TRC Test is often applied today, 

where many states account for the participant costs of 

efficiency measures, but few of them account for the full 

participant benefits. In sum, the majority of states currently 

conduct cost-effectiveness tests that are inherently skewed 

against energy efficiency.

On the other hand, several states have taken steps 

to incorporate OPIs into energy efficiency program 

screening.22 Some of the more interesting regulatory 

approaches are described below.

•	 California: The California Public Utility Commission 

(PUC) requires program administrators to account for 

utility-perspective and participant-perspective NEBs 

when assessing the low-income efficiency programs 

(SERA, 2010, p. 34). The participant-perspective 

NEBs include: water and sewer savings; fewer 

shutoffs; fewer calls to the utility; fewer reconnects; 

property value benefits; fewer fires; reduced moving 

costs; fewer illnesses and lost days from work or 

school; net benefits for comfort and noise; and net 

benefits for additional hardship (CA PUC, 2012b). 

The state hired a consultant to construct a model to 

monetize the low-income NEBs (SERA, 2010, p. 34). 

Historically NEBs have not been applied to the nonlow-income efficiency programs. The PUC is currently 

investigating modifications to its energy efficiency 

cost-effectiveness practices, however, including 

whether to account for NEBs in assessing all programs 

(CA PUC, 2012a, 2012b).

•	 Colorado: The PUC of Colorado requires a 

10-percent adder in TRC Test cost-effectiveness 

calculations to represent non-energy benefits. 

The percentage is applied to the sum of the other 

quantifiable benefits and is used when calculating 

TRC Test values for specific DSM programs and the 

overall portfolio. The Colorado PUC also allows for 

the option of including specific non-energy benefits, 

on a program-by-program basis, when such benefits 

are clearly occurring and can be easily calculated. 

Furthermore, in applying the TRC Test to lowincome DSM programs, the benefits included in the 

calculation are increased by 20 percent to reflect the 

higher level of non-energy benefits that are likely to 

accrue from DSM services to low-income customers 

(CO PUC, 2008, p. 26-27, 43). 

•	 Massachusetts: OPIs that can be quantified 

and monetized are included in cost-effectiveness 

screenings, including reduced operation and 

maintenance, increased health, safety, and comfort, 

increased property value, and others. In 2011 a 

study was prepared for the Massachusetts program 

administrators assessing and monetizing the OPIs 

applicable to the residential and low-income programs 

in the state (NMR, 2011). The results of this study 

have been incorporated into the Massachusetts 

Technical Resource Manual to ensure that all program 

administrators include the same NEI assumptions. 

In 2012 a second study was prepared for the 

Massachusetts program administrators assessing and 

monetizing the OPIs applicable to the commercial and 

industrial programs in the state (Tetra Tech, 2012). 

The results of these studies are discussed in more 

detail in Section 3.4.

•	 New York: Detailed evaluation of OPIs is conducted 

for many or all of the programs in the program 

administrator’s residential, commercial, and industrial 

portfolio. OPIs such as comfort, safety, air quality, 

productivity, and so on are included in regulatory 

cost-effectiveness evaluations for informational 

purposes only, but are not used for specific decisionmaking with respect to cost-effectiveness. Program 

administrators present the benefit-cost results both 

with and without OPIs. Occasionally program 

administrators use a scenario approach in which 

regulators are shown the benefit-cost results including 

zero OPIs, 50 percent of OPIs, and 100 percent 
26

Energy Efficiency Cost-Effectiveness Screening

of OPIs (or similar). For utility OPIs, the program 

administrators generally rely on defaults and proxy 

values from the literature, adjusted for New York, and 

do not generally conduct arrearage or similar studies. 

For participant OPIs, they generally use the survey 

method developed in the literature. For societal 

figures (emissions and jobs), they use specialized 

regional models developed by a consulting firm 

(SERA, 2010, p. 34-35; NYSERDA, 2005; NYSERDA, 

2012). 

•	 Oregon: The PUC of Oregon has a long-standing 

policy that utilities (now the Energy Trust of Oregon) 

should calculate non-energy benefits if they are 

significant and there is a reasonable and practical 

method for calculating them (OR PUC, 1994, p. 15; 

SERA, 2010, p. 34-35).

•	 Washington: Puget Sound Energy: Puget Sound 

Energy categorizes OPIs as quantifiable and nonquantifiable. Where possible and easily quantifiable, 

Puget Sound Energy may include dollar values for nonenergy benefits in its TRC 

Test, including values 

for water usage savings 

or maintenance savings. 

Non-quantifiable OPIs 

may include legislative 

or regulatory mandates, 

support for regional 

market transformation 

programs, low-income 

health and safety, lowincome energy efficiency, 

or experimental and pilot 

programs. Where there 

is a significant amount of 

non-quantifiable OPIs, 

then Puget Sound Energy 

is able to accept energy 

efficiency programs with 

a benefit-cost ratio of less 

than 1.0, as long as the 

ratio exceeds 0.667 

(PSE, 2012; SERA, 2010, 

p. 35).

•	 Vermont: The Vermont Public Service Board requires 

that several OPIs be accounted for in energy efficiency 

screening. First, the risk benefits of energy efficiency 

resources should be accounted for by applying a 

10-percent discount to the energy efficiency costs. 

Second, the non-energy benefits of energy efficiency 

resources should be accounted for by applying a 

15-percent adder to the energy benefits (Vermont 

PSB, 2012). Third, water, O&M, and other fuel 

savings should be accounted for with quantified and 

monetized estimates of those benefits, and applied to 

those programs in which these savings are expected to 

occur. Fourth, the non-energy benefits of low-income 

programs should be accounted for by applying a 

15-percent adder to the energy benefits associated 

with those programs. The Board acknowledges that 

this adder is an approximate, conservative estimate 

of the value of low-income benefits, but notes that 

such a value is better than assuming zero, which is 

clearly not correct (VT PSB, 2012, p. 30). Finally, 

the environmental externalities associated with GHG 

emissions should be accounted for by assuming a CO2

Figure 3-1

Other Program Impacts Applied to Efficiency Screening in Vermont

GHG Emissions

PAC 

Benefits

Minimum 

TRC Benefits 

(for all 

programs)

Potential 

TRC Benefits 

(for relevant 

programs)

Potential 

Societal 

Benefits 

(for relevant 

programs)

$200

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0

Energy Efficiency Benefits ($/Mwh)

Avoided Energy

Avoided Capacity

Avoided Transmission

Avoided Distribution

Line Losses

Avoided Reserves

Risk Benefits

OPIs Adder

Water

O&M

Other Fuel Savings

Low-Income OPIs

Source: VT PSB, 

2011 and VT 

PSB, 2012; with 

assistance from 

Efficiency Vermont 
27

Energy Efficiency Cost-Effectiveness Screening

23 For a more detailed discussion of these options, see SERA, 

2010, p. 17-24.

allowance price of $80/ton (VT PSB, 2011). Note that 

the Vermont Public Service Board requires program 

administrators to use the Societal Cost Test to screen 

energy efficiency resources, which includes the costs 

of environmental externalities.

Figure 3-1 presents a summary of the OPIs that are 

accounted for in energy efficiency screening in Vermont. 

These costs are presented in terms of levelized costs (in $/

MWh). The leftmost column indicates the benefits that 

would be applied to all programs under the PAC Test, 

using the avoided costs currently applied in Vermont. The 

second column from the left indicates the risk benefits 

and the non-energy benefits that would be applied to all 

energy efficiency programs under the TRC Test. The second 

column from the right indicates the potential magnitude 

of the water, O&M, other fuel savings, and low-income 

benefits under the TRC Test. These benefits would not 

necessarily be applied to all programs; they would be 

applied only to those programs in which the measures are 

expected to result in the relevant benefits. Also, the size of 

the benefit can vary depending upon the amount of savings 

from any one measure or program; the values presented in 

Figure 3-1 are averages based upon the actual savings for 

Efficiency Vermont in program year 2010. 

The rightmost column includes the avoided emissions 

benefit that is applied under the Societal Cost Test. The 

sum of all the benefits in the rightmost column should be 

seen as the potential amount of societal benefits; the water, 

O&M, other fuel savings, and low-income benefits would 

only apply to relevant programs.

3.4 Estimating the Value of Other 

Program Impacts

Methodologies for Monetizing Other 

Program Impacts

Some OPIs are priced by markets; many are not. Those 

OPIs that are market-based (e.g., other fuel savings, water 

savings) should be quantified and monetized using market 

prices to the extent possible.

Two primary approaches are used to quantify OPIs 

that are not priced by a market: computational and 

survey-based. Computational approaches use primary 

or secondary data assembled from program records or 

literature-based sources (SERA, 2010, p. 17). 

Survey-based approaches rely on commonly used types 

of survey-based data gathering and estimation approaches, 

including stated preference surveys and revealed preference 

approaches. Revealed preference approaches include 

willingness to pay and willingness to accept contingent 

valuation studies, comparative or relative valuations, and 

other revealed preference and stated preferences approaches 

(SERA, 2010, p. 18). 

Direct computation approaches have obvious benefits. 

Unfortunately an extensive array of less tangible 

but potentially important benefits cannot generally 

be estimated directly by a computational approach, 

including comfort, aesthetics, and other factors. Relying 

solely on computational methods thus is not sufficient 

in deriving overall estimates of participant-perspective 

OPIs. Economists, social scientists, and researchers in the 

environmental and advertising fields have used a variety 

of survey-based valuation methods to develop estimates of 

the monetary value of externalities and intangible goods. 

Examples of a few methods with particular applicability to 

energy include the following:23 

•	 Computational approach using primary data;

•	 Computational approach using secondary data;

•	 Computational approach using statistical techniques,

including regression analysis;

•	 Survey methods, including contingent valuation

(e.g., willingness to pay and willingness to accept 

techniques); and

•	 Other survey methods, including relative scaling

approaches, ranking approaches such as conjoint 

analysis, and customer motivation approaches.

It is important to emphasize that many OPIs, especially 

the non-energy benefits, are extremely challenging to 

measure, to quantify, and to put into monetary terms. 

In addition, some of the NEBs may be unique to certain 

customer types, and some of the NEBs may depend upon 

the unique preferences or conditions of different customers. 

Under even the best of circumstances it will be very 

difficult to ensure that all relevant NEBs are accounted for, 

and that their magnitudes are properly assessed. Experience 

to date indicates that adders and other proxies designed 

to account for NEBs typically understate the magnitude 

of these benefits. Program administrators, regulators, and 
28

Energy Efficiency Cost-Effectiveness Screening

other stakeholders should be aware of these limitations 

when attempting to estimate the value of OPIs and NEBs.

Examples of Recent Estimates of 

Non-Energy Impacts

This section provides an illustrative list of the NEIs that 

have been monetized and recommended for inclusion in 

cost-effectiveness tests by recent studies.24 Most of the NEI 

values reported were derived from the existing literature 

or by developing modified algorithms from the literature, 

whereas some values were derived by surveys of program 

participants. 

In some cases, quantifying an NEI is not recommended 

for one of several reasons. Sometimes quantifying the 

NEI would amount to double counting, as it is already 

accounted for through a separate NEI or benefit. In other 

scenarios, an NEI is not monetized because there is 

insufficient evidence for its existence or because the NEI is 

too intangible (NMR, 2011, p. 1-1-2; 2-1). On occasion, 

a case might be made that an NEI is too hard to quantify 

meaningfully, but that outcome should be an exception 

rather than a rule for the reasons discussed previously and 

because experience shows that reasonable methods clearly 

exist for quantifying most NEIs. 

For the discussion in this section, we have included only 

NEIs that have been monetized. It is important to note that 

many significant NEIs have not previously been monetized, 

and therefore the information below should not be seen as 

an exhaustive list of the most significant NEIs. It is also important to note that the NEI estimates presented in the tables 

below do not necessarily represent the full range of NEIs 

that have been monetized to date. These tables should be 

seen as an illustrative list of monetized NEIs, based on recent 

literature reviews. Finally, we do not recommend that only 

monetized NEIs be accounted for when screening energy efficiency programs, as described in more detail in Section 3.6.

Typically NEIs are considered either as a one-time or 

an annual impact, and are applicable on either a perhousing unit basis (also referred to as per-participant) or 

per-measure basis. The values presented in this section 

are expressed in dollars per housing unit or dollars per 

participant on an annual basis, unless otherwise noted.25

Utility-Perspective NEIs

Utility-perspective NEIs represent tangible benefits in the 

form of direct monetary savings to the utility, and therefore 

24 In this section we present estimates of NEIs but not OPIs, 

because estimates of other fuel savings are highly dependent 

on the relevant efficiency measure, the fuel type, and the 

utility.

25 The values presented in the following tables from NMR are 

in 2010 dollars. The SERA study does not explicitly state 

which year’s dollars it uses. Because the report was prepared 

in 2010, we assume that the SERA values are also in 2010 

dollars.

Impacts Quantified 

to Date

Value or Range 

of Values

Table 3-1

Utility-Perspective Non-Energy Impacts

Financial and Accounting NEIs

Reduced arrearages $2.61

Carrying costs on arrearages $2.00 - $32.00

Bad debt written off $2.00 - $3.74

Customer Service NEIs

Terminations and reconnections $0.00 - $50.00

Customer calls $0.58 

Collection notices $0.34

Safety-related energy calls $0.50-$8.43

Source: SERA, 2010; NMR, 2011. The values presented in this 

table are expressed in dollars per housing unit or dollars per 

participant on an annual basis.

tend to be relatively easy to quantify. Most of the NEIs used 

are monetized from the literature or from algorithms using 

inputs from utilities. In general, the utility-perspective NEIs 

are relatively low in value, ranging from less than a dollar to 

nearly $9 per participant (NMR, 2011, p. 1-3-6; 4-1). Table 

3-1 summarizes the range of values associated with utilityperspective impacts.

Participant-Perspective NEIs

Table 3-2 presents a summary of participant-perspective 

NEIs for residential efficiency programs from two recent 

studies. This table is not meant to represent an exhaustive 

summary of the literature or the potential NEIs, nor is it 

meant to suggest that the values of NEIs are limited to the 

values and the ranges presented. Instead, the table is meant 
29

Energy Efficiency Cost-Effectiveness Screening

of dollars per housing unit treated. If these values were to 

be used in screening residential energy efficiency programs, 

they would be multiplied by the number of housing 

units served to get the total value for the program. Some 

housing units might experience several of 

these NEIs from program participation, 

depending upon the measures installed in 

each unit.

As indicated, some of the values are 

quite large and will have a significant 

impact on the cost-effectiveness of energy 

efficiency programs. (See Section 3.5 for 

an example of how some of these values 

affect program screening results.) Also, 

note that some of the benefits have a wide 

range of estimated values, indicating the 

uncertainties and the variability of these 

estimates.26

Commercial and industrial (C&I) 

customer NEIs have not been subject to 

the same level of research as residential 

NEIs, perhaps because C&I programs 

tend to be highly cost-effective anyway. 

A groundbreaking study was recently 

conducted to quantify participantperspective NEIs for C&I retrofit programs 

in Massachusetts through in-depth 

interviews with program participants (Tetra 

Tech, 2012). 

The Tetra Tech study specifically 

addressed the following NEI categories: 

O&M, administration, materials handling, 

materials movement, other labor, spoilage/

defects, water usage, waste disposal, fees, 

other costs, sales revenue, rent revenues, 

and other revenues (Tetra Tech, 2012, p. 

26 With regard to the recent NMR study, 

some stakeholders have raised questions 

and concerns about the study’s results, 

with several specific arguments that 

certain values are too low. These concerns 

are currently being addressed as part 

of an ongoing proceeding with the 

Massachusetts Department of Public 

Utilities (see docket number D.P.U. 11 

120).

Table 3-2

Participant-Perspective Non-Energy Impacts – Residential 

to provide an indication of the types and potential values 

for NEIs as identified in two recent, relevant studies.

Note that the values in Table 3-2 are presented in terms 

Impacts Quantified to Date Value or Range of Values

Comfort NEIs

Higher comfort levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.00 - $125.00

Quieter interior environment. . . . . . . . . . . . . . . . . . . . . . . . . $13.00 - $40.00

Aesthetics/appearance. . . . . . . . . . . . . . . . . . Few dollars to more than $20.00

Equipment/NEIs

Lighting quality and lifetime. . . . . . . . . . . . . . . . . . . . . $3.50 per CFL fixture; 

$3.00 per CFL bulb, one-time impact 

Equipment maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . $17.00 - $124.00

Equipment performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.00 - $18.00

Property Value

Increased housing property value. . . . . . . . . Few dollars to more than $2,000

More durable home and less maintenance. . . . . . . . . . . . . . $35.00 - $149.00

Health and Safety

Fewer fire deaths, injuries, and property loss. . . . . . . . . . . . . . $0.03 - $37.40

Improved safety (lighting). . . . . . . . . . . . . . . . . . . . . . Approximately $20.00

Health-related NEIs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 - $19.00

Utility-Related NEIs

(Bill-related) calls to utility. . . . . . . . . . . . . . . . . . . . . . . Approximately $0.30

Control over bill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Approximately $30.00

Termination and reconnection. . . . . . . . . . . . . . . . . . . . . . . . . $0.00 - $12.00

Resource NEIs

Reduced water usage and sewer costs. . . . . . . . . . . . . . . . . . . . $3.70 - $12.00

Economic Stability NEIs

Reduced need to move and costs of moving, 

including homelessness. . . . . . . . . . . . . . . . . . . . . Less than $1.00 to $60.00

Owners of Low-Income Housing 

Marketability/ease of finding renters. . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.96

Property value. . . . . . . . . . . . . . . . . . . . . . . . . . $17.03 one-time impact only

Equipment maintenance (heating and cooling systems). . . . . . . . . . . . . $3.91

Reduced maintenance (lighting). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66.73

Durability of property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36.85

Tenant complaints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19.61

Source: SERA, 2010; NMR, 2011. Note: The values presented in this table are 

expressed in dollars per housing unit or dollars per participant on an annual 

basis, except where noted otherwise.
30

Energy Efficiency Cost-Effectiveness Screening

3-9). O&M benefits are the most significant category of 

C&I NEIs, representing 74 percent of total electric NEIs. 

After O&M, sales revenues represented roughly seven 

percent of electric NEIs, other labor benefits represented 

roughly six percent, and reduced administration costs 

represented roughly five percent (Tetra Tech, 2012, p. 

4-39).

The Tetra Tech study investigated the potential NEIs 

from 789 different types of electric and gas C&I efficiency 

measures. They found that 57 percent of the measures had 

some form of non-energy benefit, 3 percent of the measures 

had some form of non-energy cost, and the remaining 40 

percent of measures had neither a non-energy cost nor a 

non-energy benefit. Of those measures that had a positive 

non-energy benefit, most of the benefits were in the range 

of $5,000 per measure or less (Tetra Tech, 2012, p. 4-34).

Table 3-3 presents the participant-perspective NEI values 

for electric C&I prescriptive efficiency programs. C&I NEIs 

are presented by measure end-use to provide statistically 

reliable NEI estimates across each of the key end-use 

categories (Tetra Tech, 2012, p. 4-38). As indicated, HVAC 

and lighting measures show the highest estimated NEI 

values. 

The values presented in Table 3-3 are specific to 

Massachusetts customers and focus only on C&I retrofit 

programs, which may limit the applicability of the NEI 

estimates in other jurisdictions (Tetra Tech, 2012, p. 1-7). 

Nonetheless, this study suggests that the C&I NEIs can be 

numerous and quite large. Program administrators in other 

Average Annual 

NEI per Measure

Benefit/MWh 

Saved

Table 3-3

Participant-Perspective 

Non-Energy Impacts – C&I 27

HVAC $7,687.00 $96.60 

Lighting $1,636.00 $27.40 

Motors and Drives $541.00 $4.30 

Refrigeration $5.00 $1.30 

Other $28.00 $3.90 

Average $1,439.00 $27.40 

Source: Tetra Tech, 2012

Measure 

End-Use

27 The values provided in Table 3-3 are for electric measures 

within the prescriptive C&I retrofit program. The Tetra 

Tech study also provides OPI values for custom C&I retrofit 

programs, as well as gas prescriptive and custom C&I retrofit 

programs.

states may experience C&I NEIs of similar magnitude. 

Societal-Perspective Other Program Impacts

There is a large amount of research and literature 

regarding the environmental externality benefits and 

the economic development benefits of energy efficiency. 

Conversely there is much less literature regarding the 

other types of societal OPIs, such as national security and 

healthcare cost savings. 

This category of OPIs is beyond the scope of our study, 

thus we do not provide a summary of these values here. 

Nonetheless, states choosing to apply the Societal Cost 

Test to evaluate energy efficiency should consider ways to 

account for these important OPIs.

Prioritizing Other Program Impacts

Given the large number of OPIs and the difficulty in 

measuring and accounting for all of them, it may be helpful 

for regulators to prioritize the impacts to identify those that 

are most likely to affect the outcome of the energy efficiency 

cost-effectiveness screening.

Utility-perspective OPIs are generally considered to be 

relatively small, as indicated in Table 3-1. Some studies, 

however, have identified significant benefits associated 

with reduced shutoffs and reconnects, as well as bad debt 

write-offs and carrying costs on arrearages. In addition, 

utility-perspective OPIs can be significantly larger for lowincome customers, particularly in states where low-income 

customers are offered discounted rates or shutoff protection 

provisions that can sometimes result in large arrearages.

Participant-perspective OPIs have been found to be 

quite large, sometimes even exceeding the value of the 

energy savings (NMR, 2011, p. 5 1; NZ EECA, 2012). 

The participant-perspective OPIs that are considered to be 

most valuable include: health and safety related impacts; 

improved comfort; improved home durability; reduced 

home maintenance; improved equipment performance; and 

reduced equipment maintenance (ACEEE, 2006, p. 12; 

SERA, 2010, p. 28). Many of these impacts, such as health, 
31

Energy Efficiency Cost-Effectiveness Screening

safety, and comfort, are higher for whole-building retrofit 

programs than for individual measure programs. 

Many of these participant-perspective OPIs are 

particularly large for low-income customers, because of the 

conditions of their dwellings, the other demands on their 

limited resources, and other hardships they may face. In 

addition, low-income energy efficiency programs are often 

less cost-effective than other efficiency programs because 

the customers are harder to reach and the barriers are more 

difficult to overcome. Consequently regulators frequently 

place a higher priority on the participant-perspective OPIs 

that apply to low-income efficiency programs.

It is important to avoid giving greater priority to those 

impacts that are readily measurable and quantifiable simply 

because they are easier to obtain. The utility-perspective 

OPIs tend to be relatively easy to quantify, but they also 

tend to be low in value. Conversely some participantperspective NEIs can be difficult to quantify, but are 

expected to be quite large.

For example, health-related OPIs can be difficult to 

quantify, but some research indicates that the benefits 

can be very large. A recent New Zealand study found that 

health benefits of some residential retrofit programs were 

even larger than the original energy benefits. In some 

cases, more than 90 percent of the total program benefits 

(energy plus non-energy) were attributable to health-related 

improvements, including reduced hospital admissions for 

respiratory conditions, reduced days off from school and 

work, psychologic and stress benefits, and reduced health 

issues from indoor dampness and mold (NZ EECA, 2012).

Part of the difficulty in quantifying and prioritizing 

OPIs is that the impact can be very specific to the location, 

utility, customer, property, or measure. For example, health 

and safety benefits are significantly greater for customers 

whose homes are in disrepair prior to the efficiency 

improvements. Improved comfort benefits can be very 

dependent upon the climate where the customer is located, 

where the benefits are greater in regions experiencing either 

extreme cold or extreme heat conditions. These variations 

partly explain the ranges of values found in the literature 

for many of the OPIs discussed earlier. These variations also 

suggest that analysts need to be cautious about applying 

OPIs from one utility, state, or region in another.

3.5 Implications for Efficiency Program 

Screening

The importance of properly applying OPIs is apparent in 

many program administrators’ energy efficiency screening 

results. Figure 3-2 presents the actual cost-effectiveness 

results for an electric utility in Massachusetts, for energy 

efficiency programs implemented in 2012. The figure 

presents the benefit-cost ratios under the PAC Test, the 

TRC Test with OPIs included, and the TRC Test without 

OPIs included. The OPIs that we use here are the ones 

that are currently in use by Massachusetts energy efficiency 

program administrators.

First, it is interesting to note the difference between the 

results under the PAC Test relative to the TRC Test without 

OPIs. The low-income programs are identical under these 

two tests because the customers are not required to make 

any contribution toward the incremental cost of efficiency 

measures. The C&I programs are more cost-effective 

under the PAC Test than the TRC Test because customers 

contribute toward the incremental efficiency measure cost, 

and the OPIs for C&I programs are currently assumed to 

be relatively small. 

Second, it is interesting to note the difference between the 

results under the TRC Test with and without OPIs. The lowincome programs are much more cost-effective with the OPIs 

included because of the low-income other program benefits 

and the other fuel savings. The residential new construction 

and retrofit programs are much more cost-effective with 

the OPIs included because of the other fuel savings. These 

two OPIs (low-income other program benefits and other 

fuel savings) account for the vast majority of the differences 

between the cases with and without OPIs.

Most important, note that if the OPIs are not included 

in the TRC Test, then the low-income, residential new 

construction, and residential retrofit programs are all at 

risk for being improperly deemed not cost-effective. These 

energy efficiency programs are especially important because 

they help to support more comprehensive efficiency 

services to a more diverse set of residential customers, 

which promotes greater customer equity, both within the 

residential sector and between the residential and other 

sectors. Promoting customer equity is clearly an important 

objective underlying the energy efficiency programs.

Many program administrators find that low-income 

efficiency programs are not cost-effective without the 
32

Energy Efficiency Cost-Effectiveness Screening

quarter 2011) the program administrators in Massachusetts 

assumed very few OPIs for C&I programs, primarily 

because they did not have much information available 

regarding the magnitude of those OPIs. As described in 

Section 3.4, a recent study for the Massachusetts program 

administrators indicates that the C&I OPIs can be quite 

significant. If the analysis presented in Figure 3 2 were 

conducted again with the results of the new study, the 

benefit-cost ratios for the TRC Test with OPIs would be 

significantly higher than those in the figure.

3.6 Considerations in Setting Customer 

Financial Incentives

Including OPIs in energy efficiency screening not only 

allows more measures and programs to be considered 

cost-effective, it also allows program administrators 

to provide greater financial incentives to customers to 

participate in the programs. This raises an important 

question for regulators and other efficiency stakeholders. 

Should program administrators be allowed to pay customer 

Figure 3-2*

Cost-Effectiveness Analysis Implications of OPIs; PAC and TRC Tests

Source: Synapse Energy Economics, 2012a

Residential New 

Construction

C&I New 

Construction

Low-Income 

Retrofit

Residential 

Retrofit

C&I Large Retrofit

Residential 

Lighting

C&I Small 

Retrofit

Residential 

Appliances

Low-Income 

New Construction

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Benefit-Cost Ratio

PAC Test

TRC Test without OPIs

TRC Test with OPIs

inclusion of OPIs. Low-income programs are generally 

more expensive than other programs because they require 

higher incentive levels; they require additional marketing 

delivery costs; they must overcome barriers such as the 

landlord-tenant split incentive; and they may face other 

barriers such as the need to serve customers with limited 

ability to speak English. 

At the same time, most utility regulators recognize that 

low-income customers are an important sector to serve 

with energy efficiency programs. The average low-income 

household in the United States spends upward of 15 to 

20 percent of their total monthly income on energy costs. 

Energy efficiency upgrades to low-income homes help 

struggling families use less energy and lower their utility 

bills while still meeting their daily energy needs. A family 

living in an older home, for example, could cut their yearly 

energy bill in half with a full home weatherization (Center 

for American Progress, 2012).

Note that for the C&I sector there is very little difference 

between the TRC Test results with and without OPIs. This 

is because at the time these programs were screened (fourth 

*Figure 3-2 represents an example 

of how the choice of economic tests 

can have significant impacts on the 

results.  These results should not be 

miss-interpreted as extending to other 

regions and circumstances.   The 

results will likely vary significantly 

by region, available fuels, and other 

program impacts that are customerclass and location specific. Further, 

the fact that some benefit-cost 

ratios exceed others should not be 

misinterpreted to favor investments 

in programs with higher ratio to 

the exclusion of lower ratios. The 

objective of the energy efficiency 

investments should be to get the 

greatest net economic benefit for the 

available investment.  
33

Energy Efficiency Cost-Effectiveness Screening

financial incentives that exceed the energy benefits of the 

efficiency measure or program? In particular, will such 

incentives result in uneconomic decision-making by 

customers or inequities across customers?

The first thing to note here is that under the Societal 

Cost and the TRC Tests, the assessment of whether an 

efficiency measure is cost-effective is independent of the 

decision of what the customer financial incentive should 

be. Energy efficiency screening provides an indication of 

whether it is in the public interest to promote an efficiency 

measure. The choice of customer financial incentive will 

affect how to promote the measure.

The rationale for offering a customer financial incentive 

is to help the customer overcome the market barriers 

to energy efficiency. The amount of customer financial 

incentive (in combination with technical support, 

education, and other support) thus should be as large 

as necessary to overcome the market barriers to energy 

efficiency, but no larger. Once an efficiency measure has 

been deemed to be cost-effective, the size of the customer 

financial incentive can be determined based on this 

principle. Under both the Societal Cost and the TRC Tests, 

the amount of the customer financial incentive will not 

affect the cost-effectiveness results.28

Nonetheless, the two questions remain. First, if a 

program administrator offers a financial incentive that 

exceeds the energy benefits of the efficiency measure, could 

this result in an uneconomic decision from the customer? 

In other words, could the customer choose to implement 

a measure that was not in the public interest as a result of 

such high financial incentives? One might argue that the 

customer already experiences the participant-perspective 

non-energy benefits, and therefore does not need to be paid 

a financial incentive that covers both the energy benefits 

and a portion of the non-energy benefits. Receiving such a 

high financial incentive could result in a customer choosing 

a very costly efficiency measure that is not in the public 

interest (i.e., is not cost-effective).

We believe that offering customers financial incentives 

that exceed the energy benefits will not lead to customers 

making uneconomic decisions. First, the efficiency 

measures and programs are screened by the program 

administrators, using the methods described in this study, 

and thus the program administrators identify the universe 

of measures that are cost-effective. Customers will only be 

able to choose from those measures that are first deemed 

to be cost-effective. Second, as noted earlier, the rationale 

for offering customer financial incentives is to overcome 

market barriers, and the amount of the financial incentive 

should be set high enough to overcome those barriers. In 

some cases, for example, low-income customers or small 

businesses, the market barriers might be especially high. 

These market barriers might be so high as to prevent the 

customer from recognizing both the energy benefits and 

the non-energy benefits, in which case a higher customer 

incentive may be necessary to get the customer to adopt the 

measure.

This leaves the second question. If a program 

administrator offers a financial incentive that exceeds the 

energy benefits of the efficiency measure, will this result 

in inequity across customers? In other words, why should 

all utility customers provide funding to pay a program 

participant a financial incentive that exceeds the energy 

benefits? Does this approach result in paying too much 

ratepayer funds to achieve non-energy benefits?

We believe that this approach does not necessarily lead 

to customer inequity concerns. This issue is parallel to the 

issue raised in Section 2.4 about whether utility ratepayer 

funds in general should be used to pay for non-energy 

benefits. We believe that this issue is best addressed 

through the program screening practices, not through 

the practices for setting the customer financial incentives. 

The program screening practices account for all of the 

costs that need to be covered by the utility funding: the 

customer financial incentive, the technical support offered 

to customers, the delivery costs, the auditing costs, the 

administration and planning costs, and the monitoring 

and evaluation costs. The program screening practices thus 

allow for a more comprehensive assessment of the potential 

for customer inequities as a result of the energy efficiency 

programs. If the customer inequity issues are resolved 

through the program screening practice, then there is no 

need to address them in establishing the customer financial 

incentives.29 

28 This will not be true if the customer financial incentive 

exceeds the full incremental cost of the energy efficiency 

measure. 

29 Furthermore, customer equity concerns might actually be 

mitigated by enabling more customer types and a greater 

number of customers to participate in energy efficiency 

programs, as discussed in Section 3.2.
34

Energy Efficiency Cost-Effectiveness Screening

As discussed in Section 2.4, we believe that it is vitally 

important to ensure that utility ratepayer funds that are 

used to support energy efficiency programs will result in 

a net reduction in ratepayer utility costs, that is, that the 

energy benefits will exceed the efficiency program costs. 

This goal can be achieved by applying the PAC Test to the 

entire portfolio of energy efficiency programs offered by a 

program administrator. If the portfolio passes the PAC Test, 

then customers and consumer advocates can be confident 

that the energy efficiency programs as a whole will reduce 

utility costs to customers.

Nonetheless, there is an important perception issue 

here. At first glance, it appears as though paying financial 

incentives that exceed the energy benefits could lead to 

uneconomic decision-making or inequitable outcomes, 

or at least create the risk for such outcomes. We therefore 

recommend that program administrators should not offer 

customer financial incentives that exceed energy benefits 

as a general rule. This is consistent with the principle of 

setting the customer incentive as large as necessary to 

overcome market barriers, but no larger. However, in those 

cases in which the program administrator has evidence that 

it may be necessary to offer customer financial incentives 

that exceed the energy benefits in order to overcome 

market barriers, for example, for some low-income 

customers or for some small business customers, then they 

should have the flexibility to do so.

3.7 Regulatory Options to Address 

Other Program Impacts

There are several options available for including OPIs 

in energy efficiency cost-effectiveness screening. The ideal 

approach is to develop quantitative, monetary estimates for 

all relevant OPIs. These dollar values of the OPIs would 

be added to the energy benefits and the energy costs for 

each measure, as appropriate. This would allow for a 

comprehensive comparison of the energy efficiency costs 

and benefits, including OPIs.

There are, however, several challenges and uncertainties 

associated with developing quantitative monetary estimates 

of some OPIs. Consequently regulators have developed 

several approaches for incorporating OPIs into energy 

efficiency screening practices despite these challenges. 

These approaches are summarized below. 

•	 Include all relevant OPIs: Develop quantitative 

estimates of all OPIs, with a focus on those OPIs that 

are expected to be most relevant and most significant. 

In theory this approach would produce the most 

accurate representation of OPIs. The challenges and 

uncertainties of quantifying OPIs are frequently 

cited as reasons for not including them in energy 

efficiency screening. We note that these challenges 

and uncertainties exist for many aspects of utility 

regulation and planning, including estimates of 

avoided costs that form the heart of energy efficiency 

screening. Some states have been able to develop 

quantitative estimates of OPIs that are sufficiently 

reliable for planning purposes.30

•	 Readily measurable OPIs only: Develop 

quantitative estimates of those OPIs that are readily 

measurable. This is a practical approach because 

several OPIs are readily measureable without 

significant time or financial commitments.31 This 

approach will fail to capture the full range of OPIs, 

however, depending upon the resources and time 

dedicated to the effort.

•	 Sensitivity analysis: Consider cost-effectiveness 

results with varying ranges of OPIs included. For 

example, New York regulators are provided with 

benefit-cost ratios that include a range of NEIs, from 

zero NEIs, to half of the readily measurable NEIs, 

to all of the readily measurable NEIs. This approach 

assists regulators in understanding a range of effects 

that NEIs can have on benefit-cost ratios, and may 

help to address concerns about uncertainty in the 

NEI values. The New York approach is inherently 

conservative, however, in that it only assesses the 

impacts of NEIs of magnitudes that are lower than 

the readily measurable magnitudes. A better approach 

would be to include higher levels of NEI values in the 

sensitivity analyses as well. 

•	 Adder: Develop and apply an adder to the efficiency 

program benefits to reflect the non-energy benefits. 

30 See, for example, NMR, 2010.

31 For additional information on methodologies for quantifying 

OPIs, see SERA, 2010 and NMR, 2010.
35

Energy Efficiency Cost-Effectiveness Screening

For example, the adder could be a percentage increase 

or a $/MWh increase to the energy benefits. The 

rationale for using an adder is that it is meant to be a 

proxy for the difficult-to-measure non-energy benefits. 

It is an explicit acknowledgement that the non-energy 

benefits are higher than zero, and that the adder is 

the best approximation available at the time. Adders 

could be applied at the measure, program, sector, 

or portfolio levels. Adders applied at the measure 

or program levels could be tailored to the specific 

non-energy benefits associated with those measures 

or programs, while adders applied at the portfolio 

level should represent non-energy benefit levels across 

the portfolio on average. Overall this is a simplified 

approach that does not require extensive evaluation 

activities and lends certainty to the routine of program 

screening. On the other hand it may be seen as too 

much of an approximation, and determining an 

appropriate adder may be difficult, or may be very 

conservative owing to estimates and politics.

•	 Reduced Benefit-Cost Ratio Threshold: Apply a 

lower benefit-cost threshold than 1.0 to efficiency 

programs to reflect the non-energy benefits. This 

approach has an effect similar to applying an adder, 

that is, an adder can be directly converted into a lower 

threshold and vice-versa. However, we prefer using an 

adder relative to reducing the benefit-cost threshold. 

Using an adder has the benefit of being more 

transparent, because there is an explicit increase in the 

benefits to reflect the non-energy benefits, whereas 

reducing the benefit-cost threshold has implications 

for both the benefits and the cost. Also, it is more 

transparent and easier to understand the application 

of a different adder for different efficiency programs 

to reflect different non-energy benefits, relative to the 

application of a different cost-benefit threshold for 

different programs.

•	 Hybrid: A combination of the various options 

could be employed to create a hybrid approach. For 

example, a state could include all readily measurable 

NEIs, and use an adder for hard-to-measure NEIs. 

As discussed earlier, Vermont uses an adder for 

NEIs in addition to readily measurable NEIs, while 

Colorado requires an adder but also allows for readily 

measurable NEIs. Furthermore, a state could include 

readily measurable NEIs and conduct a sensitivity 

analysis for additional NEIs. This approach is most 

consistent with the nature of NEIs, whereby some 

NEIs are easily and readily monetized, while others 

require a more qualitative analysis on the potential 

range of impacts that accrue to customers from 

efficiency programs. Additionally, this method 

affords regulators flexibility in determining the most 

appropriate NEI policy for their state. Finally, it 

allows consideration of all NEIs believed to be most 

significant, with the choice of methodology used 

to determine each NEI being made on the basis of 

available resources.

The approach used may depend upon the particular OPI 

being evaluated. Other fuel savings and resource savings 

(e.g., water and sewer) are relatively easy to quantify and 

monetize, and thus they should always be monetized 

in cost-effectiveness analyses. Some of the non-energy 

benefits, such as improved health, safety, and comfort, can 

be more difficult to quantify and may be better suited for 

sensitivity analyses or adders if resources are not available 

to develop monetary values.

Ideally the approach used to account for OPIs should be 

applied at the measure level. If they cannot be applied at 

the measure level, then the next best approach would be to 

apply them at the program level. OPIs can vary significantly 

by efficiency measures, and many OPIs are only relevant for 

certain measures (e.g., water savings associated with water 

heater measures; other fuel savings associated with space 

heating measures; and health, safety, and comfort benefits 

associated with space heating measures). Applying OPIs at 

the measure level offers a more accurate depiction of the 

magnitude of their benefits.

3.8 Recommendations 

The Best Tests to Use for Screening Energy 

Efficiency Programs

We recommend that the Societal Cost Test be used to 

screen energy efficiency programs. This test includes the 

broadest range of energy efficiency costs and benefits and 

provides the best measure of public policy benefits that are 

of great importance to legislators and regulators, such as 

other fuel savings, low-income benefits, and environmental 

benefits. 
36

Energy Efficiency Cost-Effectiveness Screening

We recommend that all states that choose not to rely 

on the Societal Cost Test use the TRC Test to screen 

energy efficiency programs. This test includes many of the 

important energy efficiency costs and benefits and helps 

address many important public policy benefits, such as 

other fuel savings, low-income benefits, and customer 

equity. 

There is an important concern, however, with applying 

either the Societal Cost Test or the TRC Test, because of 

the potential impact on costs to utility customers. Some 

stakeholders may be concerned that accounting for OPIs 

and the associated public policy benefits will unnecessarily 

increase energy efficiency program costs and burden utility 

customers with costs for achieving benefits that are not 

related to utility services. This is a critical consideration, 

particularly for states that are pursuing aggressive levels 

of energy efficiency savings or pursuing all cost-effective 

energy efficiency. 

To address this concern, we recommend that the 

PAC Test be applied to the entire portfolio of efficiency 

programs. This will ensure that the entire set of programs 

will result in a net reduction in utility revenue requirements 

(i.e., a net reduction in costs to utility customers). This 

combined program/portfolio screening approach should be 

simple to apply, because it relies upon a single, primary test 

(either the Societal Cost Test or the TRC Test) for all of the 

detailed cost-effectiveness assessments, and a secondary test 

(the PAC Test) that would be applied as a check on behalf 

of utility customers. Applying the tests in this manner 

allows states to balance the goal of achieving key public 

policy objectives with the goal of ensuring a net reduction 

in costs to utility customers. 

The Application of Other Program Impacts in 

Screening Energy Efficiency

When using the Societal Cost Test, it is important to 

account for the utility-perspective, participant-perspective, 

and societal-perspective OPIs to the greatest extent 

possible.

When using the TRC Test, it is important to account for 

the utility-perspective and participant-perspective OPIs 

to the greatest extent possible. It is particularly important 

to account for the participant-perspective OPIs, because 

otherwise the TRC Test will be internally inconsistent and 

will lead to cost-effectiveness results that are skewed against 

energy efficiency, will cause program administrators to 

underinvest in energy efficiency programs, and will impose 

higher costs on utility customers.

When using the PAC Test, it is important to account for 

utility-perspective OPIs. The utility-perspective OPIs are 

relatively certain and relatively easy to quantify. In addition, 

the utility-perspective OPIs will directly affect utility 

revenue requirements, and thus have a direct impact on 

utility customer costs.

We recommend that each state develop an approach 

for accounting for OPIs that best suits its needs and best 

accounts for values of the OPIs relevant to it. To this end, 

we recommend that each state should do the following:

•	 Identify all of the OPIs that are relevant for the

energy efficiency programs offered and the screening 

test used in the state, regardless of whether reliable, 

monetized values are available for them. This should 

be based on a state-specific assessment of which OPIs 

are likely to be most significant, not simply on those 

that are readily measurable. This step is important to 

at least understand the type and breadth of the OPIs 

relevant to the state efficiency programs.

•	 Develop quantitative, monetary estimates for all

OPIs that can be readily monetized. At a minimum, 

this should include the other fuel savings, because 

these savings can be relatively easily monetized using 

forecasts of the prices for those fuels.

•	 Develop some methodology for addressing those OPIs

that are not monetized, for example, by conducting 

sensitivities or using an adder to the benefits as a 

proxy. Although there are limits to these approaches, 

and adders are sometimes criticized for being too 

conservative, these approaches may be necessary 

to ensure that some of the significant OPIs are not 

ignored simply because they are difficult to quantify. 

•	 Address the non-energy benefits associated with lowincome customers. Many studies have shown that 

these are among the most significant NEBs, and many 

analyses have indicated that these NEBs can have a 

substantial impact on the cost-effectiveness of lowincome programs, frequently making the difference 

between programs that are cost-effective and those 

that are not. If the state does not develop quantitative 

estimates for the low-income non-energy benefits, 

then at a minimum these benefits should be addressed 

through some proxy approach.

•	 Hire independent contractors to develop the best
37

Energy Efficiency Cost-Effectiveness Screening

state-specific OPI estimates possible. The money 

required for this type of research could come from the 

program administrator’s energy efficiency budgets, as 

a part of the evaluation, monitoring, and verification 

activities. The value of this research would likely be 

well worth the cost, given the magnitude of OPIs that 

could be identified and pursued through the energy 

efficiency programs.

•	 Identify those OPI assumptions, methodologies,

and outcomes that can be transferred across utilities 

and across states, in order to increase awareness of 

the issues, promote consistency where appropriate, 

increase acceptance of hard-to-quantify values, and 

reduce costs. 

Recommendations for Further Research

Also, as noted earlier, each state should hire independent 

consultants to develop state-specific OPI estimates. In 

addition, some national level research could help advance 

our understanding of some of the more important nonenergy benefits (SERA, 2010, p. 46-47; 78-79). This 

research could also lend support to the analyses that are 

conducted at the state level. The following list includes 

those NEIs that we believe are likely to be significant and to 

benefit from further research.

•	 Indoor air quality and health effects at home and at

work

•	 Reduced sick days off from school or work

•	 Increased productivity at businesses and at schools

•	 Family stability and fewer household moves

•	 Safety, fires, and insurance, and damage prevention
38

Energy Efficiency Cost-Effectiveness Screening

4. Environmental Compliance Costs

4.1 Environmental Compliance Costs 

Versus Externalities

I

n theory, the Societal Cost Test, the TRC Test, and 

the PAC Test should all explicitly account for the 

avoided costs of compliance with environmental 

regulations. It is now common practice to account 

for the cost of complying with certain environmental 

regulations, such as the costs of purchasing SO2 and NOX

allowances. It is much less common, however, to fully 

account for the costs of complying with forthcoming or 

future environmental regulations. Failing to do so skews 

the cost-effectiveness evaluations against energy efficiency, 

can lead to significantly less energy efficiency than is costeffective, and can result in customers paying for alternative 

environmental compliance options that are much more 

expensive than energy efficiency resources.

The costs of environmental compliance should not 

be confused with environmental externalities. These 

costs represent the anticipated costs that will be incurred 

by utilities in the future to comply with environmental 

requirements; costs that will eventually be passed on to 

ratepayers, and thus are clearly within the definitions of 

both the TRC Test and the PAC Test, as well as the Societal 

Cost Test. In contrast, environmental externalities represent 

costs of environmental damages to society in general, or the 

costs of abating those actions that lead to the damages.32

These externalities would be included in the Societal Cost 

Test, but not the TRC or the PAC Tests.

Note also that environmental compliance costs are 

separate from environmental externalities, and it is 

important to ensure that they are not double counted. 

The environmental externalities represent all of the 

environmental damages that might happen after the 

environmental regulations are met, if there are any. Over 

time, if environmental regulations become increasingly 

stringent, the environmental compliance costs will tend 

to increase while the environmental externality costs will 

experience a corresponding decrease.

Estimates of the avoided costs of environmental compliance should be based on the environmental requirements 

pertinent to the relevant state, which might include federal 

regulations, state regulations, or both. These costs should 

include all current and reasonably anticipated future regulations that impact the electric sector, including those that 

regulate criteria pollutants (such as ozone, particulate matter, 

SO2, and NOX), water effluent and use, air and water toxics, 

solid waste management, and GHGs. In the sections that 

follow we focus on EPA regulations and GHG requirements, 

because these are expected to result in significant costs of 

compliance, in both the near term and long term.33

4.2 Current and Anticipated EPA 

Regulations

Summary of Current and Anticipated EPA 

Regulations

The EPA has proposed and promulgated a number of 

environmental rulemakings that affect the operation of 

existing and new power plants under the Clean Air Act 

(CAA), the Clean Water Act (CWA), and the Resource 

Conservation and Recovery Act (RCRA).

The CAA is a comprehensive federal law that regulates 

32 A useful frame of reference is that environmental regulations 

are a mechanism by which regulators and policymakers can 

“internalize” otherwise external environmental costs. Harm 

from pollution is considered an environmental externality 

cost imposed on society in general; by compelling power 

plants to spend money to reduce pollution and hence harm, 

environmental regulations move the burden of pollution 

from society (an externality) to polluters (an internal cost 

realized in the cost of service).

33 We recognize that utility management will be making 

decisions based on a number of factors (e.g., low natural gas 

prices) in addition to pending environmental regulations. 

(Brattle Group, 2012).
39

Energy Efficiency Cost-Effectiveness Screening

air emissions from stationary sources, such as chemical 

plants, steel mills, and electrical generators, as well as 

mobile sources (US EPA, 2012a). Under the CAA, the EPA 

sets emission standards for both stationary and mobile 

sources, and air quality standards that must be obtained by 

regions, states, and municipalities. 

Emission standards directly affecting stationary sources, 

including power plants, issued under the CAA include the 

following:

•	 Mercury/Air Toxics Standards (MATS): MATS is 

the first national emission standard to reduce mercury 

and other toxic materials such as arsenic and acid 

gas from power plants. MATS was proposed in 1990 

and finalized in December 2011. It became effective 

in March 2012. Sources effectively have four years to 

comply with the rule (US EPA, 2012b).

•	 Cross-State Air Pollution Rule (CSAPR): The EPA’s 

CSAPR was expected to replace the 2005 Clean Air 

Interstate Rule (CAIR) for the regulation of SO2, NOX, 

and particulates. A December 2008 court decision 

allowed the requirements of CAIR to remain in place 

temporarily, but directed the EPA to issue a new rule 

to implement the CAA requirements concerning the 

transport of air pollution across state boundaries. 

CSAPR was finalized in July 2011 but was stayed in 

December 2011 pending judicial review. On August 

21, 2012, the US Court of Appeals for the District of 

Columbia vacated CSAPR, ordering that CAIR remain 

in effect (US EPA, 2012c; US Court of Appeals, 2012).34

•	 New Source Performance Standards (NSPS):

In December 2010, the EPA announced it would 

propose an NSPS to regulate GHG emissions from 

new and modified electric power plants under section 

111(b) of the CAA, and from existing electric power 

plants under section 111(d). On March 27, 2012, the 

EPA proposed the NSPS for new and modified power 

plants. This proposal essentially requires any new 

power plant to limit emissions to no more than 1,000 

pounds of CO2 per MWh, which is slightly more than 

the emissions from natural gas power plants and far 

below the average emissions from coal power plants 

(Washington Post, 2012). This issue is addressed in 

more detail in Section 4.3.

Although CSAPR was recently vacated, this rule should 

continue to be included in a review of EPA regulations. As 

stated earlier, it is important to consider regulations that are 

expected to result in significant costs of compliance in both 

the near term and the long term. Although CAIR remains in 

place as a backstop, the EPA must promulgate a replacement 

for both CAIR and CSAPR in order to meet the requirements 

of the CAA. This new rule may need to achieve emission 

reductions above and beyond those anticipated from CSAPR, 

as National Ambient Air Quality Standards (NAAQS) for 

NOx, SO2, ozone, and particulates are updated and become 

more stringent. The requirements for pollution abatement to 

meet these new standards could result in significant costs of 

compliance and should be accounted for in energy efficiency 

cost-effectiveness screening.

The EPA has established and periodically revised stateby-state NAAQS for criteria pollutants. The EPA maintains 

air quality monitoring stations across the nation, and air 

managers in each state are responsible for crafting plans 

to meet NAAQS at these monitors. States where monitors 

show that air quality is out of compliance are required 

to submit State Implementation Plans (SIPs) to the EPA 

detailing how the state will implement, attain, maintain, 

and enforce NAAQS (US EPA, 2011). The EPA regularly 

revisits the NAAQS, and has over time ratcheted down the 

acceptable level of pollution at these monitors. In 2010, 

the EPA strengthened standards for NO2 and SO2, and is 

currently considering more stringent standards for ozone 

(US EPA, 2012d). 

The EPA has also proposed a few other environmental 

standards under the CWA and the RCRA, which will have 

direct impact on the operation of existing power plants and 

factories: 

•	 316(b) Cooling Water Rule: The proposed 316(b) 

will establish requirements for power plants and 

factories to adopt certain control technologies or 

34 In vacating CSAPR, the US Court of Appeals for the District 

of Columbia objected to two significant requirements: (1) 

the EPA’s cost-based standards for determining how much 

pollution power plants could eliminate if they applied 

available controls at or below given cost-effectiveness 

thresholds; and (2) the EPA’s failure to give states an 

opportunity to implement CSAPR’s obligations first 

through State Implementation Plans rather than through 

Federal Implementation Plans, which were simultaneously 

promulgated with CSAPR.
40

Energy Efficiency Cost-Effectiveness Screening

practices to reduce injury and death of fish and other 

aquatic life caused by cooling water withdrawals. The 

proposed rule applies to all existing power generating, 

industrial, and manufacturing facilities that have the 

design capacity to withdraw more than two million 

gallons per day (GPD) and use at least 25 percent of 

that water exclusively for cooling (US EPA, 2011b).

•	 Wastewater Rule: The EPA found that the current 

regulations under the Wastewater Rule, which were 

Table 4-1

Major EPA Rulemakings Impacting Power Plants

Proposed Regulation

316(b) Cooling Water Rule

Wastewater Rule

CSAPR

Mercury/Air Toxics Rule

New Source Performance 

Standards for Greenhouse 

Gases

Coal Combustion Residuals 

Rule

Targeted Pollutant

Cooling water intake 

design

Wastewater toxic metals

Reduced downwind 

contribution to ozone 

and PM2.5 nonattainment

Hazardous air pollutants 

(Hg, HCl, metals, 

organics)

Greenhouse gases

Coal combustion waste 

disposal

Control Options

Intake design upgrades: cooling 

water intake structures

Treatment or zero discharge

NOx removal: SCR 70-95%; 

selective non-catalytic reduction 

30-75%; SO2 removal: scrubber 

≥95%; dry sorbent injection <70%

Hg removal: fabric filter baghouse - 

activated carbon injection 80-90%; 

scrubber-SCR co-benefit >90%

CCS, market-based approaches

Phase out wet surface 

impoundments (ash ponds); 

composite liners; other changes 

for disposal sites

Schedule

•	 Proposed rule April 20, 2011

•	 Final rule July 2012

•	 Facility compliance due by 2020

•	 Proposed rule July 2012

•	 Final rule January 2014

•	 Final rule July 2011, vacated

August 21, 2012

•	 Schedule unknown (the EPA is

considering whether to petition 

the US Court of Appeals for 

rehearing)

•	 Proposed rule May 3, 2011

•	 Final rule due by November

2015 (3 years, case-by-case 

1-year extension)

TBD

•	 Proposed rule March 2010

•	 Final rule TBD

•	 Ash pond closures 5-7 years

after final rule (2016-2018)

Abbreviations: CSAPR, Cross-State Air Pollution Rule; CCS, carbon capture and sequestration; EPA, US Environmental 

Protection Agency; HCl, hydrochloric acid; NOx, nitrous oxide; SCR, selective catalytic reduction; SO2, sulfur dioxide

Source: RAP, October 2011

last updated in 1982, do not adequately address the 

pollutants being discharged, mainly from steam electric 

power plants, and have not kept pace with changes 

that have occurred in the electric power industry over 

the last three decades. Coal ash ponds and flue gas 

desulfurization (FGD) systems used by such power 

plants are the source of much of these pollutants (US 

EPA, 2012e). No new rule has been proposed, but the 

EPA intends to issue proposed regulations in mid 2012 

and a final rule in late 2013 (RAP, 2011).
41

Energy Efficiency Cost-Effectiveness Screening

•	 Coal Combustion Residuals Rule: Coal 

combustion residuals (CCRs), also known as coal 

ash, are the materials that remain after burning coal 

for electricity. CCRs include fly ash, bottom ash, 

boiler slag, and FGD gypsum. These materials are 

currently exempt wastes under an amendment to the 

RCRA. The EPA, however, has proposed a new rule to 

regulate CCRs on June 21, 2010. This initiative was 

triggered by the massive coal ash spill at the Tennessee 

Valley Authority’s Kingston facility in December 2008. 

Since then, the EPA has taken aggressive steps to 

gather information from and assess impoundments at 

facilities managing CCRs nationwide. No date has yet 

been set up for a final rule (US EPA, 2012f). 

Table 4-1 presents a summary of the major EPA 

rulemakings that affect power plants. It includes the 

regulation, the pollutant targeted, the primary control 

options, and the schedule for compliance.

Figure 4-1 presents some estimated ranges of forwardgoing costs of these environmental controls.35 These costs 

were estimated by Synapse Energy Economics for actual 

coal units (with the number of units indicated by “n”), using 

control cost methodologies developed by Sargent & Lundy, 

the US EPA, and EPRI. Data for current environmental 

controls, MW capacity, heat rate, and coal type were used 

to calculate $/kW costs for each of the control technologies 

for each unit.36 The 

variable costs for O&M of 

the incremental controls 

were then added to the 

amortized capital cost to 

determine a unit’s total 

forward-going cost in $/

MWh. As indicated, FGDs 

are likely to be the most 

expensive controls.

The costs in Figure 4-1 

do not necessarily represent 

the costs that would 

eventually be incurred 

to comply with EPA 

regulations. The regulations 

are often specific about 

the facilities impacted, 

by region, age, size, heat 

35 Forward-going costs are calculated for all coal units that do 

not currently have that control installed.

36 The capital costs were amortized based on a 12.7 percent 

capital recovery factor and were converted to $/MWh using 

an average of 2008-2010 annual capacity factors.

37 Cost estimates for FGD, SCR, Baghouse, and ACI controls are 

based on calculations developed by Sargent & Lundy for EPA 

Base Case IPM Model v.4.10 (US EPA, 2010). Cost estimates 

for cooling controls are based on estimates in the 2011 EPA 

document “Technical Development Document for the Proposed Section 316(b) Phase II Existing Facilities Rule” (US 

EPA, 2011b). Cost estimates for CCR and effluent controls 

based on estimates from the 2010 EPRI document “Engineering and Cost Assessment of Listed Special Waste Designation of Coal Combustion Residuals Under Subtitle C of the 

Resource Conservation and Recovery Act” (EPRI, 2010).

rate, capacity factor, pollution produced, or a combination 

thereof. Generally speaking, however, it is a reasonable 

starting assumption that coal-fired power plants that are 

currently uncontrolled for SO2, NOX, particulates, or 

mercury will likely require environmental controls.

Figure 4-2 provides an illustrative example of potential 

cumulative retrofit costs at an older 300-MW coal-fired 

power plant. This figure shows how various forthcoming 

EPA environmental regulations can contribute to total 

power plant costs in $/kWh terms relative to the current 

operating cost. The costs are illustrative, as both the 

$80

$70

$60

$50

$40

$30

$20

$10

$0

Figure 4-1

Estimated Forward-Going Cost of Environmental Controls 37

Note: The upper bound of each box represents the 75th percentile of a given control’s forward-going cost. 

The middle line of each box represents the median forward-going cost, and the bottom bound of the box 

represents the 25th percentile of the cost.

FGD

n=621

Baghouse

n=810

SCR

n=686

ACI

n=901

Cooling

n=610

CCR

n=988

Effluent

n=988

2009 $/MWh
42

Energy Efficiency Cost-Effectiveness Screening

operating costs and retrofit costs can vary significantly 

and will be dependent on each particular coal unit. The 

right-most bar in the figure indicates the additional cost 

of CO2 allowance price of $20/ton starting in 2020. (The 

cost of complying with CO2 regulations is discussed in the 

following section.)

Responding to expected EPA rulings in 2009, the Edison 

Electric Institute (EEI) suggested that environmental 

control costs could result in a “train wreck” for the US coal 

fleet. In May 2010 ICF International prepared a report for 

EEI predicting that environmental regulations could result 

in significant coal retirements (ICF International, 2010). 

Other organizations followed. Studies from Bernstein 

Research, Credit Suisse, the North American Electric 

Reliability Council (NERC), Charles River Associates, and 

the Brattle Group, all suggested that between 20 and 60 

GW of coal capacity (or 12-19 percent of coal nameplate 

capacity) could face retirement under the confluence of 

environmental regulations (Bernstein Research, 2010; 

Credit Suisse, 2010; NERC, 2010; Charles River Associates, 

2010; Brattle Group, 2010; EEI, 2011; EPRI, 2012). $/Mwh

Figure 4-2

Illustrative Example of Potential Cumulative Retrofit Costs

$140

$120

$100

$80

$60

$40

$20

$0

Current 

condition

+ SCR in 

2014

+ Low-NOx 

burners 

in 2014

+ FGD 

in 

2016

+ Particulate 

Baghouse in 

2016

+ ACI 

in 

2016

+ Cooling 

Tower in 

2018

+ Coal 

Residuals 

in 2018

+ Effluent 

in 2018

+ CO2 @ 

$20/ton 

in 2020

Current operating cost

SCR

Low-NOx burners

FGD

Baghouse

ACI

Cooling

CCR

Effluent

CO2 @ $20/ton

Source: Estimates for current operating cost and low-NOx burners are based on RAP 2011 estimates (RAP, 

2011, p. 15). All other cost estimates are based on Synapse Energy Economics analysis of Sargent & Lundy 

research for EPA IPM Base Case v4.10 model (US EPA, 2010).

An updated study from EEI reviews this confluence of 

rules with the significantly lower gas prices of 2010 and 

estimates 50-73 GW of “unplanned coal retirements” 

by 2015 (EEI, 2011). Finally, a recent study from EPRI 

predicts 35-113 GW of retirements, or up to 36 percent 

of the US coal fleet, rendered non-economic by stringent 

capital requirements and dropping gas prices (EPRI, 2012). 

Figure 4-3 summarizes the range of potential coal plant 

retirements estimated by these studies. The ranges indicate 

either uncertainty in a particular study or a sensitivity range 

of gas or carbon dioxide (CO2) prices. The most recent 

studies examining the confluence of CSAPR, MATS, the 

CCR rule, the 316(b) regulation, and the possibility of CO2 

regulations estimate that up to a third of the US coal fleet 

may be non-economic.38 

38 As discussed earlier, we maintain CSAPR in our analysis of 

EPA regulations even though the US Court of Appeals recently vacated this rule. The number of studies in Figure 4-3 

that have considered the impact of CSAPR demonstrates the 

importance of the intent of that EPA rule.
43

Energy Efficiency Cost-Effectiveness Screening

Estimate Coal Capacity “At Risk” (GW)

Figure 4-3

US Coal Capacity at Risk Due to Compliance with EPA Regulations

140

120

100

80

60

40

20

0

CSAPR

Only

MATS

Only

316(b)

Only

Ash

Only

CSAPR and 

MATS

CSAPR, MATS, 

CCR, 316(b)

CSAPR, MATS, 

CCR, 316(b), CO2

CSAPR, 

MATS, 

316(b)

Source: Biewald 2012 combining several studies, as 

indicated. Colored circles indicate the range of environmental 

regulatory assumptions in each study.

Note that none of the studies listed here consider the 

EPA’s renewed interest in modifying effluent limitation 

guidelines to prevent the leakage of toxic wastes from air 

emissions controls. The proposed version of this guideline 

is expected to be released in 2012, and may put additional 

existing coal capacity at risk for retirement.

Also note that some of the recent EPA regulations will 

apply to more than just coal units. Some of the older, 

less efficient oil and gas units may face compliance 

requirements as well.

 

The Importance of Considering Potential 

Compliance Costs

It is clear that over the next four to eight years many coal 

units will become considerably more expensive to maintain 

and operate than they are now. Utilities have been, and 

will be, conducting analyses of the economics of either 

retrofitting their coal units to meet the new regulations 

or retiring the units and replacing them with alternative 

resources. 

This has two important implications for the evaluation 

of energy efficiency resources. First, the avoided energy 

and capacity costs associated with energy efficiency could 

be higher in the future, under either a retrofit scenario or a 

retirement scenario. Some of the retrofit technologies can 

reduce the capacity factors and increase the O&M costs 

of the existing coal units. Under a retirement scenario, 

some of the replacement facilities might have higher fuel 

or operating costs than the existing coal unit. These future 

changes should be factored in to the energy efficiency costeffectiveness analysis in order to properly capture the full 

value of the efficiency.
44

Energy Efficiency Cost-Effectiveness Screening

Second, and more important, energy efficiency can offer 

a low-cost alternative resource in a coal plant retirement 

analysis. In some cases, energy efficiency might be able 

to provide sufficient energy and capacity, possibly in 

conjunction with other resources, to enable a utility to 

retire a coal plant at a lower cost than retrofitting it. 

In evaluating a coal unit retirement, it is critical that 

the evaluation be conducted as early as possible, and the 

energy efficiency resources be assessed as thoroughly as 

possible, to identify the full potential for energy efficiency. 

If efficiency resources are insufficient to replace the retired 

coal plant within the timeframe required, then they could 

be combined with other resources as needed to develop the 

lowest cost option to replace the coal unit. 

If efficiency resources are not properly assessed in 

the analysis of EPA regulation compliance options, then 

customers could likely pay significantly higher electricity 

costs.39 If a utility decides to install control technologies 

to comply with the regulations, when plant retirement 

in combination with efficiency resources would be a less 

expensive option, then customers will bear the increased 

costs of those control technologies. If, on the other hand, 

a utility decides to retire a coal plant and replace it with 

another supply-side resource (e.g., a natural gas combined 

cycle plant) without first considering lower cost efficiency 

options, then customers will bear the increased costs of the 

new supply-side resources, and associated environmental 

compliance costs for these resources.40 

To make matters worse, if a new supply-side resource 

is constructed to replace a retired coal plant without first 

considering lower cost efficiency resources, then the future 

avoided energy and capacity costs would likely become 

much lower, making energy efficiency resources less costeffective. It is thus essential that analyses of EPA regulation 

compliance options be conducted as early as possible, 

and that such analyses assess energy efficiency resources 

as thoroughly as possible, in order to ensure that the 

compliance plan will result in lowest costs to customers.

It is also important that utilities assess coal unit retrofit 

options as comprehensively as possible. Some utilities have 

taken a piecemeal approach, analyzing one regulation at 

a time or just the few regulations that would be effective 

in the short-term. This limited approach can lead to 

uneconomic decisions regarding plant upgrades versus 

retirements. Once one retrofit technology is installed at 

a plant then it is that much more cost-effective to retrofit 

it with the next technology, even if retirement would be 

most economic if all retrofit requirements were considered 

at once. Any assessment of retirement options must 

account for all of the potential control technologies that 

might be required by all of the EPA regulations that are 

anticipated over the relevant study period (as well as costs 

associated with the climate change initiatives discussed in 

the next section). This is the only way to ensure that the 

eventual compliance plan will result in the lowest costs to 

customers.

In addition, energy efficiency should be viewed as a tool 

for helping utilities and states comply with some of the EPA 

regulations. The EPA is currently considering mechanisms 

to be able to quantify emissions reductions resulting from 

energy efficiency and renewable energy. Synapse Energy 

Economics is currently working with the EPA to develop 

publicly available, transparent tools to help integrate 

efficiency into SIPs for NAAQS compliance.41

The implications of the EPA regulations on the 

economics of energy efficiency will vary around the 

country, depending upon the extent to which each utility 

relies upon older, uncontrolled coal plants. They will also 

depend upon the structure of the electricity industry. Those 

utilities operating in regions with organized wholesale 

markets could be affected by any of the coal plants in the 

region of the market, because the costs of complying with 

the EPA regulations could be passed on through wholesale 

energy and capacity prices throughout the region, either 

directly by increasing costs of plants that sometimes set 

clearing prices or indirectly by removing plants from the 

bottom of the bid stack. Those utilities that are vertically 

integrated will be primarily affected by the implications 

39 There could be an argument made that customers should not 

bear environmental compliance costs that are higher than 

necessary due to inadequate or imprudent utility planning, 

including insufficient consideration of energy efficiency opportunities. This issue is beyond the scope of this report.

40 For example, while replacing coal capacity with natural 

gas-fired generation will avoid SO2 and air toxics emissions, 

new natural gas will emit, among other things, CO2 and 

NOX. There will be compliance costs associated with these 

pollutants. 

41 For more information, see the EPA’s website: http://www.epa.

gov/airquality/eere/manual.html.
45

Energy Efficiency Cost-Effectiveness Screening

of the EPA regulations on their own coal units, but may 

also be affected by cost pressures on plants in the region 

supplying purchased power.

Recommendations: Accounting for Recent and 

Proposed EPA Regulations in Energy Efficiency 

Screening Practices

Evaluate Efficiency Resources on a Timely Basis. It 

is important to screen for energy efficiency opportunities 

on a frequent, periodic basis, because energy efficiency 

may take several years to ramp up to the levels needed 

to economically respond to evolving EPA regulations, 

or to replace or partially replace a retiring coal plant. If 

energy efficiency is considered as an alternative to a coal 

plant retrofit with only one or two years available before 

the retrofit is required, then it is likely to be too late to 

develop anywhere near the full amount of efficiency that is 

potentially available.

Consider All Likely Future EPA Regulations. Clearly 

the most important step for regulators is to ensure energy 

efficiency screening accounts for all current and anticipated 

future EPA regulations over time, because this is the most 

accurate reflection of the future and will lead to more 

efficient economic decisions than piecemeal analyses. 

Furthermore, as discussed in Section 4.3, it is important 

to account for the potential costs from climate change 

requirements along with all the current and anticipated EPA 

regulations to more accurately reflect the future and avoid 

piecemeal analyses that lead to uneconomic decisions.

Apply Comprehensive Planning Practices. Many 

states use some form of integrated resource planning (IRP) 

for evaluating energy efficiency resources. When screening 

energy efficiency resources as part of preparing an IRP, 

several steps should be taken to ensure a valid, unbiased 

result:

•	 Energy efficiency must be properly and

comprehensively modeled in all coal plant retirement/

refurbishment scenarios.

•	 Planning models must properly account for risk

associated with EPA regulations, as well as coal plant 

retirements.

•	 Planning models must properly account for the

interactive effect of plant retirements, (i.e., the 

retirement of one plant will have implications for the 

economics of other plants in the region).

Even in a more simplified avoided cost methodology 

for screening energy efficiency resources, it is important to 

ensure that:

•	 Avoided costs used in efficiency screening properly

account for all potential power plant refurbishments 

and retirements. For states in regions with organized 

wholesale markets, this should include the best 

possible forecast of all of the coal units likely to be 

retired or refurbished within the market region. For 

states with vertically integrated utilities, this should 

include the best possible forecast of all the utility’s 

coal units that are likely to be retired or refurbished, 

plus a similar forecast for neighboring utility systems 

that may affect purchases and sales of power.

•	 Avoided cost forecasts must properly account for

increased fuel and O&M costs associated with 

compliance with EPA regulations, including outage 

and replacement power costs incurred during 

upgrades.

4.3 Current and Anticipated Climate 

Change Requirements

Although there is considerable uncertainty about federal 

requirements to address climate change, this does not 

mean that there will be no future costs associated with 

climate change requirements or that such costs should be 

ignored in evaluating energy efficiency cost-effectiveness. 

Evaluators should use the best information available and 

most pertinent to their state, and should determine the best 

estimate possible of the costs of complying with climate 

change requirements.

Many states have climate change requirements and 

objectives, and many utilities do incorporate projections 

of the costs of GHG requirements in evaluating energy 

efficiency cost-effectiveness. Below we provide an overview 

of current climate change initiatives that might affect 

electric and gas utility planning.

Current and Anticipated Climate Change 

Initiatives 

Federal Initiatives

Climate Legislation

The 111th Congress from 2009 through the end of 2010 

had a major focus on climate policy. Congress considered 

enacting legislation that would reduce GHG emissions 
46

Energy Efficiency Cost-Effectiveness Screening

42 Information on the EPA’s plans and regulations are available 

from the EPA website on climate change regulatory initiatives 

at http://www.epa.gov/climatechange/initiatives/index.html. 

through a federal cap on GHG emissions and trading 

emissions allowances, or through other means. Legislative 

proposals and President Obama’s initiatives aimed to 

reduce GHG emissions by approximately 80 percent from 

current levels by 2050. Despite passage of comprehensive 

climate legislation in the House in the 111th Congress, the 

Senate ultimately did not take up climate legislation in that 

session. 

The 112th Congress from 2011 through 2012 has shown 

to be markedly different from the 111th Congress, with a 

Republican majority in the US House of Representatives 

and a diminished Democratic majority in the Senate. Rather 

than debating measures to reduce GHG emissions like 

the 111th Congress, the 112th Congress has focused on 

preventing the EPA from regulating GHG emissions under 

its existing authority. Much of this deliberation has taken 

place within the context of larger political battles over 

government spending levels (CCES, 2012a).

Congressional action, however, is only one avenue in 

an increasingly dynamic web of activities that will lead to 

internalizing a portion of the costs associated with GHG 

emissions. As Congress wrestles with the issue, the states, 

the federal courts, and federal agencies are undertaking 

initiatives to address climate change. Many efforts are 

proceeding simultaneously.

EPA Efforts

The EPA has been pursuing several approaches to 

address GHG emissions. The EPA’s initiative was also in 

response to the Supreme Court mandate in Massachusetts v. 

EPA that determined that the harms associated with climate 

change are serious and well recognized, that GHGs fit 

within the CAA’s definition of “air pollutant,” and that the 

EPA has the authority to regulate GHGs.42 As a first step, 

the EPA issued its 2009 Endangerment Finding, in which 

the “EPA formally found that six key GHGs emitted from 

motor vehicles contribute to climate change, resulting in 

a threat to the public health and welfare” (CCES, 2012b). 

This Endangerment Finding led the EPA to regulate GHG 

emissions under the CAA. Since then, a few rules associated 

with GHG regulation have been proposed or adopted as 

follows:

•	 On August 12, 2010, the EPA proposed two rules to

ensure that businesses planning to build new, large 

facilities or make major expansions to existing ones 

obtain New Source Review Prevention of Significant 

Deterioration (PSD) permits that address GHGs. 

These rules became effective in early January 2011. 

•	 December 2011, the EPA announced that it will

issue the NSPS for new and modified electric power 

plants under section 111(b) of the CAA, and for 

existing electric power plants under section 111(d). 

On March 27, 2012, the EPA proposed the NSPS 

for new and modified power plants. This proposal 

essentially requires any new power plant to limit 

emissions to no more than 1000 pounds of CO2 per 

MWh, which is slightly more than the emissions from 

typical natural gas combined cycle power plants and 

far below the average emissions from coal power 

plants (Washington Post, 2012). A recent study by 

the University of California Center for Energy and 

Environmental Economics revealed that about 84 

percent of natural gas combined cycle gas turbine 

(CCGT) units that commenced operating between 

2006 and 2010 would meet this emission standard, 

whereas the EPA reported 95 percent of such units 

would meet the standard (Kotchen & Mansur, 2012). 

The study also concluded that only 71 percent of the 

planned CCGT units would meet the target largely 

because of a trend toward smaller capacity (Kotchen 

& Mansur, 2012).

Forecasts of CO2 Prices Resulting from Federal 

Initiatives

Figure 4-4 presents two forecasts of the potential CO2

allowance prices resulting from federal climate change 

initiatives. One forecast was prepared by EEI and is meant 

to represent a proxy for regulatory action by the EPA and/

or potential future legislation from Congress (EEI, 2011, p. 

50). The EEI forecast includes a Mid Case and a Low Case.

The other CO2 price forecast in Figure 4 4 was prepared 

by Synapse Energy Economics (Synapse, 2012b). The 

Synapse Energy Economics CO2 price forecast is intended 

to represent a reasonable range of expectations regarding 

the timing and magnitude of costs for federal GHG 

emissions. The Synapse Energy Economics forecast is 
47

Energy Efficiency Cost-Effectiveness Screening

Carbon Price (2012 $ per short ton CO2) Sources: Synapse, 2012b; EEI, 2011

based on regional and federal level policy developments in 

the near term, as well as various projections of legislative 

compliance costs from past proposed federal climate 

change bills in the long term. An earlier version of the 

Synapse Energy Economics Reference Case CO2 price 

forecast is used for screening energy efficiency programs in 

California and in several New England states. 

Regional Initiatives

Over the past several years, several states and provinces 

in North America have developed or have been developing 

multistate climate initiatives, including GHG caps and 

allowance trading to reduce GHG emissions. 

•	 North America 2050: The most recent effort in 

this area is North America 2050: A Partnership for 

Progress (NA2050) launched in March 2012. NA2050 

is the successor to the 3-Regions Initiative, which was 

a collaboration among members of the three North 

American regional cap-and-trade programs: The 

Midwestern Greenhouse Gas Reduction Accord, the 

Regional Greenhouse Gas Initiative, and the Western 

Climate Initiative. NA2050 is currently comprised of a 

group of US states and Canadian provinces (16 States 

and five Canadian provinces) committed to policies 

that move their jurisdictions toward a low-carbon 

economy while creating jobs, enhancing energy 

Figure 4-4

Generic Carbon Price Estimates — 

Edison Electric Institute and Synapse

$100

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0 2010 2015 2020 2025 2030 2035 2040

Edison Electric Institute Mid

Edison Electric Institute Low

Synapse High

Synapse Mid

Synapse Low

independence and security, and protecting public 

health and the environment (CCES, 2012c; NA2050, 

2012). 

•	 Regional Greenhouse Gas Initiative: The Regional 

Greenhouse Gas Initiative (RGGI) is an effort of 

nine northeast and mid-atlantic states to limit GHG 

emissions and is the first market-based CO2 emissions 

reduction program in the United States. Participating 

states have agreed to a mandatory cap on CO2

emissions from the power sector with the goal of 

achieving a ten-percent reduction in these emissions 

from levels at the start of the program by 2018.43 This 

is the first mandatory carbon trading program in the 

nation.

•	 Western Climate Initiative: In 2007, governors of 

five western states signed an agreement establishing 

the Western Climate Initiative (WCI), a joint effort 

to reduce GHG emissions and address climate 

change.44 Subsequently two more states and four 

Canadian provinces also joined the effort.45 Fourteen 

states and provinces also are official observers of the 

process.46 WCI members signed a Memorandum 

of Understanding agreeing to jointly set a regional 

emissions target and establish a market-based 

system—such as a cap-and-trade program covering 

multiple economic sectors—to aid in meeting this 

target. The WCI regional, economy-wide GHG 

emissions target is 15 percent below 2005 levels by 

2020, or approximately 33 percent below businessas-usual levels. The WCI Partners released the Design 

43 The nine states are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode 

Island, and Vermont. Information on the RGGI program, 

including history, important documents, and auction results, 

is available on the RGGI Inc. website at www.rggi.org. 

44 The five states are Arizona, California, New Mexico, Oregon, 

and Washington.

45 Utah, Montana, British Columbia, Manitoba, Ontario, and 

Quebec.

46 Alaska, Colorado, Idaho, Kansas, Nevada, and Wyoming, as 

well as the provinces of Nova Scotia and Saskatchewan and 

the Mexican states of Baja California, Chihuahua, Coahuila, 

Nuevo Leon, Sonora, and Tamaulipas.
48

Energy Efficiency Cost-Effectiveness Screening

Alabama

Arizona Arkansas

Colorado

Delaware

Georgia

Idaho

Illinois Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Minnesota

Mississippi

Missouri

Montana

Nevada Nebraska

NH

MA

New Jersey

New Mexico

New York

North Carolina

North

Dakota

Oklahoma

Oregon

Rhode Island

South

Carolina

South

Dakota

Tennessee

Utah

VT

CT

Virginia

Washington

West

Virginia

Wyoming

California

Florida

Michigan

Ohio

Pennsylvania

Texas

Wisconsin

for the WCI Regional Program in 2010. In November 

2011, WCI, Inc., a nonprofit corporation, was 

established to provide administrative and technical 

services to support the implementation of GHG 

emission trading programs in the region (CCES, 

2012c; WCI, 2012). 

•	 Midwest Greenhouse Gas Reduction Accord: 

In 2007, six states and one Canadian province 

established the Midwest Greenhouse Gas Reduction 

Accord (MGGRA).47 Three additional states are official 

observers.48 The members agree to establish regional 

GHG reduction targets, including a long-term target 

of 60 to 80 percent below current emissions levels, 

and to develop a multisector cap-and-trade system 

to help meet the targets. The MGGRA Advisory 

Group presented final recommendations in May 2010 

(CCES, 2012c).

47 The states are Illinois, Iowa, Kansas, Michigan, Minnesota, 

and Wisconsin, as well as the Premier of the Canadian 

Province of Manitoba.

48 Observers are Indiana, Ohio, and South Dakota.

State Initiatives

Many states are taking action to address climate change 

and reduce GHG emissions within their own borders. For 

several years states have been the innovative laboratories 

for climate change policies, and they are adopting a wide 

variety of policies across the nation. For example, 43 states 

have adopted a GHG inventory and/or registry; 36 states 

adopted and two states are currently developing a state 

climate change action plan; and 22 states have established 

GHG emissions targets.

Figure 4-5 shows states with emission targets and those 

participating in or observing regional climate initiatives as 

Figure 4-5

States with Climate Initiatives and Emission Targets

States participating in regional 

GHG reduction initiatives (includes 

observers to those agreements – AK, 

CO, ID, IN, KS, NV, OH, PA, SD, WY)

States with GHG reduction targets

States with GHG reduction targets and membership 

in regional GHG reduction initiatives Source: Pew Center on Global Climate Change
49

Energy Efficiency Cost-Effectiveness Screening

Source: Utility IRPs reviewed by Synapse Energy Economics 

2010 2015 2020 2025 2030 2035 2040

Figure 4-6

Carbon Price Estimates Incorporated in Utility IRPs 50

of October 2011. States that have adopted emissions targets 

and/or that are participating actively in regional climate 

initiatives comprise 44 percent of US electrical generation, 

48 percent of retail electricity sales, and 58 percent of 

US population. The observer states add an additional 

17 percent of electrical generation, 16 percent of retail 

electricity sales, and 15 percent of the US population.

Regulatory Options to Account for Climate 

Change Requirements

Compliance with Federal Climate Change Initiatives

Many utilities and utility regulators recognize that the 

federal government will, in one way or another, impose 

carbon restrictions on energy resources in the near- to 

midterm future. There remains considerable uncertainty 

regarding exactly what those restrictions will be, when 

they will be in place, and what they will cost. Nonetheless, 

it is important to use the best forecasts possible of the 

cost of complying with federal climate change initiatives, 

particularly in the context of planning for energy resources 

that will operate for 20, 30, or even 40 years into the 

future. 

Utilities use two interrelated approaches to account for 

the cost of complying with climate change requirements 

when assessing energy efficiency resources: through 

integrated resource planning and through energy efficiency 

screening practices. The typical approach is to assume 

a CO2 allowance price that would be in effect under the 

environmental requirement. (The requirement could be 

a cap-and-trade mechanism that literally required GHG 

emitters to purchase CO2 allowances, or a different type 

of climate change requirement that is expected to lead to 

compliance costs that are comparable to the price of CO2

allowances.)

If a CO2 allowance price is used, then a forecast of 

such prices should be added to the dispatch costs of all 

generation resources that emit GHGs, either as part of IRP 

or as part of estimating avoided costs for screening energy 

efficiency resources. A CO2 allowance price forecast should 

be used as a “base case” planning assumption, as opposed 

to simply being included in an “environmental case” or 

a “carbon constrained case,” because the forecast should 

represent the most likely future cost of complying with 

federal climate change requirements. 

Figure 4-6 provides a summary of the CO2 allowance 

price forecasts used recently in several utility IRPs.49 In 

general, the price forecasts range from $10 to $30 per ton 

of CO2 in the early years, and increase to a range of $30 to 

$60 per ton in 2030. Most of these forecasts are based on 

analyses of potential future federal GHG legislation.

Those utilities that do not have the resources to develop 

49 This graph is not intended to be 

a comprehensive presentation 

of all CO2 price forecasts used 

in IRPs. Instead its purpose is 

to provide an indication of the 

magnitude and range of CO2

price forecasts used by many 

utilities.

50 The CO2 prices presented here 

are for the Reference Case, the 

Mid Case, or the case that is 

used to develop the preferred 

resource plan in each IRP. Note 

when IRP only provides a CO2

price at the beginning and the 

end of an analysis period, we 

interpolated the values for the 

interim years. All CO2 units 

are converted to short tons and 

constant dollars.

CO2 Price (2010 $ per short ton CO2)

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0
50

Energy Efficiency Cost-Effectiveness Screening

their own forecast of CO2 allowance prices can adopt a 

forecast available from public sources. Figure 4-4 presents 

two examples of publically available forecasts of CO2 prices; 

one from EEI and one from Synapse Energy Economics. 

Figure 4-7 presents a summary of the range of recent 

CO2 price forecasts in levelized terms. The low value for 

each forecast represents the levelized value of the Low 

Case; the middle value represents the levelized value of the 

Mid Case or Reference Case; and the high value represents 

the levelized value of the High Case. For those forecasts 

in Figure 4-7 that include only a single value, the value 

represents the Mid Case or Reference Case. As indicated, 

the levelized costs for the Mid Case forecasts tend to be in 

the range of $20 to $50/ton of CO2.

Many state regulatory commissions require energy 

efficiency program administrators to account for the cost of 

complying with current and anticipated GHG regulations in 

screening energy efficiency programs. Below we list several 

examples of such regulatory policies.51 2012 $/short ton

$120

$100

$80

$60

$40

$20

$0

Figure 4-7

Levelized Carbon Price Estimates: Low, Mid, and High Cases

x

x x

x

x

x

x x x

x

x

x

Entergy (2009)

Connecticut Light and Power (2010)

Delmarva Power and Light (2010)

Duke Carolinas (2011)2011 Fundamental

Duke Carolinas (2011)2010 Fundamental

American Electric Power (CPCN)

Ameren (2011)

Public Service Company of New Mexico (2011)

Tennessee Valley Authority (2011)

Public Service Company of New Mexico (2011)

Puget Sound Energy (2011 Update)

PacifiCorp (2011/2012)

Avista (2011)

Omaha (2010)

Portland General Electric (2011)

Imperial Irrigation District (2010)

Sunflower (2010)

Los Angeles Department of Water and Power (2011)

Seattle City Light (2010) 

APS (2012)

Nevada Power (2012)

Synapse

Source: Utility IRPs reviewed by Synapse Energy Economics; Figure 4-4; and Figure 4-6

•	 California. California has been incorporating 

CO2 prices in evaluating cost-effectiveness energy 

efficiency programs since 2004 when an E3 report 

examined a range of carbon values from $5 to $69 

per ton of CO2 and recommended the use of $8 per 

ton as a levelized cost in its analysis (based on a 

trend of $5 per ton in the near term, $12.50 per ton 

by 2008, and higher values thereafter [E3 and RMI, 

2004]). In 2009, California adopted the CO2 price 

forecasts prepared by Synapse Energy Economics (a 

previous Synapse Energy Economics forecast than 

the one presented above) for estimating the cost of 

51 This list is not intended to be a comprehensive list of all 

states that require energy efficiency screening to account for 

the costs of compliance with environmental requirements, 

nor is it meant to be an exhaustive discussion of any one 

state. We present these summaries as illustrative examples.
51

Energy Efficiency Cost-Effectiveness Screening

power plants used as a benchmark against renewable 

energy contracts under the State’s renewable portfolio 

standard (RPS) (CPUC, 2009, p. 9). For evaluating 

energy efficiency programs, California Public Service 

Commission has recently proposed to adopt the same 

CO2 price forecast adopted in the RPS case (CPUC, 

2011, p. 2).

•	 New England. All New England states rely on 

avoided cost estimates from the Avoided Energy 

Supply Component (AESC) Study produced every two 

years for the region. The most recent version of the 

AESC was prepared by Synapse Energy Economics, 

and includes a forecast of future CO2 compliance 

costs. The forecast is based on CO2 allowance prices 

from RGGI in the early years, and then assumes that 

federal climate change requirements will begin to take 

effect in 2018 (Synapse, 2011). The CO2 allowance 

prices for the federal requirements are the same prices 

presented in Figure 4 6. The most recent AESC study 

also includes an estimate of $80/ton for the long-term 

cost of CO2 abatement sufficient to achieve climate 

stabilization. Each state decides whether to include 

the avoided costs of complying with environmental 

regulations in screening energy efficiency measures. 

Vermont, which uses the Societal Cost Test in 

screening energy efficiency, uses the $80/ton CO2

abatement cost. Connecticut, Maine, Massachusetts, 

and New Hampshire use the CO2 allowance price 

forecast. Rhode Island uses a forecast of the RGGI 

allowance prices.

•	 New York. In the Order Establishing Energy 

Efficiency Portfolio Standard and Approving 

Programs, the Commission found that 

implementation of energy efficiency programs will 

have a more favorable impact on air quality than 

the no action alternative (New York PSC, 2008, p. 

67). At Appendix 3 of this order the TRC Test was 

amended to include a CO2 adder of $15/ton ($2008) 

as an estimate of the benefit of carbon reductions. 

This CO2 value is currently being used to screen 

efficiency programs implemented by NYSERDA and 

the investor-owned utilities (Tress & Kim, 2012; 

NYSERDA, 2012). 

•	 Oregon. In the early 1990s the Oregon PUC required 

utilities to analyze a range of environmental cost 

adders in the utility IRP process. The CO2 costs 

ranged from $10 to $40/ton (in 1990 $) (Oregon 

PUC, 1993). In 2008 the Commission adopted a 

new rule entitled “Guideline 8” on environmental 

costs (Oregon PUC, 2008). Guideline 8 does not 

provide any specific numbers, but instead establishes 

broad guidelines as to how utilities should assess 

environmental compliance costs as follows:

The utility should construct a base-case scenario to reflect 

what it considers to be the most likely regulatory compliance 

future for carbon dioxide (CO2), nitrogen oxide, sulfur oxides, 

and mercury emissions. The utility also should develop 

several compliance scenarios ranging from the present CO2

regulatory level to the upper reaches of credible proposals by 

governing entities.... The utility should identify at least one 

CO2 compliance “turning point” scenario which, if anticipated 

now, would lead to, or “trigger” the selection of a portfolio 

of resources that is substantially different from the preferred 

portfolio (Oregon PUC, 2008, Order No. 08-339, Appendix 

C, “Adopted Guideline 8”). 

The Energy Trust of Oregon, the state’s third-party 

efficiency program administrator, incorporates 

the cost of carbon in their energy efficiency costeffectiveness analysis based on the values used in 

PacifiCorp and PGE’s IRPs (Gordon, 2012).

•	 Wisconsin. Wisconsin’s state energy efficiency 

program administrator, Wisconsin Focus on Energy 

(FOE) categorizes externalities into economic and 

non-economic externalities. Economic externalities 

are assumed to be internalized, for example, through 

mitigation requirements or cap-and-trade markets 

(PA Consulting Group & KEMA, 2009, p. 3-9, 6-9). 

CO2 is part of economic externalities and is included 

in their benefit cost called “simple benefit cost test,” 

which combines elements of the TRC and Societal 

Cost Tests’ approach (PA Consulting Group & KEMA, 

2009, p. 2-3). Wisconsin FOE assumes $26/ton of 

CO2 in 2020 and $28 in 2035. Mercury, which is 

currently considered a non-economic externality, is 

included in a test called “expanded benefit cost test.” 

This test incorporates non-energy benefits as well as 

macroeconomic benefits.
52

Energy Efficiency Cost-Effectiveness Screening

Compliance with State Climate Change Initiatives

As indicated in Section 4.3, many states have established 

initiatives to address climate change, and several of them 

have established GHG emission targets. For these states, 

the environmental compliance costs may be more certain 

than those associated with federal initiatives, and may be 

experienced much sooner. In addition, some of these state 

climate change requirements could be significantly more 

stringent than the anticipated federal requirements. 

For these states with climate change requirements, it is 

important that the cost of complying with the current and 

anticipated requirements is properly accounted for when 

screening energy efficiency programs. Ideally each state 

should assess the cost of complying with its own state-level 

climate change requirements. If the state requirements are 

expected to be less stringent than the federal requirements, 

then the federal requirements should be used as the basis 

for the cost of compliance (see earlier discussion). If the 

state requirements are expected to be more stringent than 

the federal requirements, then the state requirements 

should be used as the basis for the cost of compliance.

Ideally each state’s cost of climate change compliance 

should be based on a statewide analysis of all GHG 

abatement options across all sectors of the state’s economy. 

If possible, each state should develop a forecast of the 

marginal GHG abatement option that would be necessary 

for complying with that state’s climate change requirements. 

This marginal climate change compliance cost should then 

be added to other avoided costs when screening energy 

efficiency resources. In this way, energy efficiency would 

be evaluated on an equivalent basis with other GHG 

abatement options.

In the absence of a statewide GHG abatement analysis, 

estimates could be based on an analysis of electricity 

sector GHG abatement options. Ideally this would include 

a supply curve of all the electric sector GHG abatement 

options, ranked from lowest cost to highest cost. The 

marginal GHG abatement option could then be used to 

indicate the avoided cost of complying with the state’s GHG 

requirements. This approach is likely to be conservative 

relative to an estimate of economy-wide abatement options, 

because the electricity sector typically has some of the 

lowest-cost abatement options, and the electricity sector 

is expected to play a significant role in meeting economywide climate change requirements.

In the absence of a supply curve of all the electric sector 

GHG abatement options, a state could develop estimates 

of the marginal cost of complying with GHG requirements 

using proxies. We discuss three examples below: forecasted 

renewable energy certificate (REC) prices, RPS alternative 

compliance payments, and estimates of marginal abatement 

costs. Although each of these examples should be 

considered as approximations of an uncertain cost, they 

may nonetheless be very valuable improvements to those 

planning processes that assume that compliance costs will 

be zero. 

Massachusetts Example 

In 1992 the Massachusetts Department of Public 

Utilities (DPU) required all utilities to consider the 

consequences of various environmental externalities 

when selecting new electric power generation sources 

(MA DPU, 1992). This decision was subsequently 

appealed to the state’s supreme judicial court by 

the Massachusetts Electric Company. The court 

found that the DPU did not have the jurisdiction to 

require utilities to account for environmental costs 

in their resource planning and selection process. 

The court noted, however, that the DPU did have 

the jurisdiction to require utilities to account for all 

costs required to comply with current and reasonably 

anticipated future environmental regulations, because 

the costs of complying with these regulations will be 

included in utility rates, and thus are within the DPU’s 

jurisdiction (MA SJC, 1994). 

In 2009 the DPU required all energy efficiency 

program administrators to include the costs of 

complying with existing and reasonably anticipated 

future environmental regulations when screening 

energy efficiency programs (MA DPU, 2009, p. 17). 

The DPU noted that one of the most important 

such regulations was the Massachusetts Global 

Warming Solutions Act, which requires reductions of 

Massachusetts CO2 emissions of 25 percent by 2020 

and 80 percent by 2050. The DPU currently has a 

docket open to identify the best means of estimating 

the costs of compliance with environmental 

regulations (MA DPU, 2011).
53

Energy Efficiency Cost-Effectiveness Screening

Forecasted REC Prices as a Proxy for Marginal 

Abatement Costs 

RPSs are frequently established to address environmental 

concerns and climate change requirements, and the cost of 

renewable resources is very likely to be less than or equal 

to the marginal cost of complying with climate change 

requirements. Energy efficiency resources offer many of 

the same energy and non-energy benefits as renewable 

resources, and thus there is a sound economic and public 

policy rationale for paying as much for efficiency as is paid 

for renewables.

Under this approach, energy efficiency program 

administrators would develop a forecast of the REC prices 

for their state. These REC prices would then be assumed 

to be a proxy for the cost of compliance with that state’s 

environmental requirements, including climate change 

requirements. This cost of compliance would then be 

included in the Societal Cost, the TRC, and the PAC Tests 

when screening energy efficiency resources.

There is a significant disadvantage to this approach, 

however, because REC prices can be volatile, depending 

upon the extent to which renewable supply matches the 

RPS demand. Furthermore, a state’s RPS requirement might 

not be sufficient to develop enough renewables to meet 

that state’s climate change goals, in which case the REC 

prices will be less than the marginal cost of complying with 

climate change regulations, and thus will understate the 

value of energy efficiency resources. For these reasons, we 

prefer using the RPS alternative compliance payment level 

as a proxy for marginal abatement costs.

RPS Alternative Compliance Payments as a Proxy for 

Marginal Abatement Costs 

Most RPS mechanisms have an alternative compliance 

payment (ACP), that load-serving entities can pay if they 

are unable to purchase RECs at lower cost. The ACP is 

meant to serve as a cap on the amount that load-serving 

entities (and eventually customers) might have to pay to 

comply with the RPS. In effect, the ACP represents the 

maximum cost that legislators and regulators are willing 

to impose upon customers to acquire the benefits of 

renewable resources. Load-serving entities will typically pay 

the ACP when the demand for renewable resources exceeds 

the supply and the REC prices exceed the ACP.

For those states with relatively stringent climate 

change requirements, the ACP could be used as a proxy 

to represent the cost of compliance with environmental 

regulations, including climate change regulations. In such 

states, the renewable resources developed as a result of the 

RPS alone are unlikely to be sufficient to meet the stringent 

climate change requirements, thus more expensive GHG 

abatement options will be required in addition to the 

RPS renewables. Consequently the ACP is likely to be 

less than or equal to the marginal cost of complying with 

climate change requirements, and thus would represent a 

reasonable proxy for the cost of compliance.

This approach would result in applying the same cost 

cap for both renewable resources and energy efficiency. 

This can be justified on the grounds that energy efficiency 

offers essentially the same (and in some cases more) 

environmental compliance benefits and other non-energy 

benefits than renewable resources. 

This approach would put energy efficiency on a level 

playing field with renewable resources and other GHG 

abatement options. It would allow efficiency program 

administrators and other planners to choose efficiency 

whenever it is a lower cost option for meeting climate 

change requirements. Consequently this approach would 

ultimately lead to lower costs for customers. 

Note that the costs to customers for efficiency resources 

will not necessarily include the full ACP. The ACP would 

represent a cap, in which the maximum amount that would 

be paid for efficiency resources would be equal to the 

avoided supply-side costs plus the ACP. The ultimate costs 

to customers will be the average cost of saved energy across 

the efficiency portfolio, which is certain to be much less 

than this cap due to the many low-cost efficiency measures 

and programs offered by program administrators.

Literature Available on Marginal Abatement Costs

There is a large amount of literature available on 

marginal GHG abatement costs. Program administrators 

and utility regulators can draw upon this literature to 

develop costs that are relevant to the climate change 

requirements in their state.

In recent years there has been a lot of research on the 

marginal abatement costs required to achieve climate 

stabilization, by reducing global carbon emissions to 80 

percent below 1990 levels by 2050. For those states with 

climate change mandates that are comparable to these 

climate stabilization targets, this literature may prove useful 

in developing a marginal abatement cost for the state.
54

Energy Efficiency Cost-Effectiveness Screening

For example, the recent study by Synapse Energy 

Economics to estimate the avoided costs of energy 

efficiency in New England reviewed the international 

literature containing estimates of the abatement costs to 

reduce global carbon emissions to 80 percent below 1990 

levels by 2050 (Synapse, 2011). The study indicated that 

there is a wide range of GHG abatement cost estimates 

available, but concluded that a CO2 price of $80/ton 

represents a conservative estimate in the middle to 

lower end of that range, and that such a price could be 

appropriate for screening energy efficiency resources in 

New England. 

Recommendations to Account for 

Climate Change Requirements 

Include GHG Compliance Costs in the Societal 

Cost, TRC, and PAC Tests. It is important to recognize 

that including the cost of complying with climate change 

regulations is not the same as including externalities (future 

environmental regulation costs are internal to the utility, 

not external). The costs of compliance with such future 

climate change requirements thus should be included in 

the Societal Cost, TRC, and PAC Tests. 

Recognize the Importance of Accounting for 

GHG Compliance Costs Now. Federal action on 

climate change is likely within the mid- to long-term 

future, and many states have already established climate 

change requirements. Uncertainty regarding the timing 

and magnitude of compliance costs is not an excuse for 

inaction. Not accounting for compliance costs now is 

equivalent to assuming that the costs will be zero, even 

though it is clear that they will be significantly greater 

than that within the mid- to long-term future. Failure to 

account for climate change compliance costs in power plant 

comparisons and in determining avoided costs for energy 

efficiency screening will lead to suboptimal outcomes for 

ratepayers. Many energy efficiency resources have measure 

lives of 15 years, 20 years, or more. Supply-side resources 

have operating lives that are even longer. Resource 

decisions made in the near term should be based on the 

best assumptions available about the conditions that will 

exist over these long periods of time.

Account for Federal Climate Change Initiatives. All 

states should establish energy efficiency screening methodologies that account for the cost of complying with federal 

climate change initiatives. If a state does not have its own 

forecast of federal CO2 allowance prices, then it should rely 

upon publicly available forecasts, such as the EEI and Synapse Energy Economics forecasts presented in Figure 4-4.

Account for State Climate Change Initiatives. As 

indicated earlier, there are 22 states that have set state 

emission targets, while 36 states have state climate change 

action plans. All states that have such climate change 

requirements should account for the costs of complying 

with those requirements in screening energy efficiency 

programs. Ideally they should use state-specific marginal 

GHG abatement costs. In the absence of these they should 

use reasonable proxies for the marginal GHG abatement 

costs.

Include All Types of Environmental Compliance 

Costs. It is important to account for all likely 

environmental compliance costs, for example, climate 

change and EPA regulations (e.g., air, water, solid waste), 

as they can have cumulative effects. Furthermore, because 

energy efficiency may take several years to ramp up to 

desired levels it is important to screen for energy efficiency 

opportunities on a frequent, periodic basis.

Recognize the Limits of Cap-And-Trade 

Mechanisms. If a state, region, or the federal government 

were to eventually establish some form of CO2 cap-andtrade system as a method for imposing climate change 

requirements, it will still be important for utilities to 

implement all cost-effective energy efficiency on an ongoing 

basis. A cap-and-trade system alone will not bring forth 

much energy efficiency, let alone all cost-effective energy 

efficiency, due to the many barriers to energy efficiency. 

Ratepayer-funded energy efficiency programs are necessary 

to overcome these market barriers; and in the absence of 

such energy efficiency programs, society will underinvest 

in efficiency and pay too much to comply with cap-andtrade programs. In sum, energy efficiency programs, with 

comprehensive screening practices, are an important 

complement to CO2 cap-and-trade programs.
55

Energy Efficiency Cost-Effectiveness Screening

Ensure That Efficiency Resources Are Treated 

Comparably With Other Resources Built to Address 

Climate Change. If a utility proposes to construct new 

supply-side resources specifically to address climate change 

requirements (e.g., new wind facilities, a new nuclear plant, 

or a new coal plant with carbon sequestration), then it 

should (1) use these proposed resources as the marginal 

cost of compliance with climate change requirements 

when screening energy efficiency resources, and (2) 

implement all energy efficiency resources that cost less than 

these proposed resources. Failure to do so would lead to 

uneconomic outcomes and potentially significantly higher 

costs to electric customers for complying with the climate 

change requirements.
56

Energy Efficiency Cost-Effectiveness Screening

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59

Energy Efficiency Cost-Effectiveness Screening

52 The name for this test is misleading, because it does not 

include the total cost of the resources. A more accurate name 

for this test would be the All Customers Test.

53 The name for this test is misleading, because these costs 

and benefits are not all from the perspective of the utility 

or other agency administering the efficiency programs. A 

more descriptive name for this test would be the Revenue 

Requirements test.

The Purpose of this Appendix

The purpose of this appendix is to review some of 

the theoretical underpinnings of the cost-benefit 

tests. First we define a few key terms that are 

critical to understanding the difference between 

the tests, such as “external costs” and “non-energy impacts” 

(NEIs). Then we describe each test and provide some detail 

on exactly which types of costs and benefits it should, and 

should not, include. 

We focus on the distinctions between the Program 

Administrator Cost (PAC) Test, the Total Resource Cost 

(TRC) Test, and the Societal Cost Test. These tests have 

not been well defined in practice, and this has led to some 

deviations from the theoretical underpinnings of the tests. 

The Cost-Benefit Tests in Theory

As discussed in more detail in Section 2 of this report, 

five cost-effectiveness tests have been developed to consider 

efficiency costs and benefits. Each of these tests combines 

the various costs and benefits of energy efficiency programs 

in different ways, depending upon which costs and benefits 

pertain to the different parties.

To understand the definitions of the cost-benefit tests, it 

is important to recognize three important principles. First, 

each test is meant to indicate the cost-effectiveness of the 

efficiency resources from a particular perspective (program 

participants, all utility customers, society, and so on). Once 

the perspective is clarified, then it becomes clear which cost 

and benefit is appropriate to include in which test.

Second, each test must be internally consistent, that is, it 

must include all the costs and benefits associated with the 

perspective being evaluated. For example, if all the costs 

of a particular perspective are included in the test, then it 

is important to include all of the benefits from that same 

perspective. Otherwise the results of the test will be skewed 

and misleading. 

Third, each test must properly account for “transfer payments” between different parties. Transfer payments occur 

Appendix A: Principles Underlying the Tests

when a benefit to one party is caused by a cost to another 

party. According to economic theory, these payments should 

not be considered either a cost or a benefit because they 

cancel each other out. Whether a particular cost impact is 

considered a transfer payment depends upon the perspective 

that is used for the economic analysis. For example, in the 

Participant Test, the participating customer’s bill savings are 

considered a benefit, whereas in all the other tests they are 

not considered a benefit because they are a transfer payment 

from other customers (or from utility shareholders in the 

cases in which lost revenues are not recovered by the utility).

Below we summarize the five cost-effectiveness tests, 

with an emphasis on the perspective that each is meant to 

represent. 

•	 Societal Cost Test. This test includes the costs and 

benefits experienced by all members of society.

•	 Total Resource Cost (TRC) Test. This test includes 

the costs and benefits experienced by all utility 

customers, including energy efficiency program 

participants and non-participants.52

•	 Program Administrator Cost (PAC) Test. This 

test includes the energy costs and benefits that are 

experienced by the program administrator of the 

energy efficiency program. In other words, these costs 

and benefits are limited to the impacts on revenue 

requirements from the energy efficiency program; 

the costs equal the increase in revenue requirements 

necessary to implement the programs, and the 

benefits equal the savings in revenue requirements as 

a result of implementing the programs.53
60

Energy Efficiency Cost-Effectiveness Screening

•	 Participant Test. This test includes the costs and 

benefits that are experienced by the customer who 

participates in the efficiency program.

•	 Ratepayer Impact Measure (RIM) Test. This 

test provides an indication of the impact of energy 

efficiency programs on utility rates.

Some of the most important differences between these 

tests are in whether they include NEIs and externalities. 

We discuss this issue in more detail below. First we provide 

some definitions of NEIs and externalities, to be clear on 

what is meant by each term.

Definitions of Terms

Internal Versus External Costs and Benefits

Utilities and customers make resource decisions that 

take into account the costs and benefits they, themselves, 

incur. Those costs and benefits are said to be “internal” or 

“internalized,” because the utility or customer bears them 

directly and takes them into account in its internal decisionmaking. For instance, in choosing between a natural gas 

generator and a coal generator to install at a given location, a 

utility would consider the capital and operating costs of each 

technology, as well as the benefits provided (energy, capacity, 

ancillary services, and so on) and other non-monetary 

values, such as availability, black start capability, and the 

various risks each entailed. In choosing between a natural 

gas furnace and an electric heat pump for a new home, a 

customer would also consider her capital and operating costs 

and non-monetary values affecting the quality of service 

provided by the appliance, such as ability to provide cooling, 

noise levels, and so forth. The key point in each case is that 

all of the costs and benefits listed accrue to the decision 

maker, which in general is the buyer or seller of a good; for 

our purposes it is the utility or the utility customer.

Some costs and benefits accrue to a party other than 

the decision makers. In the example of a utility choosing 

between two generating technologies, the usual example 

of an externality is the emission of air pollutants. In this 

instance, it might be that the coal technology would emit 

more air pollution per kWh of generation than the natural 

gas technology. (Assume for purposes of this discussion that 

we are discussing a form of air pollution that is not subject 

to a tax or fee.) Other examples could include noise levels or 

traffic congestion from transportation of fuel. The cost of the 

air pollution might include health effects on the population 

downwind of the plant, damage to crops and buildings, or 

global climate change. The cost of noise pollution could be 

lowered property values in the neighborhood and lost sleep. 

The cost of traffic congestion could be time lost and extra 

fuel consumed by local traffic. The point is that the utility 

does not bear those costs; members of the public bear them. 

That makes those costs externalities. 

When regulators establish pollution abatement 

requirements (e.g., the EPA cap-and-trade program for SO2

emissions), the costs of complying with those requirements 

will be borne by the polluting entity and will thus become 

internalized. There may still be external costs associated 

with SO2 emissions, if there continues to be some 

environmental and health damages after the requirements 

are met. In this case these incremental environmental and 

health damages would be external costs.

Whether a cost or benefit is an externality does not 

depend on whether there is a monetary value associated 

with it. In our examples, there is a monetary cost when air 

pollution causes increased medical bills and crop damage or 

when traffic congestion causes increased fuel consumption 

by vehicles in local traffic (the dollar per gallon price of the 

fuel), but there might not be one for lost time of the travelers. 

Either way there is a cost, and that cost is an externality. 

Monetized Versus Non-Monetized Costs and Benefits

The party to whom a cost or benefit accrues, whether 

internal or external, may experience that cost or benefit as 

a cash income or expense item, or as a change in its assets 

and liabilities on its balance sheet. In the utility generator 

case above, the capital costs for the technology show up as 

both a cash outlay and (usually) a change on the balance 

sheet reflecting the asset and its financing. The operating 

costs show up as expense items. The power supply benefit 

shows up as revenue from sale of the energy and capacity. 

These all happen to be internal costs and benefits, and they 

are also directly experienced by the company as monetary 

values, so they are said to be “monetized.” The monetary 

values typically arise directly from market prices of the 

various goods and services consumed or produced. 

The utility also experiences internal but non-monetary 

costs and benefits. One technology might provide black 

start capability (the ability to restart a generator without a 

supply of power from the grid), a vital need but not one for 

which there typically is a market price. This is an example 

of an internal cost but one that either has no monetized 

value or for which one needs to be estimated, say by 

determining the market cost of installing a diesel generator 
61

Energy Efficiency Cost-Effectiveness Screening

solely for black start service.

The cost of medical care in the community due to 

increased air pollution is an example of an external cost that 

can be monetized. It is an externality because those medical 

costs are borne by individuals, insurance companies, or 

society as a whole, not the utility. It has a monetary value 

because the market price for the various medical services 

(emergency room visits, medical appointments, asthma 

drugs, and so forth) can be determined.

Economists and social scientists have developed methods 

of estimating dollar values for costs that do not have market 

prices. For example, lost productivity and shortened life 

expectancy for the population due to air pollution can be 

treated as if it had a dollar value by estimating a person’s lost 

earning potential (as is often done in setting the damages 

in a civil liability case). Other examples include regulators’ 

revealed preference, contingent valuation surveys, and 

willingness-to-pay or willingness-to-accept surveys.

Non-Energy Impacts

Most readers will be familiar with the range of energy 

costs and savings considered in energy efficiency costbenefit tests. These include savings in capital and operating 

costs of generators or natural gas supply, avoided line 

losses, and avoided costs for market purchases of power, 

gas, or ancillary services. Energy efficiency cost-benefit tests 

also include the relevant efficiency 

program costs.

Non-energy impacts are those 

costs and benefits that are not 

part of the cost or avoided cost 

of energy. NEIs are described in 

detail in Section 3 of this report. 

NEIs might be internal or external, 

depending on whom they affect, 

and might be monetized or not. 

Taking a residential efficiency 

program for low-income 

customers as an example, we can 

identify a number of illustrative 

NEIs and categorize them. (This 

discussion does not seek to do 

so exhaustively.) Certain costs 

and benefits would accrue to the 

low-income customer, some to 

the utility, and some to society 

as a whole. Table A-1 presents 

a sample of key NEIs from a low-income home retrofit 

program, and indicates whether they are market-priced, 

and whether they are internal costs from the perspective of 

the program participant, the utility, or to society.

Utility-perspective NEIs, such as reduced arrearages and 

reduced bad debt, can be priced by markets, because these 

are direct operating costs borne by the utility. These costs 

are internal to the utility and internal to society.

Some participant-perspective NEIs, such as increased 

property values and reduced consumption of other fuels, 

can be priced by markets, whereas others, such as increased 

comfort and increased safety, cannot be priced so easily 

using markets. All participant NEIs are internal costs 

from the participant and the societal perspectives, but are 

external costs from the utility perspective.

Some societal-perspective NEIs, such as reduced health 

care costs, can be priced by markets, whereas others, such 

as reduced environmental impacts, cannot be priced so 

easily using markets. All societal-perspective NEIs are 

internal costs from the societal perspective, but are external 

costs from the participant and utility perspectives.

Table A-1 demonstrates that NEIs will be experienced 

in different ways by different parties, can be priced using 

markets in some cases but not others, and will represent 

internal costs from some perspectives but external costs 

from other perspectives.

Table A-1

Sample NEIs for a Low-Income Program: Internal vs. External Costs

NEI

Market 

Priced

Internal to 

Participant

Internal to 

Utility

Internal to 

Society

Utility-Perspective NEIs

Reduced arrearages Yes – Yes Yes

Reduced bad debt Yes – Yes Yes

Reduced terminations and reconnections Yes – Yes Yes

Participant-Perspective NEIs

Increased comfort – Yes – Yes

Increased property value (for homeowners) Yes Yes – Yes

Increased safety – Yes – Yes

Reduced water consumption Yes Yes – Yes

Reduced consumption of other fuels Yes Yes – Yes

Reduced lost pay from sick days Yes Yes – Yes

Societal-Perspective NEIs

Reduced environmental impacts – – – Yes

Reduced health care costs Yes – – Yes

Increased productivity due to fewer sick days Yes – – Yes
62

Energy Efficiency Cost-Effectiveness Screening

The choice of discount rate to use for calculating 

present values of costs and benefits has significant 

implications for the cost-effectiveness of energy 

efficiency programs, because program costs are 

typically incurred in the first years, while program benefits 

are enjoyed for the life of the energy efficiency measure. 

This section describes the rationale for which discount 

rate should be applied when screening energy efficiency 

programs, for each of the standard cost-effectiveness tests.

The Goal of Discounting

Financial analysis of investments in energy efficiency 

should account for the fact that an energy efficiency 

initiative typically consists of an upfront investment in 

a structure or an end-use piece of equipment, which is 

expected to provide returns in the form of energy savings 

over a number of years. In order to compare costs and 

benefits that occur over a number of years, the various cash 

flows (i.e., the initial investment and the annual savings 

over the measure life) must be compared in a consistent 

way, usually as a present value expressed in the dollars of a 

common reference year. 

There is nothing special about energy efficiency in this 

regard; this challenge exists for analyzing any long-lived 

investment. Economic and financial theory generally 

acknowledge that a monetary benefit provided in a given 

year is more valuable than the same monetary value 

delivered in a later year. 

There are three commonly accepted reasons for this. 

One is inflation, which almost always causes a dollar in 

a future year to have less purchasing power than a dollar 

in an earlier year. The second reason is time preference; 

economic theory holds that people simply value benefits 

in the present more than the same benefit in the future, 

at least with respect to monetary benefits. The farther out 

in the future an expected benefit, the more such a person 

would prefer a present benefit. The third reason is risk; 

future monetary benefits from an investment are rarely 

guaranteed. The promise of a monetary benefit in a future 

Appendix B: Choice of Discount Rate

year has less value than an actual monetary benefit in the 

current year due to the risk that the future benefit may not 

occur or may be less than expected. 

Accounting for Inflation

This part of the discounting is relatively straightforward 

and requires a forecast of inflation rates for the term of the 

project life. One option is to use an econometric forecast 

(e.g., from an economic forecasting firm). Another common 

approach is to use the historical long-term inflation rate 

or the average inflation rate for a period of recent years. 

Either way, the assumed inflation rate can be used to turn 

each year’s costs and savings into so-called “real dollars” or 

“constant dollars.” Typically a project’s start year or a base 

year for a utility’s other forecasting efforts would be chosen.

The choice of whether to use a “real” discount rate or 

a “nominal” discount rate depends upon the inflation 

assumptions that are used in the annual costs and benefits 

of the efficiency cost-effectiveness analysis. It is important 

that consistent assumptions are used throughout. If the 

annual costs and benefits include the effects of inflation 

(i.e., are in nominal dollars), then the discount rate should 

be in nominal terms. If the annual costs and benefits are net 

of inflation (i.e., are in real dollars), then the discount rate 

should be in real terms.

Accounting for the Time Value of Money

This is the time preference issue mentioned previously. 

Suppose that an investor is offered a guaranteed return 

for investing funds. What would that return have to be to 

attract investments? Certainly it would have to cover the 

anticipated rate of inflation, but that will usually not be 

sufficient. Most people would rather have something today 

than the same thing in a year. Some extra return will be 

required. 

This extra return is usually called a “risk free discount 

rate,” because it assumes there is no risk associated with 

future benefits. (Risk will be discussed next.) In principle, 

such a risk free discount rate measures how much the 
63

Energy Efficiency Cost-Effectiveness Screening

decision maker on a given project values money this year 

versus next year. Note that the time value of money will be 

very different for different decision makers. This point will 

also be discussed below.

Accounting for Risk

Adjusting for risk is the most difficult part of 

discounting. Again, the risk adjustment depends on the 

perspective of the decision maker. Perhaps the simplest 

case is that in which the decision maker is a utility’s 

management. The source of an investor-owned utility’s 

investment funds is a combination of bond investors 

and equity investors, possibly including some preferred 

stockholders. Utility investments are typically discounted 

at the weighted average cost of capital (WACC), that is, 

the weighted average yield of the company’s bonds and 

preferred stock along with its allowed return on equity. 

When applying WACC for discounting, it is important to 

keep in mind that these values come from markets that 

factor in all three issues: estimated inflation rates, time 

value of money, and perceived riskiness of investing in the 

utility. 

Application to the Cost Benefit Tests

Although it is important to understand the economic 

theory underlying the application of discount rates, it is 

also important to recognize that the choice of discount 

rate is ultimately a policy call by the utility regulators. The 

choice of discount rates should be informed by considering 

which party is being affected and what is the time value 

of money for that party, but it should also be informed by 

considering how much weight the regulators want to give 

to the future costs and benefits associated with energy 

efficiency programs (especially benefits, because these 

occur well into the future). 

Discount Rate for the Societal Cost Test

The Societal Cost Test, as its name implies, should use 

a discount rate based on society’s preferences. Compared 

to individuals and firms, society should have a broader 

tolerance for receiving benefits in the future, and also be 

better able to access funds at a lower borrowing cost. In this 

case, the discount rate should be relatively low. 

Energy efficiency investments for special groups 

of customers, particularly low-income and at-risk 

populations, could also be viewed with a societal discount 

rate for several reasons. These customers are generally 

receiving some degree of support from society at large, so 

the investment can appropriately be viewed in a societal 

context. It is society investing in society, and should be 

analyzed using a discount rate appropriate to society as a 

whole. 

The social discount rate should reflect the benefit to 

society as a whole, and should also take into account both 

the reduced risk of energy efficiency investments, as well 

as society’s reduced time preference for a societal payback. 

This social discount rate is typically the lowest discount 

rate that reflects increased value in future savings. The 

Societal Cost Test also includes environmental externality 

costs, which should arguably be discounted at a very low 

discount rate, if at all.

Discount Rate for the PAC and TRC Tests

The purpose of the TRC and PAC Tests is to compare 

energy efficiency investments with the decision maker’s 

other investment options. Historically the discounting 

challenge was relatively straightforward for these tests: the 

primary decision maker was the utility, and its WACC was 

used. (See, for example, NAPEE, 2008, p. 4-8.) This was 

seen as treating energy efficiency investments comparable 

to investments in supply-side resources, assuming that 

costs were recovered in a comparable fashion and that 

consumers would be paying the same cost of capital on 

both supply-side and demand-side investments. 

More recently it has become clear that there are 

significant differences in the financial risks associated with 

supply- and demand-side resource investments. Energy 

efficiency investments are typically funded by a system 

benefit charge or a balancing account in utility rates. In 

either case, there is little risk to the utility associated with 

these investments, because they are passed directly on 

to customers independent of utility operations, utility 

performance, or other risk factors. Consequently an 

energy efficiency investment is less risky than a supplyside investment on a purely financial basis, in addition to 

being less risky with regard to planning, construction, and 

operation. A lower discount rate than the WACC (i.e., a 

risk-adjusted discount rate) should therefore be used in 

applying the PAC Test or the TRC Test. 

This lower risk also exists in those instances in which 

a third party administers the energy efficiency programs 

(e.g., Cape Cod, Delaware, Hawaii, Maine, New York, 
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Energy Efficiency Cost-Effectiveness Screening

Oregon, Vermont). In these cases, the utility WACC would 

clearly not be an appropriate discount rate, because that 

rate does not represent the time value of money to the 

third-party administrator. The discount rate for thirdparty administrator programs should be low for the same 

reason that discount rates for utility-administered programs 

funded by system benefits charges should be low: there is 

very little financial risk associated with the funding source, 

as there is no long-term financing involved. 

One option for developing a lower, risk-adjusted 

discount rate is to remove some, or all, of the risk premium 

and time preference embedded in the utility’s WACC. This 

could be achieved by comparing the utility’s financial risk 

profile to that of other companies with lower risks or with 

other market indicators of low-risk investment rates.

Another option is to use a more generic market indicator 

of a low-risk investment. For example, the interest rates on 

US Treasury bills are widely regarded as a good indication 

of low-risk investments. We are aware of at least three states 

that use the interest rates on US Treasury bills as a low-risk 

discount rate for assessing the cost-effectiveness of energy 

efficiency programs (ODC, 2012; MADPU, 2010; Efficiency 

ME, 2009). 

We recommend that states use the interest rates on 

long-term (e.g., 10-year) US Treasury bills as the discount 

rate for the PAC and the TRC Tests. This indicator is widely 

accepted as representing low-risk investments and is 

straightforward, transparent, and readily available. It also 

means that different utilities in a single state will use the 

same discount rates across the state, as it eliminates the 

need to develop utility-specific risk-adjusted discount rates.

Discount Rate for the Participant Test

The Participant Test considers whether an energy 

efficiency investment is cost-effective from the program 

participant’s point of view. This test should be used 

principally to set an incentive level that would be sufficient 

to make consumers implement efficiency measures. A 

consumer’s discount rate should be used to discount the 

costs and benefits in this test.

Choosing a consumer’s discount rate is administratively 

and theoretically complicated, however, as different 

customers have different discount rates. There is 

considerable uncertainty over what the reference point 

should be, as some consumers have home equity credit 

available, but some only have access to credit card-type 

debt with a much higher cost. 

For residential customers, energy efficiency programs 

are generally of lower risk than almost any investment the 

household can make, but immediate needs tend to put 

pressure on household capital, making borrowing rates 

also a factor. These points suggest that home equity loan 

or home mortgage rates might be appropriate, especially in 

new construction and remodeling programs, with higher 

credit card rates being more applicable to participants in 

low-income programs. 

For commercial and industrial customers, a reasonable 

cost of borrowing proxy could be local commercial 

lending rates or a prime rate plus an adder for non-prime 

businesses (e.g., a prime rate plus three percent). For 

large entities with internal capital rationing, it would be 

appropriate to use the firm’s internal rate of return hurdle 

rate or its internal payback requirement.

Discount Rate for the RIM Test

Discounting is a side issue for the RIM Test, because 

the key goal of this test is to indicate the effect of energy 

efficiency programs on retail rates. The utility WACC 

may be appropriate for this purpose, because this is the 

borrowing cost that ultimately determines utility rates. 
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