Technical Report 

NREL/TP-670-44072 

October 2008 

Considerations for 

Emerging Markets for 

Energy Savings Certificates 

Barry Friedman and Lori Bird 

National Renewable Energy Laboratory 

Galen Barbose 

Lawrence Berkeley National Laboratory
Considerations for 

Emerging Markets for 

Energy Savings Certificates 

Barry Friedman and Lori Bird 

National Renewable Energy Laboratory 

Galen Barbose 

Lawrence Berkeley National Laboratory

Prepared under Task No.SAO7.8730 

Technical Report 

NREL/TP-670-44072 

October 2008 

National Renewable Energy Laboratory

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Table of Contents 

Table of Contents ....................................................................................................................................... iii 

List of Tables ............................................................................................................................................... iv 

List of Figures ............................................................................................................................................. iv 

Acknowledgments ....................................................................................................................................... 1 

Executive Summary .................................................................................................................................... 2 

Introduction .................................................................................................................................................. 4 

What is an Energy Savings Certificate and How is it Used? .................................................................. 6 

Benefits of ESCs .......................................................................................................................................... 8 

Criticisms, Challenges, and Hurdles ......................................................................................................... 9 

Transaction Costs .......................................................................................................................9 

Measurement and Verification .................................................................................................10 

M&V and ESCs .......................................................................................................................10 

Tracking Ownership.................................................................................................................11 

Credibility ................................................................................................................................12 

Trading as a Potential Weakening Force in EEPS Design ......................................................13 

Challenges Unique to a National EEPS ...................................................................................14 

Markets for ESCs ....................................................................................................................................... 14 

Compliance Markets ................................................................................................................14 

ESC Interaction with RECs and RPS Markets ........................................................................18 

Compliance Market Size Potential...........................................................................................19 

Voluntary Markets ...................................................................................................................22 

New York Voluntary ESC Pilot Program ................................................................................23 

Carbon Market Interaction .......................................................................................................26

ESC Trading in Connecticut ..................................................................................................................... 28 

Context for the Connecticut ESC Program ..............................................................................29 

Trading Experience ..................................................................................................................31 

Program Structure and Lessons Learned .................................................................................33 

Ironing Out Residential Rules ..................................................................................................33 

Other Notable Provisions .........................................................................................................35

Key Structural Elements of ESCs Programs .......................................................................................... 36 

Eligible Project Types ..............................................................................................................37 

Targets......................................................................................................................................40 

Certifying Body .......................................................................................................................41 

Additionality, Free Ridership, and Cream Skimming .............................................................42 

Trading Rules: Obligated Entities and Parties Eligible to Trade .............................................42 

Measurement and Verification .................................................................................................43 

Reporting and Tracking Requirements ....................................................................................45 

Length of Issuance Period, Up-front Issuance, and Banking Rules ........................................47 

Alternative Compliance Payments (ACPs) ..............................................................................48 

Conclusions ............................................................................................................................................... 49 

References ................................................................................................................................................. 51

 iii
 iv

List of Tables 

Table 1. States with Electricity EEPS Stand-Alone Policies .........................................................16 

Table 2. States with Electricity Energy Savings Integrated within RPS .......................................17 

Table 3. Potential ESC Compliance Market in States with Existing Long-Term Energy 

Efficiency Obligations .............................................................................................................20 

Table 4. Example of NEPOOL GIS Trading Activity ...................................................................32 

Table 5. C&LM Class III Credits Available from CL&P and UI (MWh) .....................................32 

Table 6. ESC Schemes and Eligible Project Types .......................................................................39 

Table 7. Targets for European and Australian Trading Schemes ..................................................41 

List of Figures 

Figure 1. Steps in ESC Trading Schemes ........................................................................................7 

Figure 2. States with an EEPS .......................................................................................................15 

Figure 3. The Flow of ESCs in the Connecticut Compliance Trading Scheme ............................30 
 1

Acknowledgments 

This work was funded by the U.S. Department of Energy (DOE) Office of Energy 

Efficiency and Renewable Energy (EERE). The authors wish to thank Linda Silverman, 

John Atcheson as well as the Office of Planning, Budget, and Analysis (PBA) and the 

Weatherization and Intergovernmental Program (WIP) for their support of this work. 

We also wish to thank the following individuals for their thoughtful review comments: 

Ron Benioff and Elizabeth Brown of NREL, Ed Vine of Lawrence Berkeley National 

Laboratory, Paolo Bertoldi of the European Commission, David Goldberg of the 

Connecticut Clean Energy Fund, Alfred Mascola and Pat McDonnell of United 

Illuminated, Steve Bruno of Connecticut Power & Light, Kelly Bennett of Sterling 

Planet, Steve Nadel and Laura Furrey of American Council for an Energy-Efficient 

Economy, Matthew Brown of InterEnergy Solutions, Joe Loper of the Alliance to Save 

Energy, and Joel N. Gordes of Environmental Energy Solutions. And, finally, we offer 

many thanks to Michelle Kubik of NREL for her editorial support. 
Executive Summary 

Early experiences with energy savings certificates (ESCs) have revealed both their merit 

and the challenges associated with them. In the United States, there has been little activity 

to date, so any lessons must be drawn from experiences in Italy, the United Kingdom 

(UK), France, and elsewhere. The staying power of European examples, particularly in 

Italy, demonstrates that ESCs can help initiate more efficiency projects. Although a 

robust market for renewable energy certificates (RECs) has emerged in both the 

voluntary and policy compliance contexts in the United States, ESCs have yet to gain 

significant traction. 

However, because of the large number of energy efficiency portfolio standards (EEPS) 

that have been adopted in recent years in the United States, there is now an increased 

opportunity for ESC trading to emerge. A sharply increased public awareness of the role 

of energy efficiency (EE) in climate change policy also presents a renewed opportunity 

for ESCs, a concept that has been promoted by energy efficiency advocates for some 

time. But given unique challenges to date in the U.S. voluntary market, ESCs may have 

more of a role to play in facilitating EEPS compliance, at least in the short term. 

It is unclear at this early stage whether a voluntary market for ESCs will develop as it has 

for RECs. The emergence of a credible, independent national certifying body and 

consistent set of protocols, as well as the success of early examples, most likely will 

influence those prospects. REC markets have shown that there is market potential for 

tradable commodities that represent a public good and an opportunity for consumers to 

“vote with their wallets.” But a voluntary ESC market must cross an additional hurdle 

that RECs have not faced: public acceptance of the notion of taking action that eventually 

results in saving money, and then turning around and selling the proof of that savings for 

yet more income. Is this an unwarranted double benefit? 

This report looks at the opportunity presented by ESCs, the unique challenges they bring, 

a comparison with RECs that can inform expectations about ESC market development, 

and the solutions and best practices early ESC market experience have demonstrated. It 

also examines whether there are real market barriers that have kept ESCs from being 

adopted and what structural features are necessary to develop effective trading programs. 

The most significant challenge ESCs face is the need to balance the development of 

credible standards with the likelihood that regimes will be developed on very tight 

budgets. Because establishing high standards for certain aspects, such as measurement 

and verification (M&V), can add to transaction costs, these two values must be carefully 

balanced. 

In this regard, ESCs can benefit from existing markets and mechanisms to reduce costs. 

They can benefit from the traction that RECs have gained in the marketplace, along with 

the existing infrastructure developed for REC markets, such as tracking systems. These 

systems could be modified relatively easily to accommodate ESC trading. ESCs also can 

 2
benefit from existing M&V protocols and other data acquired through long-standing 

efficiency and public benefit programs. 

The key challenges and design considerations for ESCs are as follows: 

• Balancing the need for market integrity with the need to carefully manage 

transaction costs, including those related to tracking and preventing doublecounting. Maintaining transparency in transactional information and rules 

implementation. 

• Ensuring real, measurable, verified savings that take into account the following 

issues: 

o Establishment of a central, credible certifying body. 

o Additionality tests that ensure a measure is beyond business as usual 

(BAU), effectively handling related issues of free ridership and cream 

skimming. 

o Clear, uniform, rigorous measurement and verification (M&V) based on 

established protocols, across disparate technologies and circumstances. 

o Length of period for which ESCs are issued and up-front ESC issuance 

where appropriate. 

o Alternative compliance payments. 

o Close scrutiny of double-counting through an established system of 

tracking and/or certificate attestation process.1

 

o Developing rules for banking ESCs that provide for flexibility and 

increase the value of energy savings but do not overly weaken policies. 

• Communicating a value proposition of separated environmental and social 

attributes. 

• Providing for ESC ownership in a manner that is fair to both facilities investing in 

energy savings and organizations providing energy saving services. For example, 

the installer of high efficiency equipment could give a discount to end users 

paying for the installation, in exchange for ESC ownership. 

• Providing for third-party trading, opening the market beyond obligated entities. 

• Maximizing the ability to piggy-back on to existing electronic REC tracking 

systems. 

• Integrating ESCs with carbon offset and REC markets in a manner that does not 

muddy perceptions of both. 

• Providing early planning for inter-market, interregional, and international trading. 

If ESCs are traded under rules that are developed with a solid, well-planned foundation 

and the support of authorized, objective third-party certifying bodies, they can establish 

themselves as an accepted consumer product and have a beneficial effect on the broader 

voluntary demand for energy efficiency. The obstacles remain formidable and it is too 

soon to say whether this potential will find fruition. The opportunity for ESCs’ use in the 

compliance context is the more promising, not only as an end in itself but as a means to 

reap lessons learned, gain public and stakeholder acceptance, and pave the way for the 

voluntary side. 

 

1

 Attestations are documents verifying contract paths for a certificate, its chain of ownership. 

 3
Introduction

For a number of years, the concept of creating, and even trading, verified fixed units of 

energy savings, through energy efficiency or load management, has been proffered as a 

vehicle to increase the amount of savings implemented in the United States. However, the 

country has only started to adopt energy savings certificates (ESCs), sometimes referred 

to as “white tags,” in the past two years. The energy savings analog to renewable energy 

certificates (RECs), ESCs have the potential to bring the same market-based flexibility to 

energy efficiency that RECs have brought to renewable energy. 

Yet that opportunity remains largely untapped, even though energy efficiency has been a 

priority of regulators and conservationists for decades. Public and stakeholder 

understanding of, or belief in, ESCs is likely low, which is similar to early experiences in 

the REC market. This is partly fed by a somewhat persistent perception that energy 

efficiency measures are unreliable, unpredictable, or unenforceable (Hamrin et al. 2007). 

Energy efficiency has been called “the first fuel” to signify that saving energy and using 

electricity more efficiently are often considered foundational steps in a multipronged 

environmental strategy. To paraphrase one oft-repeated catchphrase, “the cleanest MWh 

of electricity is the one that is never used.” Many policy makers consider efficiency to be 

the most cost-effective solution to address rapidly increasing demands on congested 

transmission systems (Vine 2008). Following rolling brownouts during the California 

energy crisis of 2000-01, several Western state utility commissions approved increased 

spending for efficiency (Geller 2006). 

Today, as energy efficiency is gaining a more popular foothold as a critical solution to 

increasing energy prices, energy security, and global climate change, regulators and 

market participants are giving more attention to ways to encourage its adoption. Several 

studies have identified a critical role for energy efficiency in reducing global carbon 

emissions. In their 2004 identification of 15 “stabilization wedges” to collectively 

mitigate climate change, Princeton analysts Steven Pacala and Robert Socolow identified 

four energy efficiency and conservation wedges, including the potential for the buildings 

sector to cut its carbon emissions by one-fourth, by 2050.2 In a hearing before the Joint 

Economic Committee of Congress on July 30, 2008, in which Senator Charles Schumer 

(D-NY) suggested ESC trading to the committee, Jonathan Koomey of the Lawrence 

Berkeley National Laboratory (LBNL) testified that energy efficiency is the “fastest, 

cheapest, and cleanest” way to address energy security and climate risks (Koomey 2008). 

Still in an early stage of development, ESC markets can play a role in fostering energy 

efficiency, but not before the principles of a well-designed ESC trading platform are 

understood. REC markets provide some useful lessons but not a perfect blueprint. It is too 

soon to know whether momentum will be generated for ESCs analogous to, for example, 

the critical mass that has been created for recycling and recycled products in the United 

States in the past 15 years – after a slow start of low consumer awareness and interest. 

 

2

 Each wedge would contribute one gigaton of carbon reduction (GtC/y) by 2054. 

 4
It is unclear at this early stage whether a voluntary market for ESCs will develop as it has 

for RECs. To no small degree, experience with REC markets has shown that traction in 

voluntary markets can be a function of the success of compliance markets. Although 

there can be no definitive answer to the “chicken-and-egg” causative question of markets 

versus mandates, the early compliance markets for ESCs likely will similarly drive 

voluntary interest more than the other way around. This is because compared with RECs, 

ESCs are perhaps even more tenuous in their ability to be understood and accepted as a 

credible instrument demonstrating real, additional environmental benefit. Unlike RECs, 

ESCs cannot rely on readily verified metered data to demonstrate measurable results, but 

depend instead on comparatively complex measurement and verification protocols, which 

can vary from one compliance regime to another. 

To date, four U.S. states, three European countries, and New South Wales have 

incorporated ESCs into policies that establish energy efficiency targets, often referred to 

as energy efficiency portfolio standards (EEPS). India’s National Action Plan on Climate 

Change contemplates a future national market for ESCs in that country.3

 In addition, the 

European Commission is examining whether it should propose an ESC trading scheme 

across the EU.4 In the United States, only Connecticut is actively trading ESCs. 

This analysis explores the benefits of ESCs and the obstacles and challenges associated 

with their adoption. We review three major potential ESC markets: compliance, 

voluntary, and carbon. The analysis begins with a review of EEPS policies in the United 

States as the context for future compliance markets, examining ESCs’ potential market 

size in that context. We review the limited voluntary activity in the United States for 

ESCs to date and their potential interaction with carbon offset markets. 

The analysis explores the structure of how ESC trading can work in the United States 

using the Connecticut features as an example, and takes a closer look at each design 

feature using European examples. These components include rules for the types of 

projects for which ESCs can be issued; the types of parties who can buy and sell them; 

rules for issuing ESCs, tracking their ownership, and retiring them; rules for who can 

verify and certify that a given ESC is what it purports to be; and the monitoring and 

verification (M&V) protocols to be used for that verification. ESCs in other states and in 

the voluntary market are likely keeping a close eye on how these various elements are 

treated in existing ESC schemes, examining how each translates into the desired result: 

increased cost-effective energy savings activities. 

 

3

 See http://www.pewclimate.org/international/country-policies/india-climate-plan-summary/06-2008. 

4

 Directive 2006/32/EC of the European Parliament and of the Council of 5 April 2006 on energy end-use 

efficiency and energy services and repealing Council Directive 93/76/EEC (accessed from http://eurlex.europa.eu) 

 5
What is an Energy Savings Certificate and How is it Used? 

Similar to RECs, ESCs have various names: white tags, energy efficiency certificates or 

credits, and others. But regardless of the moniker, an ESC is simply an instrument 

representing a unit of energy savings that has been measured and verified. ESCs allow 

parties to trade the attributes of energy savings: The ESC represents an ownership right to 

the intangible bundle of societal and environmental benefits created by the fixed quantity 

of energy savings with which the ESC is associated. 

An ESC can be represented in units of electricity savings, such as 1 megawatt hour 

(MWh); or in common energy units that enable direct comparisons between gas 

efficiency and electricity savings, such as British thermal units (BTUs) or tons of oil 

equivalent (TOEs).5 ESCs can be designed to incorporate estimated savings (typically 

discounted) over the expected lifetime of the efficiency measure or to represent energy 

savings accrued annually – both approaches have been used. Assigning 1 MWh to an 

ESC likely simplifies its use, both because it makes an ESC more easily comparable to a 

REC (Bertoldi and Huld 2004) and because most EEPS policies in the United States 

focus on electricity savings. 

Integral to their design, ESCs are a device that can be used to buy and sell these benefits 

as a separate commodity, either bilaterally or at auction, with the bundle of benefits 

belonging to each successive owner. The ESC is finally credited to the owner of the ESC 

when it is retired, and that owner may make the associated claims concerning the energy 

savings. Similar to RECs, ESCs are intended to be retired only once, for one purpose 

only. Generally, an authorized body is required to ensure credibility in carrying out the 

various identified stages and mechanisms required to establish effective trading schemes 

for ESCs. Figure 1 presents the various stages involved in the creation of ESCs. 

 

5

 One TWh is equal to one million MWh. In part, the unit is a function of the aim of an ESC scheme: If the 

aim is improved security of supply, the target may be better defined in primary savings units to suit the 

policy aim; if the aim is reliability of electric supply, it may be better defined in kilowatt hours (kWh) 

saved (Bertoldi 2005). 

 6
Figure 1. Steps in ESC trading schemes 

ESCs have potential benefits for both voluntary and compliance markets, so that the 

owner who retires an ESC may do so for private purposes, such as reducing a carbon 

footprint, or to comply with a legal obligation, such as an EEPS. In some cases, an ESC 

may be used as a tool to demonstrate a reduction in carbon emissions. In addition to its 

function as a commodity conveying a property right, an ESC also can be an accounting 

tool, used to demonstrate energy efficiency implementation, or eligibility for certain tax 

incentives or other public subsidies associated with implementing energy efficiency or 

load reduction (Bertoldi et al. 2005).

In compliance markets making use of ESCs, what typically determines whether trading is 

allowed is the size of the market, the number of actors involved (larger markets with 

more players have more of a reason to encourage trading), and the role that utilities 

would like to play (in-house energy efficiency or outsourcing the expertise). For example 

in France, EDF and Gas de France, the two utilities with the largest targets, tend to 

implement project by themselves to position the companies as energy service providers, 

while in Italy the majority of ESCs are delivered to ESCOs (Bertoldi 2008).6

 

6

 Personal communication, Paolo Bertoldi, October 14, 2008. 

 7
Benefits of ESCs 

In conjunction with – or as an alternative to – other tools used to implement energy 

efficiency programs, ESCs offer unique advantages and disadvantages. As a tradable 

commodity, the main benefit of ESCs that has been espoused is their potential to free 

market forces to drive capital and capabilities to energy savings opportunities. 

ESCs can enable energy efficiency to be acquired more cost-effectively. For example, by 

opening up trading to third parties, ESCs could increase participation by private energy 

service companies (ESCOs) in state EEPS compliance markets – a potential advantage 

because of ESCOs’ unique experience and expertise with energy efficiency projects and 

technologies. In some cases, private actors are better able than utilities to identify and 

access high-value energy efficiency opportunities because of their economic interest in 

reaching market segments and geographic regions not easily tapped by utilities. In some 

cases, ESCOs’ advantage may be simply a better ability to acquire energy efficiency 

savings at lower costs. 

A similar argument could be made for other third parties in optimal positions to 

implement energy efficiency, such as appliance manufacturers and retailers, commercial 

and industrial energy end users, aggregators for residential measures, and others. Trading 

programs that open markets to third parties could see greater overall savings at a lower 

overall compliance cost, by virtue of empowering these third parties to derive value from 

ESCs. The competition also could result in utilities being pressured to implement their 

own programs more cost-effectively (Loper et al. 2008). 

Because of these possibilities, ESCs could potentially increase the amount of energy 

savings should voluntary markets be developed. They also can do so by stretching fixed 

utility energy efficiency budgets further, and by expanding the size of the resource 

potential in states such as Washington or Massachusetts, where utilities are required to 

acquire “all cost-effective energy efficiency.” 

Most would agree that if the benefits of private markets can result in greater energy 

savings, then public benefits accrue. The benefits of energy savings and energy efficiency 

are well understood – to the extent that ESCs offer a tool to reduce payback periods and 

thereby encourage more energy efficiency projects to move forward, those benefits may 

be attributable to ESCs as well. They include reduced emissions from fossil fuelgenerated electricity that contribute to climate change, acid rain, and smog and other 

health effects; reduced water consumption; increased energy security; and improved 

ecosystems. 

The decrease in electricity and fossil fuel demand brought about by efficiency also 

benefits the economies by delivering cost savings, which may become particularly 

important should U.S. climate change legislation be passed. The cost savings created by 

efficiency may serve to offset the higher energy prices resulting from a cap-and-trade 

system (ACEEE 2008). The economic benefits of energy efficiency can be particularly 

important to impoverished households disproportionately affected by increasing energy 

 8
costs. Finally, improved energy efficiency can provide a competitive edge for businesses 

in difficult economic climates (see Bertoldi et al. 2005). 

Criticisms, Challenges, and Hurdles 

As attractive as the proposition seems, there is some complexity associated with 

developing ESCs as a tradable compliance mechanism. The challenges associated with 

ESCs may partly explain why they are an oft-debated but still largely unexecuted idea in 

the United States, particularly on the voluntary side of the ledger. They include 

determining which savings measures should be eligible for ESCs; managing transaction 

costs and scaling programs to do so; establishing clearly defined and understood 

standards for verifying that savings are real, credible, and accurately measured; and 

accurately tracking ESC ownership. 

It is generally anticipated that ESCs add transaction costs to an EEPS scheme (see, for 

example, Vine and Hamrin 2008). To cite one example, perceived high transaction costs 

in the first phase of the Energy Efficient Commitment in Great Britain – about 10% of the 

total costs for lighting projects and about 30% for insulation projects – were found to 

slightly reduce levels of trading (Mundaca 2007). 

Transaction Costs 

Higher transaction costs associated with ESCs include those associated with the 

complexity of a greater number of parties involved in implementation of savings 

measures; the complication and cost of issuing, tracking, and certifying ESCs and related 

activities; and the need to pay special attention to M&V standards to ensure market 

integrity. Transaction costs include the direct costs of carrying out an ESC transaction, 

such as the cost of locating, negotiating with, and contracting with transaction 

counterparties (Langniss and Praetorious 2006). Finally, unlike RECs, for which 

generation data are obtained directly through meters and result in reliable data at low 

transaction costs, energy savings data for the same volume of energy as produced by 

renewable electricity are diffuse and would need to come from many more sources 

(Hamrin et al. 2007). This extensive data collection results in increased transaction costs. 

The key question is the extent to which the technical hurdles associated with ESCs 

outweigh the benefits and, taken cumulatively, become too costly relative to the potential 

added revenue or compliance flexibility ESCs are intended to generate. One factor that 

can help tip that balance in favor of the use of ESCs is the case of larger programs with 

larger goals, where costs can be better spread across larger transaction volumes and the 

size of the program can better justify the costs (Vine 2007). 

Because of the incrementally higher costs involved in programs incorporating ESCs, each 

element of a well-structured ESC trading program requires a delicate balance between 

credible results that ensure market longevity and the price tag of the mechanisms required 

to achieve that kind of dependability. Transaction costs can be eased by allowing projects 

to be aggregated and measured in the aggregate, rather than on the basis of individual 

projects. As programs have already discovered, M&V for ESC programs can take 

 9
advantage of the protocols and processes already in place through existing efficiency 

programs. 

Measurement & Verification 

The most prominent complication with which policy makers must wrestle – and one that 

does not apply to RECs – is the need to establish clear uniform protocols for measuring 

and verifying savings (M&V) across disparate technologies and circumstances. M&V is 

always an important issue for energy efficiency programs, whether or not ESCs are used. 

It is an added dimension to be considered in assessing whether progress REC markets 

have made in the United States is an indicator of the potential of ESC markets here. 

Measuring the renewable energy associated with RECs is usually simply a matter of 

reading and reporting metered data for the process of REC issuance. Measuring and 

verifying savings resulting from energy efficiency improvements is considerably more 

complicated and can add significant costs to ESC transactions. 

Fundamentally, M&V often is not a straightforward exercise, because measuring 

reductions in energy consumption depends on a baseline or reference scenario, a “before” 

picture, which is generally a moving target that must be accurately projected. Very often, 

by the time energy savings are achieved, “business as usual” is no longer business as 

usual, because facility demand or energy use patterns have changed – typically, demand 

has increased. 

M&V and ESCs 

Yet there is agreement among stakeholders and policy makers, reflected in the existing 

European ESC policies and the ESC literature, that clear, consistent M&V protocols are 

crucial to the long-term success of ESC trading schemes. They agree that consistent 

M&V is the lynchpin to ensuring that opening ESC trading to private third parties does 

not undermine the credibility of this new market seeking momentum. Without strong 

M&V standards, savings estimates can become inflated and projects that would have 

been completed under business-as-usual scenarios could result in a deflation in ESC 

value, undermining the investments in energy efficiency intended by the EEPS (Loper et 

al. 2008). M&V standards also are crucial for the task of measuring the “shelf life” of 

projects – how many years should ESCs be issued for a project based on how long the 

project is yielding real savings and the length of its payback period. In regimes where 

ESCs are issued up front for the life of a project, M&V determines how much the future 

value of ESCs should be discounted based on risks that the shelf life might be altered 

during the period of expected savings, a task that is something of a hybrid between policy 

and engineering considerations. 

Although ESCs will benefit from years of M&V development in the broader energy 

efficiency markets and protocols that have been established, most notably the 

International Performance Measurement and Verification Protocol (IPMVP 2001), they 

present unique challenges. First, ESC markets may be broader than individual utility 

service territories or states, requiring M&V standards to be harmonized across 

jurisdictions. Second, more robust markets for ESCs may include a broader range of 

 10
energy efficiency measures that may be implemented in a broader range of applications, 

potentially requiring additional M&V protocols to be developed. Third, a larger and more 

diverse set of entities may be involved in implementing projects, requiring some 

combination of training and the development of simplified M&V options. Third-party 

ESC trading can complicate M&V simply because of the need to apply and verify 

protocols for a diverse and numerous set of companies. 

Not harmonized correctly, each of these potential areas of inconsistency could contribute 

to weakening faith in ESC trading in general, because of such risks as companies 

receiving windfall benefits without true efficiency gains. M&V for renewable energy is 

generally not as complex, because renewable generation data is metered and generally 

verified by the control area operator, who is already verifying them for transmission 

purposes (Hamrin 2007). 

Developing a robust, liquid market for ESCs depends partly on the consistency among 

the methodologies and norms for establishing M&V protocols and for clarity among 

parties as to what is actually being sold and purchased. If interstate, national, or even, 

eventually, international trading were to develop, consistency among protocols would 

prevent transactional parties from being mired unnecessarily in trying to compare apples 

and oranges for the same technologies. It is useful to identify the benefit of such protocol 

standardization at this early stage of market design and consider all best practices. For 

now, there is no concerted effort at such coordination, although there are many 

nongovernmental organizations that look across such boundaries and attempt to 

communicate standards. 

Tracking Ownership 

Another key technical hurdle to successful ESC trading programs is the requirement for 

tracking systems. Where trading is allowed, it is necessary to track ESCs’ chain of 

ownership to ensure against double-counting. Accommodating the need to ensure market 

integrity must be accomplished at a reasonable cost, to avoid undercutting the small 

operating margins many efficiency projects carry. Moreover, in future trading regimes, 

tracking systems may need to integrate ESCs with RECs and carbon offsets to avoid 

confusion, duplication of efforts, and the potential for double-counting. 

Tracking can be a costly element to an ESC trading scheme, particularly when it is done 

manually through an attestation process and not through an automated system. Along 

with M&V, the need to track ownership can create incremental costs over those of 

efficiency programs that do not involve ESCs, especially when administrative procedures 

are complex (Langniss and Praetorious 2006). There are, however, cases where this cost 

can be significantly mitigated by “piggy-backing” on automated generation attribute 

tracking systems currently used for RECs. 

In Connecticut, rule-makers have attempted to do exactly that, using the New England 

Power Pool (NEPOOL) Generation Information System (GIS). In conjunction with 

market participants, APX Inc., the company that has provided the Web-based platform 

for most of the REC-based trading schemes, has anticipated the need for automated ESC 

 11
tracking. Of existing United States REC tracking systems, only the North American 

Renewables Registry – often referred to as the “default” system because it covers all 

geographic regions not covered by the systems that pre-dated its launch in May 2008 – 

was designed to track ESCs for a contemplated voluntary market, in addition to RECs. 

Credibility 

Ensuring that savings are “real and additional” is crucial to the success of voluntary ESC 

markets. Measures must be real, surplus, verifiable, and permanent – the R.S.V.P. of 

credible offsets. For efficiency, the primary hurdles are proving that measures are “real” 

and “surplus” or additional to what would otherwise have occurred. Because many 

efficiency measures are cost-effective over a relatively short period of time, determining 

standards for what measures are additional to those that would have occurred under 

business as usual is important. 

Cream Skimming 

ESC schemes must also deal with “cream skimming,” participation in ESC schemes of 

projects with short payback periods. In their design, ESC trading programs must 

determine the number of years they will allow various project types to generate ESCs, 

based on the length of time they are expected to generate real savings and the time it will 

take for those savings to provide the full payback of the initial investment. Providing 

ESCs to projects past this estimated period can result in windfalls to project owners and 

higher compliance costs. Some trading programs limit the period for which ESCs may be 

issued for projects. To reduce the relative incentives for cream skimming, trading 

programs can offer ESC issuance for longer periods of time, so that those projects with 

longer payback periods can better compete, because they would qualify for more ESCs 

over the life of that payback period. If, for example, a regime only issues ESCs for five 

years, projects with payback periods of five years or less would gain a competitive 

advantage. Lengthening issuance periods in this way can increase the financial incentive 

for these less cost-competitive projects with longer payback periods, improving overall 

additionality standards. Some have argued that issuing ESCs for projects with short 

payback periods promotes a broader, healthier market for energy efficiency, because such 

projects help demonstrate the compelling economic benefits that tend to be particularly 

strong where payback periods are particularly short. 

Free Ridership 

ESC programs bringing an additional revenue stream to energy savings projects must 

concern themselves with “free riders,” projects that were going to be implemented 

regardless of the additional revenue from ESCs, generally for nonenergy reasons. The 

preferred approach to accounting for free ridership is to adjust, or discount, the gross 

energy savings attributable to the program based on a “derate” factor, a percentage based 

on assumptions about the level of free ridership, with the resulting figure sometimes 

referred to as “net energy savings.” These assumptions are made through studies or 

market experience (Vine 2008). The intent behind the use of such assumptions is to offer 

an approach to free ridership that is reasonable, credible, and supports the additionality 

threshold, while avoiding overly burdensome enforcement costs. 

 12
Through such adjustments, regulators can prevent free ridership from causing an overestimation of the cost-effectiveness of a program when evaluating it. In a review of 

energy efficiency protocols in the Northeast United States, states had different rules on 

what adjustments were applied to gross savings to calculate net savings (Michals and 

Titus 2006). Other regimes employ protocols to exclude projects that are likely to be free 

riders from receiving ESCs, instead of applying a derate factor. In the end, policy makers 

must determine the right way to balance those questions in their unique situation. 

Trading as a Potential Weakening Force in EEPS Design 

Some argue that there are instances for which trading could create unintended 

consequences of weakening or narrowing EEPS policies, or making them more instead of 

less expensive. It could steer resources away from key energy saving policies and 

measures that may not qualify for ESCs, because the savings they create typically would 

not be attributable to individual parties obligated under the EEPS. Such policies include 

building codes, appliance standards, state consumer awareness and information 

campaigns, and tax incentives (Loper et al. 2008). Where an EEPS policy does not 

contemplate trading and therefore assigning ownership to ESCs from such projects, 

policy makers might be more inclined to credit these project types, resulting in their 

broader implementation. 

Others argue that the introduction of market forces can result in higher rather than lower 

compliance costs for energy efficiency, because pricing via the market rather than 

through a cost basis can result in prices higher than pure cost-based pricing should 

deliver, with the difference increasing profit margins instead of project investment (Wolff 

2008). For example, in states that have faced supply shortages in meeting RPS 

requirements, supply/demand imbalances have resulted in higher REC prices than what 

pure costs suggest they should be, because that is what the market would bear. Similarly, 

some argue that ESC short-supply scenarios can result in higher prices that do not 

necessarily yield more projects. However, energy efficiency projects do not face the same 

barriers as renewables, with respect to siting and transmission constraints, or the need for 

the same kind of long-term contracts; therefore, fewer barriers to their implementation 

exist. Theoretically, if markets operate without barriers, short-term overpayments should 

be addressed by the marketplace as a greater number of projects are implemented and 

drive down prices. 

Another criticism of ESCs concerns local air-quality benefits, if emissions reductions are 

a primary goal of an EEPS policy. If entities were permitted to buy out-of-state ESCs, 

they might be effectively “buying” their way out of part of their obligation and 

undermining any local air quality benefits. However, because obligated entities have not 

been permitted to purchase ESCs from out-of-state projects, this has not been an issue for 

EEPS states thus far. Along similar lines, out-of-state ESCs would deprive a state of the 

reduced energy costs, reduced risk mitigation benefits, and any economic development 

benefits associated with energy efficiency. The same issue has been raised for RECs, 

which is why some RPS states have required physical delivery of renewable energy into 

their states to accompany compliance RECs. 

 13
Challenges Unique to a National EEPS 

It has also been argued that ESC trading could effectively reduce the stringency of a 

national EEPS (should one be implemented in the United States), if ESCs from so-called 

“business-as-usual” (BAU) projects, like those implemented for a pre-existing state 

EEPS, were allowed to be sold into a federal compliance market (Loper et al. 2008). 

In such a scenario, a utility with excess ESCs after meeting its EEPS requirement could 

sell those ESCs to another utility in lieu of that other utility achieving additional savings 

to meet its federal EEPS requirement. 

In this case, trading among utilities could allow credit for more BAU programs, and thus 

reduce the effective stringency of the EEPS. Some contend that providing for national 

trading could allow obligated parties in states with stringent efficiency policies (with 

tougher standards for what qualifies as additional or a broader definition of the baseline 

of business-as-usual projects) to effectively weaken those standards by buying ESCs 

from states with less-aggressive baseline policies. In addition to undermining the 

stringent states’ policy, this could provide an undesirable reward to the laggard states 

(Loper et al. 2008). 

Markets for ESCs 

There are three major markets or potential markets for ESCs: EEPS or RPS compliance, 

voluntary, and carbon; carbon markets also include both voluntary and compliance 

markets. All of these markets can benefit from consistent M&V rules and a clear thirdparty certification body. But some issues are unique to each. 

Compliance Markets 

EEPS policies that create long-term targets for energy efficiency have emerged in 15 U.S. 

states (Figure 2, and Tables 1 and 2).

7

 The fact that all but three of these states have 

done so in the past three years demonstrates a clear trend and a renewed state interest. 

EEPS policies generally apply to utilities or load-serving entities, requiring them to 

demonstrate a quantity of energy savings that usually increases during the life of the 

requirement. EEPS policies are comparable to RPS policies and, in some instances, 

energy efficiency targets have been incorporated into an expanded RPS. In other cases, 

EEPS policies are enacted with targets that are entirely separate from and independent of 

RPS targets; often, this occurs in states with an already well-established RPS.8

 

 

7

 Database of State Incentives for Renewables and Efficiency. DSIRE: Rules, Regulations, & Policies for 

Energy Efficiency: http://www.dsireusa.org/summarytables/regee.cfm?&CurrentPageID=7&EE=1&RE=1

Accessed July 2008. Four other states have exceptional EE standards, as follows: In Washington State, the 

requirement is to acquire all achievable cost-effective EE, but with no specific target; Massachusetts has 

the same policy. In Vermont, the state has a contract with a third-party administrator to run their energy 

efficiency programs, and the contract includes a performance incentive based on energy savings. Finally, 

Virginia has an aspirational policy, not established through legislation or regulatory order. 

8

 Ohio has a stand-alone EEPS and also includes energy efficiency within a broader “alternative energy 

resource” portfolio standard. 

 14
 

Pending EERS

State EERS

Source: American Council for an Energy-Efficient Economy 

Figure 2. States with an EEPS 

 15
Table 1. States with Electricity EEPS Stand-Alone Policies 

State (Date 

Enacted) 

Obligated 

Parties Final Savings Target 

California 

(2004) IOUs 

Electricity: 2,631 GWh/yr (2013) Natural Gas: 444 

MMtherms (2013) 

Connecticut 

(2005) 

Retail 

electric 

suppliers 4% of retail sales (2010). 

Colorado 

(2007) IOUs 

5% of both retail sales and peak demand (2018, 

cumulatively from measures implemented since 2006) 

Illinois (2007) 

IOUs > 

100,000 

customers 

2% of energy delivered (2015) and 1.1% peak demand 

(2018) 

Maryland 

(2008) 

Distribution 

utilities 10% reduction in per capita electricity use by 2015 

Michigan 

(2008) 

All electric 

utilities 3.3% of retail sales (2012) 

Minnesota 

(2007) 

All electric 

utilities 1.5% of retail sales (2010) 

New Mexico 

(2008) 

IOUs and 

Munis 10% of retail sales (2020) 

New York 

(2008) IOUs 15% of retail sales (2015) 

Ohio (2008) 

Distribution 

utilities 2% of retail sales (2019) 

Texas 

(1997/2007) 

Distribution 

utilities 20% of load growth (2009) 

Notes: 

1) Colorado's natural gas goal has not been set yet. 

2) Connecticut's EE requirement is a separate class of measures within the RPS; as such, it functions as a 

standalone EEPS. 4% includes electricity, natural gas, and CHP measures. 

3) ) At least 1% of the Minnesota target must be met through utility conservation programs. The other 0.5% 

may come from a combination of new appliance standards and building codes, market transformation 

programs, waste heat recovery, and utility infrastructure upgrades. 

4) IOUs are investor-owned utilities. 

5) Munis are municipal utilities. 

 16
Table 2. States with Electricity Energy Savings Integrated within RPS 

State (Date 

Enacted) 

Obligated 

Parties Final RPS Target 

Maximum % that 

Can be Satisfied 

with Efficiency 

Hawaii (2004) 

All electric 

utilities 20% (2020) 50% 

Nevada (2005) 

IOUs and 

competitive 

retail 

suppliers 20% (2015); 

25% 

North Carolina 

(2007) 

All electric 

utilities 

IOUs: 12.5% (2021); 

POUs: 10% (2018) 

40% for IOUs; 

unlimited for POUs. 

Ohio (2008) 

Distribution 

utilities 25% (2025) 50% 

Pennsylvania 

(2004) 

Retail electric 

suppliers 10% (2020) 

 n/a 

Notes: 

1) POUs are publicly owned utilities. 

2) In Nevada, nonresidential measures are not to exceed 50% 

3) In Pennsylvania, energy efficiency is in a resource tier together with waste coal, large hydroelectric 

generation, and other “alternative energy” resources. The tier requirement is 10% by 2020. 

EEPS targets may be expressed as a percentage of demand, peak demand, load growth, or 

retail sales. In some cases, this is because of varying policy objectives, such as reduction 

in load growth to reduce the need for new power plants, reduction in peak demand, 

creating economic opportunity, or often a combination of factors. They vary as well in 

the types of projects that qualify. In some cases, they include a “weighting” multiplier 

feature that effectively increases the incentive to implement preferable projects, such as 

certain types of energy efficiency projects or projects meant to reduce peak load. 

Where trading is allowed, utilities required to comply with an EEPS that exceeds that 

requirement can sell ESCs to other obligated parties that fall short of their requirement. 

The result, at least in theory, is a less-expensive route to achieve an equivalent amount of 

savings. Some energy efficiency advocates have argued for a national EEPS with a 

trading regime that would create a more robust market, bringing broader opportunities for 

capital to flow to projects (ACEEE 2008). In such a regime, both buyers and sellers of 

ESCs would have a more robust set of counterparties through which to use the market to 

meet requirements in a cost-effective manner. 

Only four states have introduced ESCs into their EEPS policy – Connecticut, Nevada, 

Pennsylvania, and most recently Michigan. In only one of the four – Connecticut – have 

ESCs been actively traded for compliance purposes. Michigan’s EEPS, enacted in 

October 2008, explicitly allows the use of ESCs, called “energy optimization credits,” 

although trading is not allowed initially.9

 In the EEPS, the Michigan Legislature calls for 

the state’s public utilities commission to establish a certification, tracking, and 

accounting program for the credits; a date after which energy savings must be achieved to 

 

9

 See Michigan Senate Bill No. 213, Sections 83-87. 

 17
be considered additional; and a method for allowance for issuance and use of the credits 

in electronic form. 

At least a few other states (North Carolina and Illinois) have opened dockets or are 

otherwise gathering input on ESC trading for their consideration within an EEPS policy. 

Because EEPS policies are still very new in the United States, there is little experience 

from which to draw lessons as to whether ESCs can, and should, help with their 

compliance. Given the significant role of RECs as a tradable commodity in RPS policies 

to date and some success with using ESCs for European targets, the question of whether 

ESCs can play an analogous role for U.S. EEPS compliance is worth exploring. 

Moreover, bills may be introduced to enact a federal EEPS in the United States in the 

coming years, or energy efficiency targets within a federal RPS; it is important to 

understand the way that ESCs work, and their strengths and weaknesses, in those 

contexts as well. 

In 2007, a rejected amendment to the House of Representatives version of what later 

became the Energy Independence and Security Act (EISA) of 2007 would have created a 

national EEPS, requiring energy efficiency improvements equal to 10% of 2019 

electricity sales and 5% of 2019 natural gas sales in 2020. Should a future national EEPS 

policy be implemented, either within or separate from a national RPS, understanding the 

relative advantages and disadvantages of allowing utilities to purchase ESCs in addition 

to, or instead of, implementing their own energy savings programs is particularly 

important. The lessons learned from existing examples of trading regimes should be 

applied. 

ESC Interaction with RECs and RPS Markets 

ESCs can interact with REC and RPS markets in a number of ways. If ESCs are 

denominated in MWh units and represent electricity savings, they potentially could be 

used interchangeably with RECs in voluntary REC markets. Consumers could purchase 

ESCs to offset each MWh of electricity consumed, similar to how RECs are used by 

customers today. They also could be used essentially interchangeably with RECs in those 

compliance markets in which both efficiency and renewables are eligible to meet a single 

target. 

Combined efficiency and renewable energy portfolio targets are a relatively new concept, 

with most of these policies adopted since 2006. Therefore, experience with these policies 

is very limited. As discussed earlier, several states have designed policies that establish 

separate targets for efficiency, while others have established a single target in which 

efficiency essentially compete on a cost or other basis against renewable energy sources. 

In Pennsylvania, efficiency is included in a tier of resources with other “alternative 

energy sources” such as waste coal, large hydro, and certain forms of biomass. 

The amount of efficiency stimulated by an EEPS or RPS is a function of the cost of 

efficiency compared with the resources against which the efficiency competes. The tier 

structure – and specifically what other resources are in a given tier together with energy 

savings – is an important design element of any RPS or EEPS policy. 

 18
North Carolina’s RPS policy, which places efficiency within a tier of resources including 

some forms of renewable energy that are expected to be more expensive than the 

efficiency measures, tends to stimulate the efficiency measures, because they are costcompetitive. A standard similar to Pennsylvania’s – where efficiency is included within a 

tier of resources that also includes lower-cost alternative energy resources such as waste 

coal, large hydro, and certain biomass technologies – allows obligated parties to take 

advantage of these lower-cost alternatives and forego or reduce the need to implement 

efficiency for compliance. 

In most states for which energy savings requirements are rolled into a combined RPS, 

ESCs are likely to trade at lower prices than RECs and will likely replace demand for 

renewables. This is why certain states capped efficiency to capture energy savings 

opportunities without sacrificing renewable energy development entirely. Separate tiers 

for efficiency and renewables are likely to provide more certainty to the market, because 

the quantities needed of each resource could be more clearly delineated. Such a 

combination may encourage the adoption of efficiency in the short term and push the 

development of renewable resources in latter years, delaying the market’s ability to 

develop manufacturing capabilities and infrastructure. Separate tiers would enable the 

industries to develop in tandem with more market certainty. 

In cases where both efficiency and renewables can be used to meet the same standard, the 

introduction of ESCs could streamline the compliance process through a more liquid 

market, by combining REC and ESC trading into a single platform and tracking registry. 

Similar to RECs, ESCs can bring a market mechanism to compliance, which draws funds 

more easily toward opportunities through competition for the least-cost resources. At 

least in theory, such a mechanism can reduce compliance costs, enabling more projects 

and, consequently, the ability to develop more stringent standards. 

If ESCs are introduced for compliance, states may need to consider whether to develop a 

separate alternative compliance payment (ACP) for efficiency. In Connecticut, the ACP 

for the Class III energy efficiency targets is $31/MWh, compared to $55/MWh for Class I 

(renewables). However, in situations where both efficiency and renewables are eligible to 

meet the same standard, then one alternative compliance payment could be used. 

Because combined EEPS/RPS policies are in the early stages of implementation, and 

none of these states have yet incorporated ESC trading, there is little experience with 

which to derive lessons learned. However, many of these states have implemented REC 

trading for RPS compliance, so they are well-situated to undertake ESC trading. 

Compliance Market Size Potential 

In this section, we estimate the potential U.S. ESC compliance market. Attempting to 

forecast the size potential for the voluntary market will inevitably be a partly speculative 

exercise, given the innovative nature of the product and the difficulty in creating valid 

analogies – most notably the imperfect analogies sometimes made with RECs. 

 19
Although only four states (Connecticut, Pennsylvania, Nevada, and Michigan) currently 

allow the use of ESCs for compliance, progress in addressing some of the technical and 

institutional challenges to implementing ESCs could lead to broader adoption among 

states with long-term energy efficiency savings obligations, and among states with 

binding greenhouse gas emission targets. Until such time, current U.S. market activity is 

limited to Connecticut. The market in Connecticut is relatively large, because “Class III 

credits” (ESCs) are the sole method for EEPS compliance there – for 2008, that 

requirement was about 627,000 MWh (2% of retail sales); the 2009 requirement is 

910,000 MWh (3% of retail sales). 

As a benchmark for gauging the potential ESC compliance market in the United States, 

the analysis estimates the ESC market volume under the scenario where all 15 U.S. states 

with existing long-term energy efficiency obligations allow the use of ESCs for 

compliance. This estimate could be viewed as an upper bound, because it assumes 

universal adoption among these 15 states. However, additional states may enact longterm energy efficiency obligations (and/or binding greenhouse gas emission targets) over 

time, potentially widening the opportunities for ESCs as a compliance instrument. In 

addition, ESCs potentially could be used for compliance in states without any form of 

long-term energy efficiency obligation, but where regulators establish shorter-term (e.g., 

1- to 3-year) utility energy efficiency program budgets and savings targets. 

Table 3 presents the ESC market potential among the 15 states currently with long-term 

energy efficiency obligations. We estimate a potential market volume of more than 

35,000 GWh in 2010, growing to approximately 86,000 GWh in 2015, and 125,000 GWh 

by 2020. To put these figures into context, 125,000 GWh is more than one-and-a-half 

times the total U.S. electric utility energy efficiency savings in 2006, as reported by 

EIA.10 Illinois, New York, Ohio, Michigan, California, and Maryland represent the 

largest-potential ESC compliance markets among the 15 states, comprising about 77% of 

the total market potential in 2020. 

Table 3. Potential ESC Compliance Market in States with Existing Long-Term Energy 

Efficiency Obligations 

State ESC Market Potential (GWh) 

2010 2015 2020

Stand-alone EEPS 

CA 15,491 18,654 11,021

CT 1,125 1,330 1,400

CO 1,101 1,171 1,233

IL 1,604 11,441 24,449

MD 2,441 7,470 10,298

MI 885 6,372 11,564

MN 684 4,255 7,361

NM 401 936 1,604

NY 6,438 16,255 21,979

OH 1,115 7,523 17,160

 

10 http://www.eia.doe.gov/cneaf/electricity/epa/epat9p6.html 

 20
TX 3,193 4,463 4,769

Subtotal 33,766 80,507 114,996

Energy Efficiency Included in Broader Portfolio Standard 

HI 308 878 1,316

NC 0 2,713 6,902

NV 1,062 2,119 2,525

PA 0 0 0

Subtotal 1,370 5,711 10,742

Total 35,136 86,217 125,738

General methodology: 

(1) Several states (CA, NY, MD and MN) have adopted EEPS policies that encompass policy interventions beyond 

utility or third-party administered energy efficiency incentive programs – including, for example, building codes and 

appliance standards. For these states, the values shown in the table reflect only the portion of those broader 

targets required (or likely) to be met through energy efficiency incentive programs. 

(2) States with standalone EEPS policies typically specify their targets in terms of either (a) incremental annual 

savings as a percentage of retail sales or (b) cumulative savings over some time span as a percentage of retail 

sales in a given year. To translate these targets into an ESC market volume, we assume that energy efficiency 

measures installed to meet the standard would be eligible to receive ESCs for ten years following installation, which 

is consistent with the ESC eligibility period adopted in Connecticut and is in line with typical energy efficiency 

measure lifetimes. 

(3) States that allow energy efficiency measures to qualify as an eligible resource within a broader portfolio standard 

typically place a cap on the percentage of the total target that can be met with energy efficiency. Except where 

noted below, we assume that energy efficiency is used for compliance to the maximum extent allowed: 25% of total 

portfolio resources in Nevada, 25% for IOUs in North Carolina, and 50% in Hawaii. 

(4) For most states, GWh targets were derived from percentage targets, which required a retail sales forecast. We 

developed retail sales forecasts by applying the census region-based growth rates from EIA’s 2008 Annual Energy 

Outlook to actual 2006 retail sales in each state. In deriving the GWh targets from retail sales forecasts, we 

account for any exemptions included in each state’s RPS or EEPS policy (e.g., exemptions for publicly owned 

utilities or for large customers). 

Key state-specific assumptions, conventions, and data sources: 

(1) California: The market potential estimate shown for 2010 is based on the 2004-2013 goals adopted for the 

state’s IOUs. The CPUC recently adopted Total Market Gross goals for 2012 -2020, which encompass energy 

efficiency activities beyond utility programs. The 2015 and 2020 market potential estimates shown in the table 

reflect only the portion of the Total Market Gross goals achievable through utility programs, as determined in the 

study (Itron 2008) upon which the goals are based. 

(2) Colorado: State law requires that the Colorado PUC establish an EEPS for the state’s two IOUs, and specifies 

the minimum cumulative savings through 2018. The Colorado PUC has established a more-aggressive EEPS for 

Xcel, but has not yet established an EPPS for the state’s other IOU, Aquila. As such, the market potential 

estimates shown in the table reflect the targets established for Xcel by the Colorado PUC and, for Aquila, the 

statutory minimum target. 

(3) Connecticut: We assume that ESCs from all C&LM-funded C&I measures will be used to the extent available 

(accounting for the 10-year credit life), and that any remaining EEPS requirement will be met through CHP. 

(4) New Mexico: The state’s EEPS specifies targets for cumulative savings through 2014 and through 2020. To 

estimate the ESC market potential for 2010 and 2015, we assume a linear ramp-up to the 2014 and 2020 

cumulative savings goals. 

(5) New York: The values shown in the table for 2010 and 2015 are taken directly from a NY PSC order that 

developed annual savings targets for utility and NYSERDA-implemented programs, based on the overall statewide 

EEPS of 15% reduction by 2015. The 2020 market potential estimate assumes that programmatic efforts continue 

past 2015 at the same level as projected for 2015. 

(6) North Carolina: Unlike IOUs, publicly owned utilities (POUs) have no cap on the portion of their RPS target that 

can be met with energy efficiency. In estimating the ESC market potential, we assume that, after all RPS setasides are met and the large hydro allowance (30%) is fully exhausted, POUs meet 75% of their residual RPS 

target with efficiency. 

(7) Pennsylvania: The state’s Alternative Resource Portfolio Standard has two tiers, one for renewables and another 

for various “alternative” resources, including energy efficiency, large hydroelectric power, clean coal, municipal 

solid waste, and various other generation resources. Given that sufficient existing large hydroelectric generation 

exists to fully meet Pennsylvania’s Tier 2 standard, we assume that a market for tradable ESCs is unlikely to 

develop in that state, and thus the market potential shown is zero for all years. 

(8) The Texas EEPS is specified in terms of minimum peak demand savings as a percentage of peak demand 

growth, and applies only to the state’s regulated distribution utilities. We developed a peak demand forecast for the 

distribution utilities, based on the statewide peak demand forecast in Eliot et al. (2007). We estimated energy 

savings based on the ratio of energy-to-peak demand savings from energy efficiency programs implemented during 

2003-2007 (Frontier Associates, 2008). 

 21
Voluntary Markets 

For several years, energy efficiency advocates and others have touted a voluntary market 

for ESCs, based on their potential to provide the same level of market flexibility and 

incentives to energy efficiency opportunities as RECs have to renewable energy. The 

appeal is especially true for carbon emissions, because the location of the energy 

efficiency measure reducing carbon emissions makes little difference. The notion is that 

parties who have exhausted their own opportunities to reduce their energy consumption, 

or do so cost-effectively, should have a mechanism to reduce their footprint further by 

supporting projects regardless of geographic location. Capital investment could flow 

toward the most cost-effective opportunities, competition would be increased along with 

consumer awareness and demand, and payback times could be shortened to drive forward 

even the “higher-hanging” fruit. 

But despite the promise and the fact that the idea has been discussed for years, a 

voluntary U.S. market for ESCs has been very slow in developing. There have been some 

spot transactions, particularly of ESCs in the form of carbon offsets. In this form, the 

energy savings can be certified by credible third parties through established protocols not 

yet available to ESCs in noncarbon contexts. But there has been neither momentum nor 

structural support for a standalone ESC voluntary market. There are at least four 

significant reasons why the voluntary ESC market has not yet become a significant 

market tool in the United States, compared with the robust voluntary REC market of 

more than 10 million purchased MWhs per year. 

The first is communicating the value proposition. Much has been written about this 

difficulty with respect to RECs. But ESCs as a tradable commodity may be a more 

difficult concept to communicate (and therefore to market) than even RECs, their 

renewable energy counterpart. ESCs may find difficulty with an additional hurdle RECs 

have not faced: public acceptance of the notion of taking action that results in saving 

money, and then turning around and selling the proof of that savings for yet more 

income. Is this an unwarranted double benefit? 

In a time when institutional energy users are highly motivated to reduce their carbon 

footprint and “green” their public brand, a purchase of RECs to displace electricity use is 

a fairly straightforward means of accomplishing both. Although energy efficiency is at 

least as effective a means, the buying, and especially the selling, of the results of energy 

efficiency measures in certificate form could invite stakeholder scrutiny or accusations of 

“greenwashing.” 

At the least, voluntarily buying or selling ESCs would tend to generate a level of 

confusion and scrutiny aimed at market participants that would not apply to a company 

merely deploying its own energy efficiency program and “keeping” the certificates that 

demonstrate saved energy. For example, could a seller claim its energy savings for 

branding or carbon purposes? Or, would a buyer choosing ESCs over more costly energy 

efficiency measures that would have affected its own operations want to make energy 

savings claims under those circumstances? Both scenarios could invite the possibility of 

 22
negative attention during a time when many companies are paying close attention to both 

their carbon footprint and the greenness of their brand. 

Second, as has been discussed, measuring and verifying energy savings always comes 

with challenges. But voluntary markets tend to be national instead of confined to states or 

smaller geographic regions, increasing the risk that a given ESC, or a MWh of savings 

for a given project, does not carry the same value to the buyer as it does to the seller. For 

example, the same project could have a shorter payback period in one region of the 

country, where energy prices are higher, than in another region. Voluntary markets may 

require even more stringent additionality requirements than compliance programs, 

particularly if the ESCs are procured for their carbon benefits. If consumers voluntarily 

pay a premium for the ESCs, they need some assurance that they are supporting 

efficiency measures and savings that would not have otherwise occurred. Otherwise, 

consumers simply may be helping the bottom line of corporations where efficiency 

measures are installed, without actually driving the development of new projects. 

The third reason, related to the second, is the fact that no objective third party has stepped 

into the role of “certifying body” to address M&V and additionality issues, on a de facto 

if not officially recognized basis. Because of the scrutiny that can come on the voluntary 

side, certification is particularly important, as it has been for voluntary REC markets. 

Environmental Resources Trust-Winrock has promulgated a set of draft rules for the 

voluntary market, with an ESC certification called “Ecopower,” including a model 

“certification template.” As of September 2008, ERT-Winrock has not yet certified any 

transactions and was still in a comment period for the model rules. 

Fourth, the ESC voluntary market has not yet received the comparable boost from 

compliance markets that significantly helped the U.S. REC market. During the early 

development of U.S. REC markets from 2000-03, marketers were unsure whether RECs 

would enjoy longevity in the market, given the innovative nature of the product and the 

challenge in communicating its value proposition to consumers. At the time, a slowly 

increasing voluntary demand for RECs likely played some role in their early use by states 

as a vehicle to facilitate RPS compliance. But with the benefit of hindsight, evidence of 

the converse seems clearer: It is most likely that states’ legal sanction of RECs for 

compliance purposes lent the credibility that RECs needed to increase buyers’ comfort 

levels, which allowed the product to gain a lasting foothold in the voluntary market. For 

example, when the New England states and Texas first elected to use RECs for RPS 

compliance in 2002, the entire U.S. voluntary market for certified RECs was less than 

80,000 MWh; by the end of 2003, that figure had increased nearly fivefold (Bird and 

Swezey 2004). 

New York Voluntary ESC Pilot Program 

The New York State Energy Research and Development Authority (NYSERDA) is 

developing a pilot voluntary ESC program, which it expects to officially launch with its 

first ESC auction by spring 2009. The program is designed to create environmental 

benefits by increasing the implementation of energy efficiency measures, improving the 

transparency and credibility of ESC markets, and addressing potential emissions 

 23
“leakage” (i.e., shifting power generation to outside of the regulated region) that could 

undermine the goals of the Regional Greenhouse Gas Initiative (RGGI), for which New 

York is a participating state. 

Under the program, NYSERDA is aggregating ESCs from qualifying energy efficiency 

projects, auctioning them to brokers or consumers, and using the proceeds to fund 

additional energy efficiency projects. The revenues from the ESC sales will supplement 

funds available under NYSERDA’s public benefit fund program for energy efficiency. 

Historically, the fund was known as the “Peak Load Reduction” Program; it is currently 

being redesigned and will be relaunched as the “Existing Facilities” Program. Once the 

ESC program is operational, efficiency projects installed through the NYSERDA 

programs may sell ESCs equivalent to the calculated savings. In this way, the sale of 

ESCs should increase energy efficiency implementation, both in terms of size and 

number of projects. 

NYSERDA plans to use the measurement and verification (M&V) system already in 

place for its existing energy efficiency program to determine the savings and number of 

ESCs issued for projects. Therefore, the ESC program will require very little additional 

cost with respect to M&V, but it is expected to be well-served by NYSERDA’s robust 

project database and rigorous established protocols. One of the stated goals of the 

program is to ensure that savings are scrutinized and determined to be real and additional. 

Savings for small projects are calculated based on deemed savings, while medium 

projects require engineering analysis; and large projects require both an engineering 

analysis and actual measurement (e.g., using data loggers). 

To minimize transaction costs, the number of ESCs granted to a project will be estimated 

over the expected lifetime of the efficiency measure and issued in the first year of 

operation of the measure. The savings will be discounted for free ridership (i.e., projects 

that would have been installed without the incentives provided through the program or 

may be done for nonenergy-related reasons). NYSERDA plans to develop a standard set 

of guidance on the expected lifetime of various measures based on previous experience 

with efficiency projects and technology turnover. 

To initiate the program, NYSERDA began aggregating ESCs from customers in the Peak 

Load Reduction Program during summer 2007. All of the participants voluntarily agreed 

to donate the environmental benefits associated with the efficiency projects to 

NYSERDA, which will enable the group to auction them as ESCs. As of May 2008, 

NYSERDA had acquired about 200,000 MWh of energy savings from roughly 800 to 

900 individual projects, mainly at commercial facilities. As of July 2008, program 

administrators were developing a full plan for the auction program, including decisions 

about ownership of the ESCs. They also were determining whether the benefits of the 

ESCs would be held in escrow and retired on behalf of ESC purchasers or whether the 

ownership of the attributes would be transferred. 

To address double-counting, NYSERDA plans to initially rely on attestations from 

brokers that the ESCs will not be double-sold. Eventually, tracking of ownership and 

 24
retirement of ESCs may be integrated into an automated REC tracking system, which is 

currently under development for New York. 

One of the main drivers of the program is its potential to use energy savings to reduce 

carbon emissions leakage from the RGGI cap-and-trade program. Although the program 

design does not assign carbon benefits directly to energy efficiency projects, these 

projects can provide carbon emission reductions to the extent that they can reduce 

emissions leakage. Within the competitive generation region covered by RGGI, which 

includes New York State, there is a total cap on carbon emissions from electricity 

generation. Leakage occurs when generation shifts from sources subject to RGGI caps to 

those outside the RGGI region that are not subject to the cap, which results in a potential 

net increase in carbon emissions when the uncapped plants export energy into New York 

and other RGGI states. With no cap, the power plants outside of RGGI have a 

competitive cost advantage over the plants within RGGI. NYSERDA is deriving a 

methodology of measuring the potential leakage reduction that energy efficiency projects 

could provide. 

 

There are several key features to be culled out of the NYSERDA program and potentially 

emulated by other states’ systems benefit fund administrators who want to use ESCs to 

make limited funds go further. Most important, NYSERDA is relying on its existing 

efficiency programs and infrastructure to provide a foundation for credible ESCs. It is 

leveraging the existing M&V data and protocols to minimize transaction costs and to 

streamline the process of verifying and issuing ESCs. In this way, the NYSERDA 

program is a model that could potentially be replicated by other funds that are devoted to 

implementing efficiency measures. 

Arguably, the NYSERDA program is not a pure voluntary ESC market in the true sense. 

Unlike a straightforward voluntary market, the supply is predetermined and preaggregated. But unlike a compliance market, buyers are voluntary and demand is not 

fixed and constant. NYSERDA might perhaps be best characterized as an inversion of the 

normal compliance market model, in which regulatory mandates/goals create a supply of 

ESCs, and the market provides the demand. Perhaps, then, this kind of model provides 

some sort of pathway to creating a true voluntary ESC market, by addressing the 

development and communication of a value proposition, defining customer classes, and 

learning about and overcoming obstacles to customer and stakeholder acceptance. At the 

same time, the NYSERDA program addresses another problem that states face: meeting 

aggressive energy savings and/or carbon reduction goals while limiting the impact on 

ratepayers. One of the appeals to the program is that it encourages private participation in 

ESC markets while addressing the concern some buyers might have about supporting 

another person or entity’s private economic benefit; at least in part, the NYSERDA 

model instead supports stretching public benefits dollars farther. 

Early examples of voluntary activity (see also Other Voluntary Activity: IBM) with 

ESCs suggest an emerging interest to coincide with the renewed broader interest in the 

importance of energy savings. However, for the voluntary market to build momentum, 

there is a need for an independent, national certification body. Voluntary markets also 

 25
can benefit from lessons learned in compliance markets, particularly with regard to M&V 

protocols and certification processes. 

Other Voluntary Activity: IBM 

In the private sector, IBM launched another kind of pilot program to create the market 

flexibility that ESCs can provide and help move projects forward in their clients’ energyintensive data centers. Because of cooling and other equipment needs, these operations 

require as much as 15 times more energy per square foot than a typical office building. 

In November 2007, IBM created a relationship with Neuwing Energy Ventures to help 

measure energy-reduction measures and create certificates from the reductions. The goal is 

to make the efficiency certificates program available to users of IBM’s systems and data 

storage offerings, providing clients with the option to either keep and retire the certificates or 

make them available for purchase, first in the United States and later in Europe. The 

certificates program is part of IBM’s $1 billion per year “Project Big Green” initiative, aimed at 

increasing the efficiency of IBM products as well as delivering technologies that help 

customers increase energy efficiency in their data centers and physical plants. 

Under the program, Neuwing first establishes an energy consumption baseline for an 

interested data center based on industry estimates for the servers and the data center’s 

energy profile. The energy decision maker for the center can then choose from several 

preidentified projects aimed at reducing electricity consumption in data centers, including the 

use of virtualization technologies to reduce the number of physical systems and methods for 

correcting design flaws. Once the measure is implemented, Neuwing creates certificates 

based on the savings (MWh) and keeps a portion of the certificates or a “per MWh-saved” fee 

in exchange for their assessment services. It is too soon to gauge the effectiveness of the IBM 

program, but its outline presents an interesting set of ideas for a very important sector of the 

energy efficiency market. 

Carbon Market Interaction 

Efficiency has played a substantial role in international carbon offset markets, comprising 

18% of the global voluntary carbon offset transactions in 2007 (Hamilton et al. 2008). 

Energy savings have begun to be traded as voluntary carbon offsets in the Chicago 

Climate Exchange (CCX) – a trading platform through which businesses or institutional 

entities commit to GHG emissions reductions and trade with one another to meet their 

target – and through a small number of bilateral transactions. As of this writing, there are 

six energy efficiency-based offset projects registered on the CCX out of 106 total 

registered projects. 

Going forward, one key to the value of ESCs in these markets will be how seamlessly 

they can be integrated, or “converted” into offsets, so that the same ESC instrument can 

participate in voluntary ESC or carbon markets. While energy savings clearly offer 

carbon dioxide (CO2) emissions benefits and may be a key strategy in achieving GHG 

mitigation goals, their role in carbon markets will be shaped by the design of future 

policies and, in the interim, by standards adopted for voluntary markets. Emerging 

compliance markets could be the largest opportunity for ESCs, especially in the event of 

a federal carbon cap-and-trade program, as has been proposed. 

 26
Direct Versus Indirect Emissions 

Besides additionality requirements, which apply to any ESC market but have been 

particularly important in carbon markets, another key issue for efficiency is that it creates 

an indirect emission benefit by reducing the need for conventional generation, compared 

with direct emission reductions, such as those achieved by installing pollution controls on 

industrial factories. Therefore, there are questions as to whether efficiency measures can 

or should be used to offset direct emissions. REC policy makers grapple with the same 

issue: RECs, which also can reduce indirect but not direct emissions, are generally 

accepted as offsets for conventional power purchases, but there is ongoing debate over 

whether they can be used to offset direct GHG emissions. 

The emissions reductions associated with the efficiency measure depend on the type of 

generation that is displaced (e.g., whether it is natural gas or coal). The fact that 

efficiency creates an indirect emission reduction benefit also makes it unclear whether 

efficiency can claim the property right to the emission reduction. The issue of ownership 

likely will be clarified when carbon regulations are adopted; but, in the interim, there 

continues to be debate about ownership and the extent to which sources that provide 

indirect emissions benefits can be used as offsets of direct carbon emissions, especially in 

regions where caps are expected. 

Carbon Cap and Trade 

Carbon regulation is indeed beginning to emerge in the United States, and the shape of 

these policies will have ramifications for how ESCs can interact in carbon markets going 

forward. When it takes effect in 2009, the Regional Greenhouse Gas Initiative (RGGI), 

which involves 10 Northeast states, will be the first cap-and-trade program established in 

the United States. There also are two regional programs under development in the West 

and the Midwest. The Western Climate Initiative, which involves seven Western states 

and four Canadian provinces is developing rules. And finally, the Midwestern 

Greenhouse Gas Reduction Accord, which involves approximately a dozen Midwestern 

states, also is developing cap-and-trade systems. A program also is being debated at the 

federal level. 

In the cap-and-trade programs that have been developed in the Northeast (RGGI) and in 

Europe, allowances have been provided only to direct emitters and not to indirect 

emission reduction measures such as efficiency. Thus, while efficiency provides 

emissions benefits and will make it easier to comply with the cap, efficiency measures do 

not affect overall carbon emissions because the emitters will simply use any allowances 

that are freed-up by the efficiency measures to meet the cap. While they have not been 

adopted in these programs, set-asides or other allocation measures may be used in capand-trade programs to credit indirect emissions sources that provide emissions benefits 

(such as efficiency), which would potentially enable ESCs to play in carbon markets 

(Bertoldi et al. 2005, Bird et al. 2007). Set-asides for renewables and efficiency have 

been used in some NOx cap-and-trade programs and a set-aside was recently proposed in 

federal climate legislation (Jacobson and High 2008). Load-based caps also may enable 

efficiency to participate in carbon markets (Hamrin et al. 2007). Because most U.S. cap-

 27
and-trade programs are in the early stages of development, it is unclear how efficiency 

measures will be treated. 

While the RGGI program does not specifically grant carbon emission allowances to 

efficiency measures, some argue that efficiency can still play a role in providing overall 

reductions to the extent that it prevents leakage – the idea that caps may cause power 

generation to be shifted to high-emitting plants outside of the regulated region. Leakage 

is a particular concern for regional cap-and-trade programs and, if it occurs, overall 

emission reduction targets may not be fully realized; rather, emissions may simply be 

shifted to other regions. Energy efficiency may be able to play a role in addressing 

leakage by reducing cost pressures to meet the cap. As discussed earlier, the NYSERDA 

voluntary pilot ESC program is predicated on this theory that energy efficiency will result 

in carbon emissions reductions by reducing imports into the region. 

ESC Trading in Connecticut 

For U.S. EEPS policy makers and those seeking to understand the prospects for broader 

U.S. ESC compliance trading, the ESC trading program in Connecticut merits attention; 

at the time of this writing, it is the only U.S. state with active ESC trading.11 As the 

experience of a U.S. state, lessons from Connecticut can be more applicable than 

European examples to the circumstances and challenges of other EEPS states considering 

trading. 

Connecticut expanded its RPS in 2005 (via Public Act 05-01,“An Act Concerning Energy 

Independence”) to include an energy efficiency portfolio standard, called “Class III,” to 

meet a 1% energy efficiency savings target for 2007, ramping up to 2% for 2008, 3% for 

2009, and 4% for 2010 and thereafter.12 

The targets include a broad array of eligible savings projects, including combined heat 

and power (CHP), as well as load management and demand response. The Connecticut 

Department of Public Utility Control (DPUC) serves as the certifying body, approving 

projects for Class III credit issuance on a quarterly basis. 

In 2007, Public Act 07-242, “An Act Concerning Electricity and Energy Efficiency,” 

expanded the eligible savings measures to include certain waste heat recovery systems. In 

September 2008, a proposed expansion of the act was drafted to encompass residential 

measures (DPUC 2008). As of this writing, discussions on that draft decision are still 

underway and a decision has not yet been made on key features, such as the cutoff date 

for residential measures, prior to which the measures will be ineligible. 

Obligated suppliers can purchase Class III credits to meet their obligations on a quarterly 

basis; ESCs are issued each quarter for each project over the life of the project, with a 

maximum of 10 years. To the extent that obligations are not met, suppliers must pay 3.1 

 

11 As of July 2008. 

12 Each calendar year’s target must be met by January 1 of the following year. 

 28
cents/kWh in the form of an ACP set by the DPUC. By way of comparison, the Class I 

and II ACP (for renewables) is statutorily set at 5.5 cents/kWh. To guarantee a market for 

the credits, there is an established floor price of 1 cent/kWh for the credits. This floor 

price may become significant in the event of an over-supply of ESCs that could otherwise 

drive down the price and undermine the value of the program. 

Market value is a key indicator for considerations of market size. Although credit prices 

are under cover of contract, information on average or median prices is not confidential. 

One of the ESC providers in Connecticut, United Illuminating, reports an average price in 

the roughly 2-year-old market of about $20/MWh, and broker bulletin boards during the 

same period show that the ask price for ESCs has ranged from about $20-28/MWh.13 By 

contrast, prices in the Italian regime are somewhat lower; in fact, the weighted average 

price of Type 1 EEC (electricity savings) in Italy dropped from about 77 Euro/toe (which 

equates to about $9.05/MWh) to 47.7 Euro/toe (about $5.60/MWh) over the period from 

2006 to 2007 (Pavan 2008). 

Context for the Connecticut ESC Program 

It is important to understand not only the rules in Connecticut, their rationale, and how 

well they are working, but also the context in which ESC trading was created in the 

state.14 Connecticut’s unique circumstances likely played a significant role in the state 

legislature’s initial decision to implement an ESC trading regime. The context also helps 

explain the reasons for the various implementation rules of the Class III Credits program 

promulgated by the Connecticut DPUC. 

First, Connecticut is one of the U.S. states that has been deregulated, or restructured, for 

retail electricity. So unlike several other EEPS states that are regulated and have 

generally only a few investor-owned regulated utilities responsible for most EEPS 

compliance, Connecticut has more than 20 competitive suppliers (load-serving entities, or 

LSEs) responsible for a share of EEPS compliance.15 Unlike regulated states, the large 

numbers of competitive load-serving entities are not utilities with energy efficiency 

experience administering public benefits funds. Many of them are energy marketers and 

traders who do not possess this type of experience. 

Conversely, the two major Connecticut distribution utilities – United Illuminating (UI) 

and Connecticut Power & Light (CL&P) – had been administering the energy efficiency 

programs paid for by public benefit funds, with DPUC oversight, since 2000 (for about 

five years prior to the enactment of the EEPS). They were positioned to continue to 

implement the vast majority of savings measures for EEPS compliance. 

 

13 Indicative pricing information can be obtained from ICAP at http://www.icap.com/ and from Evolution 

Markets at http://new.evomarkets.com/. 14 Some background may also be helpful context for the Connecticut program. Because of state budget 

problems in 2003, the Connecticut state legislature took over part of the fund through a bond issue. The 

fund became partly securitized, and a little more than 25% of the ratepayer charge normally used to fund 

energy savings projects was used, for a time, to pay off the debt. 

15 WattsNewCT. “Suppliers and Aggregators.” Electric Restructuring. 

http://www.wattsnewct.com/newsuppliers.html. Accessed August 21, 2008. 

 29
Although the various suppliers are free to fund and implement their own energy savings 

activities for EEPS compliance (see Figure 3), to date they primarily have opted to buy 

ESCs from those issued through the Conservation and Load Management (C&LM) fund 

administered by UI and CL&P. UI and CL&P do not have their own Class III obligations 

under the Connecticut restructuring rules, but they are the largest sellers of Class III 

credits in the state by far. 

Source: Connecticut DPUC 

Figure 3. The flow of ESCs in the Connecticut Compliance Trading Scheme16

 

16 State of Connecticut Department of Public Utility Control. Docket No. 05-07-19, DPUC Proceeding to 

Develop A New Distributed Resources Portfolio Standard (Class III), February 16, 2006. 

http://www.ct.gov/dpuc/cwp/view.asp?a=3354&q=415186 

 30
Trading Experience 

For the most part, the Connecticut ESC market mechanism is working as intended: The 

independent suppliers are complying with the EEPS policy with their most cost-effective 

option, which is buying credits (ESCs), primarily from UI and CL&P, the two major 

investor-owned distribution utilities without Class III obligations of their own. Credits 

derived from C&LM-funded projects, administered by the two utilities, comprise the 

lion’s share of the market. 17 These credits are sold to the suppliers through the quarterly 

auctions.18 

So the effect of the Class III program generally has been that those entities in the best 

position to implement Connecticut energy savings programs – CL&P and UI – are doing 

so. At the same time, other suppliers are meeting their obligations by buying the credits, 

the proceeds of which circle back to support the C&LM fund to feed future projects and 

optimizing the state’s ability to meet its targets. The credits sold by the distribution 

utilities on behalf of Connecticut’s electric ratepayers return dollars to the funding 

stream. 

Table 4 shows the New England Generation Information System (NEPOOL GIS) trading 

volume summary for a recent quarter. Because the system was already functioning prior 

to the Connecticut trading scheme’s implementation, Connecticut’s choice to “piggyback” on to the NEPOOL GIS energy generation tracking system was a key leverage 

point in the state’s efforts to reduce transaction costs. Connecticut parties can use the 

NEPOOL GIS to track, trade, and settle Class III Credits online at www.nepoolgis.com. 

The data in the table, accessed in September 2008, showed about 77,000 Class III credits, 

all of which were derived from the C&LM fund.19 Each credit denotes 1 MWh of energy 

savings. 

 

17 This is the case regardless of whether measured in MWh, number of projects, or number of energy 

savings measures. 

18 Bruno, Steve. CL&P. Personal Communication. August 4, 2008. Mascola, Fred. UI. Personal 

Communication. July 31, 2008. 

19 https://www.nepoolgis.com/myModule/rpt/myrpt.asp?r=107&TabName=Certificate. This quantity 

should not be construed as the full amount available for that quarter, simply the amount listed as traded. 

 31
Table 4. Example of NEPOOL GIS Trading Activity 

Fuel 

Number of 

Certificates 

Traded 

Solar photovoltaic 762

Fuel cell 3,227

Digester gas 9,096

Efficient resource (Maine) 50,934

CLM 76,743

Wind 181,798

Landfill gas 252,799

Biomass 320,371

Municipal solid waste 340,409

Wood 489,610

Trash-to-energy 532,365

Jet 547,315

Diesel 813,650

Oil 1,093,789

Hydroelectric/hydropower 2,526,166

Coal 4,912,296

Natural gas 8,745,525

Nuclear 9,608,300

Total 30,505,155

Source: NEPOOL GIS, https://www.nepoolgis.com/myModule/rpt/myrpt.asp?r=107&TabName=Certificate. 

Note: Emphasis added. 

The total Connecticut Class III requirement for calendar year 2008 – enough to cover 2% 

of retail sales – is about 627,000 MWh. The available information on approximate 

eligible quantities of these credits derived from the C&LM for both 2007 and 2008 is in 

Table 5. 

Table 5. C&LM Class III Credits Available from CL&P and UI (MWh) 

2007 2008 

CL&P Residential Savings 178,500 257,500 

CL&P Commercial and Industrial 

Savings 

368,000 483,000 

UI Total Savings 98,000 110,000 

Expected Available from CL&P 

and UI, Combined 

644,500 850,500 

Expected Total State Obligation 300,000 627,000 

Sources: CL&P, UI, and the 2009 C&LM Plan submitted jointly by the two companies. 

Note: All data points are rounded approximations. 

 32
Program Structure and Lessons Learned 

Several of the structural elements in the Connecticut trading scheme support a reduction 

in the utilities’ administrative burden and transaction costs. For the first 18 months of the 

program, the emphasis was on streamlining the way that ESCs were issued and traded for 

compliance, keeping it simple with the idea that the program could be expanded later. In 

July 2008, about six quarters into the compliance period for the EEPS, some of these 

simple rules are being revisited. 

There are several examples demonstrating this approach toward establishing clear, simple 

rules meant to keep the difficulty of compliance, administrative burdens, and transaction 

costs to a minimum.20 Perhaps the most important example is one of good fortune as 

much as good planning. The DPUC was able to work with NEPOOL, APX, and other 

pertinent stakeholders to piggyback the tracking of credit ownership through the GIS, an 

automated system that was already in existence for tracking RECs in New England. The 

GIS tracks parties’ transfer of credit ownership, establishing a traceable record of the 

chain of ownership for the Class III credits. The paper-free Web-based platform allows 

these tasks to be accomplished at a low cost. 

Another example of a rule that helps ease the administrative burden is that the two major 

utilities – which together administer the fund that creates the vast majority of the credits – 

do not need to receive DPUC approval for every project’s M&V. Rather, they each 

submit an annual “blanket” plan for all of the expected efficiency projects, with M&V 

incorporated into that plan. The DPUC approves the entire plan at once, and then the 

utilities enter data into the GIS accordingly, so that credits are created quarterly as they 

are actually generated. The utilities also report on the generation of REC credits and sales 

on a quarterly basis to the DPUC. But there is no need for quarterly M&V approval, 

because that is covered through the annual process.21 

Ironing Out Residential Rules 

Residential projects typically require aggregation and a deemed savings measurement 

approach; large commercial and industrial measures are easier to measure and track. That 

is the strong rationale for excluding residential measures in the initial period, a takeaway 

for other states to consider. But once about 18 months of market experience was 

complete, the DPUC included residential measures in the Class III eligibility. 

Still another example of simplifying Class III trading is that the DPUC also established a 

kind of one-size-fits-all approach to ownership of the proceeds of sold credits. Rather 

than attempting to work a split in proceeds for C&LM-funded projects, 100% of those 

proceeds went back into the C&LM fund. Similarly, the way the rules are currently 

structured, 100% of proceeds from independently funded projects go to the source of that 

funding. The 100% rule (in both its forms) is one of the rules being revisited. 

 

20 Even with the DPUC rules established to simplify compliance, inevitable challenges have arisen. For 

example, there have been obligated parties that missed opportunities to buy Class III certificates because, in 

some cases, they were not aware of the existence of the auctions within the time frame they were occurring. 

21 The utilities’ M&V plan is called the “Program Savings Document.” 

 33
Because energy end users typically fund part of the cost of C&LM-funded energy savings 

projects on their own sites, the DPUC reviewed the possibility of returning 25% of the 

proceeds to the end user.22 This was the arrangement that the statute directed, reviewed 

by the DPUC in August 2008 as part of its rules promulgation for residential measures’ 

inclusion.23 In the conception of the 75/25 split, there was deference to the value of not 

overcomplicating such a split by attempting anything more complicated than a 75/25 

proceeds split for every C&LM project. There has been no attempt, for example, to 

introduce different proceeds split formulas for different projects types. 

But the DPUC ultimately determined that even the 75/25 split could introduce a new 

administrative burden, in that it could require the CL&P and UI to backtrack their pool of 

Class III credits to the customers participating. This was a significant concern for 

program administrators at UI and CP&L, because the legislation technically allows the 

DPUC to structure the return of proceeds from ESC sales in a way that would be tough to 

administer. For example, if customers purchased lighting fixtures, the utilities would not 

want to be in the position of reimbursing that customer for 25% of the ESC proceeds on a 

quarterly or even annual basis over the lifetime of the savings measure. 

With the aim of not adding such administrative layers to the running of the Class III 

program, the utilities took the position that a good compromise might be to return the 

25% to the ratepayers at large. This would avoid the need to track up to 10 years’ worth 

of credits to the specific customers on whose sites the measures were implemented, 

which the utilities view as too difficult and time-consuming. They proposed instead to 

simply reimburse all ratepayers by adding the reimbursement into federally mandated 

congestion charges in the customer bill. This would give deference to the fact that 

customers are paying for some portion of the savings measures, without adding the 

burdensome responsibility of trying to track proceeds back to individual projects. 

Ultimately, the DPUC decided to allocate 100% of Class III credits to the C&LM 

program, allocated to residential programs, “as a means to continue to fund the benefits 

that residential customers receive from the C&LM-funded residential programs.” They 

decided against what the distribution utilities referred to as “a plethora of administrative 

headaches associated with allocating 25% of Class III credits to residential customers” on 

to the program administrators. Important for program designers in other states, the DPUC 

cited the small energy savings accrued per customer and the many thousands of 

customers to track, the transient nature of some customers, and split benefits in rental 

properties. The DPUC concluded that allocating the 25% Class III credit on a percustomer basis was “plainly infeasible.” They directed the distribution utilities to report 

their residential allocations in their annual C&LM filing submitted to the DPUC. In the 

same proceeding of September 2008, they further directed that market participants who 

participate in C&LM programs and who aggregate more than 100 kW of residential load 

 

22 For example, if the C&LM funds an equipment upgrade, the customer would typically buy the equipment 

and be reimbursed fully for the additional incremental expenditure for buying more expensive energyefficient equipment. 

23 Conn. Gen. Stat. § 16-243t(c) 

 34
may receive 25% of the Class III credit allocation. Lastly, they directed that 

independently funded residential projects will receive 100% of the value of the Class III 

RECs generated by the projects. 

Other Notable Provisions 

At least two of the Connecticut rules are somewhat unusual and particularly worth 

watching over time to note how they affect the success of the program; after only four 

auctions to date, it is still too early to say. The most important is the inclusion of CHP 

projects. Every MWh generated at a CHP plant that came online after January 1, 2006, 

with an overall efficiency level of at least 50% and with useful electrical energy that is at 

least 20% of the total output qualifies. Because the plants will generate large quantities of 

eligible credits, some stakeholders have anticipated that the inclusion of CHP will make 

the targets too easy to attain and result in fewer non-CHP efficiency projects, because 

CHP is likely to be the most cost-competitive way to meet the requirements. Some of the 

CHP projects may not have been built as a direct result of the EEPS but may be receiving 

an extra benefit from its subsequent implementation. 

For example, at least one eligible plant at a paper mill has a capacity of about 30 MW, 

meaning it will likely generate more than 175,000 MWh per year, or more than 25% of 

the credits required for the entire 2008 overall Connecticut obligation. The ability to trade 

credits makes all of those credits eligible and will likely keep the price for credits down. 

Many expect that the CHP rule, in particular, will cause an oversupply of credits by the 

time the requirement flattens out at 4% in 2010 for each year after that, creating 

downward price pressure. But many RPS requirements around the country have been 

revisited and increased over time for similar reasons; that is the expectation of some in 

the Connecticut Class III situation as well. 

The other legislative rule worth noting and tracking is the establishment of a floor price 

of $0.01/kWh for the credits, limiting the open-bidding process. The price protection 

seems designed to ensure that the risk of oversupply does not degrade the value of the 

credits and hurt the long-term health of the market, a stop-gap measure to help keep the 

market stable if the targets turn out to be low, especially considering the availability of 

CHP credits. But the floor also can have the effect of limiting the free market’s ability to 

fully incentivize less-expensive projects and reward them for their ability to deliver 

credits less expensively. In the early auction periods, the two utility sellers have reported 

that they have already experienced an oversupply; this also may be because, at the early 

stages of market development, obligated suppliers may not have been aware of the 

auction periods and credit availability. Banking rules have allowed the sellers to sell 

some of the same credits in subsequent auctions. 

 35
Key Structural Elements of ESCs Programs 

Experience with domestic REC markets and ESC markets abroad have helped distill the 

elements of the required foundation for ESC trading, to be managed by the appropriate 

PUC or other certifying body. Early examples in Europe have demonstrated that, when 

administered effectively, ESCs can be an effective complement to existing structures 

promoting efficiency. 

Although this analysis focuses on the compliance side, where there has been more 

activity, most of the key considerations that must be addressed in a compliance ESC 

program apply to voluntary markets as well. Many considerations lead to decision points 

for which there is no clearly demonstrated “correct” policy feature, at least none that has 

emerged in market development to date. More often, conflicting values must be balanced 

and solutions are a “work-in-progress.” The most fundamental balance of interests is the 

need to create verification procedures that ensure credibility while controlling transaction 

costs. 

With these caveats in mind, an effective ESC trading platform for EEPS compliance – 

one that instills long-term public and stakeholder confidence – will depend largely on the 

following key considerations or features (Hamrin et al. 2007): 

• Real, measurable, verified savings that take into account the following issues: 

o credible certifying body 

o additionality test that ensures measure is beyond business as usual (BAU) 

o rigorous measurement and verification (M&V) based on established 

protocols 

o length of period for which ESCs are issued and up-front ESC issuance 

where appropriate 

o alternative compliance payments 

o close scrutiny of double-counting through an established system of 

tracking and/or certificate/credit attestation process. 

o careful handling of free-rider issue 

o rules for banking 

• Streamlined ownership reporting and tracking system to hold down costs 

• Provisions for third-party trading, opening the market beyond obligated entities 

• Long-term integration with REC and carbon emission reduction markets where 

feasible and sensible 

• Transparency in rules and transactional information 

• Early planning for inter-market, interregional, and international trading 

• Providing for ESC ownership in a manner that is fair to both facilities investing in 

energy savings and organizations providing energy saving services. For example, 

the installer of high efficiency equipment could give a discount to end users 

paying for the installation, in exchange for ESC ownership (Bertoldi 2008). 

Although values underlying their respective rules are generally shared among the existing 

ESC trading programs, rules for many of these aspects differ among the countries with 

 36
established ESC trading. This analysis addresses each of these features individually in 

terms of their treatment within those international energy efficiency obligation schemes 

where trading of ESCs has occurred – Italy, the UK, France, and New South Wales, 

Australia. 

In addition, the European Commission (EC) has stated an intention to implement ESCs at 

the European level. The Association of Issuing Bodies, whose mission is to harmonize 

international energy certificate schemes, has expanded its focus from green certificates 

(RECs) to also include ESCs.24 The EC and other stakeholders are considering a possible 

mandatory international scheme that would include ESC trading (Bertoldi 2008). They 

are carefully weighing the equities of such a continent-wide, or even global, trading 

scheme, most notably how to handle the difficult situation of parties in one country 

financing projects in another country and the potential such a situation has for weakening 

national policies or creating unfair burdens or benefits. This is analogous to the issues 

from one U.S. state to another that would be inherent in a U.S. federal policy. Also, an 

international ESC compliance market would have to dovetail with existing European 

carbon markets. 

The British scheme, in particular, is a case study in policy features that tend to reduce 

market size for ESCs. Only a handful of trades have occurred in the British scheme – less 

than 10 trades combined during the three compliance years of the market (Mundaca et al. 

2008). A number of factors cause the low volumes. These include an excess in the 

available supply of savings (driven also by a high cost-effective potential in the insulation 

segment and certainty about the penalty in case of noncompliance), a limited number of 

eligible parties, and perceived transaction costs (related to contract negotiation and 

liability risks). The banking option in the UK also resulted in fewer trades, as parties have 

increased their own activity level to use savings for future commitment periods. Lastly, 

the number of eligible parties has been restricted because only obligated parties are 

allowed to trade, reducing liquidity. This is crucial because large differences in saving 

costs among parties are also necessary to trigger trading. Obligated parties also thought 

that trading activity could involve high negotiation costs, as strategically sensitive 

information could be disclosed to a buyer/seller. Each of these factors is an object lesson 

for U.S. policy designers. 

Eligible Project Types 

EEPS programs differ significantly in how broad they define project eligibility, and they 

are not always consistent. In some cases, ESCs may be derived from projects that save 

energy by making use of thermal waste or another byproduct, such as combined heat and 

power (CHP). Certain project types, such as solar hot water systems and geothermal heat 

pumps, may be treated as renewable energy by one program and as efficiency in another. 

One of the concerns that has been expressed about the Connecticut program is that there 

is such an abundance of CHP, in terms of MWh generated, that its inclusion as an eligible 

resource may make EEPS obligations deceptively easy to meet. The Connecticut program 

is still too new to make an accurate assessment of this anticipated issue, but the criticism 

 

24 See http://www.aib-net.org/portal/page/portal/AIB_HOME. 

 37
underscores the importance of designing a policy for which project eligibility is 

determined in close conjunction with target stringency. The UK also grants ESCs for 

CHP projects. 

There are many different technology types from which ESCs may be derived, but they 

are generally no different than projects eligible for an EEPS, from which there are no 

derived certificates. The exception is that some compliance programs limit the types of 

eligible projects to keep measurement and verification more streamlined. The other 

significant distinction among EEPS programs generally is that they don’t all include gas 

efficiency measures. 

Projects generally exist within three general overlapping categories: upgrades and 

retrofits, heating or cooling measures, and load management. ESCs derived from energy 

savings through reduced electricity consumption may be derived from many different 

project types. All of the programs grant ESCs for energy-efficient lighting; equipment 

and appliance upgrades and retrofits, such as those for boilers, motors, and air 

conditioners; and insulation or other heating or cooling measures, such as HVAC system 

upgrades, ground source heat pumps, or solar water heating. Some measures also may 

qualify as renewable energy projects, depending on how they are categorized (Hamrin et 

al. 2007). 

The five programs that feature active trading expand somewhat from this basic list, but 

none more than Italy in terms of project diversity. In some cases, EEPS and ESC regimes 

also may include demand-response or load-management measures that shift electricity 

load from peak to off-peak hours. Eligible project types and practices are listed in 

Table 6. These could include smart metering, sensors to anticipate heating or cooling, or 

remote monitoring and control of various energy-intensive applications. 

 38
Table 6. ESC Schemes and Eligible Project Types 

ESC Program, Year 

Effective 

Eligible Technology Types and 

Practices 

Major Stipulations 

Connecticut, 2007 • CHP plants 

• Demand response 

• Load management 

• Electricity suppliers must 

meet a percentage of their 

total supply in energy 

efficiency and CHP25

France, 2006 • Double glazing of windows 

• Heating controls 

• Insulation 

• Lighting 

• Variable speed motors 

• Wood-firing heating systems 

• Favors standardized 

measures with set energy 

savings; customized or lesscommon projects are 

assessed case-by-case. 

Italy, 2005 • Bio-climatic architecture 

• Control of radiation entering through 

windows 

• Electricity in thermal uses 

• Heating/cooling and heat recovery 

with nonrenewable energy 

• On-site renewable energy 

• Passive cooling 

• Promotion of electric and natural gas 

vehicles 

• Reduction of air-conditioning 

electricity consumption 

• Reduction of passive-draw power 

• Solar water heating 

• Substitution of electricity to other 

sources 

• Half of the goal set for each 

year must be obtained by 

reductions in the 

consumption of electricity 

and gas by end-users 

New South Wales, 

Australia, 2003 

• Demand-side abatement 

• Energy efficiency projects reduce or 

replace energy consuming equipment 

or processes 

• Forest sequestration of carbon 

• Fuel switching with reduced GHG 

emissions 

• New energy efficient equipment 

• On-site electricity generation with 

reduced GHG emissions 

• Reduction of GHG emissions by 

non-electricity sector industries1

• Required “benchmark 

participants” (i.e., major 

electricity producers) must 

meet a percentage of the 

total benchmark GHG 

emissions reductions relative 

to their contribution to the 

grid. 

United Kingdom, 2002 • CHP plants 

• Fuel-switching programs 

• High efficiency hot water tanks 

• Window glazing 

• Half of the savings generated 

for compliance must be 

derived from low- or 

moderate-income family 

home 

 

25See also Hamrin et al. 2007. 

 39
Italy grants ESCs for the broadest of project types within three general categories: 

electricity, natural gas, or fuel switching combined with energy efficiency (Hamrin et al. 

2007). In Italy, at least half of the target set for each year has to be achieved via a 

reduction of electricity and gas end uses (known as the “50% constraint”); the rest can be 

achieved via primary energy savings in other sectors (Bertoldi et al. 2005). 

The other ESC programs grant ESCs for a somewhat smaller range of project types 

compared to Italy (Hamrin et al. 2007). Besides the standard project types, the UK also 

grants ESCs for high efficiency hot water tanks, window glazing, and for fuel-switching 

programs. Both the UK and Connecticut issue ESCs for CHP plants. France issues ESCs 

for wood-fired heating systems, in addition to the standard list. Some regimes exclude or 

develop requirements around entire classes of projects. For example, in the United 

Kingdom, at least half of the savings generated for compliance must be derived from 

low- or moderate-income family homes. In France, standardized measures with stipulated 

energy savings are generally favored, whereas customized or less-common projects are 

assessed on a case-by-case basis. Eligible technologies in France include lighting, 

insulation, double glazing of windows, heating controls, variable speed motors, and 

wood-fired heating systems (Hamrin et al. 2007). 

Ultimately, behavioral changes also could be included in qualifying project types. In an 

age of sophisticated Web-based remote-monitoring equipment, rewarding the installation 

of such equipment through ESC incentives makes sense. For example, ESCs could be 

created when users switch off energy-intensive equipment during peak time-of-use 

periods, decrease or increase the set temperature point of their heating or cooling 

systems, or decrease the size of their equipment (Bertoldi and Huld 2006). 

Targets 

For the five active EEPS schemes – Connecticut and the four nondomestic programs – a 

fundamental question with respect to ESCs is whether the target is stringent enough to 

necessitate trading. If targets are easily achieved, introducing trading may offer little or 

no benefit (Loper et al. 2008). Alternatively, the introduction of trading may enable 

targets to be increased over time. Because the programs considered here are still 

relatively new, it will take at least a few more years before definitive conclusions can be 

drawn as to the effect on overall energy savings that trading can provide. 

However, the ESC trading program in Connecticut does provide an early indication of the 

significance of ESC trading. As of mid-2008, the Connecticut C&LM fund was 

approximately $70 million, while the total value of the ESCs auctioned from the fund in 

2008 was estimated at about $3.3 million, or a little less than 5% of the total fund. 

Therefore, revenues from ESC trading likely will be sufficient to stimulate a reasonable 

fraction of new projects. Further conclusions about the efficacy of the ESCs in 

Connecticut are too difficult to draw at this early stage, approximately 18 months into 

compliance. It is, for example, too difficult to say whether ESCs will make a significant 

difference in the ability of obligated suppliers to comply with the Connecticut EEPS, 

should they reach a point where the target levels are challenging to reach. 

 40
EEPS targets are usually (but not always) expressed as a percentage of retail electricity 

sales. The Italian targets are expressed in terms of energy intensity, defined as energy use 

relative to gross domestic product, with a goal to reach reductions of 2% in energy 

intensity per year until 2015 and 2.5% each year after until 2030. Gas and electric 

distribution companies with more than 100,000 retail customers have energy savings 

targets that ramp up over the five-year period of 2005-09 to a potential total of an 

estimated 14 terrawatt hours (TWh) for electricity and 3.3 billion cubic meters for natural 

gas, for a total of about 5.8 million tons of oil equivalent (Mtoe) (Hamrin et al. 2007). In 

the first year of ESC trading (2006), trading exceeded the annual target of about 86 GWh; 

thus, the target was easily met. France has the unusual rule of no annual compliance 

requirement; its three-year compliance period of July 2006-09 has only one deadline, at 

the end of that three-year period. In virtually all regimes, the extent of a given party’s 

obligation depends on that party’s share of retail energy sales. The other national targets 

may be found in Table 7. 

Table 7. Targets for European and Australian Trading Schemes 

Total Target for 

Period Duration 

% of Annual Demand Period 

Italy 230 petajoules 0.5% 2005-09 

France 194 petajoules 1.0% 2006-08 

United Kingdom 468 petajoules 1.0% 2005-08 

New South Wales 5% reduction in per 

capital GHG 

emissions 

N/A 2003-20 

Source: (Hamrin et al. 2007) 

Note: One petajoule is equivalent to 100,000 MWh. 

Certifying Body

Given the innovative nature of ESCs, it is critical to the long-term health of the markets 

that a credible, established organization certifies ESCs. This is necessary for both 

compliance and voluntary markets to function effectively. To ensure the credibility of 

ESCs, it is important to have an independent entity that establishes the M&V 

methodologies and qualifications for parties conducting the M&V, and ensures that the 

procedures were followed and that the ESC conforms to the established trading rules. 

Generally, national trading programs employ governmental, quasi-governmental, or 

established nonprofits to certify that ESCs are what they purport to be. For example, in 

Italy, the Regulatory Authority for Electricity and Gas certifies the ESCs. 

In the United Kingdom, where the Energy Efficiency Commitment (EEC) policy was 

established in 2001 and runs in three-year cycles from 2002-11, the program is 

administered by the federal government’s Office of Gas and Electric Markets, which 

periodically audits suppliers’ savings claims through sampling and other methods. The 

compliance rules, however, were developed separately by the Department for 

Environment, Food, and Rural Affairs. Although suppliers often contract with third 

parties in the United Kingdom to implement savings projects, they cannot trade ESCs 

with third parties. Suppliers are allowed to trade among themselves, but only with 

advance written agreement from regulators. In France, the Ministry of Industry issues 

 41
certificates and administers the program. The French Agency for Environment and 

Energy Management and other industry groups define acceptable project types. In 

Connecticut, the public utility commission acts as the certifier, although the M&V 

protocols were established by the existing C&LM fund (the public benefits fund). 

Additionality, Free Ridership, and Cream Skimming 

All of the ESC programs seek to require some “additionality” threshold, i.e., a 

requirement that the projects only qualify if they go beyond what would have happened 

absent the ESC program, usually referred to as beyond “business as usual” (BAU). 

Additionality standards address free ridership, seeking enough rigor in excluding free 

riders or accounting for their presence, to bring credibility to the program. At the same 

time, regimes also may seek to serve the competing value of rewarding early action. For 

example, in Italy (where compliance targets took effect in 2005), projects developed in 

the preceding four-year period are still considered “additional” under their definition and 

therefore eligible for compliance in subsequent years to reward the early action. 

Interestingly, the French definition of additionality depends on whether the entity 

implementing the savings measure is obligated under the compliance target. As long as 

the technology type is eligible, any project implemented by an obligated party is 

considered additional, presumably as an incentive for obligated parties to implement their 

own measures. Non-obligated parties only meet the additionality threshold if the measure 

is not related to the entity’s main activity – that is, energy efficiency companies and 

ESCOs are precluded. 

Trading Rules: Obligated Entities and Parties Eligible to Trade 

For ESC implementation, a key issue is determining which parties are obligated under 

compliance regimes, as well as which parties should be eligible to participate in trading. 

Theoretically, the more parties eligible to participate, the more likely it is to increase the 

base of efficiency projects and decrease prices. However, involving a larger number of 

parities adds some administrative complexity and can pose challenges for ensuring that 

M&V protocols are followed. Widening participation also might increase the chances of 

introducing nonadditional efficiency projects, other than those that might have occurred 

otherwise (Loper et al. 2008). 

The Italian program, effective in January 2005, requires compliance from gas and electric 

distribution companies that had more than 100,000 customers in 2001. The rules in Italy 

allow energy service companies (ESCOs) to earn credits and sell them to the distribution 

companies, which can use the acquired ESCs (in conjunction with those from their own 

efficiency measures) to meet their EEPS obligations (Hamrin et al. 2007). The 

distribution utilities also are allowed to trade with one another and are also allowed to 

operate efficiency programs in partnership with ESCOs. Italy has an open policy on 

participation in the energy savings compliance market. Market sessions are held regularly 

and parties may sell only ESCs that are registered in their account in the ESC registry 

overseen by the Regulatory Authority. 

In contrast to Italy, in France, the UK, and Connecticut, retail suppliers and not 

distribution companies are obligated (Bertoldi 2008). Determining which parties should 

 42
be obligated is partly an issue of cost recovery: normally, distribution companies and 

their tariffs are regulated. For them, a wires charge can be used to pay the costs they incur 

to implement ESCs up to their saving target (either a fixed-cost recovery as in Italy or 

based on the cost of the ESC). Retailers are usually outside the regulated tariffs, so are 

free to charge their customers for the energy efficiency projects (Bertoldi 2008). 

In the UK, where retail electricity markets are deregulated, suppliers sometimes contract 

with third parties to deliver energy savings, and must report their savings quarterly to the 

Office of Gas and Electric Markets, which verifies the savings. In the UK, only suppliers 

with at least 50,000 customers are obligated; this limits the effect of the obligation on 

new entrants to the market (Bertolodi et al. 2005). 

In France, the obligated parties include electricity, natural gas, domestic fuel, and heating 

and cooling suppliers, but not smaller suppliers of less than 400 GWh per year in energy 

sales (Hamrin et al. 2007). Companies whose core business is energy efficiency are not 

permitted to trade, because the rules are structured to define their implemented measures 

as “nonadditional” because they are in the business of implementing such measures. 

Measurement and Verification 

Each ESC trading program develops its own protocols for M&V. They often use 

established templates, such as the International Performance Measurement and 

Verification Protocol, as a guide. Focused on commercial and industrial applications, the 

IPMVP covers a broad range of measures, including fuel savings, water efficiency, load 

shifting, and equipment upgrades. Others rely on existing protocols that already have 

been developed for public benefits funds that support efficiency measures. At this very 

early stage, with only a few ESC markets established, it will be useful for policy makers 

to use such guides and existing protocols. Consistency among trading regimes as they 

form will ease and, in some cases, even make possible interregional and international 

ESC trading. This could become crucial in later stages of market development, especially 

if ESCs become part of global GHG markets. 

M&V can be one of the most complex and expensive elements of ESC trading. As REC 

markets have amply demonstrated, public scrutiny of the credibility, integrity, and 

transparency of markets that allow trading can be greater than compliance regimes that 

do not. In addition to the methods for individual project measurement and verification, 

ESC programs also generally require licensed engineering contractors to conduct the 

work or independently verify the savings. In addition, for the integrity of a trading 

program, projects should generate ESCs only for the period they are actually generating 

the savings, which varies depending on project type and other variables. Measured 

lifetimes are generally stipulated for classes of measures, based on previously conducted 

measure retention studies. 

Because ESC trading can carry additional costs to an EEPS compliance program, it is 

particularly important for policy makers considering the implementation of ESC trading 

to find streamlined, cost-saving approaches. These include M&V methods that are 

 43
practical yet established ways to acquire accurate estimated savings data at lower-cost 

points: computer-based simulation and deemed savings. 

The most accurate methods for determining savings involve measuring end-use 

consumption and then imputing savings based on a projection of baseline energy use, or 

conducting whole building measurement. End-use measurement can be conducted on 

either a project-specific basis or for samples of similar projects. In the former case, 

measurements are made by installing data loggers on project submeters or circuitry to 

measure consumption, or using other field measurement methods to make accurate 

assessments of savings associated with the specific measure. These are generally also the 

most expensive and are not always feasible at any cost. An example of field measurement 

is isolating energy retrofits from the rest of a building to gauge the savings attributable to 

the retrofit. End-use M&V can entail different levels of accuracy and expense, depending 

on what parameters are monitored instead of spot-measured, the accuracy of the 

instrumentation, and the duration of the monitoring period. 

But because of the expense involved, gathering actual end-use consumption data is 

practical only for the largest savings measures, where key parameters such as how many 

hours a large HVAC system is used can change results markedly. Measurement options 

that incorporate both actual and stipulated data, such as partially measured retrofit 

isolation, involve field measurement of savings combined with certain stipulated 

parameters and can present hybrid compromise between the accuracy of actual data and 

the savings in estimating data (Bertoldi and Huld 2004). Another method for measuring 

savings is known as the whole-buildings approach, for which the collective savings of a 

series of measures within a structure are inferred from the energy savings from one or 

more measures, based on the change in energy use at the building level or on utility 

billing data. 

Computer-based simulation determines savings through software designed to predict 

energy use and demand patterns that match actual use (Bertoldi and Huld 2006). Deemed 

savings methods use historical or so called “ex-ante” data (predetermined from previous 

similar projects or established engineering methods), to make assumptions about the 

savings a given project will create. They may incorporate assumptions or default factors 

for free ridership and for the persistence of energy savings, or how long they will last 

(Vine and Hamrin 2008). The method works particularly well for established 

technologies for which data tends to be more reliable, such as lighting measures. The 

deemed savings method is being used by NYSERDA in their pilot program and is relied 

on heavily in the Italian program as well. 

Italy also has used preliminary engineering calculations to preapprove projects with more 

innovative technologies for which historical data is not available (Hamrin et al. 2007). 

For savings to be additional under the Italian definition, they must exceed market trends 

and legislative requirements (Hamrin et al. 2007). Italy uses engineering estimates and 

“standard savings factors” for natural gas decompression, certain variable speed drives, 

CHP, and district heating. For other projects in the Italian program, energy monitoring 

 44
methods are used to take a “before and after” energy picture, after which variables such 

as weather and occupancy levels are factored in. 

In the United Kingdom, deemed savings (based on previous measurements and 

engineering methodologies) is the predominant M&V approach. Preapproved savings 

estimates are also weighted for fuel type and discounted using a discount factor of 3.5% 

over the lifetime of the measure. For projects relying on government funding, savings are 

further discounted, as a policy preference to maximize private funding. For several 

project types, savings may be based on monitoring of a valid project sample. The 

demonstration of additionality is also a function of project type. Deemed savings in 

France are based on “fast and straightforward user-friendly procedures” stemming from 

sampling or engineering calculations (Hamrin et al. 2007). 

Deemed savings can be particularly useful where ESC programs have access to historical 

data from efficiency measures implemented within a systems benefit program over the 

course of several years. Sampling involves using measured savings from a statistically 

valid sample of similar projects to draw conclusions about other similar projects, rather 

than evaluating each project separately. Connecticut has a detailed “Technical Reference 

Manual” with deemed savings values, engineering methodologies, and related data for all 

of the allowable technology types eligible for Class III certificates, more than 50 in the 

approximately 250-page document. Similarly, the UK uses a “Technical Guidance 

Manual” for deemed savings for established technology types. 

Because of the many variables involved in measuring savings, some have suggested that 

the certificates represent savings over several years, rather than a single year, the 

approach taken by NYSERDA. The advantage is that the longer time period can result in 

“smoothing out” variations such as those caused by weather (Bertoldi and Huld 2004). In 

addition, it can be easier to administer, because ESCs can be issued up front for the 

lifetime of the savings, meaning that certification only needs to occur once. However, if 

this approach is taken, some form of discounting the savings also may be appropriate to 

account for any risk that actual savings do not occur. 

ESC M&V protocols have the double challenge of establishing accurate baselines, or 

reference scenarios – the “before” picture for an energy savings measure and its 

forecasted energy use absent the savings measure to determine savings. The baseline is 

important to establish that the measure resulted in savings beyond business as usual. 

Different M&V methodologies have their own guidelines for establishing baselines. For 

example, a deemed savings approach imputes baselines, eliminating the need to project 

baseline energy use. For commercial and industrial retrofits, baselines are informed by 

the equipment installed at the customer’s site before the retrofit.26 

Reporting and Tracking Requirements 

Generally, the ability to use an automated Web-based ESC tracking program is important 

for controlling ESC program administrative costs. Such tracking systems streamline 

 

26 If the original equipment was below minimum efficiency standards, the baseline will often be set at the 

standard level to avoid paying someone just to come up to code. 

 45
registration, chain of custody, and can minimize the risk of double-counting. The use of 

an automated system can ensure each ESC is identified by a unique serial number that 

need not be identified manually. Automated, Web-based tracking systems can help the 

certification process by efficiently generating the necessary reports for certifying bodies. 

The parameters and requirements for ESC-tracking software already exist and need only 

be licensed by governments or other bodies for further development specific to their 

needs. In spring 2008, APX established the North American Renewables Registry, which 

is specifically designed partly to track ESC ownership and deal with issues such as M&V 

that are specific to ESCs. In some cases, similar to that of Connecticut, an existing REC 

registry (the NEPOOL GIS system) with similar functionality to that required by ESC 

markets can be used. In Italy, the Regulatory Authority runs a separate ESC registry and 

charges annual and transaction fees (Hamrin et al. 2007). 

In Italy, the certifying body, such as the PUC or other regulating body, normally oversees 

the method of tracking and verifying ESC ownership. Ideally, however, there is 

independent oversight, so that regulating and rule-making as well as the processes of 

issuing, tracking, and certifying ESCs are not all in the hands of the same organization. 

In Italy, there is a separate market operator that issues and registers ESCs at the request 

and oversight of the certifying body, the Regulatory Authority for Electricity and Gas 

(Hamrin et al. 2007). But the two organizations are independent of one another. In 

Connecticut, the DPUC reviews an annual blanket plan (incorporating an M&V plan) 

submitted by each of the two utilities administering the C&LM fund. Other independent 

energy savings companies and energy savings project implementers in Connecticut must 

apply separately, on a project-specific basis, with the DPUC for Class III issuance, and 

submit independently verified M&V plans for the project before certificates will be 

issued. Once issued, the company can apply to the NEPOOL GIS for the requisite 

number of certificates to be deposited into their GIS account, at which point wholesalers 

seek buyers and, once found and a transaction completed, certificates can be transferred 

to the buyer’s account, which can then be used to demonstrate compliance to the DPUC. 

Collecting, verifying, and entering M&V project data into a tracking system can be 

costly, especially if data must be entered into a system manually. Each project might have 

a different verifier for its savings data, which can be similarly difficult to manage. Unlike 

RECs, which benefit from metered data verified through an ISO, there is no automated 

system for capturing savings data 

As markets develop, it is important that tracking systems are developed to be as 

compatible with one another as feasible, so that eventually trades between accountholders of different systems can be completed. The lack of central planning in this respect 

for RECs has created some extra back-end difficulties five or more years into the 

development of REC tracking systems, because interregional trades were not fully 

accommodated. As a result, REC tracking systems have incompatibilities. 

 46
Length of Issuance Period, Up-front Issuance, and Banking Rules 

ESC programs anticipate incremental increases in savings that incorporate gains from the 

previous years. ESCs from a given project can be either reissued annually for a fixed 

number of years, which is the norm, or issued the entire lifetime’s worth of ESCs up 

front. The length of the lifetime may be based on a “one-size-fits-all” approach to 

projects, such as a five- or 10-year maximum lifetime. Alternatively, lifetimes may be 

defined for individual technology types, reflecting the actual length of time during which 

savings can reasonably be expected for that type, based on the history of the project type 

and other variables. 

In determining the number of years for which a given project should be issued ESCs, 

policy makers often adopt a simplified approach with a predetermined number of years 

applied to all projects, regardless of the reality of how long the project would actually 

yield savings. This is a policy decision that again favors the value of simplicity and ease 

in planning, meant to reduce the administrative difficulty of implementation, instead of 

attempting to ascertain more specific, accurate savings measures. 

Some ESC plans, such as the voluntary program being developed by NYSERDA, grant 

the full complement of ESCs up front for the full value of the expected savings over the 

life of a project. This approach simplifies administration and maximizes the financial 

leverage ESCs can provide in shortening a project’s payback period as well as the 

chances of the project receiving the initial green light through up-front financing. But as a 

trade-off for accessing the full value up front and because of the time value of ESCs and 

the proceeds they can bring, such up-front issuances are normally discounted to some 

degree. On the other end of the spectrum is the granting of ESCs annually over the life of 

the project, as is the case in Italy, which does not incorporate future savings into ESC 

issuance. 

There also are significant differences in the number of years for which ESCs are granted. 

Italy grants ESCs for five years for most projects, but allows eight years worth of ESCs 

for certain projects, including passive cooling, thermal building insulation, and solar 

water heating, expected to generate savings for a longer average period of time. The 

normal Italian project lifetime of five years carries an implied obligation to maintain the 

measure for five years (Hamrin et al. 2007). 

In the United Kingdom, to minimize transaction costs, an up-front discounted savings is 

given to a project (based on its expected lifetime), which is used for the three-year 

compliance cycle in which the measure is implemented – this is similar to the NYSERDA 

approach.27 But the UK credits projects with long lifetime projected savings for the full 

lifetime of savings, even if it is 20 years, to provide ample incentives for such projects. 

The annual reissuing of ESCs for a given project, based on the additional savings the 

project is generating each year, should not be confused with the ability of ESC holders to 

bank ESCs for a period of time. “Banking” refers only to the timing of the sale of an 

 

27 Because of the cost of capital and other factors, there is normally a discount factor applied when ESCs 

are issued up-front for their lifetime’s worth of savings. 

 47
ESC. For example, a seller unable to find the desired sale price or counterparty for a 

given sale or auction period may simply hold the ESC for a future sale, as allowed by the 

banking rules. For the five-year compliance period in Italy, the projects given five years 

worth of ESCs are also allowed unlimited banking; in other words, once issued, ESCs can 

be used in any compliance year within the five-year period. The new Michigan EEPS 

provides that ESCs created in one year may be carried forward to the next, but only to a 

maximum of one-third of that next year’s standard.28 

Alternative Compliance Payments (ACPs) 

EEPS policies in the United States do not generally include an “alternative compliance 

payment” (ACP); on the other hand, many U.S. state RPS policies do. An ACP is an 

amount of money required for each MWh an obligated party falls short of their 

requirement of renewable energy or energy efficiency. ACPs can also be used as a 

mechanism for supporting new efficiency projects by placing ACP dollars into an 

efficiency fund, for funding projects. For those states considering the use of ESCs, an 

ACP can help obligated parties to clarify the cost of noncompliance and, consequently, 

the value of projects that comply with the EEPS. Some states, such as California, have 

shareholder incentive structures, which reward utilities for exceeding their target, and in 

some cases, penalize them for falling short. Sanctions or penalties generally are an 

important part of compliance; it is necessary to make penalties large enough to 

incentivize requirements and ensure compliance. 

In Connecticut and in Europe, plan designers seek to set an ACP at a high enough level to 

ensure appropriate incentives for compliance. The first step in setting an ACP is an 

accurate assessment of the averages and ranges in the per-MWh cost of installed 

efficiency measures. It is one of the more difficult parameters to determine, because costs 

and values for energy efficiency measures vary greatly. In the end, ACPs need to be set at 

a level cost level few projects would exceed, to ensure that the proper incentive to pursue 

even high payback projects is in place. Too low an ACP could discourage project 

development. Connecticut, the only state with active ESC trading, has set both an ESC 

price floor ($10/MWh) and a ceiling in the form of an ACP ($31/MWh). 

In Italy, the Regulatory Authority for Electricity and Gas (AEEG) assesses compliance 

with targets and sets the price for noncompliance on a case-by-case basis (Pavan 2008). 

As a guideline, the ACP must be equal to or higher than the trading price. Interestingly, 

the Italian regulators do not define the value of the penalty in advance; it isn’t a reference 

price. The reason for this approach is to prevent the market from sending false signals 

about the real cost of energy saving. Rather, the policy objective is to allow maximum 

market responsiveness to the “moving target” market value of energy efficiency. 

Generally, AEEG looks at the average market price of certificates and the average cost of 

saving energy and sets an appropriate price. The revenue from the ACP in Italy goes 

toward educational programs about energy efficiency. 

 

28 See Michigan Enrolled Senate Bill No. 213, Section 83 (3) (a). 

 48
Conclusions 

Early experiences with ESCs have demonstrated that they are worth careful 

consideration, especially in the context of EEPS compliance. In the United States, the 

ESCs may benefit from the confluence of several emerging factors: new state EEPS 

policies, public interest in tools to mitigate climate change, and the beginnings of interest 

in a voluntary market for ESCs. 

Voluntary markets can benefit from lessons learned in compliance markets, particularly 

with regard to M&V protocols and certification processes. The results from early pilot 

programs, such as NYSERDA’s, will be important to those considering emulating such 

programs. But for the voluntary market, the emergence of a credible, independent 

national certifying body and consistent set of protocols is paramount. Similarly, the 

success of early examples of the use of ESCs for EEPS compliance, such as the program 

in Connecticut, also will be watched closely by stakeholders. The staying power of 

European examples, particularly in Italy, already demonstrates that ESCs can bring added 

revenue and attention to energy efficiency. The European examples to date also indicate 

significantly higher prices for ESCs than the data available in the United States would 

indicate for the very limited U.S. market to date. 

Not entirely different from the early experience of REC markets, public and policy-maker 

perceptions of the ability to accurately capture and measure energy savings vary, and 

attempting to do so in the context of tradable certificates is still a new concept. ESCs will 

not be helped by a perception that measurement and verification is inconsistent or 

unreliable. For this reason, it is particularly important to the market’s future that a single, 

independent national certifying body promotes consistent practices that encompass both 

voluntary and compliance markets. Lessons from compliance markets also will be crucial 

for an emerging national voluntary market. 

The development of robust markets for ESCs will depend on consistency and clarity in 

standards and protocols as well as the ability of the industry to speak with a central voice. 

Ensuring that savings are real, verifiable, and additional is necessary for the market to 

gain credibility. Proper handling of the issue of free ridership is particularly important to 

preserve market integrity, especially on the voluntary side of the market, which depends 

so heavily on public perception. 

REC markets have shown that there may be potential to broaden and integrate markets 

for tradable commodities that represent a public good and an opportunity for consumers 

to “vote with their wallets.” ESCs can benefit from the traction that RECs have gained in 

the marketplace, along with the existing infrastructure developed for REC markets, such 

as tracking systems. These systems could be relatively easily modified to accommodate 

ESC trading. ESCs can also benefit from existing M&V protocols and other data acquired 

through long-standing efficiency and public benefit programs. But with a somewhat 

different value proposition, it is unclear whether ESCs will mirror RECs market progress. 

 49
Making use of these existing structures is crucial for ESC regimes to succeed, given that 

transaction costs are perhaps the single greatest market hurdle for ESCs to overcome. 

Keeping administrative, certification, and tracking costs low will enable market traction, 

given the relatively low profit margins to be expected with the product. Large programs 

that involve more parties also can help to diffuse these costs and help ensure adequate 

M&V oversight. The importance of leveraging existing M&V data and structures is 

amply demonstrated in both the Connecticut and NYSERDA examples, where ESC 

programs benefit from M&V protocols enacted by public benefit funds developed over a 

long period of time to implement energy efficiency measures. As these very new 

programs develop, other states can draw from these programs’ experiences in attempting 

to replicate their successes. 

There are strong motivating influences at work to promote a variety of mechanisms that 

support increased energy savings. Although the timing may be good for ESCs to move 

toward greater public and policy-maker acceptance and eventually toward some critical 

mass, ESCs also face obstacles to that acceptance that go beyond those of RECs. For the 

voluntary market that has played a key role in REC development, ESCs have an 

essentially challenging value proposition: selling the environmental benefits of a measure 

that has already bestowed a personal benefit of savings on the seller. It is too soon to 

know whether the benefits of ESCs will ultimately outweigh those challenges. As the 

general public and policy makers continue to warm to the idea of requirements that build 

in market-based flexibility, such as REC and carbon offset trading, the potential exists for 

ESCs to play a role in expanding markets for energy efficiency. 

 50
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F1147-E(10/2008) 

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Early experiences with energy savings certificates (ESCs) have revealed both their merit and the challenges 

associated with them. In the United States, there has been little activity to date, so any lessons must be drawn from 

experiences in Italy, the United Kingdom (UK), France, and elsewhere. The staying power of European examples, 

particularly in Italy, demonstrates that ESCs can help initiate more efficiency projects. Although a robust market for 

renewable energy certificates (RECs) has emerged in both the voluntary and policy compliance contexts in the 

United States, ESCs have yet to gain significant traction. This report looks at the opportunity presented by ESCs, the 

unique challenges they bring, a comparison with RECs that can inform expectations about ESC market development, 

and the solutions and best practices early ESC market experience have demonstrated. It also examines whether 

there are real market barriers that have kept ESCs from being adopted and what structural features are necessary to 

develop effective trading programs. 

15. SUBJECT TERMS

energy savings certificates; ESCs; energy efficiency; renewable energy; renewable energy certificates; RECs; state 

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