Incentivizing and Providing Appropriate Credit 

for Energy Efficiency Improvement 

in Forthcoming CO2 Emissions Standards

for Existing Power Plants

November 2013 

A Policy Paper Issued by the Regional Energy Efficiency Organizations
2

Acknowledgements

This paper was authored by Howard Geller of SWEEP on behalf of the regional energy 

efficiency organizations listed below that are endorsing and issuing it. Comments are welcomed 

and should be sent to Howard Geller at hgeller@swenergy.org. The author expresses his 

gratitude for comments provided on earlier drafts by Tomas Carbonell, Megan Ceronsky, Jeremy 

Fisher, Sara Hayes, Dan Lashof, Julie Michals, Steven Nadel, Vickie Patton, John Shenot, Will 

Toor and Tim Woolf. The author also thanks Gene Dilworth for his skillful editing. The views 

expressed in the paper are those of the author and the endorsing organizations, and not of any of 

the reviewers. 

The Midwest Energy Efficiency Alliance (MEEA) is the leading source for energy efficiency 

information and action in the 13-state region. MEEA raises awareness, facilitates programs and 

strengthens policies to support and maximize energy savings through efficiency. For more 

information, visit www.mwalliance.org. 

The Northeast Energy Efficiency Partnerships (NEEP) is a non-profit organization whose 

mission is to serve the Northeast and Mid-Atlantic to accelerate energy efficiency in the building 

sector through public policy, program strategies and education. For more information, visit

www.neep.org. 

The South-central Partnership for Energy Efficiency as Resource (SPEER) aims to 

accelerate the adoption of advanced building systems and energy efficient products and services 

in Texas and Oklahoma. For more information, visit www.eepartnership.org

The Southeast Energy Efficiency Alliance (SEEA) is a regional energy efficiency organization 

that serves 11 southeastern states and drives market transformation in the region’s energy 

efficiency sector as a convener for collaborative public policy, thought leadership, programs and 

technical advice. For more information, visit www.seealliance.org.

The Southwest Energy Efficiency Project (SWEEP) is a public interest organization dedicated 

to advancing energy efficiency in Arizona, Colorado, Nevada, New Mexico, Utah and Wyoming. 

For more information, visit www.swenergy.org

 
3

Introduction

On June 25, 2013, President Obama issued a Presidential Memorandum directing the 

U.S. EPA to “issue carbon pollution standards, regulations, or guidelines, as appropriate, for 

modified, reconstructed and existing power plants.” Under the directive, the EPA must issue 

proposed standards or guidelines by June 1, 2014 and final standards or guidelines by June 1, 

2015. The directive is based on the authority provided in Section 111(d) of the Clean Air Act. 

The Memorandum also directs the EPA to require that States submit plans for implementing the 

carbon emissions standards, and that the regulations require such plans be submitted no later than 

June 30, 2016. Furthermore, the Memorandum directs the EPA to engage with states and other 

stakeholders, tailor regulations and guidelines to reduce costs, develop approaches that allow 

regulatory flexibility, and support continued development and deployment of cleaner 

technologies and energy efficiency. 

Assuming the EPA moves forward with issuing carbon emissions standards or guidelines 

that apply state-by-state and then trigger state plans, the question arises as to how the standards 

or guidelines can best support and give appropriate credit for efforts that utilities, states and other 

entities take to increase the efficiency of electricity use and thereby reduce future electricity 

consumption. This is important because it is widely recognized that energy efficiency 

improvement is the lowest cost utility resource, with utility energy efficiency programs typically 

costing two to three cents per kWh saved (utility cost only), compared to costs of six cents per 

kWh or greater for new sources of electricity supply whether fossil fuel-based, nuclear power or 

renewable energy resources.1In addition, increasing the efficiency of electricity use provides a 

wide range of environmental benefits, not just reduced carbon emissions. Energy efficiency 

improvements support job creation and economic growth, enhance the reliability of the electric 

grid, improve public health and reduce power sector risks.2Thus, it makes eminent good sense 

for EPA to strongly support and give appropriate credit for a wide range of cost-effective energy 

efficiency initiatives as part of the forthcoming carbon emissions standards. 

Crosscutting Issues

One important issue that EPA has identified related to establishing CO2 performance 

standards for existing power plants is the level of flexibility that states are given.3From the 

perspective of fully supporting cost-effective energy efficiency measures as well as other 

 

1 M. Molina. 2013. “Still the First Fuel: National Review of EE Resource Costs.” Presentation at the National Energy 

Efficiency as a Resource Conference. American Council for an Energy-Efficient Economy, Washington, DC. Sept. 

K. Friedrich, et al. 2009. Saving Energy Cost-Effectively: A National Review of the Cost of Energy Saved through 

Utility-Sector Energy Efficiency Programs. American Council for an Energy-Efficient Economy, Washington, DC.

http://www.aceee.org/sites/default/files/publications/researchreports/U092.pdf 

2

J. Lazar and K. Colburn. 2013. Recognizing the Full Value of Energy Efficiency. Regulatory Assistance Project, 

Montpelier, VT. http://www.raponline.org/document/download/id/6739 Also, H. Geller, et al. 2012. The $20 

Billion Bonanza: Best Practice Electric Utility Energy Efficiency Programs and Their Benefits for the Southwest. 

Southwest Energy Efficiency Project, Boulder, CO. http://www.swenergy.org/programs/utilities/20BBonanza.htm

3

“Considerations in the Design of a Program to Reduce Carbon Pollution from Existing Power Plants.” U.S. 

Environmental Protection Agency. Washington, DC. Sept. 23, 2013. 
4

strategies to reduce the cost of compliance with CO2 emissions standards, it is important to 

provide broad flexibility by: 

1) allowing compliance across affected power plants within a state, 

2) allowing banking and trading of emissions reduction credits, and 

3) allowing credit for emissions reductions from “outside the fence” measures such as enduse efficiency improvements or distributed generation technologies.

4

The systems approach is far preferable to an approach that applies the standards plant by plant

without allowing averaging, banking or trading, and will help to minimize compliance costs.

Second, it is important to support energy efficiency policies and programs that are 

implemented at either the state, utility, or local levels. This is necessary because some energy 

efficiency policies are adopted by states (e.g., statewide building energy codes, state appliance 

efficiency standards, or financial incentives such as state income tax credits for energy efficiency 

measures); some are implemented at the utility level (e.g., energy savings goals/standards and 

energy efficiency programs designed to achieve the goals/standards); and some are implemented 

at the local level (e.g., building energy codes in home rule states or local building retrofit 

ordinances). All such policies and programs can contribute to a “best system of emissions 

reduction” which is the language specified in Section 111(d) of the Clean Air Act for the purpose 

of establishing emissions reduction standards. 

Third, another key issue is whether the performance standards that EPA sets are specified 

in terms of maximum allowed tons of carbon dioxide emissions that decline over time or in terms 

of maximum allowed rates of carbon dioxide emissions rates (pounds or tons per MWh) that 

decline over time. The former is the mass-based emissions reduction approach, the latter is the 

emissions rate reduction approach. As explained below, the mass-based emissions approach is 

preferable from the perspective of supporting and giving appropriate credit for any and all energy 

efficiency improvements.

The EPA has asked for feedback on a number of other issues including whether the 

performance standards should be uniform nationally one level for all of the the covered sources 

in a state or tailored to each subcategory of sources. These broader issues are beyond the scope 

of this paper.

Advantages of the Mass-based Emissions Reduction Approach

The mass-based emissions reduction approach presumably would establish CO2

emissions requirements (tons) that would decline over time for existing power plants, by state. 

Important issues include how baseline emissions are determined for each state, the rate of decline 

in the statewide emissions allowances relative to the baseline, whether emissions allowances are 

 

4

S. Hayes and G. Herndon. 2013. Trailblazing Without Smog: Incorporating Energy Efficiency into Greenhouse Gas 

Limits for Existing Power Plants. American Council for an Energy-Efficient Economy, Washington, DC.

http://www.aceee.org/sites/default/files/publications/researchreports/e13i.pdf. Also, see Structuring Power Plant 

Emissions Standards Under Section 111(d) of the Clean Air Act. M.J. Bradley and Associates. Oct. 2013. 

http://www.mjbradley.com/sites/default/files/Options%20for%20Regulating%20Power%20Plants%20Under%20S

ection%20111%20Final.pdf
5

given out for free or auctioned off, length of compliance periods, treatment of electricity imports 

and exports, treatment of emissions from new power plants that replace older plants, and the 

availability (or not) of backstop allowance purchases. Most of these issues are beyond the scope 

of this paper, but some are addressed below. 

If a state is required to or chooses to use a mass-based approach to meeting the standards 

or guidelines (assuming this approach is at least allowed by the EPA), the state would develop a 

plan for meeting the standards or guidelines in accordance with the complete set of rules 

established by the EPA. If broad flexibility is provided to states as suggested above, state plans 

would indicate how emissions allowances are allocated to the owners of different fossil fuelbased power plants, and other initiatives that a state is taking to meet the standards.

The mass-based reduction approach would support and give appropriate credit for any 

and all energy efficiency efforts. Anything a state, utility, local authority or other entity does to 

increase the efficiency of electricity use will reduce electricity consumption (relative to 

consumption without the energy efficiency initiative) and therefore reduce power plant operation 

and emissions (as long as fossil fuel-based plants operate on the margin at least part of the time).

5

This helps the state, and owners of power plants within the state, to achieve the specified CO2

standard or guideline. An important caveat to this point is that displaced generation does not 

respect utility or state boundaries. Energy efficiency improvements as a result of utility energy 

efficiency programs, for example, could displace generation owned by a different utility or by an 

independent power producer. This issue is discussed further below.

There is a wide array of policies and programs that could be used to reduce emissions 

including (but not limited to):

 utility/ratepayer-funded energy efficiency programs

 state or local building energy codes

 state efficiency standards on products not regulated by the federal government 

 pricing policies that reduce electricity use

 state participation in regional efforts to transform markets related to energy efficiency

 energy efficiency initiatives for the public sector

 policies or programs that promote adoption of combined heat and power (CHP) systems

 education and training programs that reduce electricity use

 energy efficiency financing or financial incentive programs at the state or local level.6

All such efforts would help a state, and the utilities within the state, comply with CO2 emissions 

reduction requirements for existing power plants at lowest cost; i.e., avoiding implementation of 

 

5

Energy efficiency efforts may reduce absolute electricity consumption in some states, or they may reduce the 

rate of growth of electricity consumption in other states. In either case, the same principles apply.

6

The wide array of energy efficiency policies and programs implemented by states are described in detail in a 

database maintained by ACEEE, http://www.aceee.org/sector/state-policy. Also, see “An Energy Efficiency Primer 

for Governors.” National Governors Association, Washington, DC. Sept. 2013. http://www.nga.org/cms/home/ngacenter-for-best-practices/center-publications/page-eet-publications/col2-content/main-content-list/an-energyefficiency-primer-for.html
6

other more costly emissions reduction measures and/or helping to suppress emissions allowance 

prices.

The mass-based emissions reduction approach also gives accurate and appropriate credit 

to all of these potential policies or programs in that each would directly reduce carbon dioxide 

emissions and help the state comply with its requirements. The amount of emissions reduction 

from each and every energy efficiency policy is uncertain (see discussion below), and does not 

need to be accurately known. If the policy or program is effective it will reduce emissions to 

some degree and there will be the right amount of credit; i.e., the amount of reduction actually 

occurring over time. Conversely if the policy or program is ineffective, there will be little or no 

emissions reductions. There is no need to evaluate the effectiveness of each policy and program 

in reducing CO2 emissions, monitor how the reductions change over time, and then provide 

“credit” for the estimated reductions. If declining mass-based emissions requirements are 

adopted to limit CO2 emissions from power plants, no additional emissions reduction credits for 

energy efficiency efforts are needed or appropriate. In fact, providing additional credits would be 

“double counting” of emissions reductions that are already captured through the direct reduction 

in emissions (see numerical example provided in the Appendix).

Returning to the issue of displaced generation not necessarily respecting utility or state 

boundaries, we have the following comments. Once again, energy efficiency policies and 

programs are implemented at either the state, local or utility level. In some cases multiple 

utilities collaborate in energy efficiency program implementation; e.g., rural electric cooperatives 

served by the same generation and transmission company. In the case of state and local energy 

efficiency initiatives, energy savings are likely to lead to in-state emissions reductions for the 

most part and thus help the state meet its CO2 emissions standards or guidelines.

7 Regarding 

utility energy efficiency programs, in many cases the displaced generation will be primarily from 

power plants owned by the utility, at least in states with integrated utilities that are responsible 

for electricity generation, transmission and distribution. 

In the case of utilities that engage in considerable power exchange or in states with 

deregulated wholesale power markets, two or more utilities could agree to comply with their 

emissions standards jointly, particularly if both rely upon end-use energy efficiency 

improvement as a major emissions reduction strategy. In the case where there is considerable 

interstate power exchange (as in New England, for example), two or more states could agree to 

comply with their emissions standards or guidelines jointly. In other words, there could be interutility or interstate trading of emissions reductions. We suggest that the EPA allow any of the 

above compliance strategies, as long as its overall performance standards or guidelines are met. 

If there is no need to rigorously evaluate each and every energy efficiency policy or 

program to determine its contribution to actual observed CO2 emissions reductions, how should a 

state include and promote energy efficiency improvement as a compliance strategy within its 

state plan? The Clean Air Act requires that traditional emissions reduction measures included in 

 

7

According to U.S. EIA data, nine states (CA, DE, ID, MD, MI, MN, NJ, TN and VA) import more than 20% of the 

electricity consumed in the state on a net basis. And only five states (DE, ID, MD, MA and VA) import more than 

30% of the electricity consumed in the state. http://eia.gov/electricity/state/
7

State Implementation Plans (SIPs) under Section 110 of the Clean Air Act be real, surplus, 

permanent, quantifiable and enforceable.8The EPA issued a Roadmap for Incorporating Energy 

Efficiency/Renewable Energy Policies and Programs into State and Tribal Implementation 

Plans.

9

The Roadmap describes four pathways that states and tribes can use to incorporate 

energy efficiency and renewable energy policies and programs into their implementation plans. 

However, the Roadmap is directed to SIPs that are required when an area is designated as 

nonattainment for a National Ambient Air Quality Standard (NAAQS). It is not clear or 

necessary that these requirements apply to state plans that will be developed after the EPA 

establishes CO2 emissions performance standards and related rules under Section 111(d) of the 

Clean Air Act.

To encourage inclusion of a wide range of energy efficiency policies and programs in 

state plans to under a mass-based emissions allowance approach, the EPA should direct or at 

least encourage states to include cost-effective energy efficiency to the maximum degree 

feasible. This directive could apply to both demand-side and supply-side energy efficiency 

improvements, in order to reduce compliance costs while providing other associated economic 

and environmental benefits. 

Each state plan should explicitly include energy efficiency initiatives within its overall 

efficiency “portfolio” with an estimate of the impact that these initiatives would have on 

electricity usage and CO2 emissions over time (using EPA-approved models that translate energy 

savings to CO2 emissions reductions, examples of which are mentioned below). While requiring 

states to estimate the impact of efficiency in state plans, the EPA should give states broad 

flexibility to implement efficiency initiatives to maximize impacts and economic benefits. This 

would enable states to readily integrate efficiency with other emissions reduction strategies such 

as increases in renewable energy generation or retirement of older, highly polluting power plants

to the degree necessary to meet the CO2 emissions standards or guidelines, and to do so at least 

cost given assumptions about population growth, economic growth, and other factors that affect 

the demand for electricity.

10

As state compliance plans are implemented, the impacts of energy efficiency initiatives 

could be estimated using evaluation, measurement and verification (EM&V) procedures adopted 

by each state. This would inform state policymakers as to the actual role of efficiency policies 

and programs to reduce system-level CO2 emissions, and help policy makers undertake actions 

necessary to ensure that compliance is achieved. To monitor the role of efficiency in reducing 

CO2 emissions, the EPA would likewise benefit from periodic state reports of the contribution of 

efficiency portfolios to achieving CO2 emissions reduction requirements. 

 

8

K.A. Colburn, B.K. Hausauer, and C.A. James. 2012. State Implementation Plans: What Are They and Why Do They 

Matter? Regulatory Assistance Project, Montpelier, VT. www.raponline.org/document/download/id/508

9

Roadmap for Incorporating Energy Efficiency/Renewable Energy Policies and Programs into State and Tribal 

Implementation Plans. U.S. EPA, Washington, DC. Oct. 12, 2012. http://epa.gov/airquality/eere/

10 It should be noted that if a state chooses to implement a cap and trade approach, it is not necessary to specify 

the different strategies that will be employed to meet the cap nor estimate how much emissions reduction will 

result from each strategy. The cap and trade allowance system will ensure that the standards are met. 
8

Although EM&V procedures vary across states, some states are interested in increasing 

standardized transparency and consistency in EM&V practices at the regional level; e.g., in 

northeast states11 as well as the national level.12 This should lead to better quality evaluations and 

improved comparability of estimated efficiency impacts from state to state. Transparent and 

consistent reporting of EM&V methods and results could also contribute to a clearer 

understanding of the contribution and cost-effectiveness of efficiency to reduce system-level 

CO2 emissions across the country. However, because compliance under a mass-based emissions 

allowance approach would be based on actual observed CO2 emissions, rigorous EM&V of the 

impacts of specific efficiency policies and programs would not be needed by the EPA to 

demonstrate compliance. As is described further below, this is an important difference compared 

to the emissions rate approach which would require rigorous measurement and documentation of 

energy savings impacts in order to calculate efficiency credits. 

The EPA could also require that state compliance plans include contingencies should 

electricity demand increase faster (or slower) than assumed due to energy efficiency initiatives 

being less (or more) effective than assumed, modified over time, etc. In fact, a state plan should 

include such contingencies whether or not energy efficiency improvement is a major component 

of the plan, because other factors that influence future electricity demand growth (such as 

population and economic growth) are also uncertain. In effect, there could be an enforceable 

requirement on the state to remedy any emissions reduction shortfall, for whatever reason, if 

elements of its state plan are not adequate for complying with the emissions standards or 

guidelines issued by the EPA under Section 111(d) of the Clean Air Act. 

The mass-based emissions reduction approach does have a disadvantage of discouraging 

electrification of certain technologies that, while increasing electricity use, provide greenhouse 

gas (GHG) reductions and other environmental benefits from the broader societal perspective. 

One such technology is electric vehicles (EVs).13 EVs in general reduce overall GHG emissions 

while increasing consumption of electricity and thus pollutant emissions from power plants. 

Utilities or states that are facing declining CO2 emissions requirements could be challenged to 

promote the adoption of EVs. This may not be a concern in the next five years when adoption of 

EVs is likely to remain relatively limited, but it could be a significant issue in the medium and 

long term. We suggest that the EPA consider provisions that promote adoption of technologies 

that result in a net reduction in GHG emissions without penalizing utilities or states with respect 

to the CO2 emissions standards set under Section 111(d) of the Clean Air Act. 

 

11 In the Northeast, the Regional EM&V Forum is steered by a committee of utility commissioners and air 

regulatory representatives from ten jurisdictions in the northeast and mid-Atlantic regions. The Forum was formed 

to support the development and use of consistent protocols to evaluate measure, verify, and report the savings, 

costs, and emission impacts of energy efficiency measures. http://www.neep.org/emv-forum/about-the-emvforum/index 

12 See, for example, Energy Efficiency Program Impact Evaluation Guide. DOE/EE-0829. U.S. Department of Energy, 

Washington, DC. Dec. 2012. http://www1.eere.energy.gov/seeaction/pdfs/emv_ee_program_impact_guide.pdf 

and the U.S. DOE EE Savings Protocols at https://www1.eere.gov/office_eere/de_ump_protocols.html

13 D. Anair and A. Mahmassani. 2012. State of Charge: Electric Vehicles’ Global Warming Emissions and Fuel-Cost 

Savings across the United States. Union of Concerned Scientists, Cambridge, MA. 

http://www.ucsusa.org/assets/documents/clean_vehicles/electric-car-global-warming-emissions-report.pdf
9

In summary, incentivizing and giving appropriate credit for emissions reductions from 

energy efficiency policies and programs is relatively simple and easy under the mass-based 

emissions reduction approach, as long as the EPA is flexible with respect to how the overall 

performance standards or guidelines are met by each state and the affected power plant owners 

within the state. Whether emissions allowances are auctioned off or distributed for free, states 

and utilities will have an incentive to implement the lowest cost emissions reduction strategies 

first if emissions must decline over time and significant actions must be taken to comply with the 

performance standards. 

Disadvantages of the Emissions Rate Approach

The emissions rate approach presumably would establish a baseline CO2 emissions rate 

(pounds or tons per MWh) for existing fossil fuel-based power plants in a state and require that 

this rate decline over time. The same issues listed above for the mass-based emissions reduction 

approach need to be addressed in the standards if the emissions rate approach is adopted. Once 

again, states would need to develop a plan for how emissions rate reductions are allocated to the 

owners of different fossil fuel-based power plants assuming a state averaging approach is 

adopted. 

The emissions rate approach would not directly support energy efficiency efforts. Energy 

efficiency improvements in aggregate reduce the operation of power plants on the margin; i.e., 

the last plant operated in the dispatch order at any point in time, and most of the time this means 

fossil fuel-based power plants.14 Thus energy efficiency improvements reduce power plant 

emissions, but they also reduce electricity consumption and production. 

Energy efficiency improvements do not necessarily reduce the average emissions rate for 

the fossil fuel plants owned by a particular utility or located in a state. In fact, if the energy 

efficiency improvements reduce the operation of cleaner-than-average plants, they would

actually increase the average emissions rate of a utility or state (assuming the average is 

weighted according to power plant generation). And this is often the case in the real world since 

natural gas-fired plants operate on the margin much of the time throughout the nation, while 

dirtier coal-fired plants tend to be baseload plants.15 (This point is explained further in the 

numerical example in the Appendix.)

To provide a real world example, an in-depth study quantifying the emissions benefits 

from energy efficiency programs in Wisconsin found that the avoided emissions from energy 

efficiency programs is 1,801 pounds of CO2 per MWh of generation when considering emissions 

on the margin at the time when energy savings are occurring.16 For comparison, the overall 

average CO2 emissions rate in the state is 2,346 pounds of CO2 per MWh generated. Thus, end-

 

14 Assessing the Multiple Benefits of Clean Energy: A Resource for States. U.S. Environmental Protection Agency. 

Washington, DC. Feb. 2010. http://www.synapse-energy.com/Downloads/SynapseReport.2010-02.EPA.CleanEnergy-Benefits.06-057.pdf 

15 Ibid.

16 D. Sumi, K. Swayne and C. Stemrich, 2013. “Quantifying Emissions Benefits for Wisconsin’s Focus on Energy 

Program.” Proceedings of the 2013 International Energy Program Evaluation Conference. Chicago, IL. Aug.
10

use energy savings cut CO2 emissions on the margin 23% less than average emissions in the 

state, per MWh of power generation. Based on these values, reducing electricity use by say 5% 

would increase the average emissions rate in the state to 2,375 pounds of CO2 per MWh 

generated.

In short, energy efficiency improvements would contribute to reduced emissions in a 

state, but at the same time move the state further from, rather than closer to, its emissions rate 

reduction target using an average emissions rate approach. Likewise, under the average 

emissions rate approach, utilities would have an incentive to increase electricity consumption if it 

leads to increased operation of cleaner-than-average power plants. Doing so would increase 

absolute emissions, while at the same time reducing the generation-weighted average emissions 

rate and moving the state (or utility) closer to its emissions rate reduction standard. 

To address this perverse incentive, some environmental and energy efficiency advocates 

have proposed separate emissions reduction credits for quantifiable and permanent energy 

efficiency improvements. For example, the Natural Resources Defense Council (NRDC) has 

proposed that such credits be allowed under an emissions rate approach for energy savings from

qualifying state and local regulator-approved energy efficiency programs or from improved 

building or appliance efficiency standards adopted at the state level.

17 Under the NRDC 

proposal, CO2 emissions credits would be issued by the state air regulator after verification of 

energy savings. In addition, the CO2 emissions credits would need to come from energy 

efficiency efforts that are additional to those during the baseline period. The state air regulator 

would then distribute these emissions credits to sources that need them in some manner (NRDC 

suggests auctioning them). Those entities obtaining credits would use them to help achieve 

compliance with the required emissions rate. 

The NRDC proposal attempts to encourage energy efficiency efforts while ensuring that 

energy efficiency credits are real and verifiable. It does address the problem of energy efficiency 

increasing rather than decreasing the average emissions rate. However, this concept has some 

limitations. First, the proposal would only allow credits for a limited set of energy efficiency 

efforts, not the full range of efforts that states, utilities and local authorities can and do undertake 

to increase energy efficiency and help consumers save energy. For example, no credits would be 

allowed for pricing policies, tax credits or education efforts that reduce electricity consumption. 

This is an important consideration as state energy efficiency potential studies have found that 

while utility energy efficiency programs offer the single largest amount of electricity savings 

potential, other state and local energy efficiency policies and programs in combination offer 

more savings potential than do utility programs.18 

 

17 D. Lashof, et al., 2013. Closing the Power Plant Carbon Pollution Loophole: Smart Ways the Clean Air Act Can 

Clean Up America’s Biggest Climate Polluters. Natural Resources Defense Council, Washington, DC. 

http://www.nrdc.org/air/pollution-standards/files/pollution-standards-report.pdf

18 See H. Geller, et al. 2007. Utah Energy Efficiency Strategy: Policy Options. Southwest Energy Efficiency Project, 

Boulder, CO. Oct. http://www.swenergy.org/publications/documents/UT_Energy_Efficiency_Strategy.pdf. Also, H. 

Geller, et al. 2008. New Mexico Energy Efficiency Strategy: Policy Options. Southwest Energy Efficiency Project, 

Boulder, CO. Nov. http://www.swenergy.org/publications/documents/NM_Strategy-November_2008.pdf
11

Second, as noted above, different states and utilities currently use various methodologies 

to evaluate energy savings. These methodologies are often approved either explicitly or 

implicitly by state public utility commissions for ratepayer-funded energy efficiency programs. 

While there is vast experience in evaluating the energy savings from energy efficiency policies 

and programs using a range of methods (e.g., deemed savings values, field-based measurement 

and verification, and large scale billing analysis, or a combination thereof), the level of rigor and 

cost to measure and verify savings is driven by the relative need for certainty and precision. In 

general, the more certainty and precision needed, the more costly the EM&V. 

Under the average emissions rate approach allowing tradable efficiency credits to help 

demonstrate CO2 emissions reduction compliance, it would be appropriate for the EPA to require 

a higher level of accuracy and precision to “document” the energy savings associated with the 

energy efficiency credits. This could increase the complexity and cost of efficiency as a 

compliance strategy relative to the mass-based emission reduction approach. As a result, under 

the emission rate approach, states would likely narrow the range of efficiency programs and 

policies offered for efficiency credits, thereby reducing the role of efficiency as an overall CO2

emission reduction strategy and increasing compliance costs as other more costly emissions 

reduction strategies are pursued. 

Third, even if energy savings are precisely estimated, there are challenges in accurately 

assessing displaced power generation and thus avoided CO2 emissions.19 A number of tools have 

been or are being developed to assist in such estimation, such as EPA’s eGRID tool and the 

Avoided Emissions and Generation Tool (AVERT).20 However, the actual level of emissions 

reduction is affected by the timing (load shape) for the energy savings which may not be 

accurately known. There is a paucity of measured data on load shapes as well as the load profiles 

of energy savings from various energy efficiency measures.21 Also, future CO2 emissions 

reductions on the margin can change over time in ways that are difficult to predict. Field-based 

studies to provide the needed load shape data are expensive and take significant time to conduct. 

Fourth, there are likely to be challenges in the implementation of energy efficiency 

credits under an average emissions rate reduction approach. In particular, utilities will have an 

incentive to overstate energy savings “on paper” as it would maximize the credits received, while 

maintaining as much electricity generation from cleaner than average power plants as possible as 

this will help to reduce the average emissions rate. To reduce the average emissions rate, some 

utilities may simply promote greater electricity use, for example by promoting inefficient 

technologies such as electric resistance heating. State agencies (or some other entity) will need to 

carefully monitor energy efficiency credits as well as broader utility compliance strategies in 

order to minimize these potential problems. 

 

19 The NRDC approach, it should be noted, does not require assessing avoided CO2 emissions from end-use 

efficiency improvements. Rather it assigns a CO2 emissions avoidance value to a given level of energy savings based 

on the average emissions rate of the system.

20 A. Diem, C. Quiroz and M. Salhotra. 2013. “Using EPA’s eGRID to Estimate GHG Emissions Reductions from 

Energy Efficiency.” Proceedings of the 2013 International Energy Program Evaluation Conference. Chicago, IL.

21 Complicating the determination of avoided emissions is the fact that the load profile of the energy savings for 

some efficiency measures will differ from the load profile of the device itself; for example, a variable speed control 

applied to a pump, compressor, blower or other device with variable load will not reduce power consumption by 

the same percentage at all times. 
12

In summary, the average emissions rate approach does not directly support or encourage 

energy efficiency improvements because efficiency improvements do not reduce the emissions 

rate of particular power plants, and in most cases will increase the average rate of all the plants 

operated by a utility or located in a state, even though energy efficiency improvements reduce 

absolute emissions. Providing energy efficiency credits as some groups have suggested would 

help, but this approach has limitations and would need to be carefully monitored to minimize 

unintended consequences. 

Why This Matters

Energy efficiency improvement is widely seen as a key strategy for reducing GHG 

emissions in both the near term and the long term, and for achieving deep, long term emissions 

reductions as cost-effectively as possible.22 Thus it is critical to design emissions reduction 

policies, such as CO2 emissions standards on existing power plants, that foster and support all 

types energy efficiency improvements, rather than making it difficult for energy efficiency to 

contribute or even discouraging energy efficiency improvements. 

The stakes are significant, as the NRDC study referenced above shows. NRDC found that 

strong pursuit of cost-effective energy efficiency policies and programs could greatly reduce the 

cost of meeting CO2 emissions standards for existing power plants, specifically standards that 

result in a 22% reduction in power plant CO2 emissions nationwide by 2020 and a 34% reduction 

by 2025.

23 According to this analysis, the net economic savings from widespread energy 

efficiency improvements would offset most of the costs of implementing the energy efficiency 

measures and other emissions reduction measures in the next decade and fully offset the costs by 

2030. Furthermore, NRDC estimates that the public health benefits would exceed the net 

compliance costs by a factor of 6 to 15, when cost-effective energy efficiency measures are used 

as the principal compliance strategy. 

Another study, performed for six southwestern states (AZ, CO, NV, NM, UT and WY) 

found implementation of best practice utility energy efficiency programs during 2010-2020 

could reduce electricity use in the region in 2020 by 21%, compared to a reference scenario 

without any utility energy efficiency programs.24 Implementing the best practice efficiency 

programs would result in about $20 billion in net economic benefits for households and 

businesses in the region, and would reduce CO2 emissions in the region by 31.6 million metric 

tons in 2020. This is a 15.5% reduction relative to projected CO2 emissions without the energy 

efficiency programs. 

Additional Considerations 

 

22 See Hayes and Herndon, 2013. Also, J. Creyts, et. al. 2007. Reducing U.S. Greenhouse Gas Emissions: How Much 

at What Cost? McKinsey & Company and G. Keith, et al. 2011. Toward a Sustainable Future for the U.S. Power 

Sector: Beyond Business As Usual 2011. Synapse Energy Economics, Inc., Cambridge, MA. 

23 See Lashof et. al., 2013.

24 See Geller et. al., 2012.
13

The EPA must also address how the CO2 emissions standards for existing power plants 

will interact with and affect standards already in place at the regional or state levels. In the 

Northeast and Mid-Atlantic regions, nine states have adopted an emissions allowance program 

known as the Regional Greenhouse Gas Initiative (RGGI) in order to reduce CO2 emissions from 

existing fossil fuel-based power plants using a market-based system. The effort has been 

successful with energy efficiency policies and programs implemented by states and utilities in

the region helping to reduce emissions as well as lower the cost of emissions allowances that are 

sold through an auction process.25 In RGGI, there is no requirement to identify the specific 

emissions reductions from every energy efficiency initiative, nor is there any sort of crediting 

system related to energy efficiency policies, programs and measures. 

RGGI has also dispersed 66% of total auction proceeds, $545 million through the end of 

2011, to help fund energy efficiency programs within participating states. This in turn has 

boosted funding for energy efficiency programs implemented by utilities and other program 

administrators in Northeast and Mid-Atlantic states. RGGI estimates that households and 

businesses will save $1.1 billion over the lifetime of the energy efficiency measures implemented 

through the programs it has funded.

26 Based on this very positive experience, we suggest that the 

EPA encourage states to use an auction approach to distributing emissions allowances, with 

some of the proceeds used to help fund energy efficiency initiatives. These initiatives could 

include state and local efficiency programs, as well as utility programs. However, we think it 

would be reasonable for the EPA to allow states to distribute allowances for free if they so 

choose, or to use a hybrid approach involving some combination of free and auctioned 

allowances.27 The goal should be to have states meet the emissions standards at lowest cost, not 

micromanage how states get there. 

California is also implementing a greenhouse gas emissions allowance program for the 

largest emitters in the state, starting with electric utilities and large industrial facilities. The goal 

is to return to 1990 levels of greenhouse gas emissions by 2020. Enforceable compliance 

obligations began Jan. 1, 2013.

28 The state is distributing emissions allowances for free initially, 

with the number of allowances declining two percent per year in 2013-14 relative to the baseline, 

and three percent per year starting in 2015, with the intent to move to auctioned allowances later 

in the program. Trading and banking of allowances is allowed. Once again, strong energy 

efficiency policies and programs are helping utilities and other covered entities comply with the 

standards, without a requirement to identify the specific emissions reductions from each and 

every energy efficiency initiative and without any sort of energy efficiency crediting system. 

 

25 For details, see the RGGI web site, www.rggi.org.

26 Regional Investment of RGGI CO2 Allowance Proceeds, 2011. Regional Greenhouse Gas Initiative. Nov. 2012. 

http://www.rggi.org/docs/Documents/2011-Investment-Report.pdf

27 The auction approach is more likely to be adopted by states that have relatively limited emissions reduction 

requirements, while free distribution is more likely in states that have more demanding emission reduction 

requirements. 

28 For details, see http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm
14

Conclusion and Recommendations

Energy efficiency improvements could play a large role in helping states and utilities 

meet the forthcoming CO2 emissions standards or guidelines for existing power plants at least 

cost. But the degree to which this occurs depends on the nature of the standards or guidelines 

adopted by the EPA. The most critical issues are: 1) the stringency of the standards; 2) whether 

the standards apply plant by plant or more broadly to utility systems or entire states; 3) whether 

the standards are based on mass-based emissions reduction requirements or an average emissions

rate approach, or allow states to choose between these options; and 4) the flexibility allowed 

within state plans. 

The mass-based emissions reduction approach would support all types of energy 

efficiency policies and programs, thereby enabling more stringent standards and greater GHG 

reductions. It would provide appropriate credit for actual energy efficiency improvements 

without the need for a rigorous and possibly complex energy efficiency evaluation and crediting 

system. The mass-based approach—coupled with flexibility within state plans to use energy 

efficiency policies and programs without limitation, and to allow inter-utility or interstate 

compliance—would help to maximize the use of energy efficiency as a CO2 emissions reduction 

strategy thereby providing a host of economic, environmental and other non-energy benefits. 

Furthermore, the suggested approach has worked well in the RGGI program, and is also the 

approach that California is using. 

In summary, we provide the following recommendations to the EPA as it crafts the CO2 

emissions standards or guidelines for existing power plants:

1) Follow the lead of RGGI and California by allowing and encouraging a mass-based 

emissions reduction approach in setting the CO2 emissions performance standards for 

each state. At a minimum, allow either a mass-based approach or an average emissions 

rate approach to be used by all states, (not just the RGGI states and California). And if 

both approaches are allowed, strongly encourage use of the mass-based approach for the 

reasons described above and the fact that this approach provides more certainty regarding 

the absolute level of CO2 emissions reductions over time compared to the emissions rate 

approach. 

2) Direct or encourage states to pursue cost-effective energy efficiency initiatives to the 

maximum degree feasible within their state plans in order to reduce costs of compliance 

and provide the other benefits offered by energy efficiency improvements. Provide states 

flexibility by allowing compliance across affected power plants owned by a particular 

entity, across multiple utilities or plant owners, or across multiple states. 

3) Allow states complying under a mass-based approach to include a wide range of energy 

efficiency policies and programs in their state plans, including those implemented at 

either the state, utility or local level. Indicate that state plans and implementation reports 

should include some estimation of expected impacts but do not require in-depth 

measurement and evaluation of each and every energy efficiency policy, program or

measure.
15

4) Allow inclusion of energy efficiency policies and programs without limitation, as long as 

there is a commitment to implement the policy or program, and an enforceable 

requirement on the state to remedy any emissions reduction shortfall. In addition, require 

states to include contingencies in their state plan that indicate what would be done if CO2

emissions do not decline as rapidly as projected for any reason.

5) Take into account the potential for substantial, cost-effective CO2 emissions reductions 

from energy efficiency policies, programs and measures when establishing the levels of 

emissions reduction called for by the standards. 
16

Appendix: Emissions Rate Reductions from Energy Efficiency Measures – A 

Numerical Example

Consider a coal-intensive utility that has fossil fuel generation of three types: baseload coalfired power plants, combined cycle natural gas plants, and natural gas peaking combustions 

turbines, with the following CO2 emissions rates which are typical of the different plant 

types and operating characteristics assuming the fossil plants in total generate one million 

MWh per year.

Coal plants – 2,200 lbs/MWh, 700,000 MWh of generation per year

CC gas plants – 1,000 lbs/MWh, 250,000 MWh of generation per year

CT gas plants – 1,600 lbs/MWh, 50,000 MWh of generation per year

The total emissions of the fossil plants taken together is:

Total emissions = 700,000 x 2,200 + 250,000 x 1,000 + 50,000 x 1,600 = 1,870 million lbs

The average emissions rate is 1,870 lbs/MWh

Now assume that energy efficiency measures result in 2% electricity savings with 95% of 

the electricity savings backing out generation by CC gas plants and 5% of the savings 

backing out generation by the CT gas plants.29 The amount of reduced electricity generation 

is 20,000 MWh, 19,000 MWh by the CC gas plants and 1,000 MWh by the CTs. The new 

level of CO2 emission is:

New total emissions = 700,000 x 2,200 + 231,000 x 1,000 + 49,000 x 1,600 = 1,849.4

million lbs 

This is about a 1.1% reduction in emissions. The new average emissions rate is:

New emissions rate = 1,849.4 million lbs/980,000 MWh = 1,887.1 lbs/MWh

The average emissions rate goes up because of the reduced generation by cleaner than 

average plants, even though total emissions go down.

Now lets assume that emissions reduction credits are also provided to help stimulate use of 

energy efficiency improvements as a compliance strategy in a situation where the utility (or 

combination of power plants) are required to (or decide to) reduce their average emissions 

 

29 This is not an unreasonable assumption about the type of generation that will be avoided by a utility that has a 

mix of coal-fired plants operating primarily as baseload plants, combined cycle gas plants, and gas-fired 

combustion turbines for meeting peak load. For the purpose of determining the avoided costs from its energy 

efficiency programs, Xcel Energy in Colorado assumed in its 2012-13 DSM Plan that 98% of total electricity savings 

results in reduced generation by combined cycle gas plants and that 2% of total electricity savings results in 

reduced generation by gas-fired combustion turbines. Xcel assumes there is no operation of coal-fired plants on 

the margin even though coal plants account for the majority of electricity production by the utility’s fossil-based 

plants, nor does it assume any operation of renewable energy facilities on the margin. 
17

rate as the primary approach to meeting EPA’s CO2 emissions standards. The amount of 

credit awarded could be equal to the estimated emissions reduction due to implementation of 

the efficiency measures, and are purchased by the coal plants.

Emissions credits = 19,000 MWh x 1,000 lbs/MWh + 1,000 MWh x 1,600 lbs/MWh = 

20,600 lbs

The coal plants have a new effective emissions rate equal to:

(700,000 x 2,200 – 20,600)/700,000 MWh = 2,170.6 1bs/MWh, a 1.3% reduction from its 

actual rate.

The new average emissions rate for the fleet of plants, with the EE emissions credits, is:

Emissions rate = (1519.4 + 231 + 78.4) million lbs/980,000 MWh = 1,866.1 lbs/MWh

This rate is below the original average emissions rate of 1,870 lbs/MWh, thereby “solving 

the problem” of energy efficiency improvements raising rather than lowering the average 

emissions rate. But it is only a 0.2% reduction in the original emissions rate.

In the approach proposed by NRDC, the amount of credit awarded is based on the average 

emissions rate of the overall group of power plants. In this case: 

Emissions credits = 20,000 MWh x 1,870 lbs/MWh = 37,400 lbs

The coal plants have a new effective emissions rate equal to:

(700,000 x 2,200 – 37,400)/700,000 MWh = 2,146.6 1bs/MWh, a 2.4% reduction from their 

actual rate.

The new average emissions rate for the fleet of plants, with the EE emissions credits

following the NRDC methodology, is:

Emissions rate = (1502.6 + 231 + 78.4) million lbs/980,000 MWh = 1,849.0 lbs/MWh

This is a 1.1% reduction in the original emissions rate of 1,870 lbs/MWh, equal in 

percentage terms to the absolute emissions reduction provided by the efficiency measures. 
Regional Energy Efficiency Organizations: 

Advancing Energy Efficiency Across the United States

The Regional Energy Efficiency Organizations (REEOs) work to advance more efficient energy 

use in 46 states as shown on the map above. All of the REEOs other than the Northwest Energy 

Efficiency Alliance (NEEA) are sponsors of this paper. NEEA is not included as a sponsor because 

it is not permitted to take policy positions.