Transforming Utility and Ratepayer Support for Electrical Energy Efficiency Nationwide

This paper is one in a series by the CCPP at Duke University to explore the barriers facing large‐scale, low‐carbon electricity generation and increased efficiency in the near‐term – primarily the next ten to fifteen years. Policy drivers may be necessary to provide the right price signal to develop low‐carbon emission technologies, but a price signal alone may not be enough to enable broad‐scale deployment.1 Significant technical, legal, infrastructural, and social barriers prevent the implementation of the necessary technologies and efficiency improvements. The series provides an overview of the barriers and outlines general policy options for lawmakers who wish to speed the development and/or wide‐scale deployment of low-carbon energy technologies. It will include papers focusing on specific energy generation technologies, including renewable energy and energy storage, and energy efficiency, a cost effective near‐term option for displacing carbon‐intensive energy generation.

Author(s): David Hoppock, Jonas Monast, and Eric Williams

Published: November 2008

download: policy brief (.pdf) >

As concerns about climate change, energy security and rising energy costs mount, greater investment in energy efficiency represents the most cost-effective, near-term solution for increasing energy security and significantly reducing U.S. greenhouse gas (GHG) emissions. Neither renewable energy sources, new nuclear plants, nor coal-fired power plants with carbon capture and storage are positioned to provide significant power in the next 10 to 15 years. Fortunately, energy efficiency presents a proven, low-cost method to significantly reduce electricity demand and GHG emissions in the near term.

Massive energy efficiency opportunities exist nationwide and generally represent the lowest-cost energy resource in the U.S. Energy efficiency investments generally cost less than half as much as comparable fossil fuel generation capacity and, on a per kWh basis, are less than half average retail electricity rates. The Environmental Protection Agency (EPA) estimates cost-effective energy efficiency could reduce national electricity demand by more than 20% by 2025 and reduce cumulative carbon dioxide emissions by more than 200 million tons.

There are numerous, well documented barriers to increased investment in energy efficiency. Traditional utility regulation discourages investment in energy efficiency and encourages utilities to increase sales as much as possible within their existing capacity, an effect known as the throughput incentive. Under traditional regulation, if a utility sells less electricity than is projected in the rate case, the utility may not have sufficient revenues to covers its costs, providing a strong disincentive to invest in energy efficiency. Generators in restructured markets and wholesale electricity providers place no value on energy efficiency because they can only earn revenues from the electricity they sell. Despite this, multiple states have successfully implemented policies to overcome these barriers to investment in energy efficiency.

This policy brief discusses these barriers in detail and outlines numerous federal policy options to increase nationwide investment in energy efficiency, including:
• Provide incentives to states that adopt decoupling. Decoupling removes the disincentives to utility investment in energy efficiency inherent in traditional utility regulation.
• Provide incentives to states that require utility or ratepayer investment in energy efficiency. This would encourage investment in energy efficiency without the federal government endorsing a specific policy tool.
• Provide incentives to states that reduce per capita electricity use by 0.5% per year. Reducing per capita electricity use directly addresses the policy goals of increasing efficiency and reducing GHG emissions.
• Create a national energy efficiency resource standard. Energy efficiency resource standards use market-based mechanism to find the lowest-cost efficiency opportunities.
• Establish a federal electricity surcharge to fund national energy efficiency programs.