Most policy analysis agrees energy efficiency is the cheapest way to reduce consumer power bills and cut emissions by lowering overall electricity demand, but if you really want to get a sense of how powerful efficiency can be, you’ve got to compare the states with ambitious policy to those without.
Just over half the US states have energy efficiency resource standards (EERS), but those 26 states represent nearly all of the electricity savings secured nationwide in 2012, finds Energy Efficiency Resource Standards: A New Progress Report on State Experience, a recent report from the American Council for an Energy Efficient Economy (ACEEE).
But if there were any doubts about the potential for energy efficiency to decarbonize our economy, consider these states are exceeding their goals, while costing utility customers far less than generating power from fossil fuels.
Texas was the first state to set an EERS in 1999, and since then, 25 other states have joined suit and set long-term energy efficiency targets. ACEEE broadly defines EERS as policy setting mandatory energy savings targets for utilities and efficiency program administrators.
And the aggregate impact of these targets? The 26 EERS states aimed to save more than 18 million megawatt hours (MWh) of energy in 2012, but they achieved over 20 million MWh – equivalent to 85% of America’s total energy savings in 2011 or enough to power around 2 million homes for an entire year.
These gains haven’t been uniform, but they’ve been close. 15 states exceeded their electricity savings targets in 2012, six others cut power use 90% or more, and just one state met less than 80% of its target. All of those numbers are improvements from 2011, when 13 exceeded their targets, six passed 90%, and two failed to reach 80%
Potential To Save 6.2% Total US Electricity Sales By 2020
If this trend continues, the 26 EERS states could become a major factor in managing America’s power sector. Assuming all targets remain in place (consider anti-efficiency legislation pending in Ohio) through 2020, their combined annual electricity savings will equal 6.2% of overall US electricity sales.
Long-term policy stability also benefits utilities, according to ACEEE. Multiyear targets provide regulatory certainty beyond annual planning, encourage utilities to consider efficiency as a similar resource to generation, and allow testing of new programs to fine-tune approaches as target savings levels increase.
Combined, the report suggests EERS could be the rare win-win-win for the climate, customers, and utilities alike. “Energy efficiency is a cost-effective and reliable resource that deserves to be a significant part of every state’s energy portfolio,” said Annie Downs, ACEEE state policy research analyst. “Setting energy efficiency targets is smart policy that encourages utilities to help their customers save money…instead of spending even more money building unnecessary new power plants.”
Those cost savings have been well documented. A recent study from Lawrence Berkeley National Laboratory found utility customer-funded energy efficiency programs in 45 states pegged the average cost saved energy at $0.021 per kilowatt-hour (kWh) saved, while a report from ACEEE analyzing programs in 20 states estimated the cost of energy efficiency was $0.028/kWh saved – both roughly 33%-50% less than building new generation.
How Can Other States Follow Their Lead?
So what can the outsized success of these 26 states teach the rest of America? To start, ACEEE suggests states encourage success by encouraging changes in utility business models. EERS targets alone don’t always work, but when paired with penalties or incentives, utilities achieve greater return on investments. Most states use a carrot approach offering a rate of return or financial award, while a few assign penalties for missing targets.
Regulatory reforms can also help encourage energy efficiency success, like program-cost recovery where utilities can recover investment costs by treating them as capital expenses, decoupling “lost” revenue from fixed costs independent of power sold on market, or performance incentives providing a risk-adjusted financial gain to meet growing power demand through increased efficiency instead of new generation.
Either way, the lesson is clear – regulators must overcome the fundamental challenge of utilities viewing energy efficiency as a threat to their profits instead of an asset to help reduce the need for new investments.
“Opponents of energy efficiency savings targets ignore the costs of building new power plants, which are paid for through charges on utility bills,” said Martin Kushler, ACEEE senior fellow. “Because saving energy through efficiency improvements is much cheaper than building a new power plant, energy efficiency programs end up resulting in lower utility bills for customers.”