Praising Energy Efficiency. Then Killing It.
What are the energy efficiency prospects for the public at large in electricity-intensive Florida? Given its poor efficiency position relative to California, wouldn’t it benefit from a big effort?
Yes, it would, but . . .
One would think that the state Public Service Commission (PSC) would help protect the future of Florida’s citizens by helping with energy efficiency and renewable energy options. Not only does this five-member commission set all the electric rates in the state, but it also reviews and directs utility plans for the future to help provide the lowest cost energy services in the state. Logically, those utility plans would include effectively helping consumers to improve the efficiency of their homes and improve the amount of electricity that might be cost effectively produced by the sun or other clean sources. But as we shall see, this is not the case.
Unfortunately, the Florida PSC, according to a consumer watchdog agency, Integrity Florida, is now a “captured agency1,” meaning that the commission is now effectively controlled by the utilities that it supposedly regulates. While before 1978 the five members of the commission were voted upon, the members are now appointed by the Florida State governor, who is currently Rick Scott. Given the governor’s ban on the words “climate change” in government documents and disparagement of the potential calamity of greenhouse gas emissions for low–sea level Florida, it is also not surprising that the appointed members are pliant to the desires of the IOUs. After all, NextEra, FPL’s parent company, donated $1.3 million to Governor Rick Scott’s 2014 election effort. And as always with politics, money curries favor.
Once upon a time, things were going in a better direction. In 2009, a major change took place within Florida’s PSC, which is tasked with regulating the state’s power producing monopolies – the state’s investor-owned utilities (IOUs). In that year, the Total Resource Cost (TRC) test, rather than the Rate Impact Measure (RIM) test, was adopted in Florida as the primary instrument to screen efficiency measures — referred to by the utilities as Demand Side Management (DSM) measures. This resulted in much larger efficiency targets for the utilities.
What might be a method to help average Floridians reach high levels of energy efficiency in their homes, so that they might contemplate, as I did, to create enough electricity to offset annual electricity requirements? Could they do it much easier and take advantage of what they had?
Thinking about these challenges with the U.S. Department of Energy, we conceived a phased approach towards energy efficiency. And rather than a single home, we would do it in a sample. The first hurdle would be to choose a real sample of 60 houses that we would monitor in unprecedented detail. Then, we would audit all of these houses to obtain information on specific appliances, heating and cooling, and the water heating system.
To be sure, these were programs that helped consumers to better insulate their attics and to purchase more efficient air conditioners and higher efficiency water heaters. And each of these elements in their public energy efficiency programs had been tested, monitored, and evaluated — and found to save consumers both energy and money2. FPL focuses on RIM as the primary screening method to decide if efficiency measures are worth doing — as illustrated in the very knowledgeable volume on the subject written by Dr. Steven Sim, who works on Integrated Resource Planning (IRP) for the company3. It is worth noting that Florida is the only state to still use RIM as its primary efficiency measure screening tool. However, it is also noteworthy that Sim with FPL has developed further, more elaborate screening tests for DSM measures: called the E-RIM and E-TRC that incorporate a value for carbon-related emissions relative to measures. The idea is that the utility and PSC should be ready to examine how a price on carbon might impact decision making. Although not used by the Florida PSC, it can be seen that when a price for carbon is instituted, the E-RIM results become very similar to results coming from the TRC. In any case, with E-RIM and E-TRC, Sim and FPL have been looking ahead. Yet, given lack of guidance from the PSC these future-pointed tools are not in use so we are left with RIM alone.
A quick way to see how RIM can give perverse results is to consider its objective — to result in the lowest cost energy regardless of what it takes. For instance, even if a technology was found to have a negligible incremental cost and would provide potentially large customer savings, it would still fail RIM, as the average costs of generated electric power ($/kWh) would often go up for non-participants! So, RIM would say that a technology that cut the consumption of all households by 10% would drive up the cost of each kWh unit of energy because the suite of generation faculties are sunk investments. According to RIM, a better technology might be one that actually increased consumption while substantially dropping peak demand. The cost per delivered kWh would go up unless there was no fixed cost to the generation facilities. The TRC test, however, might appropriately estimate that the cost of providing energy to all households would be the appropriate measure rather than the cost per unit energy.
For utility planning around the US, TRC is considered a more equitable test for society for energy efficiency measures. For instance, RIM tends to encourage measures that decrease consumption less while reducing the costs of peak generation. By contrast, TRC may encourage the utility to explore measures within its service territory that may meaningfully cut consumption.
As it turned out in Florida, however, after using TRC for one of its utility screening tools since 2009, in 2015, the PSC agreed with FPL in deciding that RIM was the most appropriate screening tool to evaluate energy efficiency measures in the state — a decision that mathematically dooms many efficiency measures in the state. Reason?
The PSC claimed the TRC test used in 2009 to set FPL’s goals caused too great a ratepayer impact – when in fact the public record shows that any impacts were less than a penny per month for typical consumers. “This recent history supports turning away from 2009’s failed experiment and returning to the fundamental rate impact and resource need considerations that have supported this Commission’s successful implementation of FEECA over decades,” according to the written opinion of the regulators.
FEECA is the Florida Energy Efficiency and Conservation Act, which was enacted in 1980 and directs Florida utilities to develop meaningful efficiency measures, plans, and programs. These are then subject to approval by the PSC. Thus, theoretically, FEECA helps consumers in Florida realize cost-effective energy efficiency. Practically, however, things are different.
Utilities: Efficiency Is No Longer Cost Effective, but Gas Exploration Is …
The unspoken Florida utility complaint regarding TRC was that its screening would greatly increase the number of evaluated efficiency programs that would be found to be cost effective for Florida utilities to implement. And those efficiency programs could cut both kWh sales and revenue to the utilities as well as undercut justification for new generation facilities that are the key element to utility profits. Typically, when built and approved, power plants are assured a rate of return on investment for the IOU of about 11% whether or not the power is needed.
According the logic of the RIM measure test, FPL in November 2014 claimed no further cost-effective efficiency was available in the state. FPL also cast it another way: even if some measures were cost effective, they are only going to implement as much demand reduction as their Integrated Resource Planning model indicated they needed. Yet, how could so much new generation be needed within that plan while DSM and efficiency was not? Stephen Smith, the executive director with the Southern Alliance for Clean Energy (SACE), commented on the seeming contradiction.
“FPL claimed in this docket that all the cost-effective energy efficiency opportunities have been captured and more are not needed because their load demand is down,” Smith said. “In another docket, they say they need to build new gas plants and a pipeline and want ratepayers to pay for fracking.”
How could it be both ways? If load growth is low in Florida — as it has been (per household consumption fell 1% from 2015 to 2016) — then it would seem that the justification for building additional generation facilities would be flawed.
In any case, in December 2014, the Florida PSC allowed FPL to invest $191 million in a joint venture with PetroQuest to drill for gas in Oklahoma’s Woodford Shale region. Later, PSC regulators allowed FPL to ramp up the investment to $500 million a year — equivalent of $100 per customer, at the same time energy efficiency was being gutted for the consumer. Ostensibly, the rationale for investment was to lock in low gas prices at the wellhead and hedge against future gas rate volatility. This is a backdrop to the installation of three new natural gas power plants representing 3.8 GW of capacity. Unfortunately, the exploration investments lost money at least initially — $6 million dollars — and in 2016 the Florida Supreme Court ruled 6-1 that the PSC had overstepped its authority in allowing such investments.
What eventually happens seems uncertain, but the fact that Florida IOU efficiency programs are gone is undeniable.
How did TRC vs. RIM assessments come out? RIM clearly rubbed out some efficiency programs, while TRC pushed them ahead.
Smith was acrimonious regarding FPL, “an arrogant monopoly institution that has captured the PSC. It is arrogantly out of control and taking advantage of a broken system where there is not a functioning regulatory body to oversee them.”
Within two years, the IOUs in Florida pushed back hard against the new targets, citing potential increases in average bills as their rationale. However, commentary on the submitted revisions by SACE claimed that the costs for delivering efficiency measures were exaggerated in the filing4. Moreover, the average increase in utility bills was pennies a month from running the new programs – if that.
Since 1990, FPL has included a Conservation Research and Development Program (CRD) as part of the DSM Plan each IOU files with the PSC every five years. Prior to FPL’s most recent DSM Plan filing, the requested and approved budget for energy efficiency and demand reduction research projects had been $3 million over five years or an average of $600,000 per year with which FPL had done some outstanding research projects on efficiency measures such as variable speed pool pumps, heat pump water heaters, mini-split heat pumps, energy recovery ventilation, hotel occupancy controls, and technologies designed to improve the efficiency of existing supermarket air conditioning and refrigeration equipment.
However, in their last DSM Plan, FPL cut the requested budget for research in new technologies in half for the next 5-year planning cycle. This change seemed to go unnoticed by the PSC and intervenors in the last DSM Plan docket. Given that FPL has nearly 5 million customers, the bill reduction customers see from the budget change amounts to just half a penny per month per customer. Under those circumstances, it’s hard to imagine FPL’s customers would support slashing energy efficiency research activities, most of which was performed by university organizations right here in the state, and some of which received approximately three times matching dollars from the US Department of Energy. Truly penny wise and pound foolish.
Every 5 years, FPL’s Craig Muccio would request a research budget with which to do Florida-specific demand and efficiency research. Before 2012, that budget had been $3 million over 5 years, or $600,000 per year, with which FPL had done some terrific research. They showed that variable speed pool were tremendous energy savers. One third of Florida homes have pools for which pumping in typically 3,000 – 4,000 kWh per year! FPL studies both by FSEC and the University of Miami showed these pumps typically cut pool energy consumption by 80%– a savings to consumers of more than a $1 each day. FPL also evaluated an ideal water heating technology for Florida: heat pump water heaters that cut energy use by greater than 65%. More recently, with DOE and FPL combined funding, we showed that ductless high-efficiency mini-split heat pumps can cut home air conditioning energy by 34%.
However, in 2012, FPL informed Muccio that the budget was being cut to $1.5 million to help reduce rates. Given FPL had over 4 million customers, the “rate reduction” being touted amounted to less than a single penny per month per customer.
Further, these cuts — slashing ability of the utility to keep up with technological progress on the demand side — came at a time when real DSM-related research needs were on the horizon — most notably, next-generation air conditioning, electrical storage, electric vehicles (including vehicle-to-grid), and the internet of things (IoT), all of which look to transform appliance electrical demand. Within our very successful Phased Deep Retrofit (PDR) project, we had also requested an effort to examine each of these things as well as to look at how rooftop stand-off solar panels might affect attic conditions and building cooling needs — a particular poorly researched topic and one with direct relevance in hot Florida.
In July 2014, in accordance with the statutorily mandated 5 year review, the Florida PSC revisited the efficiency goals set out in the Florida Energy Efficiency and Conservation Act (FEECA). In November of that same year, the regulators significantly rolled back state energy efficiency goals, largely siding with FPL, Duke Energy Florida, and Tampa Electric Company. The efficiency consumer programs in each utility were largely gutted after a heated debate between the state’s utilities and advocates led by the Sierra Club, the Southern Alliance for Clean Energy (SACE), and the Environmental Defense Fund (EDF). How did the PSC justify the move?
The PSC justified the sharp change of direction by abandoning the TRC test used to qualify efficiency programs since 2009 and switching back to the more stringent RIM test. There also had been underlying changes in the generation side of the picture that tended to disadvantage efficiency measures. Modern combined cycle power plants are more efficient than those in the past, with up to 55% of the energy in natural gas converted to electricity (6,130 Btu/kWh). And fracked natural gas has dropped from $6/million Btus to around $3.50 as of the time I write this. Thus, the cost effectiveness of modern generators which compete with potential efficiency resources in outlying years is understandably more competitive.
There were other factors in the decision by the Florida PSC used as justification to agree to largely eliminate IOU efficiency goals, but underlying all of them was the astonishing drop in household electrical load growth in the state. A good part of this came from the recession of 2008, where the influx of US population migration to the state slowed, but if Florida utilities expected a rebound with renewed prosperity in 2011, the higher demand never came back. The actual per-residential-account Florida energy use as reported to the Energy Information Association has been essentially flat since 2010. Why? In its “Ten Year Site Plan,” FPL laid the blame on the profound effect of federal standards for appliance and lighting efficiency. And in our Phased Deep Retrofit research project done for FPL in 2012–2013, our monitoring results agreed and even showed the mechanism of the flattening demand.
Changing the efficiency of lighting and appliances in Florida homes affects the energy use picture in the cooling-dominated state much more than in other locations. This occurs because the energy reductions to released heat inside the home lead to further reductions to measured air conditioning.
Yet, the IOU response to falling demand was dramatic: eviscerate the efficiency programs now.
The unspoken motivation: without higher demand, we won’t be able to argue for building more generation resources that are our greatest source of profit.
During the proceedings that followed, SACE presented data from Natalie Mims and George Cavros claiming that a 1% GWh reduction plan for the Florida utilities would result in more than a $100 reduction in the average bill for a typical Florida ratepayer by 2024 against the FPL plan. This was reflected in the SACE post-hearing brief where it claimed its proposed plan had lower consumer present value cost (CPVRR) than any of the FPL plans.
Left unsaid, however, was that the TRC and the higher levels of efficiency justified are particularly counter-productive for utility shareholders — as energy sales drop, so does the need to more rapidly build future generation resources that are an important source of IOU revenue and profits. Meanwhile, FPL claimed in the resulting docket that all cost-effective energy efficiency options had already been achieved.
“We were amazed at how aggressive the utilities were in reducing their commitments to energy efficiency,” commented SACE director Stephen Smith, “It was a difficult and hostile proceeding because they had no interest in advancing meaningful goals.”
However, at the same time that they slashed efficiency investments, in an immediately following docket, FPL claimed it needed to build new combined cycle gas plants! And it filed another seeking to spend $750 million from ratepayers to pay for exploration for lower-cost fracked gas exploration in Oklahoma. At the same time, other submitted Florida IOU dockets indicated that relying on the RIM test to screen measures resulted in benefits to utilities — for instance, $47 million in the case of Duke Energy Florida. Meanwhile, within the residential RIM evaluation conducted by Duke Energy Florida, the costs associated with lost revenues to the utility were 77% of the total efficiency measure costs. Thus, lost revenues served to doom or substantially compromise many potential measures. Moreover, a large part of these costs are the difference between the wholesale and retail electricity rates — a slight of hand that describes lost utility profits that are transferred to program participants.
In any case, the lost revenue issue is so fundamental to its discouragement of technologies that improve energy efficiency that other states have made allowances to at least partially correct the problem. For instance, North Carolina has instituted a loss revenue adjustment mechanism which the Florida PSC would be wise to consider. For instance that move has resulted in greatly expanded efficiency programs by Duke Energy in the Carolinas vs. Florida.
Moreover, the obsession on electric rates is lopsided. Utility bills are a function of both electricity rate and absolute consumption. With energy consumption drops due to efficiency, bills decrease. However, the RIM evaluation test can have the perverse effect of suppressing many energy efficiency measures in the short run, which then will argue for the construction of more expensive power plants because the efficiency resources were never installed. For, the primary mover for RIM are low costs of electricity and not savings for those benefiting from the efficiency measures. The efficiency resources keep being rejected, new generators are built every few years to meet the increasing demand, and the threat of lost revenues remain only a threat as utilities and the Florida PSC keep the efficiency measures at bay and unimplemented. Essentially, Florida utilities worship low electric rates and not low societal energy costs, and they have the PSC backing them up instead of helping consumers.
How the RIM Test Can Disadvantage Efficiency Measures
There is a fundamental weakness of the RIM test which I have never seen discussed: A touted advantage of RIM is that the lost revenues from not selling electric power from a constructed generator are taken into account. For instance, if a heat pump water heater (HPWH) — an excellent choice of Florida homes that I advocate for nearly everyone — is installed in your home, you will save about 1,300 kWh a year — worth about $145 annually depending on the Florida utility. As the incremental cost of such a water heater is only about $1,000 over a standard, electric-resistance water heater, the unit pays for itself in fewer than 6 years and saves the homeowner over a $1,000 in avoided electricity use over its 12–15 year life. Thus, it passes the participant test (cost effective for consumer) with flying colors5.
For utilities, they also reduce the summer peak kW for heating hot water by about 0.2 kW per household, and reduce the winter peak by about 0.6 kW. But in the RIM test, this reduction in annual utility costs for the homeowner becomes a loss to the utility that then must be spread over the cost of electricity for all customers to provide the necessary operating expenses as well as the missed company profits. Recently, for instance, the FPSC has granted FPL the equity proposition that their profits from operations and investments are 10.5%6 – an excellent rate of return for investors. However, there is a key point on this issue never mentioned.
Those “lost revenues” from avoided efficiency are potential personal savings to the customers installing the efficiency measures. And most importantly, the utility’s customers do not get to share in the 10.5% rate of return that the utility will earn on its operations and construction of new power plants from not installing them. As such, the computed lost revenues included in the RIM test might be devalued by the equity position of an IOU utility. Thus, in our example, the $1000 saved for each customer installing a HPWH as part of a hypothetical utility program is lost revenue to the utility. A case can be made that the actual computed lost revenue for the RIM calculation should be about $895 and not include the loss of profits to the utility. To turn the stick into a carrot for the utilities, another approach would be to compensate utilities for such efficiency measures installed such that they earn additional monies on the forgone profits from lost revenues to compensate for these losses. That might turn things around.
To be sure, this is not a profound change, but in many cases may be enough to justify measures that were previously rejected. RIM is sometimes called a “no losers” test, as it seeks to protect non-program participants from higher rates. As the test is often a more difficult hurdle to pass, particularly for measures that save a lot of energy, it is sometimes jokingly referred to as a “No Losers/No Winners” test. In particular, compensating the utilities for measures with strong certainty of savings for lost profits would likely lead to profound changes to utilities’ perspectives on efficiency improvements in Florida.
Thus, while Heat Pump Water Heaters pass the participant test by saving the household installing them a good amount of money each year, whether they pass the RIM test depends strongly on how much incentive is paid within the proposed utility program. It’s a little known fact that there are no hard and fast rules on how these incentives are set for utility programs and this facet can be manipulated to help measures pass or fail. Considering the $500 incentive used for higher efficiency SEER 16+ air conditioners as a utility incentive in Florida and given their $3,000 incremental cost, a useful consistent incentive might be around 20% for analysis purposes7.
Florida’s rules also eliminate any measures that look so cost effective that they pay for themselves in less than two years. Of course, this leaves a lot of potential highly cost effective measures on the table that many consumers are not even aware of. In its deliberations on Florida utility plans, SACE has countered that the two-year payback limit should not be used for eliminating measures (a way of supposedly eliminating free ridership); that the TRC test should be used for screening measures; that a 1 GWh reduction goal should be established for the utilities; and that within that goal that increased saturation of rooftop solar should be considered.
While the utilities hide behind the justification that relying on RIM protects low-income consumers, the reality is that relying on RIM shields utilities from more efficiency measures that can significantly drop consumption for all consumers. And the two-year payback limit on measures, beyond reducing efficiency program free ridership, actually biases against many measures for low-income households. These include items such as lighting retrofits and hot water tank wraps that would significantly help that segment of society.
Beyond personal savings, there are other advantages for efficiency and rooftop solar generation in our Florida homes. When we use electricity to turn on lights, air conditioners, and electric water heaters, we utilize electrical energy coming from distant large electrical power plants across long distribution lines to feeder stations and then across the power poles that dot our landscape. New advanced combined cycle power plants are so efficient that 55% of the energy content of natural gas is effectively converted into electricity — remarkable engineering.
Trouble is that there are losses from that distribution of electric power over long lines of transmission cable, feeder stations, power line, and transformers such that, in the FPL service territory, an average of 7–10% of the electrical energy is lost in reaching the point of use across the service territory.
Any apples-to-apples accounting of the balance of either site energy efficiency or rooftop solar must take consideration of this inherent advantage reduction of distribution losses of distributed efficiency and generation, both for energy and for peak demand.
There are other advantages for energy efficiency. Whereas there are continuing arguments about net metering for site solar generation, the fact is that all site efficiency savings are inherently compensated at the retail electric utility rate, including taxes. Also, unlike the solar electric and wind resource, efficiency inherently reduces site electrical demand, most often in perfect synchronicity with the utility system peak.
Residential programs in Florida are especially powerful. This happens because residential electric demand is responsible for more than half of the Florida system peaks. Indeed, in 2016, 89% of FPL accounts were residential8, with the rest split between commercial and wholesale accounts.
As efficiency of energy use has a profound impact on demand, what prevents Florida from more fully realizing that potential? We’ll examine this in more detail over the holidays.
1 “[the captured agency]….often leads to decisions that are not in the best economic interest of Florida’s families and businesses..” “Florida’s ‘Public Service’ Utility Commission? A Captured Regulatory Agency,” Alan Stonecipher, Brad Ashwell and Ben Wilcox, Integrity Florida, www.integrityflorida.org, October 2017. Also:“Reduce the power of state’s utilities,” Editorial Board, Orlando Sun-Sentinel, 6 October 2017.
2 The author participated in a number of these evaluations for Florida utilities, although with reports that remain proprietary.
3 Steven Sim, Electricity Resource Planning: Economics, Reliability and Decision Making, CRC Press, December 2011.
4 These were: Docket No. 100160-EG (Progress Energy Florida) and Docket No. 100155-EG (Florida Power and Light). http://www.psc.state.fl.us/Home/NewsLink?id=686
5 If the heat pump water heater is located inside utility rooms there are even more savings from avoided air conditioning as heat pump water heaters cool their surroundings – a perfect appliance for Florida. In fact, at FSEC, we measured the interaction of interior HPWH and found they could reduce cooling by about 5% – or another 300 kWh/yr. Even for the over half of installations that in Florida garages, few of those living in hot and humid Florida will complain of a somewhat cooler garage! http://fsec.ucf.edu/en/publications/pdf/fsec-cr-2050-16.pdf
6 In 2016 FPL sought to increase its return in equity from 10.5% to 11.5%. “Sparks Fly at FPL Rate Hike Public Hearing,” July 5, 2016, Cleanenergy.org.
7 Often the process seeks to establish the lowest incentive that will bring the RIM ratio to just above 1.0 while avoiding creating a pay back that is less than two years.
8 Although 89% of FPL accounts were residential, operating revenues from sales were 55% indicating that the commercial accounts are often associated with much higher levels of consumption and revenue.