The Shifting Landscape of Ratepayer-Funded Energy Efficiency in the U.S.

Abstract

Over the last two decades, utility ratepayer funding for energy efficiency programs - and the associated energy savings - has seen both booms and busts. Currently, about 35 states implement ratepayer-funded energy efficiency programs, with a total U.S. budget of $3.1 billion in 2008, approximately 80% of which is concentrated in just ten states (CEE 2008).2 However, a proliferation of new state-level policies enacted over the past several years suggests that the next decade may see a dramatic and sustained increase in overall funding levels, and a fundamental re-drawing of the energy efficiency map. These new state energy efficiency policies reflect a variety of concerns, including the increasing cost and siting challenges of building new generation and transmission, fuel cost and supply risks, and the potential cost of future carbon regulations. Within the past three years, for example, eleven states have adopted energy efficiency portfolio (or resource) standards (EEPS or EERS) that establish specific long-term savings targets that utilities are obligated to meet, and at least three other states are currently considering the same. A growing number of states have recently established laws requiring utilities to acquire all available cost-effective energy efficiency. Regulators in several Western states have also recently revised integrated resource planning (IRP) and demand-side management (DSM) planning rules to require more robust analysis of the resource potential and benefits of energy efficiency, which has resulted in increased savings targets for their energy efficiency portfolios (Hopper et al. 2008). Finally, regulators and utilities in many states are beginning to look more closely at regulatory incentive mechanisms to better align utility financial interests with improvements in customer energy efficiency. We examined energy efficiency policies on the books or in the pipeline in all 50 states, along with recent IRPs and DSM plans, and developed low, medium and high projections of future energy efficiency spending and savings. Depending on how aggressively and effectively states implement these policies, we estimate that spending on ratepayer-funded energy efficiency could increase from $3.1 billion in 2008 to more than $12 billion (nominal dollars) per year by 2020 in our high case, a growth rate in spending of about 12% per year. Annual electricity savings nationally could triple from an estimated 0.3% of retail electricity sales in 2008 to 0.9% of retail electricity sales in 2020. In the low and medium scenarios, ratepayer funding for electric and gas energy efficiency in the U.S. would increase to $5.4 and $7.5 billion, respectively, by 2020. What are the implications of such a scale-up of ratepayer-funded energy efficiency activity for national energy policy, such as a national EEPS or future carbon regulations? Can a ramp-up of this scale be achieved, and what practical constraints might slow these efforts? This paper addresses these questions by first providing an overview of recent trends in state policies pertaining to ratepayer-funded energy efficiency programs in the U.S. The paper then presents our set of projections of future spending and savings from such programs, highlighting key themes. Projected energy savings are compared to what might be required under a future national EEPS (or broader clean energy standard that includes energy efficiency), in order to gauge the potential incremental impact of such policies. In addition, the carbon emission reductions associated with our projection of energy savings from ratepayer-funded programs is compared to the total emission reductions that might be required under the American Clean Energy and Security Act of 2009 (aka, the Waxman-Markey bill), which was passed by the U.S. House of Representatives in June 2009 and would establish a cap on total greenhouse gas emission for many sectors of the U.S. economy. Last, the paper discusses some of the major obstacles and challenges that states and program administrators may face over the coming decade, as they seek to dramatically ramp-up ratepayer-funded energy efficiency program activity, as projected.