Harvesting Low-Hanging Energy Savings

The United States Should Adopt a National Energy Efficiency Resource Standard

Efficiency is frequently described as the “low-hanging fruit” for cutting greenhouse gas emissions and reducing fossil fuel consumption. Energy efficiency improvements can meet a substantial portion of new U.S. energy demand and are relatively easy, cheap, and within the scope of current technology. A number of states have already adopted an “energy efficiency resource standard,” or EERS requiring utilities to reduce electricity demand, and these standards are already creating electricity savings. New legislation proposed in Congress by Rep. Edward Markey (D-MA) would build on these successes by enacting a federal EERS that would reduce national energy demand, save businesses and households money, and reduce global warming pollution.

So far, basic market obstacles can explain our failure to seize the opportunity offered by energy efficiency despite having the means to do so. A McKinsey Global Institute study found that, “There are sufficient economically viable opportunities for energy-productivity improvements that could keep global energy-demand growth at less than 1 percent” per year. “However, market-distorting subsidies, information gaps, agency issues, and other market inefficiencies all work against energy productivity.”

There are several other systemic reasons for lack of investment in efficiency. First, the profits of most utility companies are tied to the amount of electricity sold, not to some other measure of service. Therefore, electricity suppliers have little incentive to reduce their generation because that would reduce profits. Second, split incentives discourage landlords and homebuilders from investing in more efficient appliances and materials because they often don’t receive the benefits of reduced utility bills—renters and homeowners do. And finally, efficiency improvements are too often “gold plated,” or made available only at higher prices—despite the fact that efficiency improvements ultimately save consumers money.

An energy efficiency resource standard addresses the aforementioned obstacles and would systematically achieve greater energy efficiency. It creates market-based incentives for the more efficient use of electricity and natural gas by setting mandatory annual electricity and natural gas consumption reduction targets for utilities. Savings are measured by “credits” that are earned through a combination of documented and verified end-user energy savings improvements (demand reduction), combined heat and power systems, and high-efficiency energy distribution and generation. Retail energy distributors must obtain a certain percentage of saving credits relative to projected energy sales over a specific period, usually 10 to 20 years.

EERS policies already exist in 18 states and are generating real energy savings. For instance, by 2007 Efficiency Vermont, the first statewide energy efficiency service provider in the country, had cumulatively met over 7 percent of Vermont’s electricity demand via energy savings and demand reduction. That same year, Connecticut utilities reduced their electricity sales by 1.04 percent.

Another example is California. PG&E in California annually reduces electricity use by 4 billion kWhs, and California’s efficiency programs have saved enough energy to avoid building 24 new power plants. A recent analysis by the American Council for an Energy Efficient Economy focusing on the state of Maryland found that electricity use reductions of 22 percent by 2020 and 29 percent by 2025 are not only achievable, but cost-effective.

Increased energy efficiency is possible in every state, but two-thirds of states do not have an energy efficiency standard. A national energy efficiency resource standard would address this problem by accelerating utilities’ investments in relatively cheap, easy, and necessary efficiency programs across the country.

Support for a national EERS is also building in the business sector, largely in response to states’ successes. During a February 23 House Energy and Commerce subcommittee hearing entitled, “Energy Efficiency: Complementary Policies for Climate Legislation,” several companies urged passage of a national EERS in order to expand the success of state and regional efficiency programs to millions more consumers. Rich Wells, Vice President for Energy at Dow Chemical, a company with extensive energy needs, called for the passage of a national EERS at the hearing. He said “Implementing a national EERS would commit every state to utilizing this least-cost resource, establish a baseline level of cost-effective and achievable energy savings, and reduce carbon dioxide emissions far beyond the level achievable by those states currently acting alone.”

Wells’s company has saved $8.6 billion and 1,600 trillion British thermal units, or BTU of energy through efficiency improvements since 1994, and he claims that if the United States adopted similar economy-wide goals, “the country could save the BTU equivalent of all of its oil imports from the Middle East.”

Another supporter at the hearing was Philip Giudice, commissioner of the Massachusetts Department of Energy Resources, who described his experience directing his state’s efficiency programs. Because of efficiency improvements mandated by the state, Giudice said that Massachusetts is “now meeting approximately 8 percent of our energy needs with negawatts”—kilowatt hours saved—“rather than megawatts. In fact, we are effectively creating electricity at about 3.6 cents per kWh through efficiency, as compared to 8 cents for the cost of conventional supply.”

Similarly, Tom King, the president of National Grid, a northeastern electricity distributor, enthusiastically supported efficiency legislation because his company has produced huge returns for its customers through efficiency investments. National Grid customers have saved $3.6 billion in energy costs resulting from the $1.5 billion the company has invested in efficiency technologies, for a total savings of approximately $1,090 per customer.

Here’s how a national efficiency standard would work. Under an EERS implemented from 2011 to 2024, energy distributors would achieve annual savings credits by meeting gradually increased reduction standards. Performance standards start as low as 0.25 percent of sales per year during the first year or years of the program. By increasing the mandatory savings credits in small increments to 0.75 percent or more per year, cumulative savings totaling 15 percent for electricity and 11 percent for natural gas could be achieved by 2024. More aggressive savings targets could be implemented after the program’s end. By way of comparison, states currently with an EERS like California and Vermont are achieving annual efficiency improvements of 1.5 percent and more.

States that already have EERS programs would benefit from improvements to their regional power pools as neighboring states make efficiency improvements. These efficiency improvements would reduce strain on the existing transmission system and help ensure adequate generation in their region. Moreover, states could administer the EERS locally so that more efficient states could continue to push for more reductions within their borders.

Thanks to legislation introduced by Rep. Ed Markey (D-MA), a national efficiency standard is now within our grasp. The Save American Energy Act, H.R. 889, would establish a national EERS. If passed, the standard would reduce peak electric demand by about 90,000 megawatts. This reduction in demand would save the equivalent output of over 300 medium-sized power plants, eliminating the need to build new power plants over the long term.

“Energy efficiency is all about working smarter, not harder,” said Markey. “This legislation has the effect of producing moreenergy without ever having to build a power plant. It is the most cost-effective, money-saving measure for consumers and utilities.” Because the cost of new plants is passed on to utility customers via rate hikes, demand reduction prevents future increases in consumers’ electricity bills when there are no new plants built. Senators Charles Schumer (D-NY) and Mary Landrieu (D-LA) proposed a similar policy in the 110th Congress as part of the energy bill, but it was not included in it.

The Save American Energy Act would also help many Americans take advantage of efficiency’s low cost. At $0.03 per kilowatt hour saved, efficiency improvements are much cheaper than conventional baseload electricity, which costs $0.07 to $0.14 per kilowatt-hour. Efficiency costs only a tiny fraction of new nuclear power, which carries a whopping price tag of at least $0.15 a kilowatt hour. In contrast, energy efficiency improvements actually result in net savings to consumers: A national EERS would save utility consumers and businesses a net $130 billion and create 260,000 net jobs. When fuel prices rise again, the efficiency savings would increase.

Further, energy efficiency is ready to be deployed and can start benefitting consumers right away. By contrast, permitting and constructing a new coal-fired power plant can take at least five years and a new nuclear facility can take over a decade.

In addition to a national EERS, federal and state governments should remove financial disincentives that discourage utilities from becoming more energy-efficient. The American Council for an Energy Efficient Economy recommends that public policy should help “align company financial objectives with societal energy resource objectives.” Under a pro-efficiency business model, utilities’ profits are tied to revenue targets rather than electricity sales, and to the utility’s success in satisfying consumers’ demands for cheaper and cleaner energy.

Several states have already enacted such mechanisms. These financial incentive programs have proven to be critical components of any energy efficiency policy package. The American Recovery and Reinvestment Act, P.L. 111-5, will encourage these programs by offering more money for energy efficiency projects as an incentive for states to adopt policies that encourage their utilities to increase their efficiency.

A national EERS would also serve as a critical tool in the fight to slow climate change. The low cost of energy efficiency makes it the cheapest means by which to reduce our consumption of dirty fossil fuels. In fact, a national EERS would prevent 260 million total metric tons of carbon dioxide emissions from reaching the atmosphere by 2020, the equivalent of taking 43 million automobiles off the road for a year.

What’s more, existing opportunities for efficiency improvements could provide a 30-percent reduction in greenhouse gases by 2030, and up to an additional 30 percent reduction by 2050 with the help of further technology. According to McKinsey & Company, “70 percent of the technologies needed” to aggressively improve efficiency “are either available today or are likely to be commercially viable in the coming decade.” Thus, energy efficiency alone could likely provide two-thirds the necessary greenhouse gas reductions to reduce CO 2 emissions to 80 percent below 1990 levels by 2050

The national standard would compliment the significant investment in efficiency begun under recent energy laws. The 2007 Energy Independence and Security Act, or EISA mandates several major efficiency improvements, including new minimum efficiency standards for appliances and equipment, measures encouraging the expansion of combined heat and power systems, and funding for commercial building efficiency.

One of first actions by President Obama and the 111th Congress was to include significant investments for energy efficiency programs under the American Recovery and Reinvestment Act, P.L. 111-5. The recovery package provides billions of dollars for much-needed and long-awaited improvements in energy efficiency across the nation, such as providing an additional $5 billion to the Weatherization Assistance Program to install efficiency measures in low-income households. The recovery programs will create hundreds of thousands of jobs, and slash consumers’ energy bills. For instance, low-income families will save an average of $350 annually in reduced energy costs, and the new HUD program and increased efficiency grants will generate well over 1 million jobs.

Representative Markey’s proposal aligns with President Obama’s goals, providing much-needed measures that improve energy efficiency, reduce carbon emissions, and create jobs. “By putting America in the vanguard of the efficiency revolution, we can create high-quality green jobs at home, while exporting high-quality green technology to the world,” said Markey at the House Energy and Commerce subcommittee hearing. To produce the greatest reduction in emissions at the lowest cost, Congress should act now and heed the president’s call by plucking the low-hanging fruit of energy efficiency and enacting an EERS at the federal level as part of a national effort to slow global warming.

Daniel J. Weiss is a Senior Fellow and Director of Climate Strategy at the Center for American Progress. Kalen Pruss is an intern at CAP and a junior at the University of Michigan majoring in environmental studies and history.