American Council for an Energy Efficient Economy (ACEEE)
Demand-side energy efficiency is widely recognized as the cleanest, lowest-risk and lowest-cost resource available to meet growing energy needs. Energy efficiency programs provide direct energy savings to consumers, free up financial resources and encourage investment across other sectors of the economy, displace the need for costly investments in new energy supply infrastructure, create new jobs, and reduce adverse environmental impacts from energy production. The many benefits of energy efficiency are most effectively captured when states adopt policy frameworks that support energy efficiency programs allowing businesses, governments and consumers to meet their needs by using less energy.
The American Council for an Energy Efficient Economy (ACEEE) recently released its annual State Energy Efficiency Scorecard, which ranks state policies aimed at improving energy efficiency. The Scorecard awards points in 6 primary policy areas in which states have traditionally pursued energy efficiency: Utility & Public Benefits Programs & Policies (20 pts.); Transportation Policies (9 pts.); Building Energy Codes (7 pts.); State Government Initiatives (7 pts.); Combined Heat and Power (5 pts.); and Appliance Efficiency Standards (2 pts.). Points are awarded based on the existence and effectiveness of policies within those areas that:
• Directly reduce end-use energy consumption
• Set long-term commitments to energy efficiency
• Establish mandatory performance codes and standards
• Accelerate the adoption of the most energy-efficient technologies
• Reduce market, regulatory, and information barriers to energy efficiency
• Provide funding for energy efficiency programs
West Virginia ranks # 46 in this year’s Scorecard, receiving only 9 of the total 50 available points. The top ranked state, Massachusetts received 42 points. West Virginia has made some progress on energy efficiency over the last year through the adoption of updated building energy codes, which contributed to West Virginia being one of the five states recognized as the “most improved” in this year’s Scorecard. The low total score however, highlights the need for additional progress on energy efficiency policy, particularly in the category of Utilities & Public Benefits Programs & Policies. In this area, West Virginia received only 1 out of the total 20 available points. Points for the Utilities category are awarded in 6 criteria areas: Electricity Program Budgets (5 pts.); Gas Program Budgets (3 pts.); Electricity Program Savings (5 pts.); Natural Gas Program Savings (1 pt.); Energy Efficiency Resources Standard (3 pts.); and Performance Incentives & Fixed Cost Recovery (3 pts.).
Policymakers in West Virginia have the ability to adopt policies that would require utilities to offer energy efficiency programs in their service territories. Current program offerings by the electric utilities operating in West Virginia (FirstEnergy’s subsidiaries, Mon Power and Potomac Edison, and AEP’s subsidiaries, Appalachian Power and Wheeling Power) are strikingly meager as measured against (1) the programs offered by these same utilities in the other states in which they operate, and (2) the commitment to energy efficiency adopted by virtually every other state in the United States. Progress in the Utilities category would translate to immediate benefits to West Virginia ratepayers. While West Virginians do enjoy some of the lowest electricity rates in the country, West Virginia ranks in the bottom half of states in terms of total electricity bills and is among the top 10 states with the highest residential electricity expenditures as a percent of median income In West Virginia, low electricity rates do not translate to low electricity bills. Access to energy efficiency programs would give energy consumers more control over the amount of electricity they use and provide tangible savings to families and businesses throughout the state.
The importance of regulatory mechanisms to encourage utility investment in energy efficiency programs is critical. Traditional ratemaking structures do not provide utilities the economic incentive to offer customers energy efficiency services. In fact, they provide a clear economic disincentive: as customers become more energy efficient the utility sells less energy. Reduced energy sales mean reduced utility revenues and profits. To remove financial disincentives for utilities, and promote energy efficiency program implementation, states have deployed three key policy approaches:
1) Allow direct cost recovery to ensure that the costs required to develop and operate energy efficiency programs are recovered in rates;
2) Provide decoupling or other lost revenue adjustment mechanisms to remove the “throughput incentive” (make the utility “indifferent” to increases or decreases in electricity sales); and
3) Provide performance incentives to reward utilities for meeting or exceeding program goals.
Many states around the country, including neighboring states Ohio and Pennsylvania, have adopted energy efficiency resource standards (EERS) and provide the cost recovery mechanisms necessary to incentivize utility investment in energy efficiency. These utility-based programs coincide with other policy measures in those states aimed at implementing energy efficiency across other sectors of the economy. Others states, such as Mississippi and Kentucky have more recently taken steps to adopt energy efficiency policies. Each provide useful examples for West Virginia.
Lessons Learned from Two States: Mississippi and Kentucky
Mississippi ranked dead last (# 51) in last year’s ACEEE Scorecard, but improved its rank to # 47 this year and received the top “most improved” designation. Mississippi is making significant progress toward implementing the policy frameworks necessary to achieve a more energy efficiency economy. Much of the credit goes to leadership from the Governor’s Office; in October 2012 Mississippi Governor Phil Bryant released his energy plan: Energy Works: Mississippi’s Energy Roadmap. The plan calls for a comprehensive strategy to increase the effectiveness and use of energy efficiency in Mississippi and identifies three initial steps Mississippi should take to set the stage for greater investment in energy efficiency:
1) Implement a lead by example policy to provide state agencies the resources to develop comprehensive energy management plans and deploy energy efficiency strategies in state owned buildings and facilities;
2) Adopt statewide commercial energy building codes for new construction; and
3) Initiate an energy efficiency market policy/program analysis
In July 2013, the Mississippi Public Service Commission (PSC) adopted a rule to promote the efficient use of electricity and natural gas through the adoption of energy efficiency programs and standards. Rule 29 requires all utilities subject to PSC jurisdiction to implement energy efficiency programs in Mississippi pursuant to standards prescribed by the PSC. The rules provide the foundation upon which utilities in the state can provide energy efficiency programs to residential, commercial and industrial customers and target three general areas:
1) Support the design and implementation of utility energy efficiency programs and portfolios in both “Quick Start” and “Comprehensive Portfolio” phases;
2) Address the economic disincentives traditionally associated with the utility regulatory business model and provide appropriate compensation and incentives for utility investment in energy efficiency; and
3) Establish annual energy savings targets for utilities.
The Governor’s energy plan and the Mississippi PSC policies are indicative of the strong leadership emerging in Mississippi on energy issues and the commitment to develop policy frameworks necessary to deliver energy efficiency services to Mississippians.
Kentucky, like West Virginia, is a coal-dependent state with relatively low electricity prices; in 2010, Kentucky had the 4th lowest prices for residential electric customers in the country. Notwithstanding lower electricity prices, Kentucky is ranked significantly higher (# 39) than West Virginia in the ACEEE Scorecard.
One reason is the leadership on energy efficiency provided by Kentucky Governor Steve Beshear. In November 2008, Governor Beshear released a 7-point strategy for energy independence, Intelligent Energy Choices for Kentucky’s Future. The first point in that 7-point strategy was energy efficiency. According to the strategy document, “[i]n the near term, energy efficiency and conservation represent the fastest, cleanest, most cost-effective, and most secure methods we have to reduce our growing demand for energy.” Prodded by that message from the Governor’s office, spending by Kentucky’s utilities on energy efficiency programs grew from $2.2 million in 2008 to $48 million in 2011. In 2010, Kentucky’s Department for Energy Development and Independence launched a program entitled “Stimulating Energy Efficiency in Kentucky,” or “SEE KY,” as a means of implementing the Governor’s 7-point energy strategy. The objective of SEE KY was to offset cumulative 16% of Kentucky’s projected 2025 total energy demand through natural gas and electric energy efficiency, to be achieved by ramping up energy efficiency savings 1% annually. (By way of comparison, the energy efficiency programs in place in FirstEnergy’s West Virginia subsidiaries are designed to achieve annual savings of 0.1%.)
Applying the Lessons Learned to West Virginia
West Virginia policymakers should give serious consideration to adopting the policy frameworks necessary to implement meaningful utility-based and other energy efficiency programs. These frameworks can be implemented by the PSC under its current authority or the legislature could provide the PSC guidance on the adoption of energy efficiency policy. For the past two years the West Virginia House of Delegates has considered, but failed to pass, energy efficiency legislation. Delegate Mike Manypenny, the lead sponsor of the legislation, introduced the West Virginia Energy Efficiency Act again this year in February. HB 2210 would direct the WVPSC to require and oversee implementation of energy efficiency programs by the state’s utilities. HB 2210 sets an EERS target of saving 15 percent of 2010 electricity sales by 2025 and saving 15 percent of 2010 peak demand by the end of 2025. To implement these targets, the bill directs the PSC to:
1) Adopt rate-making policies that provide direct cost recovery, decoupling or other lost revenue recovery mechanisms and performance incentives;
2) Require electric utilities to develop and implement energy efficiency and conservation programs that achieve verifiable electricity savings and peak demand reductions; and
3) Require electric utilities to consult with the PSC regarding the design and adequacy of its electricity savings and demand reduction targets.
Energy efficiency is an important and untapped energy resource that can help West Virginia families and businesses reduce their energy bills, support new jobs and spur investment in other areas of the economy. West Virginia has a long road ahead to become a more energy efficient state, but can follow a path that is well-charted by efforts in states like Mississippi and Kentucky.