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Energy Efficiency: Markets or Mandates?

By: Pat Sapinsley

September 01, 2014

Implementation of Energy Efficiency* in the US Building Sector
The implementation of energy efficiency savings in the US has been more difficult than its advocates might have hoped. Americans are relying on a patchwork system to achieve energy savings. That patchwork is derived from local, state and federal government regulations and from market forces. On the local front, there are as many as five actors: local governments, local utilities, local energy service providers, local financing programs and a panoply of local building codes. At the national level, the federal government uses frequently changing tax code provisions and various user standards. Market forces include confusing utility pricing regimes, Energy Service Companies (ESCOs) and a variety of financing mechanisms. The result is that there is enormous confusion in the marketplace about how and where to stimulate more widespread adoption of energy efficiency. Other countries have eliminated such confusion by relying more heavily on unified regulation, with far better results.

We Are Doing Some Things Right
In spite of these fragmented efforts, there are hopeful signs that Americans are beginning to use less electricity overall. US electricity demand growth has fallen off in the last decade and absolute volume of electricity sales has declined since its peak in 2007 (Nadel & Young, 2014). The Energy Information Agency predicts that US electricity use will stay below 2005 levels for the foreseeable future (EIA, 2014) due in part to such factors as the 2008 recession and a decrease in manufacturing, but there are other, more affirmative, factors at play, too. Normally electrical consumption curves and GDP follow a similar curve. However, even as GDP has been increasing in recent years, electricity consumption has been declining.

Electricity use is no longer growing
Source: ACEEE: Changes in Electricity consumption by sector and year. In: Nadel, Steven, & Young, Rachel. (2014). Why Is Electricity Use No Longer Growing?

Advocates believe that most of the disparity between GDP and electricity consumption is attributable to energy efficiency programs. It is difficult to identify which energy efficiency policies are responsible for the decrease in our electrical consumption; market forces or government mandates?

Market Forces
The most important market forces in the US energy efficiency world are the utility generation /transmission/distribution industries, the ESCOs and the end-users seeking to find a competitive internal rate of returns (IRRs). Yet pure-play market forces simply do not exist in the heavily regulated energy sector. A century of government investment in energy infrastructure, the rate regulation process, restructuring and unequal subsidies to fossil fuel/renewables providers have all mangled any residual free market aspect of pricing in this industry. Today, market forces are stacked against the utilities' offerings of energy efficiency programs. Without the prodding of the state public service commissions, energy efficiency measures run contrary to the utilities' profit motives. Historically, their business was the production, transmission and/or distribution of more and more electricity. Energy efficiency is not viewed as a profit center. Only with significant re-ordering of the role of utilities (which may follow the transformative Reforming the Energy Vision program in New York State and in somewhat different ways in California) could we expect market forces to drive utilities to really get behind energy efficiency. (NYDPS, 2014) While market forces have great advantages, it would require substantial restructuring of the electricity markets for these forces to have a truly significant effect.

Although the ESCO model (Energy Services Company) is a market-driven model, the ESCO's reach is extremely limited. ESCO's current work represents less than 0.02 percent of the US GDP (ACEEE, 2014a). ESCOs are private companies that will pay for significant upfront capital expenditures, such as the purchase and installation of a CHP plant. They are repaid over time for their work through a shared savings plan, which is funded from the energy savings attributable to the installation. In order for the ESCO model to work well, a customer must have a single decision maker and operate on a scale that is limited to campus/portfolio scale projects. This eliminates most of the residential and commercial real estate market where the decision makers are disaggregated.

The barriers to market driven energy efficiency are numerous, even given good Internal IRR's. Although a commercial business owner can be shown that savings will accrue from energy efficiency measures, this is not the core business of the owner. In the US, commercial businesses spend hundreds of dollars per square foot on a combination of rent, employees and core business expenses and only between $2-5 per square foot on energy. Lowering energy costs by a meaningful 30% percent is barely worth the building owner's time. In addition, creating a program for that energy savings, which may be trivial to the owner's overall business, can cost many thousands of dollars in capital budget expenditures.

Even companies that are motivated to do something about carbon emissions for social or reputational reasons are too often stymied by the choices, the contractors, the upfront investment and confusing information. Since this is not the core business of the end-user and very few end users understand their energy bills in the first place, the savings potential is often overlooked.

Although there are now programs that offer energy efficiency financing, the measurement and verification of energy-not-consumed is perceived as an art rather than a science. In buildings alone, quantifiable improvements are based on a building's inherent physical characteristics and its systems. Yet the characteristics of the tenants and the building's operational impacts also have a significant impact on its energy use. (For instance a 24 hour a day/ seven days a week tenant will use more energy that a previous 40 hour a week. tenant in the same space.)

In other sectors of the energy economy, similarly complicating factors exist. Technological advances that can precisely measure energy used before and after program implementation have overcome this hurdle, but the perception that these measurements are less than accurate persists and can hinder the ability to get financing. Moreover, those seeking energy efficiency financing often don't qualify due to their pre-existing debt. Those who do qualify are often disinclined to take on additional debt. All of these reasons — the limited reach of ESCO's, utilities conflicted interests and the barriers to IRR driven energy efficiency — tend to limit the effectiveness of market driven energy efficiency measures.

Mandates
If it is true that market forces alone are inadequate, are mandates better and can they get the job done? In the US we have seen widespread use of federally mandated equipment performance standards, limited use of more stringent building energy codes and a few local mandatory benchmarking/audits /building labeling laws. These last two have been in effect for a longer period of time in other countries to great success.

In the US, the most successful of these programs have been the federal appliance standards and product labeling programs. Starting with the Energy Policy and Conservation Act of 1975 and Energy Policy Act of 2005 appliance standards have been put into effect that allow for the best technological advances at economically feasible pricing. The US Department of Energy runs the standards programs for 17 categories of residential products, 13 lighting categories and 8 commercial categories. The best example of the success of these federal standards can be seen in a comparison of a refrigerator bought today and the equivalent model bought in 1975. Such a comparison would show that today's model uses one third of the energy, costs half as much and is 20% larger. Federal standards such as these bring certainty to manufacturers and consumers alike. By 2020 these appliance standards will have saved 275 million metric tons of CO2, 70 Quads of energy and will have saved $50 billion in energy costs. (Elizabeth Doris, 2009) In 2007 alone mandatory labeling saved US consumers $16 billion. (Elizabeth Doris, 2009). Both local energy efficient building codes and building performance labeling and targets have been far less widespread in jurisdiction and impact than federal appliance standards

Mandates have become unpopular in the US, as our political leaders are veering away from "Big Government." Yet the scale of our energy delivery system, the history of the government interventions and today's international need to cooperate to avert serious climate change all indicate that a comprehensive, sensible government program is required to deliver energy efficiency of the magnitude and in the time frame that could be useful.

Positive examples such as the Regional Greenhouse Gas Initiative (RGGI) intervention and the current EPA 111d can provide useful models. In the case of RGGI, a group of Northeastern states that chose to participate in a cap and trade carbon emissions program have seen positive impacts. Those states have returned an economic benefit of 5.9 times the original investment and $1.1 billion in consumer savings while creating 20,200 jobs over the life of the program. (EN, 2011) If this program were mandated as a national program the benefits could be greatly multiplied. Section 111d of the Clean Air Act already requires existing power plants to control emissions of air pollutants, including CO2. This section of the Clean Air Act calls for action by all states to remedy emissions and offers a compliance path that includes energy efficiency.

... But Other Countries Are Doing Better
The American Council for an Energy Efficient Economy, (ACEEE) Scorecard 2014 spotlights Germany as the most successful country in its energy efficiency efforts of the 16 largest world economies, and ranked the US 13th out of 16. "The United States, long considered an innovative and competitive world leader, has progressed slowly and has made limited progress since the last International Scorecard in 2012." (ACEEE, 2014a) Recent US improvements in CAFE standards, appliance standards and some building codes were cited as a positive path for the US. The success of the German system is due to mandatory building codes covering the residential and commercial sectors (including code requirements for both new and retrofit buildings,) as well as mandatory building labeling/disclosure and appliance and equipment labeling.

By contrast, in the US we have 16 various standards used in local building codes, with little in the way of mandated energy efficiency. Some of these codes are woefully outdated. Few are enforced well. Our building labeling programs are not laws; they are voluntary, such as the LEED or Energy Star ratings. The ACEEE study emphasizes that where the US system leaves energy efficiency issues to the states, Germany has had great success with national mandatory building codes covering the residential and commercial sectors with code requirements for both new and retrofit buildings, as well as mandatory building labeling. Although our appliance standard program appears to be the best of the countries surveyed, our building codes and building labeling programs lag far behind. Unlike many countries surveyed, we have no national greenhouse gas reduction plan, no federal targets for utility energy savings and no national industrial energy efficiency audits nor oversight.

The advances in Germany and other EU states have been spurred by the EU Directive system, a system of mandates that each member state must meet. The recent Energy Efficiency Directive of 2013 requires member states to create plans to meet targets for building retrofits, for combined heat and power (CHP) opportunities, for energy audits of large buildings and for the creation of financing mechanisms. These targets are mandated (ECEEE, 2013). It is up to the member states to devise plans that comply. The Economic implications of the EED mandates is summed up here, by European Parliament Member Claude Turmes:

"This essential legislation is not only crucial for achieving our energy security and climate goals, it will also give a real boost to the economy and create jobs. Crucially, it will reduce the sizeable and growing cost of our dependence on energy imports — €488 billion in 2011 or 3.9 percent of GDP — which is particularly stark in crisis-hit countries".

Those countries that are pulling ahead on energy efficiency are not only able to address global warming but are able to stave off wasteful spending in the energy sector and generate greater overall efficiency within their economies.

We in the U.S. are now paying comparatively more for the inefficiencies in our energy sector. Mandatory measures, such as those outlined below, would allow our economy to function more efficiently. A menu of strategies mandated by other countries include:

• Nationwide mandated energy savings targets

• National energy efficiency building codes for both new and retrofit construction

• Improvements in the appliance standards and appliance labeling programs

• Mandatory CHP opportunities research leading to increased use of CHP (This is because it currently takes almost three units of fuel to produce one unit of electricity; (Sachs & Khan, 2012))

• Additional investment by the government and the utilities in energy efficiency programs

• Sustained government spending on energy technology research & development

• Government tax credits and financial incentives, such as loans and loan guarantees

• Grid and power plant improvements

• Mandatory EUI building labeling to be required before a building is sold or leased (ACEEE, 2014a)

An investment worth 611,000 jobs and 17.2 billion dollars
If implementing all of those policies is not politically feasible, implementing even some would go a long way toward addressing the overall problem. The ACEEE has studied the implications of mandating only the top four strategies throughout the US. It concludes that by implementing only a national energy savings target, a national model building code, a national efficiency standard for products and a system of local CHP facilities:

"Our efficiency scenario would increase national gross domestic product by USD 17.2 billion in 2030 and produce a net gain of about 611,000 jobs. It would also improve states' economic outlook. While the impact on jobs is larger in some states than others, all 50 states would see net job creation." (ACEEE, 2014b) The ancillary benefits of better physical health due to decreased emissions and the greater benefits of mitigating the effects of climate change are significant and have been addressed elsewhere.

A Snapshot of the US in 2030
Figure: Current U.S. energy path versus energy efficiency scenario [2]

Conclusion
An integrated, well-coordinated combination of federal. state and local mandates must be implemented to complement the smaller contribution to energy efficiency of existing market forces. In light of the enormous savings potential, it would be foolish not to use every possible arrow in our quiver to expand energy efficiency programs. Energy efficiency, at approx. 2.8¢/kwh is the cheapest form of electricity "generation." (Molina, 2012)

In the absence of a functional Congress, the recent EPA 111d is an excellent opportunity to implement federal energy efficiency mandates, similar to those that are working well in the EU. The resulting state implementation plans will necessarily put forth plans for energy efficiency. (EN, 2011) Just what those will be is yet to be seen.

The Clean Air Act requires implementation of the "best system of emission reduction." There is not wording that limits "best systems" implementation to the original emissions source. Certainly demand side management programs and any of the above-mentioned strategies that reduce demand can be construed as part of "the best system of emission reduction." Using this mechanism, it is likely that through 111d every state in the US must now devise an energy efficiency program. They would be well advised to follow the path outlined above to a healthier, more efficient and more economically advantageous energy future.

Our preference as a nation to rely on market forces rather than to enact legislation mandating energy efficiency continues to hold us back. We need to rebalance our mix of mandates/markets, as the EU has done so successfully. We are only using half of our tools for staving off climate change and improving our economic and physical well-being.


Pat Sapinsley is a LEED AP architect and the founder of both Build Efficiently, a consulting company that assists energy efficient technology companies and Watt Not, a sustainable lighting consulting company. She is also a Visiting Scholar at Harvard's Wyss Institute for Biologically Inspired Engineering where she assists in translating biologically-inspired technologies into commercial products through collaborations with clinical investigators, strategic corporate entities, and venture capital investors. She is Co-Chair of COTE at the AIA NY and sits on the board of directors of Green Light New York.

Lili Torok, of Columbia University SIPA, was research assistant for this article.


Footnote:
*This paper deals primarily with electricity and energy efficiency, yet the transportation and other sectors follow a similar path.


References:

ACEEE. (2014a). 2014 International Energy Efficiency Scorecard Washington, D.C.: ACEEE.

[2] ACEEE. (2014b). Change Is in the Air: How States Can Harness Energy Efficiency to Strengthen the Economy and Reduce Pollution. Washington, D.C.: American Council for an Energy-Efficient Economy.

ECEEE. (2013). Understanding the Energy Efficiency Directive. Stockholm, Sweden: European Council for an Energy Efficient Economy.

EIA. (2014). Annual Energy Outlook 2014 Early Release Overview: U.S. Energy Information Administration.

Elizabeth Doris, Jaquelin Cochran, and Martin Vorum. (2009). Energy Efficiency Policy in the United States: Overview of Trends at Different Levels of Government. Golden, Colorado: National Renewable Energy Laboratory.

EN. (2011). Economy-Wide Benefits of RGGI: Economic Growth through Energy Efficiency: Environment Northeast.

Molina, Maggie. (2012). The Best Value for America's Energy Dollar: a National Review of Utility Energy Efficiency Programs. Washington, D.C.: American Council for an Energy Efficient Economy.

Nadel, Steven, & Young, Rachel. (2014). Why Is Electricity Use No Longer Growing?

NYDPS. (2014). Reforming the Energy Vision.

Sachs, Harvey, & Khan, A Siddiq. (2012). The Long-Term Energy Efficiency Potential: What the Evidence Suggests.

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