6:Energy Efficiency Program Best Practices

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6:Energy EfficiencyProgram Best PracticesEnergy efficiency programs have been operating successfully in some parts of the country since the late1980s. From the experience of these successful programs, a number of best practice strategies haveevolved for making energy efficiency a resource, developing a cost-effective portfolio of energy efficiency pro grams for all customer classes, designing and delivering energy efficiency programs that optimize budgets,and ensuring that programs deliver results.OverviewCost-effective energy efficiency programs have beendelivered by large and small utilities and third-party pro gram administrators in some parts of the country sincethe late 1980s. The rationale for utility investment in effi ciency programming is that within certain existing mar kets for energy-efficient products and services, there arebarriers that can be overcome to ensure that customersfrom all sectors of the economy choose more energyefficient products and practices. Successful programshave developed strategies to overcome these barriers, inmany cases partnering with industry and voluntarynational and regional programs so that efficiency pro gram spending is used not only to acquire demand-sideresources, but also to accelerate market-based purchasesby consumers.Leadership Group RecommendationsApplicable to Energy EfficiencyProgram Best Practices Recognize energy efficiency as a high priorityenergy resource. Make a strong, long-term commitment tocost-effective energy efficiency as a resource. Broadly communicate the benefits of, and oppor tunities for, energy efficiency. Provide sufficient and stable program funding todeliver energy efficiency where cost-effective.A list of options for promoting best practice energyefficiency programs is provided at the end ofthis chapter.To create a sustainable, aggressive national commitment to energy efficiencyChallenges that limit greater utilityinvestment in energy efficiency includethe following: The majority of utilities recover fixed operating costsand earn profits based on the volume of energy theysell. Strategies for overcoming this throughput disin centive to greater investment in energy efficiency arediscussed in Chapter 2: Utility Ratemaking & RevenueRequirements. Lack of standard approaches on how to quantify andincorporate the benefits of energy efficiency intoresource planning efforts, and institutional barriers atmany utilities that stem from the historical businessmodel of acquiring generation assets and buildingtransmission and distribution systems. Strategiesfor overcoming these challenges are addressed inChapter 3: Incorporating Energy Efficiency inResource Planning. Rate designs that are counterproductive to energyefficiency might limit greater efficiency investment bylarge customer groups, where many of the mostcost-effective opportunities for efficiency program ming exist. Strategies for encouraging rate designsthat are compatible with energy efficiency are dis cussed in Chapter 5: Rate Design. Efficiency programs need to address multiple cus tomer needs and stakeholder perspectives whilesimultaneously addressing multiple system needs, inmany cases while competing for internal resources.This chapter focuses on strategies for making energyefficiency a resource, developing a cost-effective port folio of energy efficiency programs for all customerclasses, designing and delivering efficiency programsthat optimize budgets, and ensuring that those pro grams deliver results are the focus of this chapter.6-1

Programs that have been operating over the pastdecade, and longer, have a history of proven savings inmegawatts (MW), megawatt-hours (MWh), and therms,as well as on customer bills. These programs show thatenergy efficiency can compare very favorably to supplyside options.This chapter summarizes key findings from a portfolio level1 review of many of the energy efficiency programsthat have been operating successfully for a number ofyears. It provides an overview of best practices in thefollowing areas:accelerate energy efficiency program success.Organizations reviewed for this effort have a sustainedhistory of successful energy efficiency program imple mentation (See Tables 6-2 and 6-3 for summaries ofthese programs) and share the following characteristics: Significant investment in energy efficiency as aresource within their policy context. Development of cost-effective programs that deliverresults. Political and human factors that have led to increasedreliance on energy efficiency as a resource. Incorporation of program design strategies that workto remove near- and long-term market barriers to invest ment in energy efficiency. Key considerations used in identifying target measures2 forenergy efficiency programming in the near- and long-term. Willingness to devote the necessary resources to makeprograms successful. Program design and delivery strategies that can maxi mize program impacts and increase cost-effectiveness.Most of the organizations reviewed also have conductedfull-scale impact evaluations of their portfolio of energyefficiency investments within the last few years. The role of monitoring and evaluation in ensuring thatprogram dollars are optimized and that energy efficiencyinvestments deliver results.BackgroundBest practice strategies for program planning, designand implementation, and evaluation were derived froma review of energy efficiency programs at the portfoliolevel across a range of policy models (e.g., public benefitcharge administration, integrated resource planning).The box on page 6-3 describes the policy models andTable 6-1 provides additional details and examples ofprograms operating under various policy models. Thischapter is not intended as a comprehensive review of theenergy efficiency programs operating around the country,but does highlight key factors that can help improve andThe best practices gleaned from a review of these organ izations can assist utilities, their commissions, state energyoffices, and other stakeholders in overcoming barriers tosignificant energy efficiency programming, and begintapping into energy efficiency as a valuable and cleanresource to effectively meet future supply needs.1 For the purpose of this chapter, portfolio refers to the collective set of energy efficiency programs offered by a utility or third-party energy efficiencyprogram administrator.2Measures refer to the specific technologies (e.g., efficient lighting fixture) and practices (e.g., duct sealing) that are used to achieve energy savings.6-2National Action Plan for Energy Efficiency

Energy Efficiency Programs Are Delivered Within Many Policy ModelsSystems Benefits Charge (SBC) ModelRequest For Proposal (RFP) ModelIn this model, funding for programs comes from an SBCthat is either determined by legislation or a regulatoryprocess. The charge is usually a fixed amount perkilowatt-hour (kWh) or million British thermal units(MMBtu) and is set for a number of years. Once fundsare collected by the distribution or integrated utility,programs can be administered by the utility, a stateagency, or a third party. If the utility implements theprograms, it usually receives current cost recovery anda shareholder incentive. Regardless of administrativestructure, there is usually an opportunity for stake holder input.In this case, a utility or an independent system opera tor (ISO) puts out a competitive solicitation RFP toacquire energy efficiency from a third-party providerto meet demand, particularly in areas where there aretransmission and distribution bottlenecks or a gener ation need. Most examples of this model to date havebeen electric only. The focus of this type of programis typically on saving peak demand.This model provides stable program design. In somecases, funding has become vulnerable to raids bystate agencies. In areas aggressively pursuing energyefficiency as a resource, limits to additional fundinghave created a ceiling on the resource. While predom inantly used in the electric sector, this model can, andis, being used to fund gas programs.Integrated Resource Plan (IRP) ModelIn this model, energy efficiency is part of the utility’sIRP. Energy efficiency, along with other demand-sideoptions, is treated on an equivalent basis with supply.Cost recovery can either be in base rates or through aseparate charge. The utility might receive a sharehold er incentive, recovery of lost revenue (from reducedsales volume), or both. Programs are driven more bythe resource need than in the SBC models. This gen erally is an electric-only model. The regional planningmodel used by the Pacific Northwest is a variation onthis model.Portfolio StandardIn this model, the program adminstrator is subject toa portfolio standard expressed in terms of percentageof overall energy or demand. This model can includegas as well as electric, and can be used independent ly or in conjunction with an SBC or IRP requirement.Municipal Utility/Electric Cooperative ModelIn this model, programs are administered by a munic ipal utility or electric cooperative. If the utility/cooper ative owns or is responsible for generation, the energyefficiency resource can be part of an IRP. Cost recoveryis most likely in base rates. This model can include gasas well as electric.To create a sustainable, aggressive national commitment to energy efficiency6-3

Table 6-1. Overview of Energy Efficiency ProgramsPolicy Model/ExamplesSBC with utilityimplementation: California Rhode Island Connecticut MassachusettsSBC with stateor third-partyimplementation: New York Vermont WisconsinIRP or gasplanning model: Nevada Arizona Minnesota Bonneville PowerAdministration (BPA)(regional planningmodel as well) Vermont Gas KeyspanRFP modelfor full-scaleprograms andcongestion reliefFundingTypeNevada California Connecticut TexasMunicipalutility & electriccooperative:LeadAdministratorRole inResourceAcquisitionScope ofProgramsPoliticalContextSeparate chargeUsuallyUtilityDepends onwhether utilityowns generationPrograms for allcustomer classesMost programs ofthis type came outof a restructuringsettlement in stateswhere there was anexisting infrastruc ture at the utilitiesSeparate chargeNoState agencyThird partyNone or limitedPrograms for allcustomer classesMost programs ofthis type came outof a restructuringsettlementVaries: in rates,capitalized, orseparate chargeIn some casesUtilityIntegratedProgram typedictated byresource needPart of IRPrequirement;may be combinedwith other modelsVariesNoUtility buys fromthird partyIntegrated – canbe T&D onlyProgram typedictated byresource needConnecticut andCon Edison goingout to bid to reducecongestionVariesUtility mayimplementprograms orbuy to meetstandardStandard portfolioPrograms for allcustomer classesGenerally usedin states withexisting programsto increase programactivityNoUtilityDepends onwhether utilityowns generationPrograms for allcustomer classesBased on customerand resource needs;can be similar to IRPmodelPortfolio standard Variesmodel (can becombined withSBC or IRP): ShareholderIncentive1In rates SacramentoMunicipal UtilityDistrict (CA) City of Austin (TX) Great River Energy(MN)1A shareholder incentive is a financial incentive to a utility (above those that would normally be recovered in a rate case) for achieving set goals forenergy efficiency program performance.6-4National Action Plan for Energy Efficiency

Key FindingsOverviews of the energy efficiency programs reviewedfor this chapter are provided in Table 6-2 and 6-3. Keyfindings drawn from these programs include: Energy efficiency resources are being acquired on aver age at about one-half the cost of the typical newpower sources, and about one-third of the cost of nat ural gas supply in many cases—and contribute to anoverall lower cost energy system for rate-payers (EIA,2006). Many energy efficiency programs are being delivered ata total program cost of about 0.02 to 0.03 per life time kilowatt-hour (kWh) saved and 0.30 to 2.00per lifetime million British thermal units (MMBtu)saved. These costs are less than the avoided costs seenin most regions of the country. Funding for the majorityof programs reviewed ranges from about 1 to 3 per cent of electric utility revenue and 0.5 to 1 percent ofgas utility revenue. Even low energy cost states, such as those in the PacificNorthwest, have reason to invest in energy efficiency,as energy efficiency provides a low-cost, reliableresource that reduces customer utility bills. Energy effi ciency also costs less than constructing new genera tion, and provides a hedge against market, fuel, andenvironmental risks (Northwest Power and ConservationCouncil, 2005). Well-designed programs provide opportunities for cus tomers of all types to adopt energy savings measuresand reduce their energy bills. These programs can helpcustomers make sound energy use decisions, increasecontrol over their energy bills, and empower them tomanage their energy usage. Customers can experiencesignificant savings depending on their own habits andthe program offered. Consistently funded, well-designed efficiency programsare cutting electricity and natural gas load—providingannual savings for a given program year of 0.15 to 1percent of energy sales. These savings typically willaccrue at this level for 10 to 15 years. These programsare helping to offset 20 to 50 percent of expectedenergy growth in some regions without compromisingend-user activity or economic well being. Research and development enables a continuing sourceof new technologies and methods for improving energyefficiency and helping customers control theirenergy bills. Many state and regional studies have found that pur suing economically attractive, but as yet untappedenergy efficiency could yield more than 20 percent sav ings in total electricity demand nationwide by 2025.These savings could help cut load growth by half ormore, compared to current forecasts. Savings in directuse of natural gas could similarly provide a 50 percentor greater reduction in natural gas demand growth.Potential varies by customer segment, but there arecost-effective opportunities for all customer classes. Energy efficiency programs are being operated success fully across many different contexts: regulated andunregulated markets; utility, state, or third-partyadministration; investor-owned, public, and coopera tives; and gas and electric utilities. Energy efficiency resources are being acquired througha variety of mechanisms including system benefitscharges (SBCs), energy efficiency portfolio standards(EEPSs), and resource planning (or cost of service)efforts. Cost-effective energy efficiency programs for electricityand natural gas can be specifically targeted to reducepeak load. Effective models are available for delivering gas andelectric energy efficiency programs to all customer classes.Models may vary based on whether a utility is in the ini tial stages of energy efficiency programming, or hasbeen implementing programs for a number of years.To create a sustainable, aggressive national commitment to energy efficiency6-5

Table 6-2. Efficiency Measures of Natural Gas Savings ProgramsKeyspanVermont GasSoCal Gas(MA)(VT)(CA)Policy .53%Annual MMBtu Saved 1 (000s MMBtu)500601,200Lifetime MMBtu Saved 26,00070015,200Cost of Energy Efficiency ( /lifetime MMBtu)221Retail Gas Prices ( /thousand cubic feet [Mcf])119819%18%18%12117Program AdministratorProgram FundingAverage Annual Budget ( MM)% of Gas RevenueBenefits(000s MMBtu)Cost-EffectivenessCost of Energy Efficiency (% Avoided Energy Cost)Total Avoided Cost (2005 /MMBtu) 31SWEEP, 2006; Southern California Gas Company, 2004.2Lifetime MMBtu calculated as 12 times annual MMBtu saved where not reported (not reported for Keyspan or Vermont Gas).3VT and MA avoided cost (therms) represents all residential (not wholesale) cost considerations (ICF Consulting, 2005). Energy efficiency programs, projects, and policies ben efit from established and stable regulations, cleargoals, and comprehensive evaluation. Energy efficiency programs benefit from committedprogram administrators and oversight authorities, aswell as strong stakeholder support.Summary of Best PracticesIn this chapter, best practice strategies are organized andexplained under four major groupings: Making Energy Efficiency a Resource Developing an Energy Efficiency Plan Most large-scale programs have improved productivity,enabling job growth in the commercial and industrial sectors. Large-scale energy efficiency programs can reducewholesale market prices.Lessons learned from the energy efficiency programsoperated since inception of utility programs in the late1980s are presented as follows, and cover key aspects ofenergy efficiency program planning, design, implemen tation, and evaluation.6-6National Action Plan for Energy Efficiency Designing and Delivering Energy Efficiency Programs Ensuring Energy Efficiency Investments Deliver ResultsFor the most part, the best practices are independent ofthe policy model in which the programs operate. Wherepolicy context is important, it is discussed in relevant sec tions of this chapter.

Making Energy Efficiency a ResourceEnergy efficiency is a resource that can be acquired tohelp utilities meet current and future energy demand. Torealize this potential requires leadership at multiple levels,organizational alignment, and an understanding of thenature and extent of the energy efficiency resource. Leadership at multiple levels is needed to establish thebusiness case for energy efficiency, educate key stake holders, and enact policy changes that increase invest ment in energy efficiency as a resource. Sustainedleadership is needed from:— Key individuals in upper management at the utilitywho understand that energy efficiency is a resourcealternative that can help manage risk, minimize longterm costs, and satisfy customers.— State agencies, regulatory commissions, local govern ments and associated legislative bodies, and/or consumeradvocates that expect to see energy efficiency consideredas part of comprehensive utility management.— Strong support from upper management and one ormore internal champions.— A framework appropriate to the organization thatsupports large-scale implementation of energy effi ciency programs.— Clear, well-communicated program goals that are tiedto organizational goals and possibly compensation.— Adequate staff resources to get the job done.— A commitment to continually improve businessprocesses. Understanding of the efficiency resource is necessaryto create a credible business case for energy efficiency.Best practices include the following:— Conduct a “potential study” prior to starting programsto inform and shape program and portfolio design.— Outline what can be accomplished at what costs.— Businesses that value energy efficiency as a way toimprove operations, manage energy costs, and con tribute to long-term energy price stability and availabili ty, as well as trade associations and businesses, such asEnergy Service Companies (ESCOs), that help membersand customers achieve improved energy performance.— Public interest groups that understand that in orderto achieve energy efficiency and environmentalobjectives, they must help educate key stakeholdersand find workable solutions to some of the financialchallenges that limit acceptance and investment inenergy efficiency by utilities.3 Organizational alignment. With policies in place to sup port energy efficiency programming, organizations needto institutionalize policies to ensure that energy efficiencygoals are realized. Factors contributing to success include:— Review measures for all customer classes includingthose appropriate for hard-to-reach customers, suchas low income and very small business customers.Developing an Energy Efficiency PlanAn energy efficiency plan should reflect a long-term per spective that accounts for customer needs

Strategies for overcoming this throughput disin centive to greater investment in energy efficiency are discussed in Chapter 2: Utility Ratemaking & Revenue Requirements. Lack of standard approaches on how to quantify and incorporate the benefits of energy efficiency into resource planning efforts, and institutional barriers at

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