This post is co-authored by Dylan Sullivan and Mathias Bell of the Rocky Mountain Institute, and cross-posted on RMI's "Outlet" blog.
The utilities in Ohio will tell you that they're nothing like the energy efficiency leaders in California, Oregon, Vermont, or Massachusetts. Their systems are different and so are the regulations they must follow. But none of that has prevented them from investing in energy efficiency with their customers.
In 2008, recognizing that energy efficiency is the cheapest way to meet energy needs, Ohio’s Legislature passed a law that requires electric utilities to help their customers save energy. Since then, American Electric Power, Duke Energy, and Dayton Power and Light have stepped up those efforts and saved almost twice the amount of energy required by law (.3% and .5% of load in 2009 and 2010, respectively). AEP went from saving almost no energy in 2005 to saving a cumulative 554,000 MWh from its 2009 and 2010 energy efficiency programs, enough energy to power 55,000 Ohio homes for one year.
Utilities in Ohio aren't the only ones making these changes. They're part of a national trend. From 2007 to 2010, electric utility efficiency program budgets have gone from $2.7 billion to $5.4 billion. In other words, utilities have doubled the amount they are spending on efficiency in just the past three years. These numbers will only continue to rise. By 2020, program budgets are expected to reach $10.9 billion.
The reasons efficiency programs are growing at such a rapid pace are twofold. First, the leaders in states including California and Vermont are pushing energy efficiency programs more aggressively than ever. California electric utilities invested more than $1.1 billion in efficiency this past year. Efficiency programs in Vermont saved so much energy in 2008 that load growth was negative.
Second, many utilities that traditionally haven’t done so are investing in efficiency utilities in Ohio. Other states increasing investment in energy efficiency include Pennsylvania, Illinois, Indiana, Nevada and Arizona. (To see where states stand today, ACEEE's state energy efficiency scorecard is an excellent resource).
A couple of factors explain this recent momentum, and a lot of it has to do with policy and regulation. 30 states now have Energy Efficiency Resource Standards (EERS), which require utilities to invest in efficiency. EERS have been instrumental in getting utility efficiency efforts started and pushing utilities to achieve new levels of energy savings. In seven states, including Ohio, utilities are required to achieve average savings of at least 2% of load per year over the next decade.
Another factor is more states are changing the way utilities are regulated to support and encourage investment in energy efficiency. Traditionally, most utilities have been governed under a framework that rewards them for increasing energy sales. States have begun to change this model by breaking the link between energy sales and financial health, ensuring that utilities are able to cover their fixed costs even as energy efficiency efforts decrease sales. Today, 14 states and the District of Columbia have “decoupled” fixed cost recovery from sales; this change is pending in six states. Another nine states have adopted lost revenue adjustment mechanisms, which allow a utility to recover revenue foregone as a result of energy efficiency programs (NRDC does not generally support lost revenue adjustment mechanisms, for reasons discussed in this recent FAQ published in the Electricity Journal.)
Rocky Mountain Institute's recent publication Turbocharging Energy Efficiency Programs highlights strategies utilities should embrace as they pursue more energy efficiency. The leaders in energy efficiency — Massachusetts and California, as we discussed earlier — have been employing some of these strategies for years. In Ohio, which is just beginning its energy efficiency efforts, AEP is excelling at collaboration, for example. It is working with utilities and other stakeholders to increase compliance with building energy codes and has an excellent working relationship with its energy efficiency advisory group.
But probably no utility has excelled in all areas highlighted in the report: making marketing work, improving sales execution, driving down transaction costs, and the aforementioned collaboration. As utilities face more aggressive goals for energy savings, and increasing costs for building new energy facilities, they’ll have to employ all of the strategies to be successful.
In addition to decoupling, more states are giving utilities the opportunity to earn money when they perform well in improving efficiency, which is critical because utilities are usually able to earn a return only on investments in power plants, transmission lines, and the distribution system. In Ohio, both AEP and Duke have performance incentives in place that allow them to benefit when they exceed the legislated targets.