When President Obama released the first draft of the Clean Power Plan last summer, energy efficiency was a central part of the initiative to cut carbon pollution from power plants. In calculating targets for emissions reductions, the U.S. Environmental Protection Agency assumed that states would invest in home insulation, LED lightbulbs, and other efficiency measures.
When the EPA released its final plan last week, however, the decision to drop energy efficiency from the target calculations—a move that diminished the stringency of the requirements—came as a surprise to some climate change advocates.
The motivations for this omission and its implications are complex, but think of this as a “teachable moment.” If you take the time to understand why the decision was made, what impacts it will have, and the important role energy efficiency will still play in the carbon reductions, you will “get” the Clean Power Plan in a way few people do.
Why Was Energy Efficiency Dropped?
The draft plan from last summer assumed that states would use four primary strategies to reduce carbon emissions: (1) improve efficiency at coal-fired power plants; (2) replace coal with lower-carbon natural gas; (3) expand renewable energy capacity; and (4) invest in energy efficiency.
Even at first glance, one of these things is not like the others. The first three relate directly to energy production—generating the same amount, or more, energy with lower emissions. Energy efficiency, however, means reducing demand.
Opponents of the rule seized on this difference, claiming it allowed the EPA to regulate activities “beyond the fence line” of power plants, which they believe exceeds the agency’s legal authority. In comments on the draft, industry groups likened the inclusion of energy efficiency to requiring automakers to pay their customers to drive less, or asking paper companies to pay people to write smaller. In short, utilities argued that the EPA has no authority to incentivize energy conservation.
This is a controversial argument. Environmental advocates, and presumably many within the EPA itself, felt that courts would reject this narrow view of agency’s role in energy and pollution. The EPA, however, decided it was a battle not worth fighting, and that’s the most likely reason it dropped energy efficiency from its emissions target calculations.
The EPA took steps to try to make up for energy efficiency’s removal. Analysts say the cost of solar panels is already on a steep decline and could drop as much as 40 percent in the next two years. The price of wind energy is down 58 percent over the past five years, and that trend is also likely to continue. Equipped with these bullish forecasts, the agency increased its projections for states’ capacity to expand renewable energy, which it hopes will offset the loss of energy efficiency in the emissions target calculations.
Even more importantly, although energy efficiency played no role in the calculation of the state’s carbon targets, it remains a legal, viable, and important strategy that states can use to meet their obligations under the Clean Power Plan.
Energy Efficiency Stateside
States can take one of two approaches to satisfy the plan’s requirements. The “mass-based” approach is the more intuitive option: The EPA places a cap on how much carbon a state’s power plants can emit in one year. The states, in turn, would issue “allowances” to utilities—basically licenses to emit a pound of carbon into the atmosphere. The states can sell them for a set price, auction them off, or distribute them in some other fashion. No matter how the state issues the allowances, though, they will have a monetary value because there will be a fixed limit on how many allowances are in the marketplace in a year.
By investing in energy efficiency, utilities can lower demand for energy, thereby reducing the amount of fossil fuels they have to burn, the carbon they emit, and the allowances they have to purchase. Utilities would therefore have a powerful financial incentive to get customers to buy energy-efficient lightbulbs, improve their home insulation, or tune up their air conditioners.
Under this mass-based approach, there’s no need for a special accounting system for the energy-efficiency programs. The savings would manifest themselves directly: Cut energy demand, and you cut emissions.
The other approach to meeting the Clean Power Plan targets, known as the “rate-based” option, is slightly more complicated. Here, the EPA sets a cap on how much carbon a power plant may emit per unit of energy produced. Low- or zero-carbon energy generators will be granted “credits,” which they can sell on the market. Power plants that don’t meet the standard must buy enough credits to bring their emissions rate back into compliance.
The national standard for a coal-fired power plant, for example, is 1,305 pounds of carbon dioxide per megawatt-hour of electricity generated. Without adopting carbon-capture methods, a coal-fired power plant can’t meet that standard, so the plant owner would have to identify a friendly wind farmer—who’s earned lots of credits by producing megawatt-hours with no carbon emissions—and buy his credits.
Here’s where energy efficiency enters the rate-based scenario. When a utility invests in energy efficiency—let’s say it subsidizes the purchase of LED lightbulbs—an independent party would estimate how much energy the investment saves each year. The utility would then take that estimate to a state regulator, who issues credits that could be used to offset power plant emissions above the legal limit. (There will be verification provisions in place to ensure that customers are actually using the lightbulbs and that other energy-efficiency investments remain active.)
The credits for energy efficiency would work the same way as credits earned for clean energy generation in a rate-based system. Each megawatt-hour of energy produced by a solar panel eliminates the need to produce a megawatt-hour of energy using coal. A megawatt-hour of energy saved by an energy-efficiency program has the same effect.
There are a few additional wrinkles. For example, the EPA will give extra credit for energy-efficiency investment aimed at low-income communities, a population that these programs too often ignore.
The Clean Power Plan is not simple—I grant you that—but neither is it string theory. The targets are clear, as are the many routes a state can take to achieving them. Energy efficiency will be a key part of this process, especially in the early part of the compliance period, when renewable energy capacity is still ramping up. So, when your utility calls offering to tune up your air conditioner or help insulate your home, remember that the EPA sent them.
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