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Extreme Efficiency

Performance standards are a valid idea—if targets are achievable.

Fortnightly Magazine - September 2010

extensive research into the legislative record. The U.S. Energy Information Administration (EIA) has data on what has been accomplished by utilities in the United States, and the data available from 2006 through 2008 via FERC Form 861 provide a useful benchmark. Of the 191 5 records of utilities reporting energy-efficiency activity, 6 some 55 investor-owned utilities consistently reported energy-efficiency expenditures and savings from 2006 to 2008. These utilities reported savings averaging 0.42 percent of sales in 2006, increasing to 0.49 percent of sales in 2008—a rise, on average, of about 16 percent in two years. Between 2006 and 2009, 28 utilities nearly doubled their savings on average. In spite of the obvious improvements in annual savings among the 55 utilities, there were only 24 cases with reported savings of 1 percent ( i.e., relative to annual sales) or greater in any one year. And, crucially, utilities reported annual savings of 2 percent or more in any one year in only five cases.

The difference between mere expectation and a target is that targets are intended to be a stretch from the normal. But if the purpose of setting a target is to improve performance, then that target should be realistic and achievable. Compared to historical performance of utilities elsewhere, the standards set in the six states appear aggressive and, in some cases, possibly unachievable. What’s more, in the majority of these states, the targets are expected to be met through utility programs, with no provisions for contributions from other measures, such as applying new building energy codes or relying on supplemental generation from, for example, combined heat and power. In the case of Ohio, ACEEE estimated that including these measures would satisfy 10 percent of the EERS target, leaving a more realistic and achievable savings target of 12 percent through utility programs. 7

Managing Targets

The phased approach adopted by these standards is, of course, useful. It’s also sensible from a regulatory point of view in that it helps mitigate rate shocks resulting from the effects of direct utility expenditures and revenue losses. However, in most cases, the mandated ramp-up rates are overly aggressive and don’t allow utilities enough time to develop effective programs, prepare marketing plans, and put in place the necessary infrastructure to implement large portfolios. This is especially true in states with little or no recent experience with demand-side management.

In many cases, the established targets seem arbitrary when compared to the accomplishments in recent years of utilities with successful programs in other states. Moreover, it isn’t clear how long the mandated annual savings can be sustained, since they don’t appear to be based on a systematic assessment of realistically achievable energy-efficiency opportunities.

Energy savings produce significant benefits to end users. More important, they help avoid or defer the need for new energy sources to meet future requirements. From this point of view, setting saving targets relative to projected loads—particularly load growth, as it’s done in Texas—conceptually is appealing; however, it also creates a considerable uncertainty for utilities obligated to meet the targets. Performance targets defined as absolute amounts