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Extreme Efficiency

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

Fortnightly Magazine - September 2010

or relative to a fixed historical baseline largely eliminate this uncertainty, but they lack a clear relationship with planning imperatives. The model used in Massachusetts, Washington, and Rhode Island is a more sensible approach from a resource-planning point of view, which also eliminates at least some of the uncertainty facing utilities.

There have been approximately 60 studies of energy-efficiency potentials since 2000, including more than a dozen by the authors of this article. These studies generally estimate cost-effective, energy-efficiency potentials of about 15 to 20 percent of annual loads at the end of the forecast horizon, usually 10 to 20 years away. A 2009 study sponsored by EPRI shows the national average cost-effective potential to be lower, at about 12 percent. The study estimates a maximum achievable potential at 8 percent of projected loads with 5 percent being “realistically achievable.” These estimates are, however, overly conservative, being lower than what many utilities already have realized. 8 Nevertheless, even assuming a 12-percent achievable potential, Arizona would exhaust all of its potential by about 2016, Illinois by 2018, and all other states by 2020 or shortly thereafter.

Of course, the actual energy-efficiency potentials vary by state, depending on a number of factors such as customer mix, end-use saturations, existing energy codes and standards, and efficiency gains already realized through past conservation programs. There’s also the knowledge that the amount of energy-efficiency potential isn’t fixed. New and more efficient technologies appear regularly, and emerging end-uses, such as home electronics, generate new opportunities for efficiency improvements. However, these developments are gradual and will continue beyond the performance deadlines in such states as Illinois and Ohio.

Expenditure Caps

Cost-effectiveness is an explicit condition for performance standards in all cases. The criterion is almost universally based on the total resource cost (TRC) or the societal perspective, except in Utah and Michigan where energy-efficiency programs are judged—inexplicably from a resource planning point of view—according to the utility cost criterion. A less-common practice is to set expenditure limits, usually at 2 percent of the utility’s annual retail sales. Expenditure caps are appealing from a regulatory point of view; they serve as measures of cost control and, like ramping, they help mitigate near-term rate shocks. But caps also limit a utility’s ability to construct optimal portfolios that increase the depth of savings. Caps encourage the utility to pursue only the least-cost savings options, leaving significant amounts of cost-effective energy-efficiency potential untapped, a practice known as cream skimming. In this way, caps constrain investments in efficiency to levels that are significantly below a utility’s avoided costs.

More important, expenditure caps, coupled with aggressive annual saving targets, might prove impractical. In Illinois, for example, spending limits start at 1.5 percent of revenues in 2010. They increase to 2 percent in 2011 and remain at that level through the end of the performance period in 2016. The resulting relationship between annual performance targets and allowed annual expenditures appears counterintuitive and is inconsistent with historical data available from EIA. The data clearly show a strong, positive relationship between savings and expenditures ( see Figure 2