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Extreme Efficiency

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

Fortnightly Magazine - September 2010

). They also show that the few utilities saving 2 percent or more of their annual sales spent at least 2.5 percent of their annual revenues to achieve that savings level. There are no cases where expenditures of 2 percent of annual revenues produced savings larger than 1.5 percent.

There are, of course, possible learning effects and likely economies of scale. As utilities gain more experience in implementing energy-efficiency programs, they’ll learn to do so more effectively and more cheaply. The growing investment in energy efficiency also attracts firms to enter the market, stimulating competition and lowering costs. There’s also an argument for the existence of scale economies, but the evidence of such is weak and inconclusive. The available data from EIA show that savings increased from 0.42 percent of sales in 2006 to 0.49 percent of sales in 2008, with a three-year average of 0.45 percent. During that same period, spending increased from 0.9 to 1.2 percent of revenue—an increase of 30 percent. Regression analysis of per-unit cost of first-year savings as a function of savings, measured as a percent of annual sales, shows an elasticity of approximately 0.3 percent. 9

As studies of energy-efficiency potential have shown, conservation supply curves invariably re positively sloped. Marginal costs of energy savings are more likely to increase as savings potentials from low-cost measures are exhausted and the early-adopter markets are saturated first during an energy-efficiency program’s life cycle. Over time, and as higher savings need to be achieved, utilities need to implement more expensive measures, consider paying higher incentives, intensifying marketing efforts to attract more participants, or both.

Also, utilities might be impeded in realizing aggressive saving targets after 2014, once the 2007 residential lighting standards of the Energy Independence and Security Act (EISA) fully take effect, thus eliminating significant savings from compact fluorescent light bulbs, a major source of electricity savings in nearly all utility energy-efficiency programs.

Analysis of the per-unit cost of energy savings is another way to examine the effects of expenditure caps. For example, in Illinois the allowed expenditure limits in conjunction with the increasing annual saving targets results in an average, per-unit budget that begins at approximately 18 cents per first-year kWh saved in 2010, but decreases to 8 cents in 2016 for the typical utility ( i.e., a weighted average of 10 cents over the performance period). The EIA data, on the other hand, show that utilities approaching 2 percent savings tend to spend between 20 and 30 cents per kWh, more than the Illinois limits, particularly by 2016 ( see Figure 3 ).

Too Many Objectives

In 2008, Pennsylvania enacted Act 129 (the Act), establishing a four-year EERS. The law requires each electric distribution company with at least 100,000 customers 10 to reduce energy consumption by at least 1 percent by May 31, 2011, relative to 2009-2010 retail electricity sales, phasing to 3 percent by May 31, 2013. Peak demand also must be reduced by 4.5 percent, on average, during the highest 100 hours of the utility’s load by May 31, 2013. Also, the law